NEW YORK — Fighting counterfeiting has become part of the counter-terrorism campaign.

A common sight on this city’s streets — a vendor unfurling a sheet or opening a briefcase to hawk purses, T-shirts or watches bearing a well-known brand name — could be a front for some of the most infamous terrorist groups in the world.

Most knowing New Yorkers see the street vendors as harmless, simply offering a good chance to get a knock off of a famous name at a bargain — so long as they didn’t feel the need to ask questions about the merchandise’s origins.

But law enforcement officials from the U.S. and abroad are exploring a striking new theory: That terrorist organizations, including Al Qaeda, Hamas and Hezbollah, are using the profits from the increasingly organized trade in counterfeit merchandise to fund their violent operations.

According to the Bureau of Customs, proceeds from a counterfeit T-shirt ring helped finance the 1993 truck bombing of the World Trade Center.

It’s hard to determine exactly how big the international trade in counterfeit goods is, though sources estimate that it could amount to a $500 billion business globally, involving such disparate product categories as jeans, cigarettes and computer software. The trade’s vastness is making observers especially concerned about the threat of the profits from the sale in bogus branded merchandise flowing to terrorist groups.

“Even if 10 percent of the counterfeit trade — and I think it’s more than that — is linked in some way to the funding of terrorism, we need to do something about that,” said private investigator Kevin Dougherty, in an interview.

Dougherty is owner of Counter-Tech Investigations, a New York firm that works with apparel companies on tracking down counterfeiters.

Observers said one reason that the counterfeit trade has grown so massive is that it has long been seen as a victimless crime and a low priority for law enforcement agencies faced with issues like the drug trade and violent street crimes. So organized crime groups — largely traditional ethnic gangs, but now also terrorists — have taken to what they see as a much less risky proposition than drug running, which carries much stiffer sentences and a higher likelihood that someone arrested will face prosecution.According to sources, full criminal prosecution of a counterfeiter could result in a prison term of one to three years. But attorneys involved in the field said only a handful of people in the U.S. are criminally sentenced for counterfeiting each year. In most cases, people who face criminal charges pay fines and damages. More commonly in the U.S., anticounterfeit lawyers pursue civil suits.

The growing involvement of terrorist groups in counterfeiting has attracted the attention of Congress. In July, the House Committee on International Relations held a hearing on the issue of terrorist groups raising funds through counterfeiting.

In his opening remarks, Rep. Henry Hyde (R., Ill.) said, “Terrorists are becoming more creative with their financing of operations, especially when it comes to intellectual-property crimes. The counterfeit item you purchase from a street vendor or on the Internet may be helping to finance terrorism.”

Interpol Secretary General Ronald K. Noble told the House committee that counterfeiting was becoming “the preferred method of funding for a number of terrorist groups.” He said the reason these groups were turning to counterfeiting was clear: It’s estimated to pay a return of $10 on every $1 invested, a profit that can meet or even exceed that of the drug trade, at a lower risk.

Noble cited instances where terrorists in Northern Ireland, Kosovo, Chechnya and north African nations were connected to counterfeiting various goods, as well as a connection to Hezbollah, the Middle Eastern terrorist organization. He also detailed a case in which an Al Qaeda member shipped a cargo container of counterfeit shampoos, creams and fragrances from Dubai to Copenhagen.

Asa Hutchinson, undersecretary of the Border and Transportation Security Directorate at the Department of Homeland Security, told the committee: “Customs attachés have seen, in two specific areas, indications and circumstances that led Customs to suspect that intellectual property crimes and terrorism are linked.”

While he conceded that Customs has not “established a direct link between profits from the sale of counterfeit merchandise and specific terrorist acts,” he said there has been suspicious activity in South America and the Philippines.

Timothy Trainor, president of the Washington trade group International Anti-Counterfeiting Coalition, also testified that counterfeiting is becoming attractive to organized crime groups.“I can only speculate that smart counterfeiters are counting on law enforcement, prosecutors and the courts to take a soft approach to those who engage in what appears to be ‘victimless’ counterfeiting,” Trainor said.

The IACC recently issued a 26-page white paper that sketches out the links between counterfeiting and terrorist groups, noting that one recovered Al Qaeda training manual “revealed that the organization recommends the sale of fake goods as one means to raise funds.”

In an interview, Trainor said, “We do have members that have found [counterfeiting] operations in the Middle East that they are certainly convinced are part of terrorist organizations.”

Another person who testified at that hearing was Larry C. Johnson, a founder of the Washington consulting firm Berg Associates LLC, who earlier in his career served in the Central Intelligence Agency and the State Department’s Office of Counterterrorism.

He said in an interview that through his firm, which specializes in investigating counterfeiting, he has been involved in raids on three Latin American companies with officials who turned up on a U.S. government list of people who were known to have direct links with terrorist groups.

“Most of what I’ve been involved with has been household appliances,” he said. “However, a couple of those family groups get involved with all sorts of fashion goods.”

A spokesman for the Bureau of Customs and Border Protection, part of the Department of Homeland Security, confirmed that it is investigating the link between counterfeiting and terrorists.

Customs seizures of counterfeit merchandise entering the U.S. have been up significantly this year, rising 42.6 percent to $38 million worth of goods through the first six months of 2003. That increase is largely due to a massive surge in the volume of counterfeit cigarettes seized — Customs this year has seized $18.5 million in counterfeit Chinese cigarettes alone.

Just as China is growing to be a dominant supplier in many categories of legitimate imports into the U.S., it also leads the list of counterfeit goods seized by Customs. The bureau this year has seized $26.7 million of bogus Chinese goods, including $2.4 million of bags and wallets, $1.2 million of apparel, $488,955 of footwear and $358,217 of watch parts. Seizures of Chinese goods far outweighed that of the other leading nations to have goods confiscated. They were Hong Kong, from which $1.9 million in merchandise was seized; Mexico, with $1.5 million; South Korea, with $1.4 million, and Malaysia, with $902,532.It’s unclear how much of the counterfeit goods flowing into the U.S. is intercepted by Customs, observers said, but they said it likely represents a small piece of the pie. By way of comparison, this year, the New York Police Department’s trademark-infringement unit has seized about $16 million worth of counterfeit goods. (The NYPD numbers do not correlate directly to Customs’ figures, as NYPD figures are based on what undercover officers found the resale price for the goods to be — roughly a wholesale figure — while Customs’ numbers are based on an estimate of what the merchandise would have sold for on the street — more analogous to a retail price.)

“The U.S. government spends billions of dollars a year to try to keep drugs out of this country,” said Robert Tucker, of Tucker & Latifi LLP, a New York law firm that specializes in intellectual property issues. “They have the full resources of the Army, Navy, National Guard, Marines, [Drug Enforcement Agency] and FBI, and they can’t keep drugs out. If they can’t do that, how is U.S. Customs going to keep counterfeit goods out of the country?”

Sources described the organizations dealing in counterfeit goods as becoming much more sophisticated over time. They have diversified sourcing networks, bringing in merchandise from Asia and the Middle East. In some cases, foreign factories who are authorized suppliers of branded merchandise run legitimate orders during their day shifts and additional runs of identical merchandise at night, then resell the goods to counterfeit dealers.

How common a practice that is is unclear. One source estimated that as much as 30 percent of the world’s counterfeit clothing is being produced in that way, while others thought the number would be far lower.

In other cases, counterfeit dealers import unbranded clothing, like T-shirt blanks, into the U.S. and then have counterfeit brand identification added when the goods arrive.

“If someone wants to sell counterfeit Rolex watches, what comes in are generic watches that look like Rolexes, and once they come in, the dials are switched out and new crowns are glued on,” said attorney Tucker.

NYPD’s Sgt. Tom McFadden of the trademark-infringement unit said last month the police raided a counterfeiting operation in the Bronx that was using 116 high-end Tajima embroidery machines to put brand logos on garments. That allowed a massive output in bogus goods.Sources added that the quality of counterfeits is also improving, for instance counterfeit jeans will feature such details as hangtags and authentic-looking buttons and rivets.

Dougherty, the private investigator, described “an alarming increase in the higher quality of merchandise, which is particularly of concern to us because, basically, when someone goes to Canal Street and buys a handbag or watch, most of the time they realize it’s a knockoff and they buy with the intention of buying a knockoff.”

Today, he added, “some of the garments out there I find difficult to identify as knockoffs, and I’ve been doing this 17 years.”

In Manhattan, sources said, the trade in counterfeit goods — ranging from jeans, jewelry and purses to CDs and DVDs — is concentrated in two key areas: Chinatown and a stretch of midtown clustered around Broadway from around West 25th Street to West 32nd Street, just south of the apparel district.

The Chinatown trade, sources said, tends to be dominated by Asian criminal gangs, including the Chinese gang the Triads. In midtown, the trade is more controlled by persons of Middle Eastern origin, though sources cautioned that they don’t presume all such persons are funneling money to terrorist groups.

According to sources, authorities are also looking into claims that terrorists might be using legitimate apparel factories abroad in Pakistan, the Middle East and elsewhere as ways to launder money and transmit funds to terrorist groups. The theory is that they could do so by overpaying for actual shipments of merchandise.

Court papers filed in the case of Uzair Paracha, a Pakistani and the son of a garment factory owner, indicated that authorities were looking into whether a company he was running in the garment district was being used to launder money.

Another concern of authorities is that the growing amount of high-quality merchandise is changing the nature of the counterfeit trade.

“The lower-quality merchandise is definitely distributed through the streets and the flea markets,” said the NYPD’s McFadden. “But the higher-end counterfeits can be distributed through legitimate channels.”

Sources explained that the high-quality counterfeit goods are often mixed in with legitimately acquired merchandise, as well as the odd lot of stolen garments, and resold through channels such as off-pricers and jobbers.“More organized groups will sanitize invoices, so that a shipment of 10,000 jeans or shirts will reflect a shipment of 100,000, and then it’s mix-and-match,” said McFadden. “They’ll get identical thread-count jeans or shirts and have the different trademarks sewn on and neck labels sewn in and then mix-and-match to large discounters.”

McFadden said his year’s city seizures of about $16 million worth of goods are about double the volume the NYPD would typically confiscate four or five years ago. His unit, which includes six officers altogether and is part of the Organized Crime Investigation Division, is widely cited as the most extensive such operation mounted by a local police department within the U.S., though the unit’s size has declined by about four officers over the past few years.

Part of the reason for that is that two years ago the NYPD Foundation began raising contributions from trademark holders to help fund the department’s buy-and-bust counterfeiting efforts. Gregg Roberts, executive vice president of the foundation, said it has raised about $200,000 for anticounterfeiting purposes so far.

Sources said having funds to buy counterfeit goods in large quantities is important because it allows investigators to move up the food chain and find big suppliers. Before the foundation began raising funds for this purpose, investigators often weren’t allocated money for large buys.

“When you’re the chief of department and one request says we need $25,000 to buy three AK-47s from the South Bronx, and one is $40,000 for two kilograms of cocaine and one is $15,000, and we’re going to buy 600 pairs of blue jeans, well, the reality of it is the reality of it,” said Steve Davis, a former NYPD official who now runs the Davis Investigative Group, a private investigations firm.

The trade in counterfeit goods in New York has also become more violent, and in recent months there have been several shootings and armed robberies of CD-duplicating operations in midtown. McFadden explained that is because of the large volumes of cash involved in counterfeit trade.

“You can go into a room that could be 15 [feet] by 15 [feet] and there could be 50,000 CDs — and 50,000 CDs have a street value of a quarter of a million dollars,” the NYPD’s McFadden said. “If you have an illegal African immigrant sitting on a quarter-million dollars of product, he’s going to have a lot of cash in his pocket.”Also, a drug dealer with that much product likely would be a major player in a gang and therefore armed or protected by armed associates,” he noted. A counterfeiter with that volume of merchandise, he added, would be “a nobody.”

“That’s one way of looking at how large the counterfeiting business has become,” he added.

McFadden said his unit, which investigates large-scale distribution and sale of counterfeit goods, typically makes about 100 arrests and executes a like number of warrants a year. Other units that focus on the street peddlers themselves typically arrest a higher volume of people — he estimated that in Manhattan south of 59th Street, 3,000 peddler arrests are made every year.

Information on the major suppliers of counterfeit goods tends to bubble up from the streets, he explained.

“Maybe one van is supplying two or three street vendors. If we receive information on that van, we can do a workup and see where the van has been, who the owner is, where it is registered,” he said. “If the van goes back to a factory area, we may set up surveillance on that factory, maybe go through their garbage.”

In sportswear, McFadden said the most counterfeited brands these days are “definitely the hip-hop brands: Sean John, Phat Farm, Enyce, Akademiks, Rocawear.” In handbags and accessories, the most common victims include Louis Vuitton, Burberry, Prada, Fendi and Gucci, he added.

Not all observers of the counterfeiting problem agree that the trade is becoming highly organized.

“My theory has always been that counterfeiting is fragmented and not organized at a very high level,” said Tucker, the attorney. “Typically, the sophistication level that’s necessary to counterfeit products isn’t very high.”

Still, most observers said they hoped that if the reports of terrorist ties to counterfeiters are true, it will result in increased law-enforcement attention to the trade.

“For the longest time, I think that counterfeiting was perceived as a victimless crime,” said Dougherty, the private investigator, “and I don’t believe it is.”

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