The Purse-Party Blues

By Kate Betts

Inside Louis Vuitton's sleek flagship store on New York City's Fifth Avenue, customers are ogling the now ubiquitous Murakami Speedy, a monogram handbag that sells for $1,500 and is carried by such A-list celebs as J. Lo and Reese Witherspoon. Four blocks south, the same bag--or what looks like it, anyway--can be had for $35. A California woman, in town with her fiance last week, was spotted perusing a table stacked with fake Vuitton, Kate Spade and Marc Jacobs handbags. She was looking for a new Vuitton bag because the strap on the one she bought in Chinatown had already broken. "I need a new bag, and I don't want to pay $600 for the real thing," she said with a shrug.

It's a familiar refrain these days. Counterfeit shopping has become something of a sport, much to the chagrin of luxury-goods manufacturers. Fake designer bags are everywhere, it seems--so easy to buy that in some circles it's almost uncool to carry the real thing. Once limited to grimy stalls on New York's Canal Street, counterfeit luxury goods can be found online and in malls, and have even turned up at discount chains such as Daffy's, based in Secaucus, N.J. Among the ladies-who-lunch crowd, purse parties, where guests buy inexpensive fakes in private homes while they sip champagne, are the latest trend. With all this fun, cheap merchandise, why buy the real thing?

That's a question that infuriates the luxury-goods manufacturers, the chief victims of what has become a global counterfeit-buying spree. There's nothing new about copying in the fashion business, of course. Product ideas have always trickled down from the high-end runways to the mass market. In the past, designers often took pride in their work being copied. But that was before counterfeiting became a multibillion-dollar, multinational business. Knock-off luxury products--particularly the bogus designer bags coming out of China, where the majority of them originate--have become a mortal threat. "Ten years ago we said it wasn't a problem, that it was even proof of our success," says Marc-Antoine Jamet, president of France's anti-counterfeiting lobbying group Union des Fabricants, and secretary-general of LVMH, whose Louis Vuitton bags are perhaps the most flagrantly ripped off in the world. "Nobody says that now. We see it as an economic and even a social danger."

The luxury fakes are part of a much bigger counterfeiting problem, also largely based in China. Worldwide production of counterfeit goods--everything from DVDs to pharmaceuticals to brake pads--has jumped 1,700% since 1993, according to the Italian anti-counterfeiting coalition Indicam. No longer just a localized business in Asia or Mexico, counterfeiting accounts for more than 6% of worldwide trade, or $450 billion a year. And some $100 million worth of fake goods are seized each year entering the U.S.

Luxury-goods manufacturers are fighting back. They are spending millions of dollars a year on legal teams and private investigators, who work with international customs officials to bust rings of organized counterfeiters. Louis Vuitton is one of the most aggressive manufacturers. The company employs 40 full-time lawyers and 250 freelance investigators around the world, and last year its operatives were involved in 4,200 raids on counterfeiting rings and 8,200 legal actions. Companies like Kate Spade, Chanel and Coach, whose purses are also widely copied, are members of several consortiums of luxury-goods manufacturers that facilitate civil and criminal seizures of counterfeit goods. "Every company affected by [counterfeiting] spends an inordinate amount of money trying to fix it," says Barbara Kolsun, general counsel at Kate Spade. La Chemise Lacoste, whose alligator-logo shirts are knocked off and sold around the world, reportedly budgets some $4.2 million annually to battle counterfeiting.

The luxury-brand companies' dragnets are pulling in folks who don't fit the usual criminal profile. In March, three women in suburban Detroit were arrested for selling fake Vuitton, Gucci and Burberry bags at posh purse parties.

Authorities recognize that counterfeit trafficking is part of a broader, organized-crime problem. In June, U.S. immigration and customs-enforcement agents busted 17 people for smuggling tens of millions of dollars' worth of bogus Louis Vuitton, Prada, Coach, Chanel, Christian Dior and Fendi merchandise in thirty 40-ft. containers through Port Elizabeth, N.J. According to the customs officials, 15 of the defendants are Chinese nationals who are part of two separate crime networks that use shell companies to import counterfeit luxury goods from China and distribute them through storefronts on Canal Street. Each organization paid undercover agents $50,000 a container to look the other way. These might be run-of-the-mill crime rings, but both customs and Interpol have warned in recent months that counterfeit merchandising is also being used to fund terrorist groups.

So far, the bad publicity has hardly put a dent in the trade, largely because China's factories are getting so good at churning out nearly perfect fakes. (Discounter Daffy's, for example, claims it was duped into buying high-quality fake Gucci bags--and promptly took them off the shelves when Gucci complained.) China's counterfeiters have a system for classifying their reproductions. Bags that are virtually indistinguishable from the originals are class AA. This merchandise is exported almost exclusively to the West. Grade-A or -B fakes sell for less in the bazaars of China--although some make their way to U.S. street stalls. Hong Kong residents stock up on fakes across the border, at Shenzhen's multi-story mall, where fluorescent-lit shops sell pirated Chinese-made DVD players, sneakers and top-quality knock-offs of the latest brand-name bags.

The global trail of bogus goods generally begins in workshops in the Chinese provinces of Guangdong, near Hong Kong, and Zhejiang, south of Shanghai. Both regions are centers for legitimate manufacturing of leather goods, so getting raw materials and other supplies is relatively easy. (Some luxury companies, like Coach, manufacture in China, while others, like Louis Vuitton, are manufactured only in Europe and the U.S.) "The machines that companies use as legitimate manufacturers are also available to the bad guys," says Timothy Trainer, president of the International AntiCounterfeiting Coalition. The factories disguise the contents of containers with foodstuffs or other consumer products like lingerie. For those brave enough to risk it, it's a spectacular investment, with as much as a 1,000% return--better than drug trafficking. A 40-ft. container filled with fake bags can turn a profit of $2 million to $4 million. And counterfeiters save the roughly 50% of that revenue that luxury houses would invest in innovation and marketing.

On the Chinese end, the luxury-goods companies try to take legal action against the big production centers and close them down. But crackdowns on the fake factories are complicated by widespread official corruption and a general disrespect for copyrights that extends far beyond the luxury goods industry. More than 90% of all CDs, DVDs and computer software sold in China are pirated, according to various trade groups. Trade restrictions have loosened since Beijing joined the World Trade Organization in 2001, making it easier for Chinese manufacturers to escape government scrutiny. At the ports, investigators say, the counterfeiters who get caught can often buy their freedom by bribing Chinese customs agents.

Once the goods hit the U.S., there's little deterrent. "In narcotics, they get 20 years to life," says Pat Stella, U.S. customs assistant special agent in charge of New York City. "But a guy caught on Canal Street in the morning is back on the street by the afternoon." Customs officials have been working to increase the penalties, tacking on other charges like money laundering, which can increase a sentence to 10 to 20 years.

For the luxury-goods makers, it's a high-stakes battle. Louis Vuitton's Murakami bag, for example, generated more than $300 million in sales last year. It's hard to quantify exactly how much money a luxury brand loses to counterfeiting, since investigators and manufacturers say most people who buy fakes wouldn't pay for the real thing anyway. The larger risk is that the brand will get devalued. Brandmakers fight counterfeiting "not because they feel this will steal a genuine quantifiable sale from them," says luxury-goods analyst Andrew Gowen of Lazard & Co. in London, "but because of the overexposure of the brand."

Chemise Lacoste recently commissioned a poll in 12 markets to study the impact of counterfeits. When asked how they felt about the proliferation of fake luxury items, most respondents said the prevalence of a widely copied product considerably eroded the image of the authentic brand; 76% said the growing abundance of forged items and logos made buying the original far less alluring.

One of the biggest problems is that customers in the West have become inured to the idea that counterfeits--and knowingly selling them--are illegal. The Comite Colbert, a French luxury-goods organization, recently launched a campaign at Paris airports to discourage tourists returning from Italy--the entry point for many Chinese-made fake goods--from bringing back counterfeit bags. One sign showed a fake Louis Vuitton cell-phone case with the tag line "Your last call will be to your lawyer" and warned that fake goods would be confiscated and that bringing in counterfeit goods could result in a fine of up to $360,000 and three years in prison.

People who buy fakes often rationalize counterfeiting as a victimless crime. "I've seen law-abiding people who wouldn't think of stealing suddenly become much fuzzier when it comes to buying counterfeit goods," says Carol Sadler, general counsel at Coach, which has seen a 368% increase in the number of fake bags seized in the past two years. "Buying stolen intellectual property is theft." But the criminal scope of the counterfeiting business doesn't trickle down to the consumer in quite the same way that, say, the details of the latest Vuitton bag do. "People do not realize where the money goes," says Kate Spade's Kolsun. "If you tell them it funds criminal operations, they say, 'Gosh, I didn't know.'" Even if they did, many people find those cheap bags just too good to resist. --With reporting by Bruce Crumley and James Graff/Paris, Helen Gibson/London, Neil Gough/Hong Kong and Jeff Israely/Rome

With reporting by Bruce Crumley and James Graff/Paris, Helen Gibson/London, Neil Gough/Hong Kong and Jeff Israely/Rome