The rise of online shopping made it easier for shoppers anywhere to buy virtually anything, but it has also raised the odds of getting ripped off for consumers and merchants alike, as illustrated by the federal charges against two Chinese students accused of bilking iPhone maker Apple out of nearly $900,000.
The suspects, Quan Jiang and Yangyang Zhou, both in the U.S. on student visas, received counterfeit iPhones from an associate in China, then submitted them to Apple for replacement under the Cupertino, Calif.-based company’s warranty program, federal prosecutors said in a complaint filed in U.S. District Court in Portland, Ore.
Records that Apple provided to investigators show it received 3,069 iPhone warranty claims tied to Jiang, all of which cited the same problem, that the devices couldn’t be turned on. It approved replacements for 1,493 of them, worth about $600 each.
“With counterfeit goods, the counterfeiters and criminals are just so savvy these days that if you can make it, the counterfeiters will fake it,” said Kasie Brill, senior director of brand protection at the U.S. Chamber of Commerce’s Global Innovation Policy Center.
Once the province of sidewalk vendors hawking knockoff designer handbags and perfumes in large urban areas, counterfeiting has grown in sophistication and breadth with the development of digital commerce platforms, such as Seattle-based Amazon.
Counterfeit and pirated products accounted for up to $509 billion in global trade in 2016, a figure that represents 3.3% of total commerce, according to a March study from the Organisation for Economic Co-operation and Development. A different report from 2017 found the global counterfeit industry totaled $1.2 trillion that year and could reach $1.82 trillion by 2020.
Most of the items originated from China and Hong Kong, the study found. Phony electronics pose a particular risk, said Maysa Razavi, a spokeswoman for the International Trademark Association.
For companies, counterfeiting may “lower consumer satisfaction, notably when low-quality fake goods are purchased unknowingly,” the Organisation for Economic Co-operation and Development report’s authors asserted. “For right holders and their authorized vendors, rising counterfeiting increases revenue losses, while trademark infringements continuously erode brand value. For governments, counterfeiting means lost tax revenues, higher unemployment, and greater expenses incurred.”
“Every time we have counterfeiters who are caught, we have another opportunity to educate the public,” Brill explained. “But it also means we have active law enforcement who are doing everything they can” to keep Americans from being defrauded.
Investigators were tipped off to the iPhone scam in April 2017 when customs officials seized shipments with cell phones bearing Apple markings and design features. Though the phones looked genuine, they were deemed counterfeit based on shipping methods and packaging, according to federal investigators.
Both Zhou and Jiang are free, pending further court proceedings, and Zhou’s lawyer told the Oregonian, “We do believe that Mr. Zhou will be vindicated.”
Jiang told a customs enforcement agent that he had never been notified that any of the phones he turned in to Apple were counterfeit, according to court records. The company said it had sent him two “cease and desist” letters by mail.
Work by federal law enforcement agencies, including U.S. Customs and Border Protection, the Department of Homeland Security, and Immigration and Customs Enforcement, has made strides in curbing the market of phony goods, said Brill, who cited the agencies’ initiatives to promote consumer safety.
President Trump, meanwhile, ordered the secretary of homeland security this month to complete a report by November that analyzes data for online marketplaces, such as Amazon, eBay, and Alibaba, to examine how they’re leveraged for counterfeit trafficking, according to Peter Navarro, one of Trump’s top trade advisers.
“We’re only as strong as our resources in this space,” Brill said. “That’s one way we can start to work on these additional counterfeits coming in through international mail facilities and flooding our borders as well.”
Amazon, which already reimburses buyers who unwittingly purchase counterfeit items, warned that the program’s costs will grow along with its business.
Not only might phony products hurt the company’s reputation with users, but “we could face civil or criminal liability for unlawful activities by our sellers,” the company said in a regulatory filing. “The law relating to the liability of online service providers is currently unsettled. In addition, governmental agencies could require changes in the way this business is conducted.”
