From...

November 24, 1998
Web posted at: 12:00 PM EST

by Christina Wood

(IDG) -- Annie Jones watched as Baldwin Park, California, police officers surrounded a building containing the offices of Compact Media. Jones (not her real name) had been staking out the place since receiving an anonymous tip that it actually housed a software counterfeiting operation. The police had their guns drawn as Jones glanced at her watch: 2:30 a.m., March 6, 1998.

Suddenly, people began to leave the building, and the officers moved in. They nabbed one of the employees, Kenneth Khoung, at his sport utility vehicle. In his car they found 3400 counterfeit copies of Microsoft Office Professional. Police also apprehended Shawn Wang, the 24-year-old owner of the counterfeiting plant.

Inside the building, Jones and her partner, investigators for Microsoft, found four CD replicators (worth over a million dollars each), two silk-screening machines for printing CD labels, three shrink-wrap devices, and more -- enough to manufacture and package several hundred thousand CDs a month.

The next day while searching Wang's car, investigators found a receipt from a local storage facility. There they hit more pay dirt: an estimated $4 million worth of counterfeit Microsoft software, still on CD spindles.

All in all, six people were arrested. Three -- Shawn Wang, Kai Lin Chen, and Kenneth Hoa Khoung -- were charged with possession of counterfeit materials and counterfeiting equipment. Wang had not been sentenced at press time. According to Baldwin Park Detective Chris Hofford, "The max he can get is eight to ten years." Chen and Khoung will each serve a maximum of two years.

Does this incident sound more like a detective movie than a day in the life of software company employees? It might come as a surprise to learn that when you go shopping for software bargains, you may actually be contributing to the wealth of criminals like Shawn Wang -- or of even worse characters.

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Pirates everywhere

Counterfeiting is just one of many forms of software piracy. The most common is committed by people who "borrow" a friend's software and load it on their own PC, or by businesses that aren't careful to buy enough licenses for the software they use.

But more organized forms of piracy abound. Computer resellers and others often release what's known as gray market software -- authentic software that's sold in violation of a distribution agreement. Small PC makers load supposedly free copies of software on the systems they sell. Scofflaws post software for illegal download on the Internet. And a few unscrupulous people seek to enrich themselves through counterfeiting.

You may not be overly concerned that software companies lose out when their products are pirated. But when you buy counterfeit or gray market software, you're getting ripped off, too. You won't be eligible for technical support, and you may be buying programs with viruses, or old, buggy versions. Buying counterfeit goods is also illegal. Though you're unlikely to be arrested, you're contributing to a criminal activity. If you're a small business, you could be liable for hefty fines -- even if you thought you were buying legitimate software. So it pays to be informed.

Sandy Boulton, director of Autodesk's antitheft division, says, "We've been running an antipiracy program since 1989, and based on empirical data, it looks as if for every legal product we sell, there are seven illegal versions in the market."

The numbers for the software industry as a whole aren't quite as staggering. According to the Business Software Alliance, a coalition of software publishers, 27 percent of all software used in the United States is pirated. Worldwide, that number jumps to an astonishing 40 percent. The BSA estimates that all forms of software piracy cost the U.S. economy $1 billion in lost taxes and 130,000 lost jobs in 1996, and that the U.S. software industry lost $11.4 billion of revenue in 1997.

Have you been bilked?

Richard Lange, a computer consultant in Wolf Point, Montana, bought a computer at an auction site for only $300. Sweetening the deal were preinstalled copies of Windows 98 and Microsoft Office 97 Professional. But when his PC arrived, there were no CDs, no manuals, and no certificates of authenticity for the software. He called the company he bought the computer from, thinking the missing CDs and certificates were an oversight. Its reps said they'd sell him the Windows discs for $45.

"That sounded real suspicious," says Lange (although missing discs are not always an indication of piracy). When Lange checked with Microsoft, the company told him it was likely that his software was pirated -- and his copy was therefore not eligible for technical support or a license agreement. Not only that, but because he didn't get a CD of Windows 98, he was missing the tutorials that come with legitimate versions of the software.

You, too, may have purchased pirated software without knowing it. If you bought a no-name computer with preinstalled software but didn't get registration forms or (for Microsoft products) a certificate of authenticity, that software might be pirated. If you got a fabulous price on software at a swap meet or online auction, or from a mail-order company advertising in the back of a computer magazine, that item, too, may be illegal.

It's often hard to tell pirated software from the real thing, though. Unless you buy from a well-known source, the only way to be sure your software is legitimate is to ask its manufacturer if the place you bought it from is an authorized reseller. But pirated versions get into buyers' hands in so many ways, even the software companies sometimes can't tell the good from the bad.

The gray market

Gray market software is the real thing, produced by the software vendor but sold in violation of a distribution agreement. Often it won't come with all the retail packaging. Other than that, it can be hard to distinguish from legitimate software.

Three types of software make up most of the gray market: products from original equipment manufacturers, academic versions, and discs from Microsoft's Worldwide Fulfillment Program (formerly called the Easy Fulfillment Program).

OEM software comes bundled with PCs and other hardware as part of a marketing agreement between the software publisher and hardware manufacturers. The packaging usually states that the software is not to be sold separate from the hardware. But it often is. Either the hardware vendor decides to make a few dollars on the side and sell the OEM software by itself, or the software is stolen, ending up on the open market.

Software publishers also offer discounted academic versions of their programs to students and teachers who have legitimate identification. Some gray market resellers repackage this software, removing all evidence that it is an academic version. Others simply sell it without requiring ID.

Microsoft's Worldwide Fulfillment Program was created for corporations. If a company needs 1000 copies of Office 97, it can buy a site license at a significant discount. Instead of getting 1000 boxed programs, the company receives CDs and manuals, which are clearly marked as part of the program. But some gray marketers pose as corporations so as to buy these site licenses, then sell the software to unwitting consumers or distributors.

All three types of gray market software are widely available at online auctions, at swap meets, and even through ads in computer magazines -- usually at dirt-cheap prices. According to Cynthia Navarro, senior investigator at Adobe, "Any copy you see of Adobe Photoshop for less than $400 is probably gray market."

Remember, when you buy on the gray market, you've been conned. When you go to register your program, the company may be aware that the copy you have is illegal, even if you don't. Such applications aren't eligible for upgrades or technical support -- they may not even be the latest version.

From gray to black

Increasingly, what you buy may be counterfeit. But counterfeiters rarely bother to copy the retail version. The box, manuals, and packaging simply add too much to their production costs. Instead, they copy OEM and Microsoft's Worldwide Fulfillment software, which come without packaging and documentation. "It saves the counterfeiter money and offers what might seem to the consumer like a reasonable excuse for the lack of documentation or certificate of authenticity," says Sarah Alexander, international corporate issues manager for Microsoft.

These counterfeiters then sell their wares to a variety of distributors who eventually sell the software to end users.

If the distributors themselves have not been fooled into thinking they're reselling legitimate software, they'll try to persuade you that their wares are on the level. They normally provide a registration number that will unlock the protection mechanism on your new CD. But when you try to register the software or obtain technical support, you'll usually be out of luck. The registration numbers are often stolen, fake, or copied during the counterfeiting process. If it was ever a legitimate number, the software publisher will know it has been compromised. If it is not a real number, the publisher will know that, too.

Craig Hammersmith, a student and network administrator in Morrison, Colorado, thought he had found a terrific deal on Microsoft Office Pro at Onsale Exchange (now Yahoo Auction), a popular person-to-person Web auction site.

Hammersmith was initially suspicious of the prices ($70 to $80) that he saw for the office suite. "I asked people I know, and they speculated that it must be overstock," he says. "One person was selling 500 copies. How could they advertise illegal software like that? I thought it must be legit."

But what he got was a CD in a jewel case, marked Microsoft Easy Fulfillment, and no documentation. When he realized the CD did not come with a certificate of authenticity, he called the vendor, who told him not to worry, Easy Fulfillment didn't come with a certificate (not true). Finally, Hammersmith called Microsoft's piracy hot line (800/785-3448) and learned he had indeed purchased counterfeit software. In the end, Hammersmith confronted the vendor who had sold him the fake goods, and he eventually got his money back.

Why should you care?

On a good day, you can get a counterfeit copy of Microsoft Office on the Web for just $35--up to 94 percent off retail. If it works and if you're certain you'll never call tech support, what's the big deal? For one thing, buying counterfeit goods is against the law. Of course, if you are caught, the worst that's likely to happen to you is confiscation of your software. But there are other reasons to avoid counterfeit items.

When you buy software from a legitimate source, you get a license to use it. The license usually entitles you to upgrade offers. But if you're a business, large or small, the license is even more important. The Business Software Alliance and the Software Publishers Association, another industry trade group, actively audit software licenses in businesses and can fine a firm up to $100,000 (through a civil court judgment) for each product it finds in violation.

Don't think you won't get caught. The BSA and the SPA both operate confidential hot lines for reporting software piracy. On average the BSA gets 100 to 150 calls per month, of which it pursues about 70 percent. In the past five years, the BSA has collected over $30 million from companies that have been found in violation of license agreements.

Even if you're never caught with counterfeit software, you could be letting yourself in for other headaches. Since the software you bought was manufactured or distributed by an unknown source, you have no assurance that it won't have viruses or be an earlier, buggier version of the program you thought you were buying. Criminals are not known for stringent quality control. According to Detective Jess Bembry, a 27-year veteran of the Los Angeles County Sheriff's Department who has arrested a number of software counterfeiters, even the crooks admit that "only about 15 to 20 percent of the software they produce is any good."

Every software firm we spoke to said it had encountered problems with counterfeit software, from viruses to shoddy workmanship. And when these companies get tech support calls from users of bad software, they have to tell callers they can't help.

But perhaps the most compelling reason to avoid (and report) counterfeit and gray market software is that the money you spend usually ends up in the pockets of frightening people.

First, there are gangs. Adobe investigator Navarro says that the huge amount of money to be made in the software gray market has inspired various -- often enemy -- gangs to work together.

"They recruit people with no criminal background to go work for a hardware or software company--usually in shipping and receiving. [These recruits can pass] the background checks that software and hardware companies run on new employees," she explains. Once inside, the new hire scopes out the situation so the gang can commit a robbery.

After the software has been ripped off, it's often funneled to international gangs -- in places such as East Asia, Russia, Nigeria, and Ireland -- for distribution. Where do the profits go? Into the pockets of criminals involved in drug trafficking. "Narcotics agents are finding a lot of software and hardware when they do raids now," Navarro says.

Software meets the Mob

But when it comes to counterfeiting software, street gangs are small potatoes. Setting up a large-scale counterfeit operation takes lots of money. A single high-capacity CD press can cost over a million dollars. According to Bob Kruger, vice president of enforcement at the Business Software Alliance, "When you're talking about counterfeiting, you're talking about people who have organization. And they can be very hard-core criminals." Who are these criminals? Think Scarface, with an Asian twist.

At the Los Angeles County Sheriff's Department, much of software counterfeiting falls under the jurisdiction of the Asian Organized Crime Unit. "San Gabriel Valley [in the Los Angeles area] is the counterfeit capital for the U.S. as far as software is concerned," says Detective Bembry, a key investigator in the Asian Organized Crime Unit.

Detective Marcus Frank of the Westminster Police Department in Orange County adds, "There are high-level syndicates behind the majority of [counterfeiting], probably emanating out of Asia."

George Abbott, managing director of the International AntiCounterfeiting Coalition in Washington, D.C., agrees most counterfeit goods come from the Pacific Rim.

Software counterfeiting appeals to organized crime because it is a white-collar offense that doesn't pull long prison terms. But the money that's derived from counterfeiting funds other operations that are far more illegal. "They've used the money from counterfeiting to finance guns, drugs, gambling, prostitution...as well as legitimate businesses," says Bembry.

While much counterfeiting is carried out in this country, a large chunk takes place overseas -- again, mostly in Asia. In 1997, U.S. Customs seized $54.1 million in counterfeit imports, including software, film, music, and clothing, according to Bruce Raine, senior import specialist at the U.S. Customs service in Los Angeles. Much of the merchandise ($14.5 million worth) came from China.

The amount of piracy in China has caught the attention of the White House. In a speech to the SPA in September 1997, Vice President Al Gore called the level of piracy in China "alarming and unacceptable." He told the group, "We went eyeball-to-eyeball with the Chinese in 1995 -- right to the point of sanctions -- before they gave us a sweeping and comprehensive agreement to enforce intellectual property rights. Now we have to make sure that agreement is carried out."

An even broader counteroffensive may be needed. Brad Smith, Microsoft general counsel international, says he has seen a still more ominous element in the software piracy food chain. "I'm not prepared to talk about specifics," he says, "but we have seen organized criminal groups using the proceeds from software counterfeiting to pay for terrorist operations overseas. We have seen a couple of terrorist organizations get involved in software counterfeiting."

It's not the first time terrorists have been mentioned in connection with counterfeiting. Testifying before Congress in October 1995, Dempster Leech, a detective who has investigated counterfeiters, implicated terrorists. According to a summary of the hearings, Leech discussed counterfeiting in general. The summary reads, in part: "Money generated from counterfeiting supports organized crime, [Leech] said, adding that recently, several high-level players indicted in a counterfeiting organization were financially tied to terrorist groups such as the one that bombed the World Trade Center."