Luxury Industry Goes Global, Knock-Offs Follow

When Giuseppe Festa, an Italian man who owned a small store in Naples became involved in counterfeiting, he also became a global businessman. Mr. Festa imported watches from Hong Kong through Georgian and Egyptian contacts, paid for the goods through New York and Swiss bank accounts, and distributed them throughout Europe in what amounted to one of the continent’s most successful luxury-goods counterfeiting rings. While Mr. Festa dealt in watches, the counterfeit industry covers everything from compact disks and sneakers to medicine and other luxury goods. With the manufacture of luxury goods going global, counterfeiters have increasing sophistication in shadowing the latest trends. In Asia, particularly China, where most imitations are made, counterfeiters have the opportunity to work in close proximity to the manufacture of authentic products, which had moved in search of low-cost platform. Knock-offs sometimes beat the genuine products to market. In tapping Asia as a resource, luxury goods manufacturers provide an unwitting service to their illegal rivals. – Yale Global

Luxury Industry Goes Global, Knock-Offs Follow

Alessandra Galloni
Friday, February 3, 2006

Giuseppe Festa, a Neapolitan store owner turned counterfeiter, was a global businessman. From Georgian and Egyptian intermediaries, he purchased watches and watch parts that came from Hong Kong. Investigators say he was the mastermind behind one of Europe's biggest fake luxury-goods rings and that he paid for goods through New York and Swiss bank accounts.

Now Mr. Festa, 62 years old, is expected to stand trial on counterfeiting and other charges after a five-year probe by prosecutors and finance police in Naples. Mr. Festa, through his attorney, says he denies some but not all of the charges. His tale illuminates a problem faced by the world's biggest luxury-goods companies: As they become more complex, the billion-dollar counterfeit business is shadowing them around the world.

In China, where the majority of knock-offs are made, counterfeiters can visit boutiques opened by luxury-goods companies. Some fashion houses also have moved parts of their production to Asia in order to trim costs. The proximity to actual luxury goods has enabled counterfeiters to raise quality and copy products faster. The Internet is spurring sales, too: Counterfeiters' Web sites show photos of real watches and then pitch replicas at a fraction of the price.

This month, a Hong Kong market was selling copies of Louis Vuitton handbags that had been unveiled in Paris but weren't yet in stores, says Nathalie Moullé-Berteaux, intellectual-property director of LVMH Moët Hennessy Louis Vuitton SA's fashion group.

When components of faked goods are shipped back to Europe, they often are accompanied by detailed instructions. One 2001 Hong Kong shipment nabbed by finance police contained a kit for the forgery of Officine Panerai watches, a brand of Compagnie Financière Richemont SA, according to documents gathered by the police. Included were metal plates and diagrams showing how to attach them to watch faces and how to forge the Panerai logo.

"This is for use to put the logo in relief," the sender wrote in a note. "Please keep the plate and next Monday will send you the dials."

As a result of this increasing sophistication, illicit profits from counterfeit goods have swelled. According to Alain Defer, a French police official who until recently headed an anticounterfeiting unit, profits have reached $10 per dollar invested. That is significantly higher than profits earned by the companies being copied and equivalent to returns in the illicit drug trade.

Lured by high returns, an increasing number of organized crime groups such as the Chinese triad and terrorist groups such as Hezbollah have turned to the sale of counterfeit goods, according to Interpol, the international police organization based in Lyon, France.

"A counterfeiter can sell counterfeit handbags and make as much money as someone selling cocaine," Kris Buckner, president of Investigative Consultants, told a U.S. Senate hearing last year. Investigative Consultants is a private-investigations firm in Lawndale, Calif.

One Vietnamese group in New York imported watch movements and other components from China that cost 27 cents apiece to make, according to Harley Lewin, an attorney at Greenberg Traurig LLP who represented Richemont in a 2003 New York civil suit. According to evidence he introduced in court, the group assembled the watches with fake logos and sold them to associate wholesalers for $12 to $20.

The wholesalers resold them to street vendors and beauty parlors for $20 to $35 and to Internet dealers for as much as $125. Consumers bought the watches for as much as $250. A real, basic Cartier starts at about $1,800. In the end, Richemont won the civil case and a $594 million judgment against a group of Chinatown dealers.

The annual sale of counterfeit goods -- from compact discs to sneakers and medicine -- is about $540 billion, estimates the World Customs Organization, an international organization. Luxury goods account for about 5% of that number, industry executives say. While relatively small, the trade maddens luxury-goods companies, because they feel it cheapens their reputations for quality and exclusivity.

Tighter Penalties

Some countries have recently tightened penalties. Last summer, France enacted a law under which even a shopper caught with a fake handbag faces three years in prison. In the U.S., a first-time counterfeiter can face as much as 10 years in prison and $2 million in fines. (See related article1.)

Watches and jewelry are increasingly important parts of the luxury-goods industry. Fashion companies such as LVMH and Gucci Group NV have created watch and jewelry lines to compensate for the inevitable slumps in their core fashion businesses. Unlike ready-to-wear collections, which change every season, high-end watches and jewelry are more immune to fashion trends.

In 2004, the latest available data, Swiss watch exports were $8.6 billion, a 10% jump from the prior year. Most luxury watch brands are made in Switzerland.

A burly man who goes by the nickname Pino, Mr. Festa for years ran a store called Mister Watch in the bustling port city of Naples with his wife Gisele and their two sons. It sold inexpensive, unbranded watches and home products such as lamps and kitchen appliances.

Mr. Festa began trafficking in fake watches more than a decade ago, finance police in Naples say. In 1992 and again about five years later, he was charged with trafficking in counterfeit watches but was acquitted in both cases, says his attorney, Ercole Ragozzini. Mr. Festa's role in the fake watch trade was pieced together from court documents filed in Naples and interviews with investigators and luxury goods executives in Europe and the U.S.

Mr. Ragozzini says his client resumed selling fake watches when business at Mister Watch stalled. "Pino loves beautiful watches, so he hated the idea of selling fakes, but he had no choice," Mr. Ragozzini says.

He expects his client, who wears a classic Seiko, to be indicted soon. Prosecutors in Naples are requesting Mr. Festa be indicted on charges of counterfeiting and criminal association, which could get him as much as seven years in prison.

Mr. Ragozzini says his client admits only to falsely branding watches in Italy, a lesser crime than that of importing watches already counterfeited. Part of Mr. Festa's defense will be based on the theory that "a watch that sells for €100 [$120] is clearly not the real one, so the consumer isn't being tricked," his attorney says. He adds that by agreeing to a fast-track trial and earning points for good behavior, Mr. Festa should be able to end up with a "tolerable sentence of community service."

Through his attorney, Mr. Festa declined to comment.

According to an indictment request filed by prosecutors in a Naples court, Mr. Festa acted mostly as a wholesaler. He procured counterfeit watches, unbranded watches and watch parts from importers in Europe who sourced their products in Hong Kong. Mr. Festa then sold to shops and street vendors across Italy, according to the indictment request.

By early 2000, Mr. Festa had teamed up with several suppliers, including David Pitimaschvili and David Zach, both natives of the former Soviet Republic of Georgia who lived in Vienna, according to the court documents. Though they worked separately, investigators say both men bought watches from a Hong Kong wholesaler called Kam Seng Precision Watch Band Manufactory Co.

Another supplier was an Egyptian called Nabil Hussain and his wife Sofia who worked out of Switzerland. Mr. Hussain didn't sell finished products to Mr. Festa. Rather, he provided unbranded watches and parts that the Italian customized, according to the indictment request. The three suppliers sent Mr. Festa a continuous stream of goods.

"I've been to China, Japan, Korea and especially to Hong Kong where I scoped out lots of new models," Mr. Hussain told Mr. Festa during a phone call in November 2000, according to a transcript of a wire tap contained in the Naples court documents. In the call, Mr. Festa placed an order for 1,000 watches, including 200 that resembled Rolex Submariner models.

About the same time, according to the transcripts, Mr. Pitimaschvili called to offer Mr. Festa fake versions of the sporty watch brand Breitling. "Oh yes, we don't have any more of those. Send some over," Mr. Festa replied. The Neapolitan also ordered an assortment of 4,000 watches, including several fake Rolexes, for $100,000, or $25 apiece.

In the same call, Mr. Pitimaschvili worried about being stopped by police. Mr. Festa shot back: "I don't want to make mistakes."

Mr. Festa transferred funds from Italy to an account in Lugano, Switzerland, after which the money was transferred to an account in New York to which Mr. Pitimaschvili had access. From there, it was transferred to Hong Kong, according to the indictment request. When the watches reached Mr. Pitimaschvili in Vienna via courier, he drove them across the Italian border hidden under the floor of his sedan. Mr. Festa's son picked them up in Venice, investigators say.

By way of thanks, Mr. Festa sent Mr. Pitimaschvili a pack of Neapolitan mozzarella. Mr. Festa resold the watches to retailers for as much as double what he paid, according to the financial police working on the case.

To diversify his business, Mr. Festa also assembled fake watches in secret warehouses. Police say he imported from Hong Kong faces and winders that looked like Rolex parts. From Switzerland, he procured several thousand automatic watch movements made by Eta SA, a leading Swiss manufacturer (a movement is the motor that makes watches work). Gold cases and wrist-bands came from factories in northern Italy.

In Naples, Mr. Festa's son Daniele, 34, and other associates forged trademark language, such as "Rolex Oyster Perpetual Datejust," onto the watch faces and assembled the other pieces, according to the indictment request.

Mr. Ragozzini says Daniele Festa, whom he also represents, will have the same defense as his father. There is a pending warrant against Daniele Festa but he hasn't been arrested.

A spokeswoman for Eta, a subsidiary of Switzerland's Swatch Group AG, says the company is aware it might be supplying counterfeiters, but notes that it is difficult to keep track of all customers. To try to curtail the phenomenon, ETA wants to stop selling individual components for watch movements, which are hard to monitor. Under European Union competition rules, it can't do so until 2011, the spokeswoman says.

Vast Operations

Mr. Festa extended his operations, offering to fix fake watches that had defects. "Send me some [Rolex] crowns and some watch faces. I'll pay you well for them," Mr. Festa told Mr. Hussain in one conversation. "This way, if a watch breaks, I can repair them."

He dispatched his sons and other associates across Italy to show off samples of his increased range: Cartier, Longines, Vacheron Constantin, Gucci and Baume et Mercier. To potential customers, "I say these are fakes," Mr. Festa told an associate during one taped phone conversation. "But some people are stupid. They think they have the real thing."

By the end of 2000, Mr. Festa's supplier network was so vast -- stretching across Asia to Eastern Europe -- that he could count on a continuous flow of watches even as police were starting to close in. They had been tailing him and tapping his phones for months.

One afternoon in mid-December, police stopped two Polish men in front of Milan's Hotel Michelangelo who were on their way to meet Mr. Festa. The police ripped up the floorboards of their green Audi A-6 sedan and found 10,752 fake watches, including men's and women's Gucci models -- a bounty valued at about $500,000 at retail. The timepieces had been sent from Vienna by Mr. Zach, one of Mr. Festa's suppliers, according to the indictment request.

Mr. Festa watched the raid from his minivan parked across the street from the hotel. "They've nabbed them," he told an associate on his cellphone, according to a transcript of their conversation.

Within 24 hours, Mr. Festa procured another batch. Mr. Zach drove straight to Naples from Vienna where he delivered 15 cartons with 10,000 more watches, according to the court documents. Mr. Festa paid him in cash. About this time, investigators say, Mr. Festa was processing more than $600,000 of fake goods every few months.

In August 2001, Mr. Festa and several associates were put under investigation and arrested on suspicion of counterfeiting and spearheading a criminal organization. Mr. Festa spent several months in preventive detention in a Naples jail.

A judge in Naples has issued an international arrest warrant for Mr. Zach, but he hasn't been detained. Prosecutors don't believe he has hired a lawyer in Italy and attempts to reach him for comment were unsuccessful. Italian prosecutors have been unable to track down the owners of Kam Seng, the Hong Kong wholesaler, which isn't at the address supplied by the court documents.

Mr. Pitimaschvili's lawyer, Andrea Castaldo, says the Georgian, who still is under investigation by Naples prosecutors, denies breaking the law. Through his attorney, Mr. Pitimaschvili contends he supplied Mr. Festa only with unbranded watches and watch parts. He was arrested in 2001 and spent a few days in jail. Prosecutors haven't asked for an indictment.

Franco Sotgiu, a lawyer for Mr. Hussain, the third of Mr. Festa's suppliers, says his client reached an out-of-court settlement with Naples prosecutors last year and agreed to a one-year jail sentence that was later suspended. In the settlement, Mr. Hussain didn't confirm or deny any of the prosecutors' charges.

Mr. Sotgiu says his client confirms buying watch parts and unbranded watches in Asia that he sold to Mr. Festa.

Mr. Festa and several other members of the organization are expected to go on trial in Naples this year. The five-year delay is due to a slow-moving Italian justice system bogged down with a heavy case load.

Mr. Ragozzini says Mr. Festa now is living in Dortmund, Germany. He is selling tableware and other home products after a stint peddling Italian foodstuffs. "He's an eclectic guy," Mr. Ragozzini says.

Staff Reporter of The Wall Street Journal

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