Is it Gucci? The Underground Market For Counterfeit Bags

The holidays are right around the corner. Malls and shopping strips around the world will soon be flooded with shoppers, hungry for the best deals on the best gifts. As much as we would all love to buy our loved ones the highest quality, most luxurious products on the market, our wallets often steer us in a different direction. So, what do you do when that Louis Vuitton clutch you desperately want to get your mother is too expensive? One alternative that many shoppers resort to, however frowned upon it may be, is to buy a low-quality replica of those luxury brands we see touted by the celebrities or featured on the covers of fashion magazines.

Anyone who has ever visited New York City (or any other major city, for that matter) has likely witnessed this underground, illegal market for “knock-off” luxury goods. Vendors swarm the city streets, verbally targeting tourists with their “bag sales” or even spreading their collections across large blankets that they can easily wrap up and run off with at the sight of the police. While some innocent shoppers buy these knock-offs without thinking twice, there is little public knowledge about this billion-dollar, underground market. According to the Department of Homeland Security, 500 million fake handbags, belts, and wallets worth $1 billion on the street were confiscated in 2012, and $1.2 billion were seized in 2014. Given this “brand epidemic,” we should be wondering where these counterfeit goods are made, where the money is going, and why the practice is illegal.

To the untrained eye, designer counterfeits look and feel like the real deal. In fact, a Virginia woman recently made $1M in profit by simply purchasing real designer bags online and returning the counterfeit versions from China at the in-store locations. A UN report found that almost 70 percent of counterfeits seized globally from 2008 to 2010 came from China, but India and Brazil are popular spots for knock-off manufacturing as well. So, why China?

China has become the world’s workshop, hosting thousands of Western companies’ outsourced supply chains for manufacturing goods. Their economic system supports counterfeiters either directly (through a leakage of products out of a legitimate supply chain), or indirectly (drawing on local manufacturing expertise and suppliers to set up illegitimate manufacturing sites). According to Business Insider, many Chinese counterfeiters have successfully bribed or otherwise co-opted local law enforcement officials into allowing them to continue to operate. Even worse, in some cities in China, counterfeiters number amongst the larger employers, and shutting them down would have large political and economic consequences.

The harm of buying a counterfeit Fendi bag goes beyond just sending money to China, something we do almost daily. According to Valerie Salembier, CEO of  The Authentics Foundation, because the operations are hidden from legal regulations and inspections, the money often goes to groups that support child labor, gruesome factory conditions, drug dealing, human trafficking, and even terrorism. This illicit trafficking of counterfeit goods offers criminals a supplementary source of income and a way through which they can launder money. Money from the counterfeit bag sales can be used to fund additional illegal activity, and vice versa. Specifically, Interpol—the world’s largest international police organization—found that funds are especially linked to terrorist groups like Al-Qaeda and Hezbollah. With this knowledge of where the funds are going, one would hope that consumers would think twice before purchasing a counterfeit bag.

A proposed solution to this dilemma would be to legalize counterfeit bag production, allowing knock-off producers to compete in the open market and play by the same rules that regulate other manufactured goods (i.e. child labor laws, paying taxes, disclosing financial statements, etc.). As of 1984, the Trademark Counterfeiting Act has made the sale of counterfeits illegal, punishing offenders with up to a $5 million fine and 20 years in prison. The law is designed to prevent  counterfeiters from “free riding” on research and development (R&D) investments of on-brand companies, the creativity and brand equity (how much a brand is quantitatively worth) of design houses that have built their staple trademarks from the bottom up. Much like intellectual property in the technology industry, bag counterfeiters avoid the expensive upfront costs that legitimate designers have had to face to build up their logo’s perception and image. For example, building brand equity in the luxury goods market involves spending a large amount of capital advertising their products through various media forms, a cost that counterfeiters are able to profit off of without paying. The end result is that counterfeiters not only avoid these costs, they also leech revenues from the designers themselves by selling substitute goods that potential customers buy instead of purchasing the authentic product.

        While laws punishing the sale of counterfeit bags exist in the United States, laws punishing those buying such goods are non-existent. In 2013, NYC councilwoman Margaret Chin brought a bill to then-mayor Michael Bloomberg proposing that the purchase of counterfeits be treated as a Class A misdemeanor. Chin’s bill was defeated over concerns that tourism would be affected. While that may be the case here, countries such as Italy, England, and France prosecute consumers who buy fake luxury goods or are caught in the possession of counterfeit items. For now, and for the upcoming holiday season, the decision to purchase counterfeit bags in the United States remains a moral one that the consumer must decide on their own.

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