Saturday, 20 February 2010

Blind Eye Turned to Counterfeit Cell Phones

It's a typical sight in many of Moscow's electronics markets: a 3,000 ruble Blackberry, a gold-plated Nokia and an iPhone with a television antenna.

Counterfeit and other illegal mobile phones have been flooding into the country, but while law enforcement, mobile providers and phone makers have all pledged to tackle the problem, illegal mobile phones continue to be openly sold in most electronics markets with impunity.

Counterfeit phones currently make up 2 percent to 3 percent of the Russian market, according to estimates by Mobiset.ru, a telecoms portal. Total contraband phones, a category that includes both counterfeit and authentic phones that have been smuggled into the country, account for about half of all mobile phones currently sold in Russia.

Counterfeit phones are pouring into the country almost exclusively from China, giving consumers the option of choosing anything from a cheap, disposable knockoff to a high-quality reproduction at a fraction of the price.

Counterfeit mobiles can be divided into three main groups, ranging from low-quality knockoffs to exact copies of the latest models, said Eldar Murtazin, editor of telecoms portal Mobile Review.

"The first category are mobile gadgets that are labeled 'Nukua' or something that sounds like a well-known brand and can only be mistaken as genuine from a distance," he said.

"The second type is a more precise copy, which looks much like the original one and has an official logo, but offers a primitive interface. You can also find a high-quality falsification made of decent materials, using exact copies of the original microchips and even screws."

The last group includes the exact replicas, which have the unit's original software installed and for which the only visible difference from the original is the price — which is several times lower.

Moscow's markets are flooded with the imitations, ranging from cheap knockoffs with "enhancements" added, to jewel-studded luxury brands.

"Here is one that looks exactly like an iPhone 3G. It costs 3,400 rubles ($114), but I can give you a small discount if you will take the memory card too," said Sergei, a salesman from Savyolovsky Market, who pointed to iPhone-like gadgets, all of which are sporting a small, sliding television antenna and slots for two SIM cards, options that a real iPhone 3G doesn't have.

Sergei, who wouldn't give his last name because of the illegal nature of his enterprise, also offered a more expensive model that was labeled as containing 32 gigabytes of memory. But it only works well with 16 gigabytes, the salesman said, advising a reporter not to "put too much memory in, or it will freeze up."

Both phones had the Apple logo, but fine print on the back said, "Designed by Cpple in California, made in China," an apparent attempt by the manufacturer to protect itself from trademark lawsuits.

A spokeswoman for Apple Europe wouldn't give an estimate for how much it loses from falsifications or say whether the company is fighting the illegal trade at all.

Sellers say China is the sole source of counterfeit mobile handsets that make it to Moscow markets.

"I don't really know who exactly manufactures these 'masterpieces,'" Sergei said, "but they are assembled in China where there are numerous illegal factories."

The factories are technically operating underground, but look like legal assembly lines, said Murtazin, who recently visited a factory near Guangzhou, an industrial Chinese city near Hong Kong.

"The producers work underground and are sometimes raided by the police, but they still manage to function normally," he said. "I remember trying to take pictures in Guangzhou at a shopping center where they sell these fakes, but they thought I was from an international phone company, and the guide told me to delete the pictures if I wanted to leave the market unharmed."

Other knockoffs run the gamut from the absurd to the gaudy.

Another salesman at Savyolovsky was selling a so-called iPhone 2G, a replica of the original iPhone — only half the size. "We call it a mini-iPhone, a good present for a lady. Only 4,600 rubles!" he said.

A Vertu Ascent Ferrari 1947 Limited Edition, which is on sale for 7,480 euros ($10,500) in an official Vertu shop in Moscow, is on sale for just 8,000 rubles in Gorbushkin Dvor, a market in the west of Moscow.

"Few would see the difference. Look, ours has leather, titanium and looks exactly the same. So why pay more?" a seller said.

A golden-plated Nokia 8800 with rhinestones, selling for 3,000 rubles instead of the 70,000 to 80,000 ruble price tag for a genuine model, and a phone resembling a Blackberry but labeled as "Bloakberry" were the "hot sales hits," another seller at Savyolovsky said.

"Counterfeit phones are one of our most serious problems," Viktoria Yeremina, a spokeswoman at Nokia Eurasia, said in e-mailed comments. "They not only damage the brand, but they can be dangerous for users," she said.

"We have a special team working in China, and we also fight bootlegged goods in other countries, and naturally, in Russia."

Spokespeople for Vertu and Research in Motion could not be reached for comment.

It's unclear how much help the phone makers are getting from Russian law enforcement, however, as two Interior Ministry departments each said the other was responsible for dealing with trafficking in illegal smartphones.

"We can't assign a police officer to every salesman of illegal goods. This will just not work," said Andrei Pilipchuk, a spokesman for the Interior Ministry's economic security department. "We curb the channels of illegal supplies on a strategic level."

"Illegal dealers bribe officials at customs and carry whatever they want to inside the country, whether it be phones or other gadgets, in containers that may be listed as 'clothes' in customs forms, for example," he said.

Plipchuk directed all further questions to the Interior Ministry's department "K," which is tasked with dealing with high-tech crimes.

A spokeswoman for department "K" said only that the department didn't deal with illegally imported smartphones and directed all further questions back to the economic security department.

If a smartphone makes it through the border, it is as good as sold, so the most effective way to curtail the sale of counterfeit phones is at the border.

The Federal Customs Service discovered 7 million units of counterfeit goods and initiated more than 1,000 legal cases countrywide in the first two weeks of 2010 alone, said a spokesman for the customs service, who declined to be identified. He did not say how many of these cases involved counterfeit phones.

"Counterfeit phones are usually smuggled in peoples' luggage in lots that rarely exceed 200 to 300 units, which on average are valued at 600,000 to 2 million rubles," the spokesman said.

In every shipment that crosses the border, customs officials crosscheck the names of the product and the importer with a database to confirm that the importer is officially accredited by the manufacturer to sell the goods in Russia.

"In some cases when we have doubts, we detain the goods and consult the manufacturer to find out whether the goods are of legal origin," he said.

But heading off all illegal phones at the border runs the risk of throwing out the baby with the bathwater.

The introduction of the iPhone 3Gs into Russia has been pushed back several times because of customs problems. Last month, RIA-Novosti quoted sources close to mobile operators as saying new customs regulations were hampering the introduction of Apple's smartphone on the Russian market.

According to new customs regulations that went into force on Jan. 1, importers of radios and other electronic devices must get licenses and inform the Federal Security Service if the devices have encoding functions.

Theoretically, it should be easier to curtail the counterfeit phone trade at the point of sale. But unlike smuggling, which is easy to prove and get a court ruling on, selling counterfeit phones falls under a number of articles of the Administrative and Criminal codes, and it is difficult to successfully prosecute such cases, lawyers say.

"The police say they lack expertise to differentiate fake smartphones from the genuine ones, which could be true in the case of high-tech sophisticated falsifications," said Oleg Moskvitin, a senior lawyer with Muranov, Chernyakov & Partners. "But most Chinese fakes have defects, or, alternatively, have an abundance of functions that the original model does not offer, so in most cases it is easy to track those."

Even if law enforcement did crack down on illegal phone retailers, it would be a piecemeal effort, requiring them to prosecute individual sellers rather than the markets at which they are sold.

"The trade center itself does not sell mobiles — they lease properties to tenants who may be honest businessmen or may not be," Moskvitin said. "The news of a 'piracy orgy' on the territory of a trade center or a market creates reputational and political risks, rather than legal risks, which, however, may result in the closure of the property, as was the case with the old Gorbushka."

A chaotic outdoor weekend flea market near the Gorbunov recreation center in the west of Moscow was closed in 2001 after an anti-piracy campaign orchestrated by city authorities, but a new modern trade center with the same name was soon opened nearby.

The most effective tool to fight counterfeit phones is in the hands of mobile operators, but they may be loathe to use it.

All legally produced phones are hardwired with an International Mobile Equipment Identity, a unique code assigned to each device, which would allow operators to immediately detect when a call was placed from an illegal phone.

In December, mobile operators in India blocked all phones that didn't have an IMEA code, rendering useless most counterfeit phones.

But to do so would not necessarily be in the interest of Russian operators, who would be effectively dropping many of their subscribers.

"The problem is that phone operators are more interested in getting as many subscribers as possible and don't care about the fakes," said Sergei Vasin, a telecommunications analyst at Metropol.

Mobile operators say they are against the use of illegal phones, as they can damage the operators' networks, but that they cannot solve the problem on their own.

"It is impossible to fight [illegal trade] using only the resources of the mobile operators," Ksenia Korneyeva, a spokesperson for Beeline, said in e-mailed comments.

She said blocking illegal phones by tracking their IMEI could be a useful tool, but doesn't look like a realistic option quite yet.

"We should first work out the technical procedure necessary to carry out this project, the logistics and the areas of responsibility," she said.

"Of course, phone handsets can be identified by IMEI code, and it is logical that one IMEI should correspond to one particular phone. But sometimes phones can be cloned, in which case a large number of devices are assigned one IMEI," she said.

But while mobile operators and law enforcement mull over how best to deal with the issue, sellers aren't particularly worried that their trade is in any danger.

One retailer of illegal phones at Savyolovsky brushed off concerns about the legality of his trade. "If everyone does this here, it is supposed to be OK."

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