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August, 2017

Xuzhou police break up major cross-border counterfeit cosmetics ring

Original article: People's Daily

Authorities in the Jiangsu Province city of Xuzhou have broken up a large cross-border ring of cosmetics counterfeiters, arresting 37 suspects and seizing goods valued at up to 200 million yuan. The counterfeiters established an operation in both China and South Korea, as they infringed on the trademarks of Korea's Innisfree and Etude House. Investigators say that about 1.3 million people in 23 Chinese provinces were affected by the counterfeiters' activities. Police further seized a large amount of cash from the suspects: 812 million Korean won and 11.42 million yuan. 


From November 2014 to mid-2015, the counterfeiters effectively controlled the online sales network for Innisfree and Etude House in China, and earned 10 million yuan in profits. 

Analysis:

Chinese consumers see Korean cosmetics as high quality. The Korea International Trade Association notes that revenue generated from Korea's exports of skincare and makeup products to China reached US$3.97 billion in 2016, up 44.3% from US$2.75 billion a year earlier. 


Despite the fuss in the Chinese press about South Korea's deployment of a missile-defense system (THAAD) - China argues that THAAD threatens its security - and a subsequent ban on 19 Korean cosmetics products, TIPG does not expect demand for Korean cosmetics to lag in China anytime soon - except perhaps among a few diehard jingoists. Chinese citizens are increasingly able to read between the lines of government efforts to use economics as a weapon. At the same time, banning certain Korean cosmetics may even offer more opportunities for counterfeiters if genuine products are harder to find. 


This case is unique because of the size of the operation and the cooperation between counterfeiters in China and South Korea. Indeed, this is not a typical instance of a contract manufacturer deciding to go down the road of fake goods. Instead, Chinese students studying abroad in South Korea who had some experience with the sale of genuine Korean cosmetics brands teamed up with a Korean university professor (assumedly someone with chemistry expertise) to manufacture fake Innisfree and Etude House cosmetics. The professor assisted with the production of raw materials in Korea. 


The counterfeiters told police that they "strived for perfection" in their products. For instance, they boasted about how they produced the paste for a facial mask in South Korea, then shipped it to Hong Kong and later to a factory in Guangzhou for finishing and packing. 


To promote their products on Taobao, the suspects used photos taken by their colleagues at the authentic brand stores in South Korea. To persuade buyers the products were genuine imports from Korea, they forged customs documents and posted them online. 


What brought the counterfeiters down this time was not unusual: The products were shoddy. Xuzhou authorities first learned of consumer complaints in January 2016. Buyers said Innisfree facial powder they had purchased on a Taobao store based in Nanjing was poor quality and they suspected it to be fake. 


Investigators uncovered 20 million yuan worth of counterfeit cosmetics when they arrested the store owner, Wang Chenmou, a student who had studied abroad in South Korea. After Wang's detention, they arrested another student, Zhang Mouli, and discovered she had been involved in a transaction volume of 10 million yuan over a one-year period: all conducted through Alibaba's Alipay and WeChat Wallet. Let's hope those two companies keep a closer eye on transactions on their platforms in the future - especially WeChat, which receives virtually no negative PR compared to Alibaba. 

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