Cover

How Fake Goods Sail Past Customs

Danylo Hawaleshka March 20 2000
Cover

How Fake Goods Sail Past Customs

Danylo Hawaleshka March 20 2000
The crammed offices of OMI Music Inc. are located in a small, nondescript business plaza built across from railway tracks in an older neighbourhood of Brampton, Ont. From inside Unit A10, Bhaskaran Menon and his five employees distribute South-Asian music to the world. But unfortunately for Menon, pirated copies of his compact discs are flooding into Canada, cutting into sales and driving down prices. Adding to the frustration, says Menon—echoing a view held by the RCMP—is how Canada Customs makes it remarkably easy for bootleggers to break the law.

Counterfeit items from music CDs to golf clubs flood into Canada as the RCMP seethes

Menon started OMI Music in 1991 and holds a licensing agreement with Magnasound (India) Ltd. Under the deal, he is authorized to sell copies of Magnasounds movie sound tracks, classical music and pop songs anywhere outside India and the Persian Gulf. His discs are manufactured in suburban Montreal. Last year, Menon sold 80,000 CDs to retailers on four continents. If not for the piracy, and what he calls Canada Customs’ indifference to it, Menon says he could triple sales in Canada. “My perception,” he says, “is they couldn’t care less.”

As Menon mulls over his predicament, he takes little comfort in knowing he is far from alone. In fact, a Macleans investigation has confirmed that Canada Customs inspectors, under the direction of senior civil servants, routinely allow pirated merchandise of all manner to enter the country unhindered—thanks, they say, to inadequate laws against it. Music, software and movies are among the most popular items being bootlegged, but the practice extends to just about anything worth counterfeiting, from Tommy Hilfiger clothing to Tag Heuer watches to Intel computer chips. Toys and video games are also lucrative, as are cellphone accessories, perfumes, prescription drugs, even golf clubs.

Moreover, the agency goes so far as to collect duties and taxes on shipments its inspectors often know to be in violation of copyright and trademark laws. In effect, Ottawa’s coffers are being swelled by millions of dollars a year due to levies applied to fakes. Roy Gellner, district branch president of the Customs Excise Union in Windsor, Ont., says inspectors across the country “see obvious abuses” of the Copyright Act on a regular basis. “If there’s one thing that our members are universal on,” Gellner told Macleans, “it is that very frequently they see commercial and private shipments, which > very clearly are bootleg copies of legitimate recordings.” Furthermore, says Gellner, “if they’ve declared it and they’ve got s? their paperwork in order, we don’t do anything other than *• collect the duties and taxes.”

Senior officials at the Canada Customs and Revenue Agency insist they can do nothing more. They contend existing legislation does not give customs agents the authority to seize goods that contravene intellectual-property laws. According to Craig Turner, a director with the policy and inter-

pretation directorate of Canada Customs, inspectors may detain goods when the materials are prohibited, such as hate literature and child pornography, or when they are controlled, as with firearms and explosives.

The only time inspectors may hold shipments of fake merchandise, says Turner, is when Canada Customs is served with a court order, which the rights holder must obtain in advance. “The copyright and trademarks acts say were supposed to be detaining goods when we receive a court order,” says Turner. “When we receive the court order, we do that. We don’t have any scope for any other action.”

Critics such as Staff Sgt. Doug Ford of the RCMP’s Toronto West detachment intensely disagree. Ford maintains Canada Customs simply lacks the political will to enforce laws already on the books. No court orders need be obtained, he argues, because the Customs Act clearly states inspectors already have the power to detain merchandise if it contravenes any act of Parliament “that prohibits, controls or regulates the importation or exportation of goods.” The Copyright Act and the Trademarks Act are two such laws, notes Ford. The Customs Act also plainly states it is illegal to possess counterfeit goods. Therefore, every time a suspect shipment lands under an inspectors nose, Ford wants Canada Customs to pick up the phone and call the RCMP “Somebody in Ottawa is sitting on their hands,” says Ford. “We think they have the legal authority to provide the information to us and they just haven’t got off their asses and done it.” At the Toronto offices of the Canadian Recording Industry Association, Brian Robertson, the association’s president, and Ken Thompson, the group’s vice-president, are also feeling frustrated. While digital music may be the threat of the future, old-fashioned piracy is costing the Canadian recording industry $30 million a year, I says Thompson, and “over 80 per cent of that, we esti| mate, is imported.” Both men have lobbied high-rankf ing customs officials on a regular basis. In most cases, I says Robertson, the association only gets a call from customs when an inspector wants to check the declared value of a shipment of CDs—even when the discs are unmistakably bootlegs.

The consequences are far-reaching. To begin with, free trade in illegal goods hurts the Canadian economy. When counterfeit merchandise enters the market, cashonly transactions rob Ottawa and the provinces of substantial GST and sales-tax revenue. Contraband also costs domestic jobs, as legitimate enterprises such as Bhaskaran Menons fail to grow, or simply fail. Furthermore, says Rick Jenkins, one of two RCMP officers assigned to full-time policing of intellectual-property violations in the Greater Toronto Area, allowing forgeries onto the market can pose safety hazards to consumers. Goods can include clothing that hasn’t been tested for flammability or toys not checked for toxicity.

So who’s right—customs or the RCMP? Jacques Léger, an expert in intellectual-property cases at the Montreal firm Léger Robie Richard, agrees that current legislation is vague. Parliament, he believes, should draft laws specifically targeted at counterfeit goods. “We need more clarity,” he says. Christopher Pibus, a Torontobased partner at Gowling, Strathy & Henderson, one of Canada’s largest law firms, also blames the law—and Canada Customs’ selective interpretation of it. Pibus, who also practises intellectual-property law, notes the United States has anti-counterfeiting legislation a. that specifically targets the problem. “We have a Customs Act, I a Trademarks Act, a Copyright Act that can be used for enforcement, but that does not specifically address the problem § of counterfeiting,” says Pibus. “Customs would be assisted by

legislation that was more pointed. But at the same time, there are sections that they could be using. That’s why I say there’s a lack of political will.”

As it now stands, Canada Customs will detain fake goods only when served with a court order. But getting one has proven to be a cumbersome and largely unworkable process, says Pibus. The chief drawback is copyright and trademark holders must know in advance when a shipment of boodeg merchandise is about to arrive before they can seek a court order, most often through the Federal Court. As critics point out, boodeggers are not about to advertise their delivery schedules. The law’s impotence, they say, is reflected in the number of seizures made in the past five years. In that time, Canada Customs has been served with just four court orders. In three of the four cases, customs agents found and detained the goods.

Such slim pickings have raised eyebrows south of the border. Tim Trainer, president of the International Anti-counterfeiting Coalition in Washington, contrasts the record at Canada Customs with the U.S. Customs Service’s hardline crackdown. Trainer’s coalition, made up of businesses whose annual sales total more than $750 billion, notes that since 1995 the U.S. Customs Service has made 13,371 seizures involving intellectual-property rights. Those goods were worth $470 million. Customs inspectors in the United States, notes Trainer, are widely recognized as among the most aggressive anywhere. “If we’re having a problem year after year and our numbers continue to go up,” says Trainer, “it’s a rather fearful thing to think

Senior customs officials insist they have no authority under the law to seize bootleg goods

about in countries where they have passive systems, like Canada, just how much may be passing through their borders.”

Canada Customs and the RCMP used to co-operate. Beginning in late 1997 and continuing throughout 1998, senior customs officials allowed inspectors at a Toronto mailprocessing centre to phone Jenkins when suspect shipments arrived. In that time, the RCMP made 33 seizures—29 with customs’ assistance—worth $2.3 million, without ever seeking a court order.

Then, in January, 1999, customs ordered an end to the cooperation after the Federal Court ruled against the department in an unrelated case brought by Canada’s privacy commissioner. The case involved a program designed to combat employment-insurance fraud, in which customs forwarded the declaration forms of returning travellers to Human Resources Development Canada. Human Resources then crossreferenced the forms with their own files on the unemployed. The court noted customs is allowed to disclose information under limited circumstances, but ruled the co-operation with Human Resources exceeded that limitation. Customs is appealing the case, but until it is resolved, says spokesman Michel Proulx, co-operative efforts with the RCMP remain in limbo.

The federal government did beef up customs agents’ au-

thority in April, 1997. An amendment to the Criminal Code gave customs inspectors the power to detain any goods they have reasonable grounds to believe are illegal—power that the critics believe they already had. Maureen Tracy, an official in the contraband and intelligence services directorate of the Canada Customs and Revenue Agency, says her office is in talks with the RCMP in Ottawa to define what those “reasonable grounds” might be. But in the three years since the amendment, not one shipment has been detained under the new statute. “It’s very difficult,” says Tracy, “for customs officers at the border, at the time that they’re moving the shipment, to have the appropriate reasonable grounds to believe that there is an actual offence occurring.”

Not really, says the RCMP’s Jenkins. Many of these shipments are easy to identify because the goods are often haphazardly packaged or obviously underpriced. Reaching into a cardboard box sitting at his feet, Jenkins pulls out dozens of counterfeit Sony PlayStation CD-ROMs. Instead of the games being individually packaged, the disks are bundled together and shrink-wrapped in what police call a baloney roll. Shipments like these, says Jenkins, should raise a red flag with Canada Customs. “Daily, we have hundreds of thousands of dollars of counterfeit product flooding this country,” he says, “and these customs officers know it.”

Most of what is counterfeited is made in China, Taiwan or Southeast Asia. As the torrent of fake goods continues— most of it entering through Toronto’s Pearson International Airport, the port of Vancouver and the port of Montreal— the federal government can expect to come under increasing scrutiny as business leaders and Canada’s trade partners ask why Ottawa isn’t cracking down. “It is very disheartening,” says Trainer, “when you have a country that we consider to be sophisticated, developed, and certainly has the capability to do more, that chooses to do the absolute minimum.” Bhaskaran Menon would agree with that. While customs wrangles with its critics, Menon is contemplating lowering the wholesale price of his CDs further still, perhaps to as little as $4.50 apiece, half of what he was getting when he started his business in 1991. To him, the bureaucratic impasse is absurd. “Somebody,” says Menon, “has to turn around and say, ‘This is nonsense. It has to stop.’ ” E3