COLUMN ONE : High-Tech Piracy Hits Home : Asian software counterfeiters have set up shop in the Southland, lured by big profits and low risk. Huge losses threaten to sap the strength of a key U.S. industry.

It was a check forgery case that brought deputies to the quiet Rowland Heights cul-de-sac. But what they found at the home of Ming Chin Jin and his wife, Pifen Lo, was $400,000 worth of counterfeit copies of Microsoft’s Encarta ’95 CD-ROM encyclopedia and 48,000 fake holograms from China.

The March 17 raid was a scene all too familiar to the Los Angeles County Sheriff’s Asian organized crime squad, which has landed on the front line of a battle against global counterfeiters that reaches from China, Hong Kong and Taiwan to Southern California’s immigrant neighborhoods.

While international attention has focused on the Clinton Administration’s threatened trade war with Beijing over technology piracy there, evidence is mounting that China and other Asian countries are exporting counterfeit products--and their considerable expertise in making them--to the United States.

It is in some respects an old story: the migration of crime to where the money is. But it also is a quintessentially Southern California phenomenon, a price the region pays for being the epicenter of entertainment, technology, Asian immigration and Pacific trade.

That position has brought economic vigor, but also sophisticated criminals who view the huge U.S. market as promising territory for global expansion.

Already this year, deputies have broken up two rings and confiscated millions of dollars worth of counterfeiting equipment and thousands of copies of counterfeit Microsoft software, licenses, manuals and security devices such as seals and holograms.

Semiautomatic weapons, handguns and explosives were found in the raid in Rowland Heights and in homes elsewhere in the San Gabriel Valley, which has one of the region’s largest Asian populations.

In March, Microsoft Corp., which has been the primary target of domestic piracy, was awarded $5.6 million in a civil lawsuit against a Hong Kong native living in Los Angeles who was accused of distributing 50,000 counterfeit copies of Microsoft MS-DOS and Windows, the popular operating system software, from coast to coast.

But the Redmond, Wash.-based software giant--which has filed more than a dozen civil suits in Los Angeles against alleged counterfeiters in two years--has yet to see any money from the latest award, according to company attorneys.

Indeed, high profits and minimal penalties make this form of high-tech crime a criminal’s dream and a police officer’s nightmare.

“If I were going to become a criminal, I would become a counterfeiter, not a drug dealer,” said Dempster Leech, a New York City private investigator specializing in counterfeiting.

The expansion of armed and well-versed criminals into this new counterfeiting arena is doubly worrisome because computer software is so cheap and easy to duplicate. Left alone, some warn, this phenomenon could undermine the high-risk marriage of entrepreneurship and technical genius that has built an industry central to the nation’s competitiveness.

In effect, the counterfeiters are pirating intellectual property, attacking U.S. software firms in their most lucrative market and stealing the revenues they need to fund their next generation of ideas.

“Unchecked, this trend could be very devastating to software producers,” said Christopher Westland, an associate professor at USC. “The marginal costs are small in software but the fixed costs are enormous. Companies invest hundreds of millions of dollars to develop a product like Windows. You’ve got to sell an awful lot of copies to recoup your fixed costs.”

According to Microsoft and other companies, there is more than self-interest at stake. They contend that counterfeit software, unprotected by warranties or service agreements, often is produced with cheap materials or equipment and has high rates of defects and viruses. Microsoft says government agencies, hospitals and other institutions have unwittingly bought defective counterfeit software in their search for the lowest bid.

Yet independent experts say the risk to consumers is exaggerated. They claim that the illegal software is usually as good as the real thing. Indeed, that is what makes the problem so insidious, not only for a software maker’s bottom line but for the industry’s credibility.

“From a user’s standpoint, there’s virtually no risk to using pirated software,” said Westland. “It’s not like buying a knockoff watch in Hong Kong where the movement is going to break down in six months.”

In the United States, which has a $40-billion-a-year software market, the most common form of piracy occurs when people or businesses make unauthorized copies for their own use. But industry officials believe that counterfeiting accounts for a growing share of the $2.2 billion a year in lost U.S. sales attributed to piracy.

“The amazing phenomenon in the last couple years is how the connections have strengthened between Asia and the U.S.,” said Alison Gilligan, senior anti-piracy specialist for Microsoft, the world’s largest software producer. “There’s a strong counterfeiting connection and obviously an organized crime element.”

California law enforcement officials are leading the nation’s battle to stop Asian crime groups from exploiting trade routes not just for counterfeiting but for smuggling drugs and people and for money laundering. In March, FBI Director Louis J. Freeh told a Boston crime conference that the agency is seeking 50 new agents and increased contacts with police in Asia in hopes of slowing the spread of criminal gangs across the Pacific.

Robert Kruger, director of enforcement for Business Software Alliance, a Washington, D.C., anti-piracy group representing the nation’s leading business software firms, said the problem only recently surfaced on the “North American radar screen” in a significant way--and that many in the industry are not fully aware of it.

“I think there’s a lot of ignorance (in the industry), a lot of slowness in coming to the recognition that this is a serious problem,” he said.

Like their counterparts in the drug trade, global software counterfeiters are well-financed and mobile. Sometimes, they smuggle in counterfeited products produced in Asia. More often, the software is partially produced and then assembled in this country with components from abroad, according to Gilligan and others.

The makings of a counterfeiting lab are easy to acquire and relatively inexpensive: a computer, a disk or CD-ROM duplication machine, a laser printer, a shrink-wrap machine and someone willing to produce the labels and packaging.

The items most commonly smuggled into the United States are the holograms--laser-produced three-dimensional images--used on software packaging as a mark of authenticity. The images are expensive and difficult to copy. U.S. hologram manufacturers historically have stayed on the right side of the law for fear of alienating their legitimate customers, according to law enforcement officials.

But the same code of conduct has not applied in China, where counterfeit holograms have been traced to manufacturers linked to government agencies or the relatives of high government officials.

U.S. distributors of the counterfeit CD-ROMs and floppy disks often work from the back of vans, selling their products for cash to small computer makers that market them with their machines or to retailers willing to break the law for a larger profit. A two-tier pricing system exists, with premium prices for higher-quality counterfeits that include the hologram and other security markings.

The payoff can be great, with a potential markup of as much as 10 times the cost of production. Microsoft officials said counterfeit software is typically sold in the United States for 10% to 25% less than legitimate products, which retail from $50 to $300. A fake certificate of authenticity might start at $1 and holograms range from $1 to $10.

In February, officials said, a six-month investigation in the San Gabriel Valley led to the breakup of the largest U.S. counterfeiting operation in Microsoft’s history and the first one involving fake certificates of authenticity, which are produced on special paper commonly used for currency and are marked with a security seal. Six men were arrested in raids that netted more than $4.7 million worth of counterfeit software, materials and equipment.

Weeks later in Rowland Heights, deputies investigating a check forgery case stumbled onto a cache of weapons, plastic explosives and counterfeit software and holograms. Law enforcement authorities said they are investigating links between the five defendants, including Jin and Lo, and the Wah Ching, a U.S.-based criminal group with ties to powerful underworld organizations--called triads--in Hong Kong.

Because software itself is not illicit, it is tough for law enforcement officials to prove wrongdoing without an informant. Even those who are caught with their fake software in the shrink-wrap machine face lighter penalties than their drug-running counterparts, although U.S. counterfeiting laws are among the world’s toughest.

Under federal law, the maximum criminal penalty for copyright infringement is a $250,000 fine and five years in prison. Under California law, the maximum penalty for a single count of counterfeiting is six years in prison. But most cases are not prosecuted for lack of evidence or end up in civil court, where monetary penalties have proven to be ineffective.

An anti-piracy campaign on this side of the Pacific will not succeed unless authorities in Asia shut off the supply of money, expertise and counterfeit products, according to frustrated U.S. officials. The mixed record on global cooperation is one factor behind the Clinton Administration’s campaign to force its Asian trading partners into cracking down on piracy within their borders.

“Choking off the foreign supply permits the domestic law enforcement to focus its efforts,” said Lee Altschuler, an assistant U.S. attorney in San Jose.

Officials concede that the chances of detecting these counterfeit products and components in the millions of containers of goods that pass through West Coast ports each year are slim. A roll of fake holograms worth tens of thousands of dollars could be easily hidden in a suitcase or coat pocket. Fake CD-ROMs, disks and tape cassettes have been smuggled into the United States marked with false labels that identified them as blanks or legitimate cargo.

“The more effort we put into this, the more sophisticated the smugglers get,” said Dennis Shintani, the assistant special agent in charge of the U.S. Customs Office of Investigations in Los Angeles.

And it gets a lot tougher when the pirates operate with the latest technical expertise and equipment and can exploit opportunities that did not even exist when many of their pursuers graduated from the police academy.

Los Angeles County Sheriff’s Detective Jess Bembry went through Microsoft’s one-day piracy training course, but feels ill-equipped to do battle in the world of high-technology crime.

“We in law enforcement don’t have the financial ability to purchase the merchandise, the computers and software that the suspects are using,” he said. “They’re much more advanced than we are.”

Times staff writer Denise Hamilton contributed to this story.