An Empire of Fakes

counterfeit-productsAn anti-counterfeiting group said it was suspending Alibaba’s membership following an uproar by some companies that view the Chinese e-commerce giant as the world’s largest marketplace for fakes.

The International Anti-Counterfeiting Coalition told members that it had failed to inform the board of directors about conflicts of interest involving its president, Robert Barchiesi.  The media reported that Barchiesi had stock in Alibaba, had close ties to an Alibaba executive and had used family members to help run the coalition. The coalition, in a letter to members sent after the AP report came out, said conflicts weren’t disclosed to the board “because of a weakness in our corporate governance procedures.” It said the failure was not because of “inaction on Bob’s part,” referring to Barchiesi. The coalition said that it is hiring an independent firm to review its corporate government policies. In its letter, the board said that as a result of members’ concerns, it was suspending a new class of membership under which Alibaba had recently joined. The move would affect two other companies that signed up under the new rules.

Jennifer Kuperman, Alibaba’s head of international corporate affairs, said companies like Alibaba were important for solving the problem of counterfeiting. “Whether or not we are a member of the IACC, we will continue our productive and results-oriented relationships with brands, governments and all industry partners,” she said. At issue is the independence of a small but influential coalition that lobbies U.S. officials and testifies before Congress. Alibaba’s membership could help shape the global fight against counterfeits. Fakes damage companies’ bottom lines, can harm consumers who unknowingly buy such products and feed a vast underground money-laundering industry that supports criminal syndicates. In recent weeks Gucci America, Michael Kors and Tiffany have quit the Washington D.C.-based coalition, which has more than 250 members.

Several ties between the group’s president and Alibaba have been found:

Barchiesi has owned Alibaba stock since its 2014 listing in New York. The IACC said in a statement that the holdings represent “a small percentage of his investment portfolio.” Matthew Bassiur, who took over as vice president of global intellectual property enforcement at Alibaba in January, hired Barchiesi’s son, Robert Barchiesi II, to work at Apple back in 2011. Alibaba said that hire was made on merit. Apple declined to comment. Bassiur is a founding board member of the ICE Foundation, which supports U.S. Immigration and Customs Enforcement employees. Since 2013, the foundation has been run by Barchiesi’s other son, James Barchiesi. That same year, the foundation’s board voted to award a contract for “fiscal and operational management” to a private company, also run by James Barchiesi. The foundation has received grants of $10,000 from the anti-counterfeiting coalition every year since 2012, tax filings show. Kuperman, of Alibaba, said Bassiur’s expertise would help the company “further instill trust in our marketplaces.”

“We are highly confident in his abilities and proud to have him at Alibaba in this critical global role,” she said. Critics feared Alibaba would use IACC membership to gain legitimacy while papering over fundamental flaws in how it does business. Gucci and other brands owned by France’s Kering Group allege in U.S. court filings that Alibaba knowingly profits from the sale of fakes. Alibaba has dismissed the case as “wasteful litigation.” Robert Barchiesi had also come under fire for his stewardship of the coalition and allegations of conflicts of interest on the move to include Alibaba.”It’s crossed the line ethically,” said Deborah Greaves, a partner at Brutzkus Gubner law firm and a coalition board member from 2011 to 2013. She said she didn’t know that IACC chief Robert Barchiesi had stock in Alibaba until informed by the AP. “Really problematic,” she said.

“Everything the IACC does that makes Alibaba look better potentially drives up the price of the stock,” said Greaves, whose firm is a coalition member. “As a board member, I would never have bought stock in Alibaba.” Luxury retailers have been unhappy with Alibaba, the Chinese e-commerce behemoth that’s grown rapidly over the past few years. Earlier this week, Gucci made headlines for withdrawing from the International Anti Counterfeiting Coalition (IACC), apparently because of Alibaba’s membership in the organization. In April, Michael Kors did the same, according to the Associated Press, calling Alibaba, “our most dangerous and damaging adversary.”

And then on Friday, the retailers got an inadvertent victory: Alibaba was suspended from the IACC because the organization’s president, Robert Barchiesi, has stock in and close ties to the Chinese company, the AP reported. The company blamed “a weakness in our corporate governance procedures.” Up until this point, the company’s seat at the table was largely questioned. It did, however, give the appearance that the e-commerce giant is attempting to ameliorate a major criticism: That it’s a haven for counterfeit products, especially bags. Alibaba knows that counterfeit accessories are a problem in its business. The retailer has spent more than $61 million trying to eliminate counterfeit goods, which founder Jack Ma has compared to a “cancer.”

Michael Kors’ anger, specifically, came from a letter written by the retailer’s general counsel, Lee Sporn, which highlights how the acceptance of Alibaba into the IACC sends a bad, perhaps mendacious, message to retailers. Here’s more of the letter, :

Alibaba’s strategy has consistently been to provide lip service to supporting brand enforcement efforts while doing as little as possible to impede the massive flow of counterfeit merchandise on its platforms. By admitting Alibaba as a member and applauding Mr. Ma’s appearance at the Spring Conference, you give Mr. Ma a powerful tool to speak to brand owners and regulators about his efforts to work collaboratively and effectively with brand owners — in the experience of many of your members a shockingly brazen lie. According to The Fashion Law, Longchamp has also expressed dissent to Alibaba’s membership. And Kering, which owns Gucci, has taken the company to court. Aside from the loss of profit related to counterfeit products, many luxury brands already face the challenge of convincing Chinese consumers to pay full price for a designer bag, thanks to the growth of outlet stores.

“I think there’s a correlation between outlets and the China market getting flooded with low price, lower quality products, confusing the customer on what they should pay and what the quality of the brand actually is,” Brian Buchwald of consumer-intelligence firm Bomoda told Business Insider, noting that Chinese consumers would pay full-price for a high-quality product. Even in the US, Michael Kors, for instance, has been valiantly fighting to retain its luxury and status as an aspirational brand in the face of general ubiquity from the proliferation of outlet stores.

If outlet stores — and worse, resold outlet goods — denigrate a brand’s status as premiere retailer, then counterfeit bags worsen an already sad situation. For luxury retailers, it’s a nightmare altogether, since the brand is no longer being accurately represented, especially overseas.