Silicon Valley Tech Week
www.techweek.com
May 3, 1999
Author: David Becker
Volume: 2
Number: 9
Ripped Off
Theft and counterfeiting are a growing industry menace
Hard work, superior products and slick marketing are the typical
ingredients for success in Silicon Valley. But a sizable number
of people are getting rich through less admirable values, such
as larceny and counterfeiting.
FBI sources estimate that Silicon Valley firms lose up to $1
million a day due to high-tech crime, a category that includes
everything from sophisticated counterfeiting schemes to simple
grab-and-go robberies.
Thanks to factors ranging from small-but-expensive goods to the
ease and anonymity of Internet sales, computer hardware and software
have become prime targets of the criminal underground.
“There’s more money in this kind of stuff and it’s
easier to deal with than dope,” says Kevin Fairchild, a
former Santa Clara police officer now running Cyte-M, a Santa
Clara security firm specializing in high-tech clients.
“You get caught with a handful of cocaine, that’s
a flat-out felony. If you’ve got a handful of computer chips,
somebody’s got to do a lot of work to prove they’re
stolen, who did it, what you’re doing with them.”
A recent study funded by the American Electronics Association
estimates that $250 million worth of computer hardware and cell
phones are stolen each year, mostly while in transit from the
manufacturer. The FBI estimates the average high-tech theft costs
a company more than $500,000. San Jose Police made headlines in
March with the arrest of 15 members of a gang in the midst of
hijacking vans carrying more than $1 million in computer chips.
Software piracy, a category that includes illegal office copying
as well as counterfeiting, costs the California economy $2.5 billion
a year in lost wages and taxes, according to reports by the Software
publishers Association and Microsoft. Hardware makers are targets,
too; two Orange County counterfeiters were nabbed last year in
the midst of passing off 56,000 generic SCSI adapters as products
of Milpitas-based Adaptec Inc.
“We’ve seen businesses destroyed because of these
kinds of problems,” says San Jose Police Sgt. Nic Muyo,
head of the Rapid Enforcement Allied Computer Team (REACT), a
2-year-old task force of federal and local agencies targeting
high-tech crime. “Cash flow can be pretty tricky here under
normal circumstances. If you’re losing a lot to theft, that
can put you under.”
A number of factors have combined to make high-tech goods one
of the fastest growing segments of the underworld:
• Compared to more typical theft targets such as cars and
TV sets, computer goods are easily transported and concealed,
yet are very valuable.
• No-name computers and interchangeable components make
it hard for consumers to know when they’re getting stolen
or counterfeit goods.
• The Internet has added a vast new frontier to the “gray
market” of swap meets, fly-by-night vendors and overseas
resellers creating a steady demand for illicit high-tech goods.
“The Internet is allowing crooks to conduct fraud and theft
on a whole new level,” says Muyo. “It’s really
easy to set up a nice little operation over the Internet. All
you need is a cell phone, a P.O. Box and Web site. As long as
you don’t get greedy, you can run a fairly successful operation
dealing in illegal merchandise for a while.”
All of which puts pressure on law enforcement to keep up. Cases
sometimes hinge on elements of microprocessor design or encryption,
subjects that don’t usually come up during academy training.
The Internet also blurs jurisdictional boundaries between local,
state and federal agencies. Police have to work closely with companies
to address security concerns in the way products are designed,
shipped and sold.
“What we’re learning in law enforcement is that you
have to mirror the area you’re policing,” says Lt.
Stephen Ronco, head of the San Jose Police Department’s
high-tech crime unit.
“If you set up static boundaries, you’re going to
miss a lot of significant criminal activity. We have to stop thinking
of ourselves as separated from private industry or being limited
to geographical boundaries of the community.”
Types of high-tech crime prevalent in Silicon Valley include:
Cargo Theft
Professional crooks depend on volume, and that means stealing
from the source.
An estimated $20 million to $30 million worth of the hardware
produced annually by Silicon Valley firms never makes it to market,
due mainly to cargo thefts. A few criminal gangs, mostly South
American groups working out of Los Angeles, have come to specialize
in monitoring and intercepting shipments of hard drives, memory
chips and other compact, high-value merchandise.
“They make very sure about what they’re getting,”
says Muyo. “They go out at night and watch the business
they want to hit, get to know what they’re shipping, what
the schedule is. Then when a truck leaves, they tail it and the
first time the driver stops to go to the bathroom or whatever,
they grab everything they can.
“The problem is you never know who they’re going
to hit or what kind of company. There’s no pattern as far
as which companies, which components.”
While the methods used by most cargo thieves may be low tech,
they’re getting trickier, says Fairchild. Some gangs go
so far as to plant members inside targeted companies as employees,
where they become a pipeline for insider information.
“They’re getting pretty sophisticated,” says
Fairchild. “Usually they’ve pre-sold the merchandise,
and they do a lot of surveillance to make sure they know exactly
what they’re getting.”
A little prevention can go a long way, however. Once companies
realize their trucks are the ‘90s equivalent of armored
cars, they see the wisdom of adopting security measures such as
varying delivery routes and schedules or using two drivers.
“New corporations a lot of times don’t have a clue
about how tempting this stuff is for thieves,” says Fairchild.
“It’s an educational process, getting them to realize
they need to invest some time and money in security. You have
to be vigilant all the time to keep up with the crooks.”
Chip Remarking
It runs like a Pentium 300, it looks like a Pentium 300, and the
BIOS says it’s a Pentium 300. Must be a Pentium 300 right?
Not necessarily. Almost since the dawn of the PC era, technologically
sophisticated thieves have been taking advantage of quirks of
microprocessor design to pass off older, slower microprocessors
as faster, more expensive models.
The mechanics of making a slower chip run faster, known as overclocking,
are fairly easy to master. Thousands of computer hobbyists regularly
experiment with overclocking, juicing up chips to run faster and
hotter then intended. It’s a perfectly legal, if warranty-voiding,
hobby.
When it becomes a crime is when someone alters an overclocked
chip to make it look like a faster, more expensive chip. Known
as remarking, the practice has dwindled in recent years as advances
in chip design make it harder to pass off bogus products. But
hundreds of thousand of remarked chips still enter the market
every year.
“We’re not seeing as many cases as we used to, but
it’s still a big concern,” says Muyo. “We’ve
seen full-blown labs where they can turn out several hundred remarked
chips a day. And if they’re good at it, you have to rally
be an expert to be able to tell it’s not a legitimate chip.”
The appeal for crooks is obvious. If you can take a chip that
sells for $100 and pass it off as one worth $250, there’s
a tidy profit to be made.
Intel spokesman Chuck Mulloy estimates the percentage of Intel
chips on the market that are illegally remarked to be “in
the low single digits.”
“The honest answer is we don’t know,” he says.
“There’s a big gray market that’s very hard
to monitor.”
But even if just 1 percent of the estimated 87 million Intel
chips produced last year ended up as remarked goods; that’s
nearly a million chips that, unknown to the consumer, will wear
out quickly and perform erratically.
“If your average person buys a computer over the Internet
and it plays games and balances his checkbook, he’s not
going to know or care if it’s a remarked chip,” Muyo
says. “It isn’t until the thing breaks down and he
can’t get any help that he’ll realize he’s been
ripped off.”
Many remarked chips are sent overseas, where they’re incorporated
into no-name systems. But a good deal stay in this country, where
they’re sold to do-it-yourselfers or end up in systems sold
by fly-by-night Internet operators and swap meet merchants.
“You need to be cautious about who and where you buy from,”
says Mulloy. “People who have no intention of buying counterfeit
merchandise can get duped.”
Consumers who suspect they’ve been scammed can use one
of several utilities to check if they’ve got a legit chip.
German computer magazine CT offers a free program (www.heise.de/ct/p2info)
to check out Pentium II 300 chips, a common target for remarkers.
And Intel has a new program (http://support.intel.com/support/processors/tools/frequencyid)
to verify a Pentium III is running at the appropriate speed, part
of the company’s ongoing effort to thwart remarkers.
“It’s sort of a cat-and-mouse game,” says Mulloy.
“We’ve become more sophisticated about protecting
our products, and the crooks have become more sophisticated at
what they do. You can never assume you’ve got the problem
licked.”
Employee Theft
While most media and law enforcement attention surrounding high-tech
crime is directed at large, organized operations, non-professional
crooks account for a significant part of the theft losses around
Silicon Valley.
Rapid employee turnover, easy opportunities to sell stolen goods
over the Internet and ax corporate security have created a fertile
environment for anyone prone to sticky fingers.
“I’ve had cases where you have 10, 15 employees all
taking a little bit out,” says Cyte-M’s Fairchild.
“They grab a laptop, pull out some memory chips. It’s
like the unofficial bonus program.
“They’re not violent or dangerous like professional
thieves, but the stuff they take adds up. My minimum case is a
quarter-million dollars now, and employee theft accounts for a
lot of that.”
Fairchild says part of his work is to convince clients to prosecute
employee thefts.
“There a lot of companies who just want to boot them out
the door, but as far as I’m concerned that’s just
passing the problem along to the community,” he says.
“It’s a systemic problem,” agrees Ronco. “We
really want to drive home the idea that it’s not enough
to just kick them out the door. They’ll just go to work
for someone down the street and steal some more there. You need
to prosecute.”
Employers also need to think about security before there’s
a problem, Ronco says.
“You need to take basic precautions, like keeping a good
inventory and putting laptops away when you’re not there.
People jump from job to job all the time around here. You need
to remember you don’t really know all the people you share
that office with. There are people who aren’t necessarily
career criminals, but if you give them an opportunity, they’ll
take advantage of someone’s carelessness.”
Counterfeiting
From business software to SCSI boards, enterprising crooks often
try to get rich by slapping brand names on bogus goods.
While most hardware and software counterfeiting activity is concentrated
in Southern California, Bay Area firms are usually the victims.
Take San Rafael software firm Autodesk, creator of the market-leading
AutoCAD drafting software. Sandy Boulton, the company’s
director of piracy prevention, estimates that “for every
legal copy we sell there are five to seven illegal copies.’
Most of those illegal versions are unlicensed copies made by
business users, a civil violation. But about 20 percent result
from counterfeiting-bootleg CD-ROMs sold at swap meets, Internet
auctions and foreign markets.
Autodesk has responded with an anti-piracy division that includes
more than 20 lawyers, plus investigators and researchers. Boulton
says that any high-tech company serious about reducing counterfeiting
losses has to take on the job itself.
“The reality is that law enforcement has limited resources,
and those tend to go toward dealing with violent crimes,”
she says. “We pretty much consider it a cost of doing business
to do our own investigations. We buy illegal software out on the
market; we follow all the Internet auction houses daily. It’s
a daily monitoring activity to know who’s stealing from
us.”
Like other high-tech crimes, counterfeiting depends on a thriving
gray market. While illegal computer goods are most often associated
with lax foreign markets, a good share either stay in the United
States or return here in the form of low priced systems put together
by overseas integrators.
Ronco says that while it’s tough to track down the source
of illegal hardware of software once it becomes part of a system,
it’s not hard at all to go after those who knowingly accept
illegal goods.
“People have an obligation to look at what they’re
buying,” Ronco says. “We’ve had cases where
legitimate companies have bought stolen equipment and are facing
prosecution now.
“Telling us ‘I don’t know’ isn’t
going to cut it. You’re an expert; you’re buying this
kind of stuff all the time. You know what it’s really worth.
If you’re paying $10 for a piece of software that usually
sells for $400, common sense tells you something stinks.”
Staff writer David Becker can be reached at davidb@techweek.com.
