Pirates sail the virtual seas: intellectual property thieves exploit electronic avenues to construct organized crime cells.

When Arnold Schwarzenegger held a Mexico City press conference to promote his action-packed "Terminator 3: Rise of the Machines," a journalist showed the former Mr. Universe a pirated DVD of the new movie that he had bought on the street--before the film even opened in Mexico.

"We need stricter laws so that the people who do this are treated the same way as somebody who steals something," growled the Terminator and candidate for governor of California.

Schwarzenegger and his colleagues at Time-Warner have every right to be irate--piracy slashed at least US$50 million in profits off cinema and film sales in Mexico last year, according to the Motion Picture Association. And when there is a pirated DVD out before the original has been released anywhere in the world, it means there must be someone on the inside helping the counterfeiters.

Crime has always been a thorn in the side of business. Since the beginning of capitalism, companies have had to adjust their revenue to account for goods being held up on the highways or pinched off the shelves. But in the information age of the 21st century, it is the theft not of merchandise, but ideas, that is hitting business hardest.

The International Intellectual Property Alliance (IIPA) estimates that copyright piracy of software, books, music and films in Mexico cost companies US$717.9 million in lost earnings in 2002 alone. Furthermore, these are only a few of the products being tipped off. Mexico's streets are awash with counterfeit clothes, sneakers, watches, cigarettes and even car ball bearings and motor oil. Not to mention that 25% of pharmaceuticals sold in the republic ignore copyright law, according to the Counterfeiting Intelligence Bureau of the International Chamber of Commerce.

Mexico has the fifth-largest market of counterfeit goods in the world after China, Russia, Italy and South Korea, according to the IIPA. "Piracy is one of the biggest criminal problems the nation faces. It is a major threat to the economy and it affects public safety," said Assistant Attorney General Carlos Javier Vega Memije.

INTELLECTUAL PROPERTY JUNGLE

The problem with trying to protect intellectual property rights is the diverse number of forms copyright piracy can take, explained Abraham Hernandez, a corporate lawyer and head of the Mexican Alliance Against Piracy (AMCP). Rights can be violated when counterfeit goods are sold on the streets, when unlicensed radios are playing music or when someone is watching a digital TV station from a cable hooked to a neighbor's satellite.

The rise of the Internet complicates the situation tenfold, allowing copyrighted audio, video, photos and texts to be thrown around cyberspace and downloaded anywhere on the globe. Even the words of this article may be copied and pasted illegally onto numerous web sites. The laws and those enforcing them struggle to keep up with the pace of technological change and the new weapons in the hands of the pirates.

"The problem is that a lot of judges did their training long before the Internet or CD burners existed," said Francisco Guerra, director of the Motion Picture Association's Mexico Anti-Piracy Program. "We are all in the process of learning."

The defining legislation in Mexico is the Law of Author's Rights and Industrial Property, originally drafted in 1964. Under its terms, the intellectual author of a product or work of art must file a lawsuit against a specific party violating his or her copyright. As almost 70% of music compact discs sold in Mexico are pirated, that means a lot of complaints need to be put on record.

"It's crucial that companies file the lawsuits, or the authorities can't act," said Jon French, head of IPSA International security consultants in Mexico. "Counterfeiting is a real serious problem here, one that has a potential impact on foreign investment."

French advises clients on how to send the claims to the courts--a procedure that can involve a lot of paper-work and investigation. With the process so demanding, the industries that are hit hardest by counterfeiters have developed specialized organizations to attack pirates head on.

SOFTWARE CAT AND MOUSE

David Shaw is the representative in Mexico of the Business Software Alliance (BSA)--a group representing all the big international players in office and industry software. For 10 years, Shaw has been directing the battle against pirates that made an estimated 55% of all business applications sold in Mexico in 2002, robbing the industry of US$168.9 million.

The center for counterfeit software is the Plaza de Computacion, an indoor market in downtown Mexico City that sells cut-rate computers and accessories. The streets around the plaza are filled with vendors peddling counterfeit software at a fraction of their retail price; applications that can cost hundreds of dollars in stores can go for as little as 50 pesos per CD. Shaw explained how the merchants have played cat and mouse with the police for a decade and keep adapting their modus operandi to stay in business.

"We've been dealing with these guys for years," Shaw said. "They used to sell software inside the plaza so we kept on raiding stalls until the plaza organizers kicked them out. Then they sold them out of cars, so we raided them and seized their vehicles."

JUST LIKE RUNNING 'SHINE

The peddlers now stand around with just a catalog and a cell phone. Happy shoppers choose the product they want from the catalog, the vendors make a call to a hidden location, and someone comes running up with the merchandise.

"The guy on the street is not breaking the law until he has software in his hands. It's like saying 'I can get you bootleg liquor,' but he doesn't have any at the time," said Shaw.

But even when the BSA has helped the police make arrests, the offenders have nearly always paid bail and disappeared, Shaw said. "The judges have to become sensible about putting the offenders in prison for years," he said. "These are sophisticated criminal gangs with a lot of financial resources."

Industry and police sources told BUSINESS MEXICO that there are at least 25 big gangs dedicated to counterfeiting in Mexico. Many are highly advanced crime organizations with their hands in other rackets.

"There are sophisticated groups with cells dedicated to smuggling in materials, production and distribution," said PGR official Vega. "The big money they are making puts some groups in a league with drug traffickers."

However, new technology, such as cut-rate CD burners, is also letting many smaller players break onto the piracy scene, sources said. "With an investment of just US$500 people can start operating. And you don't need to be a rocket scientist to use the equipment," said Shaw.

Pharmaceutical counterfeiting is allegedly just as easy. In his 1996 work "Farewell My Logo," U.S. writer David Stipp described drug piracy as being "as lucrative as pushing heroin, about as hard as photocopying and low on the law enforcement agenda." Once products have been produced, Mexico's brimming black market and endless flea markets make distribution a dream for counterfeiters and a nightmare for police.

A 25-year-old who called himself "Frankie" has been selling counterfeit software around the Plaza de Computacion for five years. "Piracy is cool," said Frankie, a well-built youth wearing a designer shirt. "It allows people to get stuff for a price they can afford. Most Mexicans are struggling economically, so they look for the cheapest offer."

Frankie said he can make about 2,000 pesos per week selling software, a decent salary when the minimum wage is 42 pesos per day in Mexico City. He said the police have picked him up several times but have never charged him.

"Some of this software costs 20,000 pesos in a shop like Sears. Imagine what you can buy for 20,000 pesos," he said with a smile. "I don't think Bill Gates will miss the money. He's loaded. "

Industry representatives don't agree with Frankie. They argue the high prices are needed to support thousands of people involved in researching, manufacturing and marketing products. If there was no piracy, the software industry could employ an additional 30,000 people in Mexico, said Shaw.

"There are a lot of families that live off the work," said Hernandez of the AMCE "Piracy has the power to destroy industries and stop them from being able to produce the material. It is a social cancer."

SPY Games

Some people inside legitimate businesses are allegedly working with counterfeiters. Music producer and session musician Rodrigo Bernal, who has worked with several major record companies, said there are weak links in the music industry that allow some albums to appear in pirated edition prior to their release date.

"The final copy of the recording is on a digital audio tape stuck in a safe. But somehow it gets out onto the street," said Bernal. Likewise, there were pirate DVDs of summer blockbusters "Terminator 3" and "Hulk" before the official DVD had been released.

Guerra of the Motion Picture Association explained how logistics make it very difficult to keep an eye on all copies of a film. He said there are 600 cinemas in Mexico, each of which must have a reel of the movie ready to show on the same day. Furthermore, he suggested pirates could be recording movies when they are shown in the United States, bribing cinema workers to let them attach a camera to the projector. "The quality is not that great, but it's enough to stop people going to the cinema to see the film," said Guerra.

Security consultants said they are working with companies to help them prevent insiders from stealing crucial data or copyrighted material.

"Recently we got a request from a client to help them construct a pro-active investigative team to stop the theft of critical information," said Kevin O'Brien, the director of security services for Kroll Mexico. "There is a need to place inside figures to keep an eye on suspicious employees."

Some anti-industrial espionage tactics mirror techniques developed by national intelligence services, according to O'Brien, a former naval officer who worked in counter-narcotics operations in Panama.

Eduardo Ortega, Kroll's marketing director in Mexico, said companies were keen to stop crooks on the inside as their reputations were on the line.

"The worst thing about industrial espionage is that it can destroy the reputation of a company that has taken years to build," he said.

ADVOCATING ANNIHILATION

While piracy is bad in Mexico, industry groups and authorities say they are gaining ground against the counterfeiters. The Attorney General's Office (PGR) is stepping up its offensive against piracy and recently created a special division dedicated to intellectual property crimes.

In 2002, the PGR carried out a total of 1,488 raids on product pirates, a seven-fold increase compared to 2001. As a result, authorities seized an incredible 24,473,113 counterfeit items, more than twice as many as in the previous five years put together. The BSA says its work has reduced the sales of pirated software from 65% of the Mexican market to 55% in the last decade, while the MPA says it has reduced the number of pirated movies sold from 50% to 40% in the same period.

Furthermore, a major reform of the copyright law is working its way through Congress. The law would stiffen sentences for intellectual property crimes. Industry groups are fighting for an amendment that would let the police act against pirates without a lawsuit filed by the authors, a move Vega said he supports.

Guerra believes that piracy can be totally stamped out if it is attacked the right way. "It can be done," said Guerra, echoing a chant Mexican soccer fans shout to their national team. "Piracy is not an animal that will die if you cut its head off. It is more like a primitive worm that will be killed only if all of its parts are crushed."

Industry groups and authorities all agree that the public and individual businesses play a crucial role in the fight against counterfeiters. Vega said businesses should make sure they file lawsuits if their intellectual property rights are violated.

"If the company doesn't act then our hands are tied," he said. "We have to work together."

Shaw said companies should carry out an annual audit on all their computers to make sure there is no illegal software installed. He also said it was safer to restrict employees from installing any software whatsoever on work machines.

"Companies can deny all knowledge of illegal software found on their computers but at the end of the day, if it's their machine then they are responsible," he said. Police and industry groups are also working together on campaigns to try and persuade the public not to buy pirated products. Activities include public destruction of counterfeit goods, talks in schools and adverts on television.

"The public holds the key. They can choose if piracy lives on or not," said Hernandez. "People need to develop a greater civic conscience."

Guerra said Mexicans could also benefit from some Eastern wisdom on the matter.

"There is a Chinese saying that when there is calamity is in the house it's because you invited it to come in through the front door," he said. "People have to learn to close the door to piracy."

Ioan Grillo is a Mexico City-based freelance writer.