store. >> shirts at $22.50, and they got the whole rack. >> when police moved in to make the arrest, they found enough merchandise to fill a room. all taken in less than an hour without anyone inside the store noticing a thing. [ticking] >> we have never seen a problem of this size and magnitude in world history. >> now hang on. in world history. >> there's more counterfeiting going on in china now than we've ever seen anywhere. >> name an american brand. any brand. any kind of product. just name it, and we'll tell you something about it. it's probably being counterfeited in china as we speak. >> this is the most profitable criminal venture, as far as i know, on earth. >> counterfeiting. >> counterfeiting and your partners don't kill you. >> welcome to 60 minutes on cnbc. i'm steve kroft. in this edition, we look at the multibillion dollar business of international crime. first, we report on the theft of an eye-popping fortune stolen from the iraq treasury. then we take a look at shoplifting gangs from south america. and finally we go undercover in china to expose rampant product counterfeiting. we begin in iraq with the theft that's been called one of the largest of its time, the mother of all heists. and it happened right under the noses of u.s. advisers. as iraqi investigators told us in october of 2006, more than half a billion dollars had disappeared from the defense ministry-- money that was supposed to equip the iraqi military. investigators believe the very people that the united states had entrusted with the funds had stolen them. but it seemed neither the u.s. nor its allies had much of an appetite for pursuing the matter. >> people have died. moneys have gone missing. culprits are running around the world, hiding and scurrying around. i have to ask myself why has this happened? it is not every day that you get billion dollar scandals of this kind. when ali allawi, a harvard educated international banker took over as iraq's minister of finance in 2005, he was confronted with a gaping hole in the treasury. $1.2 billion had been withdrawn by the new ministry of defense to supply the iraqi army with desperately needed equipment to fight the growing insurgency. millions had been misspent on old and antiquated equipment, and allawi says most of the money simply disappeared. how much do you think was stolen? >> i think the figure is probably between $750 million, $800 million >> that's a lot of money. >> it is a huge amount of money by any standard, by--even by your standards. it's one of the biggest thefts in history, i think. >> gone. >> gone, yes, up in smoke. >> the story begins in june 2004, when presidential envoy paul bremer turned over authority to the interim iraqi government, which would run the country until elections could be held. [gunfire] >> the insurgency was already gaining momentum. and with the, then newly constituted iraqi army riding into battle in unarmored pickup trucks, and scrounging for guns and ammunition, the iraqi defense ministry went on a billion dollar buying spree with almost no oversight. the contracts were paid in advance with no guarantees, and most of them involved a single company. >> there were awarded without any bidding to a company that was established a few months prior with a total capital of $2,000. so you had nearly a billion dollars worth of contracts awarded to a company that was just a paper company whose directors had nothing to do with the ministry of defense or the government of iraq. >> the name of that company was alain al jaria, which in arabic means the ever-flowing spring. it's address, here in amman, jordan was a post office box. it's telephone number, a mobile phone. the principal was a mysterious iraqi by the name of naer jumaili. and a half a billion dollars in iraqi defense funds would eventually find their way into his private account at the housing bank of jordan. the person who knows the most about the case is judge radhi al radhi, who in 2004 was iraq's commissioner of public integrity. it was his job to prosecute official corruption in iraq, and it may have been the most dangerous job in the country. twice tortured and imprisoned under saddam hussein, he received death threats from both the insurgents and from corrupt officials. seven of his people had been killed. >> do you have body guards? >> [speaking arabic ] >> yes. >> how many? >> [speaking arabic ] >> 30. >> lots of people would like to see you dead. >> [speaking arabic ] >> i don't care. that's their problem. >> you don't care? >> i do not care. >> judge radhi was more than happy to walk us through the case. aside from the hundreds of millions of dollars that were stolen, radhi says much of the equipment actually delivered to the iraqi military was useless junk. soviet era helicopters, some of which were considered unfit to fly; bulletproof vests that fell apart after a few weeks; and a shipment of ammunition so old, one of the people inspecting it feared it might blow up. >> [speaking arabic ] >> instead of aircraft, we received mobile hospitals. what would an army without aircraft do with mobile hospitals? instead of getting planes and tanks and vehicles and weapons that we needed, we got materials there really was not a big need for. [ticking] >> coming up, confronting the accused. the allegations are that $1.2 billion left iraq-- >> yes. >> to buy military equipment. >> yes. >> and only about $400 million worth of equipment came back into the country. and that $800 million somehow disappeared. >> it isn't true. [ticking] >> and later we'll look at the billion dollar industry of shoplifting. if this is happening all over the country, why do so few people know about it? >> when you talk about shoplifting, not a lot of people think about organized crime. most people think, when you say shoplifting, it's the opportunistic shoplifter. >> that's ahead when 60 minutes on cnbc returns. ♪ [ engine revs ] ♪ ♪ [ male announcer ] the mercedes-benz winter event is back, with the perfect vehicle that's just right for you, no matter which list you're on. [ santa ] ho, ho, ho, ho! 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[ male announcer ] good choice business pro. good choice. go national. go like a pro. free streaming quotes, all your investments, positions, and even your trade ticket are all on one customizable page. see the 360 investing dashboard at e-trade. >> in october 2005, iraq's anti-corruption commission obtained arrest warrants for some of the top officials in the iraq defense ministry. accused of massive fraud, almost all of them fled the country. one of them was ziad cattan, an official in charge of military procurement. but when we caught up with cattan in paris, he didn't seem terribly concerned about the charges against him. there is an arrest warrant out for you. >> yes, i hear about that. >> if you went back to baghdad you'd be arrested. >> uh, no. nobody will arrest me. they will kill me. [speaking arabic ] >> the son of a retired iraqi general, cattan had been living in poland until a few days before the u.s. invasion, running a pizza parlor in germany, and importing and exporting used cars. but his can-do attitude and ability to speak english impressed the americans, including ambassador bremer, who praised cattan in his memoir. after a few months working with the coalition on neighborhood councils, cattan was given a position in the new ministry of defense. so you were recruited for this job. >> yes. >> by the cpa. >> yes. >> by ambassador bremer and his aids. >> the staffs, yeah. >> did you have any experience in military procurement? >> no. >> to make up for this obvious deficiency, cattan was sent off to the national defense university in washington d.c. for a few weeks of training and eventually placed in charge of buying $1.2 billion worth of equipment for the iraqi military. the allegations are that $1.2 billion left iraq-- >> yes. >> to buy military equipment. >> yes. >> and only about $400 million worth of equipment came back into the country. and that $800 million somehow disappeared. >> it isn't true. >> cattan told us that the charges are politically motivated, and that he can account for every single dinar. >> all equipment with this 1 billion, 200 million, it is nowaday in iraq. >> it was delivered to iraq. >> i have documentation. i give it to you in your hand. >> this is a big misunderstanding, i mean, we're talking about $800 million. >> yes, it is here. i can show you. this is btr-80, from vanguardian. this is ambulances, 2005 production, also in iraq nowaday. this is mobile kitchen. also in iraq nowaday. >> well, this isn't equipment. this is just pictures of equipment. >> yeah, but you can prove it if you wanted to. nobody want to prove it. that's the problem. >> we took all of cattan's documentation, had it translated into english, and gave it to jane's, one of the world's leading authorities on military hardware. at the time, john kenkel was the senior director of consulting, advising countries on military purchases. >> if you had $1.2 billion and you were going to equip the iraqi army, would you have bought what they bought? >> well, that's the big question, 'cause nobody really knows what they bought. kenkel told us the documents were so vague that he couldn't tell what had been ordered, or whether it had been delivered. >> i think the biggest thing was that you couldn't identify what the equipment was that was actually being delivered. to say that you were being delivered a gun, doesn't necessarily mean anything in terms of what you're getting. >> can you think of another government in the world that would have spent $1.2 billion this way on military equipment? >> nobody that you would consider on the up-and-up. >> [speaking arabic ] >> but the thing that really suggests this wasn't on the up-and-up, are these audio recordings, which we obtained from a former associate of ziad cattan and the mysterious middleman, naer jumaili. we have some audio recordings that we'd like you to listen to. >> is that your voice? >> yes. [on recording] so i just talk with him-- >> the recordings were made by the associate as he drove cattan around amman in 2004. according to two independent translations, they're talking about payoffs to iraqi officials. this is cattan talking about a top political advisor to the defense minister, a man who was also identified on the recordings as a representative of the president and the prime minister of the interim government. >> he want to know how much money is gonna be placed in his account. >> he want-- >> say 45 million. >> yes, but not dollar. i don't say dollar. >> and what was it? 45 million what? >> i don't remember. >> well, you were going to give him 45 million of something? >> yes, but i don't remember what the matter was. >> cattan told us that u.s. and coalition advisors at the ministry of defense approved everything that he did, and he now believes that the recordings have been doctored. the audio experts that we consulted could find no evidence of it. judge radhi told us that he, too, has a copy of the recordings, and that one former ministry of defense employee confessed after hearing them. how could the american advisors have missed all of this? >> [speaking arabic ] >> i think this question should be directed to the americans. >> [speaking arabic ] >> we certainly tried to, but no one in the u.s. government would talk to us on camera about the missing $800 million. off camera, we were told that this was iraqi money spent by a sovereign iraqi government, and, therefore, the iraqi's business. so where did all the money go to? it's impossible to tell. the money trail disappears inside a number of middle eastern banks. we can report that ziad cattan, who was convicted in absentia in iraq and sentenced to 60 years for squandering public funds, was building this villa for himself in poland. and naer jamaili is said to be snapping up real estate in amman and building himself a villa. a lot of these suspects are living outside of iraq in comfort and don't seem to be too concerned about the charges against them. >> [speaking arabic ] >> as you know, those people, they have a lot of money right now, so they use it to bribe anybody in the world. >> how much help have you gotten from countries like poland and jordan in either apprehending suspects or recovering money? >> [speaking arabic ] >> no help at all. >> we have not been given any serious, official support from either the united states or the u.k. or any of the surrounding arab countries. >> why has this received so little attention, do you think? >> the only explanation i can come up with, is that too many people in positions of power and authority in the new iraq have been, in one way or another, found with their hands inside the cookie jar. and if they are brought to trial, it will cast a very disparaging light on those people who had supported them and brought them to this position of power and authority. >> nobody wants to get to the bottom of it. >> in practice, no. >> since our report first aired, a lot of things have changed in iraq, the biggest being the withdrawal of american military forces. since ali allawi left his post in early 2006, he has returned to his teaching position at oxford university, and has also taught at harvard and princeton. among other changes, judge radhi, the man with the most dangerous job in iraq, fled the country and sought asylum in the united states. as for the man he was investigating, ziad cattan, he's not returned to baghdad to appeal his conviction. and accused middleman, naer jamaili, is also still at large. [ticking] coming up, the science of big-time shoplifting. this man holding up the clothes, is executing what's called a blocking maneuver. >> just loading things up in a booster bag. now here's a different angle. just different view. just loading. >> is he gonna leave anything on the rack? >> basically, it's empty. this is how bold and brazen they are. >> they're good. >> oh, no, they're professional at what they do. [ticking] >> and later, we look at china's massive counterfeit industry. >> what would retail for close to $3,000 in the united states was being offered to us for $275, because, as the owner of the shop readily admitted-- >> copy. >> copy. not fake. copy. >> boosting billions when 60 minutes on cnbc returns. 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[ticking] >> boosting is a term used for organized shoplifting. and if you think shoplifting in america is nickel-and-dime, think again. the truth is, as we first reported in february of 2004, it's a billion dollar business, and back then, a huge chunk of that business was under the control of highly skilled, well organized professionals from south america. [camera shutter snaps] these surveillance photos were taken by undercover police officers while they watched a team of seven south american thieves clean out an old navy store. >> shirts at $22.50, and they got the whole rack. >> when police moved in to make the arrest, they found enough merchandise to fill a room, all taken in less than an hour without anyone inside the store noticing a thing. there may be as many as 1,000 of these teams operating every day. and about the only place they're ever captured, is on the video tape in store security cameras. craig matsamato used to be in charge of loss prevention for t.j. maxx and reebok. he is now a security consultant for major retailers and is well acquainted with the south american groups. >> you're finding them now throughout california, maryland, chicago, miami, new york. >> if this is happening all over the country, why do so few people know about it? >> when you talk about shoplifting, not a lot of people think about organized crime. most people think when you say shoplifting, it's the opportunistic shoplifter. >> winona ryder. >> winona ryder. there you go. that's kind of how people look at shoplifting. nobody really talks about the fact that, jeez, it's really organized, it's big business, and it's high loss to retailers. that's all part of the group, right-- >> matsamato says the south americans usually work in small groups, relying on distraction, advanced planning, and precision teamwork. one or two people occupy the sales staff while others go to work. it doesn't take them long. watch these two. they're about to steal $3,000 worth of armani suits in just ten seconds using some specially designed equipment. >> he's gonna roll it up. now, here's a booster girl right here. this is a great example of how we talked about, how it's elastic. very quick. notice how quick this can be done. mm-hmm. >> at eye level, the woman on the right looks like a customer, but she is actually a lookout, watching the sales floor while her partners load up on merchandise. this man holding up the clothes is executing what's called a blocking maneuver. >> now, this is just a great angle. there's a blocker. he's looking. there's another gentleman right on the side you'll see just putting things in a booster bag. right down there. just loading things up in a booster bag. now, here's a different angle. just different view. just loading. >> is he gonna leave anything on the rack? >> basically, it's empty. this is how bold and brazen they are. >> they're good. >> oh, no, they're professional with what they do. >> sergeant scott guginsky heads the new york police department's organized theft task force, which focuses almost entirely on south american organized crime. he says they use specially made booster bags lined with foil or duct tape to smuggle the stolen merchandise out of the store. >> the foil's on top of a piece of cardboard, and it's sewn into the linings. >> and the purpose of the foil on the inside. >> that actually throws off the security at the doors. if you're walking out with an item with a security tag, it won't set it off. >> south american shoplifting teams feed a black market for stolen goods that flourished in most big cities. this discount outlet in queens contained more than a million dollars worth of brand-new, brand-name clothes selling for half off retail price. >> it's known to certain communities where, if you live in that community, you know where you can go and you can get a discount, a 50% discount on clothing. >> five finger discount, we used to call it. >> yes. >> still call it that. >> yes. >> some of the loot turns up in other countries, and even online, where stolen merchandise occasionally finds its way onto ebay. for the south american gangs, guginsky says boosting is a highly lucrative, low-risk criminal enterprise. when you arrest somebody, are they cooperative? >> for the most part, no. they're trained, and they know exactly what to say, what not to say. you won't even get a name out of them. >> but he does get a picture. these books contain mug shots and surveillance photos of 2,500 south american gang members known to be operating in the united states. all of them have been arrested at least once. almost all of them are in the country illegally and have a number of different identities and aliases provided by the organization. >> and what they do is they come here, and they'll either do jewelry theft or boosting, and they'll work for six months, and they'll go back to their country where they take that money back to a south american country. >> sergeant tony ojeda of miami's dade county police department, has been following these groups for 14 years. he's arrested and interrogated hundreds of members, and he says they have one thing in common: almost all of them started off as pickpockets. >> that is their foundation. it doesn't matter what their specialty is, but that is their foundation. they all learned the art of pickpocketing. >> and how does pickpocketing help them out? >> obviously, number one, they want to get money. but the second thing, more important, is they're looking for travel documents to smuggle more of their criminal element into the united states. [ticking] >> coming up, trailing the boosters. >> sometimes you might not be sure what type of crime they're gonna go out that day to commit. and you'll have to surveil them and actually watch them for a little while. >> you call this fishing? >> yeah, it's sort of like fishing. you don't know what you're gonna catch. we can catch a boosting team, or we can catch a jewelry team. >> that's ahead when 60 minutes on cnbc returns. [ticking] with the spark cash card from capital one, olaf gets great rewards for his small business! pizza! [ garth ] olaf's small business earns 2% cash back on every purchase, every day! helium delivery. put it on my spark card! [ pop! ] [ garth ] why settle for less? great businesses deserve great rewards! awesome!!! [ male announcer ] the spark business card from capital one. choose unlimited rewards with 2% cash back or double miles on every purchase, every day! what's in your wallet? [ abdul-rashid ] i've been working since i was about 16. you know, one job or the other. the moment i could access the retirement plan, i just became firm about it -- "i'm done. i'm out of here." you know, it's like it just hits you fast. you know, you start thinking about what's really important here. ♪ ♪ >> south american thieves have been sneaking into the united states using phony passports and visas since the 1970s when informants used to talk about a now defunct college for thieves called the school of the seven bells. >> what it involved was actually, they would dress up a mannequin, and they would attach sleigh bells to all the pockets. for the student to be able to graduate, he actually had to lift a wallet from all these seven pockets. >> so the idea was to lift the wallet or steal something without ringing the bells. >> correct, that was their graduation. >> those most likely to succeed tend to gravitate towards jewelry theft, which is the most lucrative business the south americans are involved in. these surveillance photos show a jewelry team staking out a store in boston, waiting for a jewelry supplier or courier to make a sales call. they've been known to follow a victim for weeks or even months, learning their routines, waiting for the right time to strike. this time it was outside a hotel near chicago. >> this is not something that happens occasionally. it's pervasive. it's an epidemic. >> rich loebl is vice president of le vian jewelers in new york city. he says that thieves are so brazen, they'll even target jewelers in new york's heavily fortified diamond district. >> they say there are more police officers on the street here than anywhere else in new york, and the reason is, it's not safe to be out here without a police officer. a lot of these guys are retired. look over to the left there. see the guy with the hat on? >> right. >> retired cop, bet you anything there to protect that fedex delivery person. >> turns out he was right. but loebl learned all of this the hard way. in 1999, he was followed leaving a department store in cincinnati. after waving off his police escort, he stopped at this restaurant. when he came out, a van screeched up next to his car. >> how many of them were there? >> five. >> how much did they get? >> they got over $5 million. >> it's a pretty good haul. >> it's a frightening-- it's a frightening haul. >> in 2003, south american gangs were responsible for 195 jewelry robberies, stealing more than $50 million in merchandise. this video, taken from a police helicopter, shows one of their favorite tactics. notice the gang member getting out of the car and sneaking up on a jewelry salesman's vehicle to puncture his tire. >> what we've been seeing is, they'll pop your tire. you'll have a slow leak. you'll be driving. you'll pull over because you have a flat tire. >> then they will strike with paramilitary precision. in fact, police believe some of the leaders may be former military or police. sergeant guginsky says they rely on surprise, and if there's any resistance, they'll resort to violence. we've had one individual that was followed from long island back into the city where they actually cut him from ear to ear, cut his throat. he had the jewelry bag wrapped around his hand and they actually took, like a hatchet, and tried to take off his wrist to get that bag. within 24 hours, the gems will have been recut and the precious metals melted down. they're then recycled back into the legitimate jewelry industry. sergeant guginsky took us out on one of his operations, looking for south american thieves shaping up or meeting on the street. >> sometimes you might not be sure what type of crime they're gonna go out that day to commit, and you'll have to surveil them and actually watch them for a little while. >> you call this fishing? >> yeah, it's sort of like fishing. you don't know what you're gonna catch. i mean we can catch a boosting team or we can catch a jewelry team. this morning, guginsky became suspicious of some people in a white minivan, so we shadowed it for several hours through new york city, across the entire state of new jersey, and into eastern pennsylvania. i'll do pennsylvania but not ohio. the south american crews from new york travel as far as the midwest and could be gone for more than a week. the type of crime and the targets are selected by lieutenants in the organization who are called hombres. they also supply the vehicles, expense money, and shopping lists. the white minivan finally pulled into an outlet mall in tannersville, pennsylvania. it turned out to be a boosting team made up of three women. after several forays into the store, they spotted our camera, so guginsky, assisted by local police, moved in for the arrest. they were all illegal aliens from columbia. this one was a fugitive, having jumped bail on a california burglary charge. another had been arrested for shoplifting just four months earlier and deported. but somehow, she got back into the united states. because shoplifters are not considered serious criminals, they rarely spend much time in jail. >> these groups predetermine and have plans if somebody is arrested. if a team of eight goes out, and two of those people are arrested, it's the responsibility of the other six to get the money together to bail them out and get them back out on the street. >> then, he says, they disappear, traveling to another city, or assuming a new identity. the few cops who follow these groups say they have effectively carved out a criminal niche for themselves, exploiting a justice system that lets people who commit property crimes off easily. what percentage of the time were you caught? >> we can say once a year. >> and you worked every day. >> five days a week. >> this professional shoplifter from chile became a confidential informant for the new york task force when they threatened to deport him. did you go to jail? >> yes, for one of the charges, yes, we went to jail, yes. >> for how long? >> 30 days. >> that's not a long time. >> no. >> how much did you steal? >> that day? we stealing around $20,000 worth of clothing. >> $20,000, and you got 30 days. >> yes. >> we talked to a retailer in california who said, "it's not uncommon to arrest these people and find them with plane tickets in their pocket for kansas city or chicago," and they'll check, and four days later some of them have been arrested out there. >> absolutely. >> that seems to indicate a level of organization and planning. >> it definitely does. i don't think anybody really has a good grasp on how central and how organized it really is. >> since our report first aired in 2004, cities like los angeles, miami, and new york have set up special task forces to combat organized boosting gangs, but the national association for shoplifting prevention estimates that shoplifting still costs u.s. retailers more than $35 million every day. [ticking] coming up, the big problem of copycat crime. >> we have never seen a problem of this size and magnitude in world history. >> now, hang on. in world history. >> there's more counterfeiting going on in china now than we've ever seen anywhere. >> china's massive counterfeit industry, when 60 minutes on cnbc returns. [ticking] i always wait until the last minute. can i still ship a gift in time for christmas? yeah, sure you can. great. where's your gift? uh... whew. [ male announcer ] break from the holiday stress. ship fedex express by december 22nd for christmas delivery. by december 22nd when you take a closer look... ...at the best schools in the world... ...you see they all have something very interesting in common. they have teachers... ...with a deeper knowledge of their subjects. as a result, their students achieve at a higher level. let's develop more stars in education. let's invest in our teachers... ...so they can inspireour . let's solve this. [ female announcer ] today, it's not just about who lives in the white house, it's about who lives in the yellow house, the green, and the apartment house, too. today we not only honor the oval office, but we honor the cubicle, and the home office as well. because today it's about all of us. and no matter who you are, you're the commander-in-chief of your own life. ♪ welcome to the world leader in derivatives. welcome to superderivatives. >> for years now, china has been the workshop of the world. that raises the question, once the chinese know how to make an american product, what's to stop them from copying it? the answer, nothing at all. and what's to prevent the chinese from shipping these counterfeits back to the united states for sale? as bob simon reported in january of 2004, the answer to that question is not much. >> that's what we discovered when we found a corner shop in dongguan, china, selling golf clubs by callaway, the american manufacturer of the famous great big bertha driver. the chinese government didn't want us to bring our cameras, so we did undercover. inside, we saw a club that looked and felt like the great big bertha. not only that, we were offered callaway irons, putters, golf bags, gloves, even a callaway umbrella. and the best part? i want good quality, good price. what would retail for close to $3,000 in the united states, was being offered to us for $275, because, as the owner of the shop readily admitted-- >> copy. >> copy. not fake, copy. the whole set was a copy. that's what they call it in china. at callaway, they call it counterfeit. >> the first clue we had to that problem was when people began sending in the clubs as they broke. >> stu herrington is callaway's head of security and he has seen fake callaway clubs pour into the u.s. from china. and, of course, repairs took a look at this broken club and realized right away it was fake. >> but fake golf clubs don't begin to suggest the enormity of the problem. >> we have never seen a problem of this size and magnitude in world history. >> now, hang on. in world history. >> there's more counterfeiting going on in china now than we've ever seen anywhere. >> dan chow should know. a law professor at ohio state university, his specialty is chinese counterfeiting. we know that 15% to 20% of all goods in china are counterfeit. >> and these days, the way china's economy is booming, 15% to 20% means tens of billions of dollars. evidence of the counterfeiting trade can be seen at this hong kong warehouse where counterfeit watches, shoes, computer chips, all copied in china, and seized in hong kong, are tossed onto a conveyor belt, and consigned to the dust bin of history. but it's like stopping the rain, the seizure may look impressive, but every day, 6,000 shipping containers leave hong kong's harbor for the u.s. packed with products made in china, and only a small fraction of those containers are ever inspected. >> this is the most profitable criminal venture, as far as i know, on earth. >> counterfeiting. >> counterfeiting. and your partners don't kill you. >> attorney harley lewin has been chasing counterfeiters from china for more than twenty years. and china's now the undisputed capital of the counterfeit. >> 80% or more worldwide. >> can you give me an example of any american or european product that's manufactured here without being counterfeited? >> no. >> so we could have followed just about any trail, but we decided to stay on the fairway. and we went undercover to find a small factory in dongguan, churning out fake callaway golf bags, 500 a week. the workers, mostly from rural provinces, make a few bucks a day and don't have the slightest idea that what they're doing is illegal. china may be the largest labor pool in the world, but ultimately, it's all in the family. >> when you teach the production line how to make your product, if it's a mold, that mold will find its way down to a relative's production line down the street, an uncle, or grandfather, or husband, or brother. >> and the buyer could be a daughter or a son. did you ever imagine that children's books could be counterfeited? harry potter is as popular here in china as he is in the rest of the world, so you can imagine the excitement when volumes five, six, and seven of the harry potter series appeared in stores all over china with author j.k. rowling's name on them. harry potter and the crystal vase was the title of one. harry potter and leopard walk up to dragon the title of another. there was only one problem, as any american kid could tell you, j.k. rowling didn't write them. the chinese counterfeited something that doesn't exist. even fake sardines have been seized coming out of china. >> we had prunes the other day. >> prunes. >> fake prunes, coming from china to thailand. >> and if you can copy a prune, why not a car? >> there is a new factory in china that rolled out its very first automobile, and the front half was german model a, and the back half was german model b. >> just to take a wild stab, one could imagine, say a bmw front, and a mercedes back, something like that. >> one could imagine that. literally. >> did it look good? >> depends where you looked at it. if you looked at it head-on, it wasn't bad, you know. [ticking] >> coming up, the serious reality of the fake business. >> chinese government studies indicate that thousands of their own citizens have died because of fake medicine. >> do you know which is which? >> i say this is real. >> this is the authentic one. >> this is the authentic one? >> yeah. >> so i'm wrong again. huh. >> we'll have more fakes when 60 minutes on cnbc returns. [ticking] if you are one of the millions of men who have used androgel 1%, there's big news. presenting androgel 1.62%. both are used to treat men with low testosterone. androgel 1.62% is from the makers of the number one prescribed testosterone replacement therapy. it raises your testosterone levels, and... is concentrated, so you could use less gel. and with androgel 1.62%, you can save on your monthly prescription. 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[ female announcer ] want to spend less and retire with more? then don't get nickle and dimed by high cost investments and annoying account fees. at e-trade, our free easy-to-use online tools and experienced retirement specialists can help you build a personalized plan. and with our no annual fee iras and a wide range of low cost investments, you can execute the plan you want at a low cost. so meet with us, or go to etrade.com for a great retirement plan with low cost investments. ♪ [ticking] >> china is widely regarded as the counterfeit capital of the world, but as bob simon discovered, the counterfeiters don't confine their business to the export market. they sell the goods to chinese consumers as well. >> look at this shopping mall in shenzhen. it's got hundreds of stores packed with brand-name goods. not one of them is real. >> well, those are studs. >> they are. to the untrained eye, these necklaces and studs marked tiffany's look real. so do these blue pills marked viagra, which promise to make you a stud. the mall is hardly underground. it's five stories high. the local police are here, but only to give directions. we came here with jack clode, an investigator for kroll associates. >> they do do raids here. >> huh. >> but very quickly, the shops are back in business. >> and when a shop gets raided, is it gone for good? >> well, it might change its name. it may shift one floor up or down, but it'll be back in business. >> whether it's retail or wholesale, counterfeiting is an industry that supports entire towns. yiwu, a few hours from shanghai, is the wholesale counterfeit capital of chine. villagers flock here to buy or to sell or both. in the indoor market, you'll find batteries that look like duracell, even if they're called dinacell or super-cell. kodak film is popular. so are gillette razors and mickey. 100% genuine? maybe not. the chinese are addicted to brand names, even if they don't always know how to spell them. with the help of kroll investigators, we found a counterfeiter who took us to her garage in yiwu, where she displayed western running shoes ready to be copied. we wondered how long it would take to make copies of these nikes. >> [speaking foreign language] >> ten days. >> ten days. 1,000 shoes at $4 a pair. was she afraid of the police? not at all. "we have a good relationship with the cops," she said. and what do the chief cops in beijing say? we spoke to gao feng, deputy head of china's anti-counterfeiting police unit. from what we've seen, sir, counterfeiting is tolerated. obviously the authorities know about this, and yet, the shopping mall is open, the markets are open. >> [speaking foreign language] >> this phenomenon does exist. i admit its existence, but there's a question of how hard you crack down. that's because, under chinese law, someone cannot be prosecuted only because he sells a small quantity of fake products. >> in 2003, there were about 1,000 police raids, often followed by press conferences and displays of the seized goods. but american companies say that's what it amounts to: a display. that's because, unless a counterfeit really hurts people seriously, the fines imposed by the authorities are very low. and the relationship between the cops and the counterfeiters is often less confrontational than cozy. >> i remember going on a raid one time, in which the counterfeiter and the local enforcement official seemed to know each other very well. he said, "hello." he actually served tea to us when we went and seized the product. of course, i was outraged at the time. >> but that outrage is not shared by the chinese authorities. they will do anything to avoid social unrest, and counterfeit factories keep a lot of poor people employed. american firms may not like it, but they may just have to live with it. >> [speaking foreign language] >> we don't want to ignore counterfeiting, but for those foreign companies, when they enter the chinese market, i'm afraid they should also pay some cost due to the realities of china. >> so what you're saying is that the chinese market is so large and labor costs so low that an american company is going to come, and if it has to lose some of its investment because of counterfeiting, well, that's life. >> yes. >> trouble is, it's not just a problem for american companies. consumers beware. >> you won't die from purchasing a pair of counterfeit blue jeans or a counterfeit golf club. you can die from taking counterfeit pharmaceutical products. john theriault is the head of global security for the american pharmaceutical giant, pfizer >> and there's no doubt that people have died in china from bad medicine. >> chinese government studies indicate that thousands of their own citizens have died because of fake medicines, counterfeit drugs that may have had some active ingredients or not, but they look good. take pfizer's popular drug viagra, for instance, a favorite among chinese counterfeiters. >> do you know which is which? >> okay, i say this is real. >> this is the authentic one. >> this is the authentic one? >> mm-hmm. yeah. >> so i'm wrong again. huh. while pfizer is confident chinese counterfeits haven't infiltrated american pharmacies, there's that market that transcends state lines, the internet. you'll find fake expensive brand names sold for next to nothing on the web, often to americans. >> the oldest adage in the world is when you get something for nothing, that's usually what it's worth. >> right. >> except people go brain-dead when they buy this stuff. >> we wanted to see if we had gone brain-dead. remember that set of callaway golf clubs we bought for $275 in china? we brought them to callaway's headquarters in california to see what we had. >> i can't believe it says great big bertha. >> we had our clubs inspected by a pro. >> well, they've copied everything. >> by an investigator. >> these look like the authentic. >> and by a robot. all in an attempt to see how good the counterfeits were. what we learned, is that the great big bertha of china was hitting 240 yards on the robot, only ten yards shorter than a genuine. that looked pretty good. until we gave them to a real golfer. >> huh, that's ugly. >> jim colbert of the pga champions tour, who swings with callaways. so it keeps going off to the right a bit, doesn't it? >> a bit? >> then stu herrington, callaway's head of security showed up one reason why. >> it's supposed to be a titanium club. okay, there's a magnet sticking to it, which shows that it's steel, not titanium. >> and unless the average golfer had a saw, he or she wouldn't notice what we discovered. the head of our great big bertha was actually two pieces welded together, instead of one. what one might expect, for $275. >> folks who have bought a set for $275 in china bring them to the states, and they internet auction them for $1,500, and, you know, that's a pretty good margin in anybody's book. >> so good, that american companies are having trouble staying even one step ahead of china's counterfeiters. >> on the day that callaway golf releases a new club, they can purchase one, and within seven days, using computer assisted design in their modern facilities, begin cranking out counterfeits. >> the chinese authorities insist that they're working on the problem, that they're sensitive to american concern. we thought about that as we strolled down silk alley in beijing, where you can buy everything except the real thing. silk alley is a few steps from the american embassy. >> since our report first aired in 2004, the trade in counterfeit and pirated goods has continued to be a major challenge for the american economy. according to the department of homeland security, in fiscal year 2011, china continued to be the number one source country for counterfeit and pirated goods seized, accounting for 62% of the total. well, that's our edition of 60 minutes on cnbc. i'm steve kroft. thanks for joining us.