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The Federal Bureau of Investigation announced on Friday that it has arrested four people in Los Angeles whom it says tried to distribute counterfeit Microsoft software.

Most significantly, the counterfeiters, who were arrested on Thursday, made the first serious effort to illegally replicate Microsoft's new edge-to-edge hologram security feature on the software CDs.

The FBI says the four were part of an organized Asian criminal group that has been active in California's San Gabriel Valley for some years. "This was a very significant seizure because of the sophistication of this ring," says FBI spokesperson Cheryl Mimura.

Searches of houses and storage facilities in the San Gabriel Valley area resulted in the seizure of counterfeit copies of Windows 98, Office 2000, Windows NT Server, and Windows Millennium Edition, with an estimated retail value of $10.5 million.

Each counterfeit copy of the Windows Me CD was overlaid with a stick-on label that carried a hologram similar to those embedded in the metal portion of genuine CDs.

Mimura says the software was smuggled to the United States from Asia and alleged that the four individuals who had been arrested were responsible for pickup and distribution.

High-Quality Copies

According to Richard LaMagna, a former Drug Enforcement Agency veteran who heads Microsoft's Worldwide Piracy Investigations unit, 6.6 million units of counterfeit software with a retail value of some $2 billion have been seized worldwide in the two-year period that ended June. Most of the software programs were of poor quality.

Microsoft has become increasingly concerned about Asian organized crime rings producing high-quality counterfeit copies of its software CDs. The legal discs are produced in replication plants in Asia, and leakage from those plants is a serious problem.

LaMagna stressed that in this case, Microsoft's key antipiracy technology--the edge-to-edge disc holograms--had not been replicated because the counterfeiters were unable to put the hologram on the discs themselves. However, the stick-on label was sufficiently close to the look of the official hologram that the CDs could plausibly pass as genuine.

"To the untrained eye, it could pass as possibly genuine," LaMagna says. The FBI's Mimura, who was unfamiliar with the look of the genuine discs until Friday, says the discs looked official. "I would have thought it was the real thing," says Mimura.

LaMagna joined Microsoft two years ago, after 27 years with the DEA where he specialized in cracking Asian drug rings.

Software counterfeiting and the related counterfeiting of DVDs and music CDs holds a strong appeal for criminal groups that in the past might have focused on drugs such as heroin, says LaMagna.

"Profits are high, and the risk is very low," he says. "It's unlike alien smuggling or drugs, where it's hard to get a legitimate cover. But an office in Silicon Valley has an air of respectability. You're not dealing with the dregs of society. There's a great appeal there."

The arrests and seizures came after a 14-month investigation by the Los Angeles FBI Asian Organized Crime unit in West Covina, California. Assistance was provided by the U.S. Customs Service, the L.A. Police Department, and the L.A. Sheriffs Department, Asian Crime Task Force. Microsoft was also closely involved in the investigation.

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