Amend law to kill fake goods business

A third-party vendor, Belle Boutique, is found to have sold China-made counterfeit luxury products like watches, apparels and bags through major e-commerce platforms, such as jumei.com, a beauty product seller, and jd.com, an e-commerce leader.

The two e-commerce giants have already issued statements of apology and vowed to stop cooperation with Belle Boutique, a small dealer based in Hebei province. They also have offered the fraud victims free and unconditional product return services.

The scandal is set to diminish consumer confidence in the two e-commerce giants, because people use their websites to buy luxury goods not only for the low prices they offer, but also because of the belief that the two reputable companies (both are industry leaders and listed on the US stock market) will not sell fake products.

The two companies could pay a dear price because their websites would now register fewer hits and they might easily become the target of shorting capital in the US stock market.

Some US-based investment research companies, such as Muddy Waters LLC, have accused a few Chinese companies of "financial cheating" and selling "fake products", which caused their stock prices to drop, at times steeply. Jumei's stock price, too, dropped sharply after the Belle Boutique incident came to light. If investment research companies step in and issue unfavorable reports, investors could continue to dump Jumei stocks, causing greater loss to the company's shareholders.

Consumers should draw lessons from the incident. If international luxury brands generally offer very small discounts, how come the two e-commerce platforms were offering many watches and bags of globally famous brands at very low prices? Rational consumers should have questioned the reason for such huge discounts before deciding to buy.

One of the problems with e-commerce in China is that, even after realizing that the products they have been delivered are fakes, many consumers tend not to report the fraud to intellectual property rights protection agencies so long as the retail websites agree to refund the products. By doing so, the consumers miss the opportunity to let regulators and other consumers know about the frauds in which the websites are involved. In a way, these consumers help the websites to continue cheating unsuspecting customers.

So, are such consumers partly blamed for the retail frauds? Perhaps not, because as rational individuals, they are entitled to make decisions that they think are the most appropriate. What needs a rethink is the regulatory and legal system that has allowed commercial cheating to go unchecked.

Jumei has apologized to consumers and promised to refund the fake products. It has explained that it has strict rules in place to prevent fake products from being sold through its website, only that it couldn't detect the fraud the third-party vendor was carrying out.

In other words, Jumei has shifted the major part of the responsibility to the third-party vendor. If regulators do not step in, the company, along with the other e-commerce platforms involved, could emerge unscathed from the scandal.

A large number of third-party vendors are active on Jumei's platform. And since these third-party vendors are estimated to contribute more than half of the platform's revenues, it is difficult for Jumei to carry out due diligence to completely rule out cheating in e-transactions.

The cheated consumers logged on to Jumei's website, not that of the third-party vendor, to buy luxury goods. So Jumei cannot escape punishment by simply saying that it didn't know the third-party vendor was cheating buyers.

Many online dealers are involved in cheating, and regulators should punish all of them to protect consumers' interests and prevent the fraudulent companies from continuing to make money by violating laws and intellectual property rights.

Current laws do not allow consumers to file a class action against companies involved in cheating; they can only sue the companies individually. Since this is a lengthy and complicated procedure, many consumers decide against going through it to protect their interests. As a result, the companies are not made to pay much as compensation to victimized consumers even if they lose a case.

Such "leniency" for commercial interests - companies making huge gains from cheating but paying insignificant amounts if caught in the act - has to a large extent encouraged some unscrupulous market players to cheat customers.

Therefore, the government must revamp its legal system to ensure that the cost of cheating in business outweighs the potential gains in order to protect consumers' interests. Or else, it will be almost impossible to develop an honest business environment.

The author is a senior writer with China Daily. xinzhiming@chinadaily.com.cn