(FORTUNE Magazine) – One day last September, private investigator Douglas Erb sought enlightenment, as he often does, sitting in the back of a parked truck in central Los Angeles. Hidden behind a black glass window, he was studying a tawdry boutique across the street called Black Box. Business seemed as slow as always at the clothing shop, whose main offering was a meager selection of shirts. But Erb had been tipped that behind that facade, it was shipping a torrent of bogus upscale clothes--fake Nike sweatshirts, Calvin Klein pullovers, Polo T-shirts, and the like--to illicit apparel merchants across the country.

He perked up as two nattily dressed men walked in and engaged the proprietor in conversation. Showtime at last! These dandies looked a lot like counterfeit dealers seeking inventory. At least Erb hoped so. They were working for him on a sting.

A husky, affable former cop, Erb, 44, works for corporations ferreting out and shutting down sellers of phony name-brand merchandise. He'd started his investigation months before, after busts of knockoff vendors on the East Coast had turned up records naming Black Box as a supplier. Ambling into the shop for the first time, he'd expected to see his clients' logos sticking out like diamond pinkie rings in a soup kitchen. Instead, he'd found nothing but humdrum duds on spartan metal shelves--labels were conspicuously absent. But when Black Box closed one night, he'd tailed the store's Korean owner. The man got into a new, jet-black Corvette, sped to a tony suburb called Rowland Heights, and pulled into the three-car garage of a sprawling house, right next to the family Mercedes. Home, sweet home.

Just how sweet product forgery has become for scofflaws is a sore subject for many companies--some won't discuss it publicly for fear of undermining confidence in their brands. But federal and industry surveys indicate that America's annual losses from the problem have quadrupled over the past decade to a staggering $200 billion. An estimated 5% of products sold worldwide are phony, and almost anything that plays well in Boise and Bangkok becomes unfair game, from Windows 95 to Similac baby formula to ACDelco auto parts. The explosive growth is propelled by three simple facts: Pirating products can be as lucrative as pushing heroin. It's about as hard as photocopying. It's low on law enforcement's agenda. Jim Moody, head of the Federal Bureau of Investigation's branch on organized crime and drugs, calls it "the crime of the 21st century."

The pirate captains of the underground economy typically hail from places like South Korea, Vietnam, or Russia. They work as a loosely intertwined network of importers and distributors, often living in the U.S. or Europe and using connections overseas to procure knockoffs. Some in the Northeast have diverse business lines, including drugs, money laundering, and prostitution. With so much at stake, people can get hurt. David Thai, alleged leader of a Vietnamese gang calling itself Born to Kill, dominated the market for bogus luxury watches in New York a few years ago by killing business associates who didn't share his strategic vision--until he was convicted of murder in 1992 and sentenced to life in prison. Recently the International Federation of the Phonographic Industry, a trade group pressing Chinese authorities to crack down on piracy, yanked its staffers out of Guangzhou after learning from "reliable sources" that hit men had been hired to make an example of them.

As with insider trading, the fallout is broad and insidious: Counterfeiters cheat bigtime on taxes, take away jobs from U.S. workers, add to the trade deficit, hoodwink consumers, and tarnish reputations for quality honed over decades. Some of their stuff truly stinks--a few years ago, federal agents seized a load of Cabbage Patch dolls that had been doused with kerosene to keep vermin away during shipment. Some fakes could kill you. Last year the Federal Aviation Administration grounded 6,000 piston-powered aircraft to check for bogus crankshaft bolts that could cause crashes.

Still, few cops care to clock time on a crime whose hurts are usually hard to see, and for which perpetrators traditionally get hand-slap fines if convicted. "Most police go into law enforcement to fight the bad guys, and it's hard to get excited over a bunch of hard-working T-shirt counterfeiters," says Vincent Volpi, a former police detective and president of the Professional Investigating & Consulting Agency (PICA) in Columbus, Ohio, which specializes in anticounterfeiting. That's changing in some places, most decidedly in Los Angeles and New York City, as the scope of counterfeiting's fallout and its links with organized crime become more apparent. Capping a three-year investigation of one ring last year, federal agents seized $27 million of counterfeit apparel and accessories in four states and arrested on fraud and conspiracy charges 27 Korean citizens living in the U.S. The goods nabbed in the sweep, Operation Pipeline, were imported from dozens of factories in South Korea, says Robert Van Etten, who heads U.S. Customs investigations in New York and New Jersey and coordinated the bust.

Such cases are wake-up calls for legislators. California, New York, and a few other states have enacted laws in recent years that, for the first time, let police routinely charge major counterfeiters with felonies. A pending federal bill, expected to go on the books this year, would add racketeering charges for trafficking in counterfeits. The stiffer penalties make law enforcers more willing to go after shamsters. But even when there's a will, there's often no way. Says Van Etten: "I can't devote more than 1% of my manpower to the problem. We can't back away from narcotics and other higher priorities."

Thus, the war on counterfeiting is largely waged by private detectives hired by companies and trade groups. Police typically are called in to make arrests and seizures only after most of the investigative work is done--and then only if the case involves an operation big enough to warrant felony charges. Says Heather McDonald, an attorney whose New York firm, Gibney Anthony & Flaherty, coordinates anticounterfeiting efforts for Rolex Watch USA: "We go to law enforcement when we can present cases on a silver platter."

For private investigators like Erb, PICA's main man in L.A., that means prying open businesses like Black Box far enough to see exactly what's inside, including the trademarks being infringed and how the bogus goods are stored and distributed. A standard ploy is to find and "roll" the low-level vendors involved--that is, get them to play confidence tricks on their suppliers in return for suspended prosecution. As Erb watched the L.A. shop last fall, one such trick was about to be played.

A few weeks earlier, a shopkeeper from another city who regularly bought bogus designer apparel by mail from Black Box had been arrested in a raid organized by one of Erb's colleagues. Shown the error of his ways--the local prosecutor nicely wrote it all out for him--he agreed to visit L.A., ostensibly on a buying trip. The plan: He would introduce one of Erb's men to Black Box's owner as a friend in the fake apparel business. The two would try to make buys. If all went well, they would be taken to a hidden storage site to inspect the goods. Erb would tail them to pinpoint the location for a later raid and step in if things got random. He hoped to link Black Box with a cache of at least 1,000 trademark-infringing items, the minimum required for a felony in California.

When the two entered the shop at about 1 p.m., says Erb, "the owner and his wife were very cautious, standing there with their arms folded. The wife goes up front to look out the window and see if anyone is watching. She doesn't notice my truck--it's been there since 6 a.m. and already has two parking tickets. I'm thinking, 'This is going to be a slam-dunk. They're going to make a sale.' Then the owner brings out a photo album from under the counter with pictures of counterfeit clothes. He tells our guy, 'Just point at what you want, and I'll ship it later C.O.D.' Damn." The paperless office. A legally spotless office. A clueless detective. The score: Black Box, 1. Erb, 0.

Erb fell back on dogged waiting and watching. Surveillance is the kind of mind-numbing grunt work that drives a hard-boiled fictional gumshoe like Philip Marlowe to hard pulls of whiskey. But Erb learned the value of patient attention to detail early, helping with the chores at his father's grocery store in Buhl, Idaho.

Erb has made loitering into a thespian art. Says he: "The trouble is, I'm white." His targets operate mostly in the Asian, Hispanic, and black neighborhoods of central Los Angeles, near the city's garment district. Hanging around there draws unwanted attention, says Erb: "I either get taken for an undercover cop or somebody out to make a drug buy."

But not when he's camouflaged with the help of a friend at a Hollywood studio, an expert with makeup and "facial prosthetics." In one get-up he poses as a homeless man-- filthy, disheveled, and stinking of T-bird--who just happens to have reeled into a stupor near the doorway of a place like Black Box. Says he: "No one pays a speck of attention to a street bum. The only thing that's not quite right are my shoes"--hey are scuffed but high grade, in case he has to run after a perp--or from one. (The only weapon he carries is pepper spray.) The pose also facilitates a time-honored technique: dumpster diving for evidence. He totes a bag of empty soda cans to make the ruse convincing.

Most of his surveillance, however, is performed more as audience than actor, sitting dawn to dusk in parked vehicles. Tinseltown helps with that too: Rental agencies catering to movie studios offer a variety of wheels that blend in, from cabs to flower delivery vans. Parked down the street from Black Box in a beat-up truck one day, he hit pay dirt: A pale-blue Ford Econoline van pulled up, and its Asian driver dropped off some big boxes inside the shop's front door. Shortly after, a UPS truck came by and picked them up. Then it happened again. Follow that Ford.

Staying well back in traffic, Erb managed to keep it in view on a twisted tour of the area's back-alley sweatshops, pockmarked bungalows, two-bit taco stands, and gang-scrawled walls. Then the van turned abruptly into a fenced lot lined with long rows of eight-foot-high self-storage units. Erb dared not follow or pull up near the entrance--the lid he'd finally lifted on the case would be slammed down tight if the counterfeiters suspected they were being watched. Cursing, he tore around the block, then suddenly pulled over and grabbed binoculars out of his rucksack--down the street was the back border of the storage lot, and the blue van had parked in plain view at the end of a row. Says Erb: "Knowing how sharp they were, I couldn't believe how stupid they got on this. Their storage units faced a street, and when they rolled up the doors my eyes popped out. I could see a lot of merchandise." Welcome to the naked city. Score: Erb, 1.

He had enough to orchestrate a police raid. But he needed more for a clear-cut win. Says Volpi, PICA's dapper 41-year-old investigative maestro: "It's not fair to our clients to just bust one retailer after another. It's cheap, and it makes a splash. But we need to get to where the stuff is manufactured to make a difference."

In many cases that's complicated by fabrication overseas. Indeed, the money U.S. companies have saved by moving manufacturing operations to developing nations has been offset by a huge, hidden cost: Their designs, factory equipment, and expertise have increasingly fallen into shady entrepreneurs' hands. Most knockoffs are retailed abroad; the availability of dear brand names on the cheap helps keep consumers happy in poor, politically volatile countries. It also favorably tips the nations' trade balances, boosting exports while damping down demand for expensive imports. Such countries' authorities tend to have problems with their eyesight around factories making fakes. Chinese compact-disk factories produced three million legitimate units in 1994--and 70 million pirated ones, according to the Recording Industry Association of America. The rampant piracy brought the U.S. and China to the brink of a trade war last year, averted at the last minute by an accord under which Chinese authorities agreed to crack down. But the pirates' production continues "unabated," grumbles Jay Berman, the trade group's chief executive.

Listen up, marketing czars: If you're counting on getting a major piece of the action in the developing world's up-and-coming economies, do a recount--particularly if you're hawking high-margin products such as software and pharmaceuticals, which pay irresistible returns on counterfeiters' investments. Some 70% of medicines sold in Third World countries are knockoffs, according to the International Anticounterfeiting Coalition, an industry-funded group in Washington, D.C. Adds Microsoft attorney Anne Murphy: "We refer to some countries in Asia as one-disk markets. More than 99% of the software is illegitimate copies."

Consumers in the U.S. and Europe buy counterfeit products in countless places---small discount stores, flea markets, street vendors' carts, and, occasionally, chains whose honest merchants don't realize they've been had. Covert retailing is on the rise, such as Tupperware-like parties for phony Rolex watches, Louis Vuitton bags, and other luxury items. Some counterfeit products are shipped shelf-ready to the U.S. from Pacific Rim nations and other places. But that poses risk of discovery at the border by U.S. Customs inspectors. Hence, many counterfeiters prefer to import cheap "blanks"--say, perfectly legal unlabeled watches or sweatshirts--and then add designer logos and labels in U.S. sweatshops filled with illegal immigrants. They work for slave wages and reliably avoid the police.

Technology's frantic advance has pulled counterfeiters along like leeches on Tarzan with the piranhas after him. Need 20,000 Tommy Hilfiger and Calvin Klein sweatshirts for what's-his-name in Miami? No sweat. Just lease a 12-head Tajima embroidery system that can automatically replicate stitched logos fed in as digitized images.

Of course, you'll need a load of blanks for the hired hands to work with. So get wired. Bill Ellis, vice president of National Trademark Investigations, an L.A. agency, says his boss recently ran across a site on the Internet's World Wide Web that counterfeiters were using to advertise their wares. The I-way is a natural for counterfeiters. After all, information wants to be free, and designs are just information. Says Dempster Leech, a veteran private eye at Harper Associates in New York City: "All of the hot technologies today are about copying, and that lends itself to counterfeiting. Think what computers do: Give you an electronic thing to print out over and over again. Scanners let you copy and save logos. Laser printing and color copying let you make labels. It's simple to copy audiotapes, video, software, and stuff on the air. With more digitized signals it's going to get worse."

Some things are a little tricky, such as fabricating small, intricate clothing labels, or holograms that are put on computer software packages to foil counterfeiters. But both are readily available from high-tech copy shops in the Far East and Eastern Europe, and the items' small size facilitates slipping them across borders. You can carry enough fake holograms in a matchbox to stick on $10,000 worth of counterfeit software packages. If you strolled by a drug-sniffing dog at an airport with it, he would yawn and wag his tail.

Losing ground to the kudzu of counterfeiting, trademark owners increasingly collaborate to fund lengthy investigations aimed at getting at the roots. But counterfeiters tend to be quick learners, and nailing them is getting harder, say investigators. Among the bad guys' latest ploys: Routing counterfeits from the Far East through Japan to lessen the chance of a spot-check by U.S. Customs; assembling products at a hard-to-connect jumble of small operations, none of which is big enough to get law enforcers very exercised; using just-in-time manufacturing and spreading inventory among different warehouses to minimize the chance of getting caught with a felony-size store of counterfeits.

Customs' Van Etten thinks counterfeit goods increasingly are piped through channels that organized crime uses for illegal drugs. Two years ago federal agents seized a load of bogus handbags from Korea and noticed they had been slit earlier with a knife. Lab tests indicated they had been filled with heroin. A counterfeiter branching out? A bag man paying dues to a snow man? Van Etten isn't sure.

Asian counterfeiters are the old masters of this sort of con artistry in the U.S., and New York City is where they produce some of their most popular work. Private investigator Robert Holmes is a close student of their technique. In fact, he pops up so regularly in their midst that they have given him a nickname: the Chief.

The inspiration for the moniker becomes clear if you follow Holmes around for a few days. First, you have to find him. Go to an old warehouse in lower Manhattan. Take a freight elevator up a few flights and wander down a long corridor past rooms filled with shipping containers to a locked metal door. There may be a sign on it that says Holmes Hi-Tech--but not if a perp who's being set up is due by. Ring the bell and tell them you're seeking the gent who looks like Pavarotti about to burst into an aria in a biker bar--they'll know who you mean. The former New Jersey state trooper will be sitting behind a big gray desk under hard fluorescent lights. Nearby an arthritic tabby will be dozing on a scruffy chair. Name of Abacat.

The Chief will probably be headed downtown soon to quarterback his zillionth seizure in Chinatown, near Canal Street, where fake gold Chanel purses alternate with rows of naked ducks in a haze of incense and fried rice. It's Hong Kong in Gotham, and a polyglot throng of tourists peruse open-air stalls offering everything from phony Rolexes to faux Louis Vuitton bags. At most places, a hawk-eyed "spotter" sits on a stool next to a walkie-talkie or a cell phone, ready to spread the word if a detective is detected--when a place is raided, stalls snap shut for blocks around like startled clams. Working together a few years ago, Holmes and Leech prefaced a raid by broadcasting "Ride of the Valkyries" on the spotters' walkie-talkie frequency. "The jamming didn't do us a lot of good," says Leech, "but it was fun to hear Wagner all along Canal Street."

Holmes's Chinatown raids--mostly "civil" seizures of small quantities of counterfeits without arrests--are weekly rituals. They have an indirect goal: Vendors here often use their shops as showrooms to attract wholesale customers, and keeping their bogus goods off the street dents their trade with the visiting shopkeeper from Caracas, or the guy with three flea-market booths in Texas. Holmes's targets are set by undercover operatives, often actors between stage jobs posing as finicky shoppers. They locate shops selling phony goods bearing names of clients footing the bill that week. On a recent raid the name was Rolex.

A U-Haul truck pulled up in front of a tiny curio shop--one of several stops it made that day--discharging a dozen men in jeans and leather coats who swarmed into the place. Papers were served on the proprietor, who stood by sullenly plucking at takeout noodles as the team searched. They found his stash of watches hidden inside a large Rolodex. Then Holmes sauntered into view like the director after a play, pausing to greet a shopkeeper next door whom he had last raided two weeks ago: "I see you're being good today."

"Naw, Chief, you put me out of business."

He should be so lucky. Like much in Chinatown, the courtly atmosphere is misleading. Only one side is playing by rules, and things can get nasty fast. "Once we pulled up at a store near Canal Street, and the next thing we know the whole street is coming at us with chairs and pipes," says Holmes. "Luckily we got out without injury." He and his men have dodged broken bottles, knives, and exploding cans full of nails. A few years ago Heather McDonald, the attorney representing Rolex, didn't move fast enough when a Chinatown vendor slapped her hand during a raid, breaking her knuckles. A lawyer representing Cartier, who asked not to be named, was walking away from a seizure two years ago when a vendor went ballistic and sank a butcher knife into his back--he's okay now but doesn't like to talk about it. Rumor has it that the murderous David Thai took out a contract on Leech before his arrest. Says Holmes: "I never drive a car that won't do 130. If I'm on the turnpike and see certain faces in my mirror, I want to be able to say, 'Bye-bye.' "

Los Angeles counterfeiters tend to be foxes rather than wolves, so Erb doesn't worry much about getting hurt. Still, the chase can fray his nerves. If police make false arrests based on his investigations, he's toast. If he organizes a bust that doesn't net enough counterfeit items for a felony charge, the police may tell him they're busy the next time he comes by. If he does everything right, he may still lose. To bolster his income, Erb tries to recruit additional trademark owners as clients by divulging enough information to show he can nab a major infringer. But a trademark owner may pass his tips to its regular detective agency instead of hiring Erb to follow up.

To nail Black Box's owner, Erb figures he must document a big sale before the bust. By February, his undercover men had made two small purchases of counterfeit items from Black Box--trust builders leading up to a felony-size buy. While glad-handing the owner, a Mr. Jun S. Shim, they heard that he dealt with several counterfeiting operations at different locations. But where? Shim didn't say, and they didn't dare ask. Shim finally let down his guard in March, when he delivered over 1,000 T-shirts ordered by Erb's men. Erb was ecstatic: "We're going to wrap this guy up with a bow."

Meanwhile, Erb continued to tail Shim's employees, laboriously mapping out his business network. One merry chase led to a warehouse with a rolled-down door, where Shim's man drove an empty van inside, then emerged with a load of something. "I began praying for warm weather so they'd roll up the door," says Erb. A few days later his prayers were answered: Through binoculars he spotted a crew of Latinas inside hunched over sewing machines.

Another chase led to another warehouse, where the view through the front door was blocked by an eight-foot-high fence of plywood just inside. It looked like a job for Dumpster Dan, Erb's stinko alter ego. But the place's dumpster was kept inside, and on trash-collection day Erb watched with disgust as it was rolled out of the warehouse just as a city garbage truck pulled up, giving him no chance to dive. Erb wondered why Shim was so cautious. He soon learned why.

Running out of money and time on the $20,000 investigation, the detective went to the Los Angeles police. Their records held a surprise--Shim had been arrested on an apparel counterfeiting charge the summer before, pled guilty, and been placed on parole. No wonder he was circumspect: If convicted as a repeat offender, he'd probably spend more than a year in jail. Now Erb had no trouble making his case with the police. "They thought they had blown the guy out of the water," he says.

Erb still didn't know crucial details, such as where Shim got his phony name-brand labels. Shim's business records, seized at the bust, might fill in the gaps. But Erb knew counterfeiters generally work through verbal agreements, deal in cash, and write little down. So he planned to give Shim some friendly advice immediately after his arrest: Spill. In return, Erb would tell the judge that Shim had been cooperative, potentially lightening his sentence.

On raid day, Wednesday, April 3, Los Angeles was playing angel face: Turtle doves cooed under the palms along Wilshire, orchids exhaled sensuously in Beverly Hills, and a caressing sea breeze wafted the smog toward Phoenix. Erb was too busy to notice. At 8 a.m. he huddled at a brick police station a mile from Black Box with detective John D. Rodriguez to talk logistics. The plan: At 10:30, black-and-whites carrying about a dozen officers in "full felony" gear, including bullet-proof vests and running shoes, would pull up at four sites linked to Shim: his storefront, the self-storage units, and the two warehouses. After the police secured each premises, squads of "baggers and taggers" working for Erb would arrive in rented moving vans to itemize, pack up, and haul away counterfeit goods and the machines used to make them. If Shim was found, he'd be arrested and allowed to have a little chat with Erb. After Rodriguez gave marching orders to his coffee-sipping troops, one of his officers warned the team to be careful--Shim, fearing a stiff jail sentence, might try something stupid.

But when the police walk into Black Box, Shim acts dumb, not desperate. Wearing a chic black collarless shirt, dark slacks, rimless glasses, and handcuffs, he sullenly denies selling counterfeit goods. Moments later an officer opens a large package, apparently awaiting pickup near the shop's front door, and finds it full of what appear to be fake Nike sweatshirts. Shim isn't fazed. A look of dismay crosses his face, however, when Erb tells him about the large sale to the undercover man. But the shopkeeper quickly resumes a stony expression and refuses to answer questions. Visibly irritated, Erb finally gives up. "Sorry, you had an opportunity here. I could have helped you," he tells Shim as an officer leads him away. Later, Shim is charged with felony violations under California's anticounterfeiting law and is released on $35,000 bail. Through his lawyer, Shim declined to comment.

Rodriguez's radio is crackling with reports from the other teams as Erb and the police detective speed off in the latter's gray Chevrolet to tour the front. They arrive at the warehouse lined with sewing machines just after an Asian man walks in the door, apparently unaware that a bust is in progress. Asked what he's doing there, he obligingly says he's come to collect $36,000 for unlabeled clothing he recently sold to the place. There's nothing illegal about that, so he's sent on his way, sans the 360 portraits of Ben Franklin. The workers also are briefly questioned and released.

Erb's team finds a trove of counterfeits in the warehouse-- everything from boxes of Mickey Mouse sweatshirts to a mountain of Nike jeans. That night, when the baggers finally leave, they will have carted off more than 100,000 items with an estimated street value of $2.3 million. Meanwhile, they discover 49 $100 bills under a dusty plaid couch, a well-used wooden Go set, and an interesting airbill on a box containing 4,000 fake labels for Nike jeans--it shows the labels have been imported from Korea, giving Erb an international link that he'll take to U.S. Customs.

Walking into the second warehouse, the one with the plywood cheater at the front door, Erb's usual poker face is split by a grin: "Yes! Oh, yes!" he says, looking around the cavernous room, which is filled with racks of silk-screens, machinery for using them, and jumbles of counterfeit clothes. Score: Erb, 10 and game.

The rush of excitement soon gives way to tedious, back-breaking chores--counting all the counterfeit items, recording them on inventory sheets, stuffing them into boxes, and loading them into a moving van. The goods will be held in locked storage for later destruction or donation to a charity for distribution in a place like Rwanda. At 7 p.m., Erb is hunched over on a metal chair at the warehouse, ankle-deep in embroidered Donald Ducks and Chicago Bulls, which he's counting and sorting into piles. He's bone-tired. But he's a happy craftsman, a joiner whose methodically shaped dovetails have slipped into place today like key into lock.