Money Laundering Conviction Delivers Big Win to Gray Market Alliance

In late September, a U.S. District judge in Raleigh, N.C. sentenced three defendants for scamming Cisco Systems Inc. out of some $20 million by reselling replacement parts fraudulently procured under the vendor's Smartnet warranty service program.

The defendants, whose combined sentences totaled 25 years in prison and $21 million in restitution to Cisco, pled guilty to selling the vendor's replacement parts on the gray market to downstream customers from January 2003 to July 2005, in what amounted to a lucrative money laundering and mail fraud scheme.

Although convictions of this sort aren't an everyday occurrence in the IT industry, this one delivers a huge win to the Alliance for Gray Market and Counterfeit Abatement (AGMA), a non-profit organization homed in on warranty and service abuse.

Cisco is a founding member of the organization, which also includes IT heavyweights Advanced Micro Devices Inc. (AMD), Avaya Inc., EMC Corp., Hewlett-Packard Co, IBM Corp., Juniper Networks Inc., Microsoft Corp., Oracle Corp. and Seagate Technology LLC, among its 17 members.

AMGA officials said that warranty and service abuse occurs when a customer or other recipient uses services or warranties from a vendor to which it is not entitled. The organization said that the relatively unpublicized problem siphons up to 5 percent of overall revenue from the IT industry.

"Warranty and service abuse is not going to decline as the economy remains difficult," said Ram Manchi, AGMA president. "Perpetrators are constantly looking for creative ways to commit fraud," he said.

Warranty and service abuse crimes often are considered white collar offenses, and, according to an FBI agent, typically remain unremarkable to the public.

"These crimes may seem intangible to the general public, but when companies lose millions of dollars to hackers who socially engineer scams, customers end up paying the price," said Owen D. Harris, an FBI Special Agent in Charge.

"Billions of dollars are lost each year to hackers who think they won't get caught operating in cyberspace," he said. "We have the technology and the expertise to track down criminals and hold them accountable."

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