Apple Investigates $1.3B Fraud Scheme That Made Working iPhones from Rejected Parts

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Apple is investigating claims of a massive fraud campaign that involved rejected iPhone parts sourced from a Foxconn facility in China.

Reportedly, the mastermind of the scheme was an unnamed Taiwanese businessman referred to in local media reports as “Mr. X.” Along with a small team of Foxconn managers, Mr. X allegedly earned more than NT$1.3 billion ($43M USD) in profit from the fraud, according to Taiwan News.

While details are fairly scarce, local media reports indicate that the management team at Foxconn’s Zhenghou factory responsible for destroying flawed or rejected iPhone parts actually kept those components.

It seems that the crime ring then assembled those faulty parts into working iPhones and sold them as if they were legitimate Apple devices. At least one report also indicates that the fraudsters resold individual components on the black market as well.

The Zhenghou facility is a major one and is capable of producing 500,000 iPhones a day. With those numbers, it would make sense that rejected parts netted the fraudsters a hefty profit.

According to another local news story, the fraud was discovered back in June and reported to Apple. The Cupertino tech giant is said to have launched a formal investigation headed by the company’s Business Assurance & Audit team.

Interestingly, that same report suggests that a whistleblower personally emailed Apple CEO Tim Cook earlier this year to report the massive fraud campaign.

Foxconn, for its part, said in a statement to CNA that it and its employees have always abided by codes of conduct and workplace ethics. It also said that an internal investigation is underway, likely by the company’s in-house “anti-corruption team.”

Former chairman Terry Guo, who stepped down from his position earlier this year, declined to comment, but did say that with a staff of more than a million, it wouldn’t be surprising for some of them to be involved in “unreasonable things.”

While there hasn’t been a crime campaign as large as this one, Apple’s iPhone business is no stranger to fraud.

Back in April, two Oregon college students were accused of defrauding Apple out of nearly $1 million in replacement iPhones by taking advantage of the company’s warranty policies.

And in 2018, another crime ring in Shenzhen, China carried out a nearly identical campaign and reportedly scammed Apple out of “millions.” Interestingly, in that case, it seems like the crime ring was allegedly associated with Apple Store staff in Shenzhen.

This also isn’t the first time Foxconn itself has been under fire. The company has been accused of breaking Chinese labor laws in past years. And recently, it’s embroiled in several controversies related to its hiring and factory promises in the U.S.

While the Apple and Foxconn investigations likely center on the Zhenghou facility, it remains to be seen whether those probes will uncover other instances of corruption elsewhere.

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