First thing to check is to turn on hidden files and make sure it is also copying the desktop.ini file in each folder, as that is what contains the information on which custom icon to use for the given folder. If that is copying, and you were to say logout/login, or reboot, you would likely see the folders that you copied did copy over the custom icon and display it properly. To do it without restarting explorer, you can force an icon cache update:
Code:
Process.Start("ie4uinit.exe","-ClearIconCache")
Note that if the given folder is displayed in an explorer window when you run that, you won't see it instantly change, but closing and reopening the folder should then display the correct custom icon. Works on Win7 and 8, not sure about prior versions.