Intellectual Property
Initial Observations on the STOP Initiative and U.S. Border Efforts to Reduce Piracy Gao ID: GAO-06-1004T July 26, 2006U.S. goods are subject to substantial counterfeiting and piracy, creating health and safety hazards for consumers, damaging victimized companies, and threatening the U.S. economy. In 2004, the Bush administration launched the Strategy for Targeting Organized Piracy (STOP)--a multi-agency effort to better protect intellectual property (IP) by combating piracy and counterfeiting. This testimony, based on a prior GAO report as well as from observations from on-going work, describes (1) the range and effectiveness of multi-agency efforts on IP protection preceding STOP, (2) initial observations on the organization and efforts of STOP, and (3) initial observations on the efforts of U.S. agencies to prevent counterfeit and pirated goods from entering the United States, which relate to one of STOP's goals.
STOP is the most recent in a number of efforts to coordinate interagency activity targeted at intellectual property (IP) protection. Some of these efforts have been effective and others less so. For example, the Special 301 process--the U.S. Trade Representative's process for identifying foreign countries that lack adequate IP protection--has been seen as effective because it compiles input from multiple agencies and serves to identify IP issues of concern in particular countries. Other interagency efforts, such as the National Intellectual Property Law Enforcement Coordination Council (NIPLECC), are viewed as being less effective because little has been produced beyond summarizing agencies' actions in the IP arena. While STOP has energized IP protection and enforcement efforts domestically and abroad, our initial work indicates that its long-term role is uncertain. STOP has been successful in fostering coordination, such as reaching out to foreign governments and private sector groups. Private sector views on STOP were generally positive; however, some stated that it emphasizes IP protection and enforcement efforts that would have occurred regardless of STOP's existence. STOP's lack of permanent status and accountability mechanisms pose challenges for its long-term impact and Congressional oversight. STOP faces challenges in meeting some of its objectives, such as increasing efforts to seize counterfeit goods at the border--an effort for which the Department of Homeland Security's Customs and Border Protection (CBP) and Immigration and Customs Enforcement are responsible. CBP has certain steps underway, but our initial work indicates that resources for IP enforcement at certain ports have declined as attention has shifted to national security concerns. In addition, prior GAO work found internal control weaknesses in an import mechanism through which a significant portion of imports flow, and which has been used to smuggle counterfeit goods.
GAO-06-1004T, Intellectual Property: Initial Observations on the STOP Initiative and U.S. Border Efforts to Reduce Piracy
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Testimony:
Before the Committee on Homeland Security and Government Affairs,
Subcommittee on Oversight of Government Management, the Federal
Workforce, and the District of Columbia, United States Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 3:30 p.m. EDT:
Wednesday, July 26, 2006:
Intellectual Property:
Initial Observations on the STOP Initiative and U.S. Border Efforts to
Reduce Piracy:
Statement of Loren Yager, Director International Affairs and Trade:
GAO-06-1004T:
GAO Highlights:
Highlights of GAO-06-1004T, testimony before the Subcommittee on
Oversight of Government Management, the Federal Workforce, and the
District of Columbia, Committee on Homeland Security and Government
Affairs, United States Senate
Why GAO Did This Study:
U.S. goods are subject to substantial counterfeiting and piracy,
creating health and safety hazards for consumers, damaging victimized
companies, and threatening the U.S. economy. In 2004, the Bush
administration launched the Strategy for Targeting Organized Piracy
(STOP) – a multi-agency effort to better protect intellectual property
(IP) by combating piracy and counterfeiting. This testimony, based on a
prior GAO report as well as from observations from on-going work,
describes (1) the range and effectiveness of multi-agency efforts on IP
protection preceding STOP, (2) initial observations on the organization
and efforts of STOP, and (3) initial observations on the efforts of
U.S. agencies to prevent counterfeit and pirated goods from entering
the United States, which relate to one of STOP‘s goals.
What GAO Found:
STOP is the most recent in a number of efforts to coordinate
interagency activity targeted at intellectual property (IP) protection.
Some of these efforts have been effective and others less so. For
example, the Special 301 process – the U.S. Trade Representative‘s
process for identifying foreign countries that lack adequate IP
protection – has been seen as effective because it compiles input from
multiple agencies and serves to identify IP issues of concern in
particular countries. Other interagency efforts, such as the National
Intellectual Property Law Enforcement Coordination Council (NIPLECC),
are viewed as being less effective because little has been produced
beyond summarizing agencies‘ actions in the IP arena.
While STOP has energized IP protection and enforcement efforts
domestically and abroad, our initial work indicates that its long-term
role is uncertain. STOP has been successful in fostering coordination,
such as reaching out to foreign governments and private sector groups.
Private sector views on STOP were generally positive; however, some
stated that it emphasizes IP protection and enforcement efforts that
would have occurred regardless of STOP‘s existence. STOP‘s lack of
permanent status and accountability mechanisms pose challenges for its
long-term impact and Congressional oversight.
STOP faces challenges in meeting some of its objectives, such as
increasing efforts to seize counterfeit goods at the border – an effort
for which the Department of Homeland Security‘s Customs and Border
Protection (CBP) and Immigration and Customs Enforcement are
responsible. CBP has certain steps underway, but our initial work
indicates that resources for IP enforcement at certain ports have
declined as attention has shifted to national security concerns. In
addition, prior GAO work found internal control weaknesses in an import
mechanism through which a significant portion of imports flow, and
which has been used to smuggle counterfeit goods.
Figure: Examples of authentic and counterfeit products.
[See PDF for Image]
Source: GAO.
[End of Figure]
What GAO Recommends:
GAO is not recommending executive action.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-1004T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Loren Yager at (202) 512-
4128 or yagerl@gao.gov.
[End of Section]
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to appear again before the subcommittee
to discuss our work on U.S. efforts to protect U.S. intellectual
property (IP) rights. We appreciate the opportunity to contribute to
the record that this Committee has established on IP protection. The
United States dominates the creation and export of intellectual
property--creations of the mind--and provides broad protection for
intellectual property through means such as copyrights, patents, and
trademarks. However, because protection of intellectual property in
many parts of the world is inadequate, U.S. goods are subject to
substantial counterfeiting and piracy. Such goods are widely
distributed in global markets, including here in the United States. As
you stated in this Subcommittee's June 2005 hearing on IP protection,
the production and distribution of counterfeit and pirated goods create
health and safety hazards for consumers, damage companies that are
victims of this theft, and pose a threat to the U.S. economy.
Since my last testimony before this committee, the United States has
continued to develop and implement its Strategy for Targeting Organized
Piracy, or STOP, which outlines priority IP enforcement efforts of 6
agencies. To understand more fully how this strategy might contribute
to better protection of IP, I will address three topics: (1) the range
and effectiveness of multi-agency efforts on IP protection that
preceded STOP; (2) initial observations on the organization and efforts
of STOP; and (3) initial observations on the efforts of U.S. agencies
to prevent counterfeit and pirated goods from entering the United
States, which relate to one of STOP's goals.
To address these issues, we have drawn on a number of completed and
ongoing GAO studies, including a report on this subject that we
published in 2004 and updated in testimony before this committee last
year.[Footnote 1] In addition, we are presenting some initial and
preliminary observations based on three ongoing reviews related to IP
protection. These include (1) a study that we have initiated for this
committee focusing on IP enforcement at the U.S. border, (2) a study
for the House Government Reform Committee on interagency efforts to
protect IP rights, and (3) additional work on a Customs and Border
Protection (CBP) program called the "in-bond system" that allows goods
to enter U.S. commerce at a port other than the port of arrival. In
conducting the GAO studies, we have performed work at multiple U.S.
agency headquarters in Washington, at U.S. ports of entry, and in other
nations. In addition, we have met with representatives from multiple
industry associations to obtain their views on STOP. We obtained
technical comments on this testimony from CBP officials and
incorporated their changes where appropriate. All work was conducted in
accordance with generally accepted government auditing standards.
Summary:
Prior to STOP's creation in 2004, the U.S. government established a
number of mechanisms and structures to coordinate interagency IP
protection activity, and they achieved varying levels of success. For
example, as we reported in 2004, the Special 301 process[Footnote 2]
that is annually led by the Office of the U.S. Trade Representative
(USTR) was generally cited as being quite effective in collecting input
from multiple agencies, identifying IP issues of concern in particular
countries, and achieving policy changes in many of those nations. On
the other hand, U.S. government efforts to improve IP enforcement under
the National Intellectual Property Law Enforcement Coordination Council
(NIPLECC), a multi-agency coordinating body, were generally believed to
be ineffective, having resulted in little more than the publication of
an annual report compiling individual agency submissions. STOP, a
presidential initiative, was, in part, a response to the need for
further attention to IP enforcement. The initiative is led by the White
House under the auspices of the National Security Council and involves
collaboration on IP protection and enforcement efforts among six
federal agencies.
STOP has energized U.S. efforts to protect and enforce IP and has
initiated some new efforts, but its long-term role is uncertain. One
area where STOP has increased efforts is outreach to foreign
governments. In addition, STOP has focused attention on helping small-
and medium-sized enterprises to better protect their IP rights. Private
sector views on STOP were generally positive, although some said that
STOP was a compilation of new and on-going U.S. agency activities that
would have occurred anyway. As a Presidential initiative, STOP was not
created by statute, has no formal structure, funding or staff, and
appears to have no permanence beyond the current administration. STOP's
lack of permanence and of accountability mechanisms poses challenges
for its long-term impact and Congressional oversight.
Certain weaknesses in agencies' IP enforcement efforts at the border
illustrate the challenges STOP faces in carrying out some of its
objectives. One of STOP's goals is to increase efforts to seize
counterfeit goods at the border, an undertaking that rests primarily
with CBP and the Immigration and Customs Enforcement (ICE) agency
within the Department of Homeland Security. However, STOP doesn't
direct these agencies' efforts or resource allocations and national
security remains a top priority. Nonetheless, CBP continues to have a
trade enforcement role and is taking steps to improve its IP
enforcement. Our initial work for this Committee indicates that
significant challenges remain. The overall task of assessing whether
particular imports are authentic has become more difficult as trade
volume and counterfeit quality increase. While the number of IP
seizures has grown, there is generally no similar trend in the
estimated value of goods seized. New tools that CBP has developed to
better target suspect shipments and deal with problem importers are
largely works in progress whose future impact is uncertain. CBP and ICE
have undergone dramatic restructuring to manage their new priorities,
and our initial evidence indicates that resources dedicated to IP
enforcement are shrinking. Finally, a range of internal control
weaknesses continue to plague a critical CBP system, called the in-bond
system, that allows goods to enter U.S. commerce at a port other than
the port of arrival. These weaknesses have been exploited by importers
to smuggle counterfeit goods. In our recent work, CBP staff continue to
observe that the limited information required from importers on in-bond
shipments makes it difficult for CBP to assure that these shipments
have reached their proper destinations.
Background:
Intellectual property is an important component of the U.S. economy,
and the United States is an acknowledged global leader in its creation.
However, the legal protection of intellectual property varies greatly
around the world, and several countries are havens for the production
of counterfeit and pirated goods. The State Department has cited
estimates that counterfeit goods represent about 7 percent of annual
global trade, but we would note that it is difficult to reliably
measure what is fundamentally a criminal activity.[Footnote 3] Industry
groups suggest, however, that counterfeiting and piracy are on the rise
and that a broader range of products, from auto parts to razor blades,
and vital medicines to infant formula, are subject to counterfeit
production. Counterfeit products raise serious public health and safety
concerns, and the annual losses that companies face from IP violations
are substantial.
Eight federal entities, the Federal Bureau of Investigation (FBI), and
the U.S. Patent and Trademark Office (USPTO) undertake the primary U.S.
government activities to protect and enforce U.S. IP rights overseas.
These 8 agencies are: Departments of Commerce, State, Justice, and
Homeland Security; USTR; the Copyright Office; the U.S. Agency for
International Development; and the U.S. International Trade Commission.
They undertake a wide range of activities that fall under 3 categories:
policy initiatives, training and technical assistance, and law
enforcement. U.S. policy initiatives to increase IP protection around
the world are primarily led by USTR, in coordination with the
Departments of State, Commerce, USPTO, and the Copyright Office, among
other agencies. These policy initiatives are wide ranging and include
reviewing IP protection abroad, using trade preference programs for
developing countries,[Footnote 4] and negotiating agreements that
address intellectual property. Key activities to develop and promote
enhanced IP protection in foreign countries through training or
technical assistance are undertaken by the Departments of Commerce,
Homeland Security, Justice, and State; the FBI; USPTO; the Copyright
Office; and the U.S. Agency for International Development. A smaller
number of agencies are involved in enforcing U.S. IP laws. Working in
an environment where counterterrorism is the central priority, the FBI
and the Departments of Justice and Homeland Security take actions that
include engaging in multi-country investigations involving intellectual
property violations and seizing goods that violate IP rights at U.S.
ports of entry. Finally, the U.S. International Trade Commission has an
adjudicative role in enforcement activities involving patents and
trademarks.
STOP Is One of Several Interagency IP Coordination Mechanisms:
STOP is the most recent of several interagency IP coordination
mechanisms that address IP policy initiatives, training and technical
assistance, and law enforcement. Some of these have been effective,
particularly the Special 301 process that identifies inadequate IP
protection in other countries and the Intellectual Property Rights
(IPR) Training Coordination Group. However, U.S. law enforcement
coordination efforts through NIPLECC have had difficulties. STOP was,
in part, a response to the need for further attention to IP
enforcement.
Coordination Efforts Involving Policy Initiatives and Technical
Assistance Have Been Generally Effective:
Results of our September 2004 report found that coordination efforts
through the Special 301 process and the IPR Training Coordination Group
have generally been considered to be effective by U.S. government and
industry officials.[Footnote 5] "Special 301," which refers to certain
provisions of the Trade Act of 1974, as amended,[Footnote 6] requires
USTR to annually identify foreign countries that deny adequate and
effective protection of IP rights or fair and equitable market access
for U.S. persons who rely on IP protection. USTR identifies these
countries with substantial assistance from industry and U.S. agencies
and then publishes the results of its reviews in an annual report. Once
a list of such countries has been determined, the USTR, in coordination
with other agencies, decides which, if any, of these countries should
be designated as Priority Foreign Countries, which may result in an
investigation and subsequent actions. As our report notes, according to
government and industry officials, the Special 301 process has operated
effectively in reviewing IP rights issues overseas. These agency
officials told us that the process is one of the best tools for
interagency coordination in the government, and coordination during the
review is frequent and effective.
The IPR Training Coordination Group is a voluntary, working-level group
comprised of representatives of U.S. agencies and industry associations
involved in training and technical assistance efforts overseas for
foreign officials. Meetings are held approximately every 4 to 6 weeks
and are well attended by government and private sector representatives.
The State Department leads the group, and meetings have included
discussions on training "best practices" responding to country requests
for assistance, and improving IPR awareness among embassy staff.
According to several agency and private sector participants, the group
is a useful mechanism that keeps participants informed of the IP
activities of other agencies or associations and provides a forum for
coordination.
IP Law Enforcement Coordination Efforts Have Faced Challenges:
Coordination efforts involving IP law enforcement through NIPLECC have
not been as successful. NIPLECC was created by the Congress in 1999 to
coordinate domestic and international intellectual property law
enforcement among U.S. federal and foreign entities.[Footnote 7]
NIPLECC members are from 5 agencies and consist of: (1) Commerce's
Undersecretary for Intellectual Property and Director of the United
States Patent and Trademark Office; (2) Commerce's Undersecretary of
International Trade; (3) the Department of Justice's Assistant Attorney
General, Criminal Division; (4) the Department of State's
Undersecretary for Economic and Agricultural Affairs; (5) the Deputy
United States Trade Representative; and (6) the Department of Homeland
Security's Commissioner of U.S. Customs and Border Protection.
Representatives from the Department of Justice and USPTO are co-chairs
of NIPLECC. [Footnote 8]
In our September 2004 report, we stated that NIPLECC had struggled to
define its purpose and had little discernible impact, according to
interviews with industry officials and officials from its member
agencies, and as evidenced by NIPLECC's own annual reports.[Footnote 9]
Indeed, officials from more than half of the member agencies offered
criticisms of NIPLECC, remarking that it was unfocused, ineffective,
and "unwieldy." We also noted that if the Congress wishes to maintain
NIPLECC and take action to increase its effectiveness, the Congress
should to consider reviewing the council's authority, operating
structure, membership, and mission.
In the fiscal year 2005 Consolidated Appropriations Act, the Congress
provided $2 million for NIPLECC expenses, to remain available through
fiscal year 2006.[Footnote 10] The act also created the position of the
Coordinator for International Intellectual Property Enforcement,
appointed by the President, to head NIPLECC.[Footnote 11] The NIPLECC
co-chairs are to report to the Coordinator. In July 2005, Commerce
Secretary Gutierrez announced the Presidential appointment filling the
IP Coordinator position. Since then, NIPLECC has added an assistant, a
policy analyst, part time legislative and press assistants, and
detailees from USPTO and CBP. Since the Consolidation Appropriations
Act, NIPLECC has held two formal meetings but has not issued an annual
report since 2004.
STOP Was Created to Strengthen IP Enforcement:
In October 2004 the President launched STOP, an initiative to target
cross-border trade in tangible goods and strengthen U.S. government and
industry IP enforcement actions. The initiative is led by the White
House under the auspices of the National Security Council and involves
collaboration among six federal agencies: the Departments of Commerce,
Homeland Security, Justice, and State; USTR; and the Food and Drug
Administration.[Footnote 12] STOP has five general objectives: (1)
empower American innovators to better protect their rights at home and
abroad, (2) increase efforts to seize counterfeit goods at our borders,
(3) pursue criminal enterprises involved in piracy and counterfeiting,
(4) work closely and creatively with U.S. industry, and (5)
aggressively engage our trading partners to join U.S. efforts.
The IP Coordinator is also serving as the coordinator for STOP. Both
agency officials and industry representatives with whom we spoke
consistently praised the IP Coordinator, saying that he was effectively
addressing their concerns by speaking at seminars, communicating with
their members, and heading U.S. delegations overseas.
STOP Has Energized U.S. Efforts, but Its Impact and Long-Term Viability
Are Uncertain:
STOP has energized U.S. efforts to protect and enforce IP and has
initiated some new efforts, however its long-term role is uncertain.
One area where STOP has increased efforts is outreach to foreign
governments. In addition, STOP has focused attention on helping small-
and medium-sized enterprises to better protect their IP rights.
Industry representatives generally had positive views on STOP, although
some thought that STOP was a compilation of new and on-going U.S.
agency activities that would have occurred anyway. STOP's lack of
permanent status as a Presidential initiative and lack of
accountability mechanisms could limit STOP's long-term impact.[Footnote
13]
STOP Has Fostered Coordination and Undertaken Some New Initiatives:
Agency officials participating in STOP cited several advantages to
STOP. They said that STOP energized their efforts to protect and
enforce IP by giving them the opportunity to share ideas and support
common goals. Officials said that STOP had brought increased attention
to IP issues within their agencies and the private sector as well as
abroad, and attributed that to the fact that STOP came out of the White
House, thereby lending it more authority and influence. Another agency
official pointed out that IP was now on the President's agenda at major
summits such as the G-8 and the recent EU-U.S. summits.[Footnote 14]
STOP has initiated some new efforts, including a coordinated U.S.
government outreach to foreign governments that share IP concerns and
enforcement capacities similar to the United States. For example, the
United States and the European Union (EU) have formed the U.S.-EU
Working Group on Intellectual Property Rights, and in June 2006, the
United States and European Union announced an EU-U.S. Action Strategy
for Enforcement of IP Rights meant to strengthen cooperation in border
enforcement and encourage third countries to enforce and combat
counterfeiting and piracy.
One particular emphasis of STOP has been to help small-and medium-sized
enterprises (SMEs) protect their IP in the United States and abroad
through various education and outreach efforts. In 2002, we reported
that SMEs faced a broad range of impediments when seeking to patent
their inventions abroad, including cost considerations and limited
knowledge about foreign patent laws, standards, and
procedures.[Footnote 15] We recommended that the Small Business
Administration (SBA) and the USPTO work together to make a range of
foreign patent information available to SMEs. Within the last year, an
SBA official told us that SBA began working with STOP agencies to
distribute information through its networks and recently linked the
Small Business Administration's website to the STOP website, making
information about U.S., foreign, and international laws and procedures
accessible to its clients.
Many industry representatives with whom we spoke viewed STOP
positively, maintaining that STOP had increased the visibility of IP
issues. For example, one industry representative noted a coordinated
outreach to foreign governments that provided a more collaborative
alternative to the Section 301 process, whose punitive aspects
countries sometimes resented. Another indicated that his association
now coordinates training with CBP that is specific to his industry as a
result of contacts made through STOP. In addition, most private sector
members with whom we spoke agreed that STOP was an effective
communication mechanism between business and U.S. federal agencies on
IP issues, particularly through the CACP, the Coalition Against
Counterfeiting and Piracy, a cross-industry group created by a joint
initiative between the Chamber of Commerce and the National Association
of Manufacturers. Private sector officials have stated that CACP
meetings are their primary mechanism of interfacing with agency
officials representing STOP.
There were some industry representatives who questioned whether STOP
had added value beyond highlighting U.S. IP enforcement activities.
Some considered STOP to be mainly a compilation of ongoing U.S. IP
activities that pre-existed STOP. For example, Operation Fast
Link[Footnote 16] and a case involving counterfeit Viagra tablets
manufactured in China, both listed as a STOP accomplishment, began
before STOP was created. In addition, some industry representatives
believed that new activities since STOP was created would have likely
occurred without STOP.
STOP Has Features That May Limit Its Long-Term Impact:
As a presidential initiative, STOP was not created by statute, has no
formal structure, funding, or staff, and appears to have no permanence
beyond the current administration. NIPLECC, on the other hand, is a
statutory initiative, receives funds, and is subject to Congressional
oversight. Recently, the lines between NIPLECC and STOP have blurred,
possibly lending STOP some structure and more accountability. For
example, as mentioned before, NIPLECC's IP Coordinator is also the
focal point for STOP. In addition, NIPLECC recently adopted STOP as the
strategy it is required to promulgate under the Consolidated
Appropriations Act of 2005. This legislation calls for NIPLECC to
establish policies, objectives, and priorities concerning international
intellectual property protection and intellectual property law
enforcement; promulgate a strategy for protecting American intellectual
property overseas; and coordinate and oversee implementation of these
requirements.
However, the nature of the relationship between STOP and NIPLECC is not
clear. Although the IP Coordinator has recently reported in
congressional hearings that NIPLECC adopted STOP as its strategy, there
have been no formal announcements to the press, industry associations,
or agency officials responsible for carrying out STOP activities. In
addition, STOP documents do not refer to NIPLECC. Our meetings with
agency and industry officials indicated that they are unclear about the
relationship between STOP and NIPLECC. The absence of a clearly
established relationship makes it difficult to hold NIPLECC accountable
for monitoring and assessing the progress of IP enforcement under STOP.
We believe that accountability mechanisms are important to oversight of
federal agency efforts and can contribute to better performance on
issues such as IP protection.
IP Enforcement Efforts at the Border Illustrate Challenges Facing STOP:
One of STOP's five goals is to increase federal efforts to seize
counterfeit goods at the border, but work we are conducting for this
Subcommittee illustrates the kind of challenges that STOP faces in
achieving its goals. CBP and ICE are responsible for border enforcement
efforts but their top priority is national security. CBP has taken
several steps since fiscal year 2003, when it made IP matters a
priority trade issue, to update and improve its border enforcement
efforts. While CBP seizures of IP-infringing goods have grown steadily
since fiscal year 2002, the total estimated value of seizures during
that time generally did not experience similar growth. Some steps that
CBP is taking to improve IP enforcement are works in progress whose
impact on this STOP objective is uncertain. CBP's ability to
effectively enforce IP rights at the border is also challenged by
limited resources for such enforcement and by long-standing weaknesses
in its ability to track the physical movement of goods entering the
United States using the in-bond system.[Footnote 17]
CBP IP Seizures Have Increased in Number but the Estimated Value Has
Fluctuated:
STOP documents cite increases in IP-related seizures as a positive
indicator of its efforts to stop counterfeit goods at the border. The
overall task of assessing whether particular imports are authentic has
become more difficult as trade volume and counterfeit quality increase.
The number of IP-related seizures has grown steadily, with CBP and ICE
together making about 5,800 seizures in fiscal year 2002 and just over
8,000 seizures in fiscal year 2005.[Footnote 18] However, there is no
corresponding trend in the estimated value of such seizures.[Footnote
19] The estimated value of goods seized in fiscal years 2002 and 2003
was $99 million and $94 million, respectively. This figure jumped to a
peak of about $139 million in fiscal year 2004, but dropped back to the
former level, about $93 million, in fiscal year 2005.
According to CBP officials, the agency's goal is to focus its resources
in part on high-value seizures, but a large percent of annual seizure
activity does not result in a significant seizure value. For example,
nearly 75 percent of fiscal year 2005 seizures were small-scale
shipments made at mail and express consignment facilities (facilities
operated by companies that offer express commercial services to move
mail and cargo, such as the United Parcel Service) or from individuals
traveling by air, vehicle, or on foot. These seizures represented about
14 percent of total estimated seizure value in that year. Conversely,
about 14 percent of fiscal year 2005 seizures involved large-scale
shipments (i.e., containers) and accounted for about 55 percent of that
year's estimated seizure value. The number of seizures made on goods
emanating from China has risen from about 49 percent of the estimated
domestic value of all IP seizures in fiscal year 2002 to about 69
percent of estimated seizure value in fiscal year 2005.
While CBP seizes goods across a range of product sectors, in recent
years, seizures tend to be concentrated in particular goods, such as
wearing apparel, handbags, cigarettes, and consumer electronics. CBP
also seeks to increase seizures of goods involving public health and
safety risks, and their data show that the estimated domestic value of
seized goods involving certain health and safety risks, specifically
pharmaceuticals, electrical articles, and batteries, increased during
fiscal years 2002-2005. However, seizures in these and certain other
health and safety categories represented less than 10 percent of the
total estimated domestic value of seizures in fiscal year 2005, and
seizures of other potentially dangerous goods, such as counterfeit auto
parts, remain relatively limited. For example, CBP estimated in a
letter to an automotive industry trade association that it made 14
seizures in fiscal years 2003-2005 of certain automotive
parts.[Footnote 20] A representative from another automotive industry
trade association noted that CBP's ability to make seizures in this
area depends on its receiving quality information about counterfeiters
from companies.
CBP Has Taken Steps to Improve IP Enforcement, but Several Are Still
Works In Progress:
In various STOP documents, CBP cites steps it has taken to improve IP
enforcement, but many of these are works in progress whose impact and
effectiveness are undetermined. CBP identified IP matters as a priority
trade issue in fiscal year 2003 and developed an agency-wide strategy
for IP enforcement. The strategy addresses several components of IP
enforcement, such as targeting (identifying high risk shipments),
international coordination, communication to employees, and industry
outreach. A CBP official who oversees the IP strategy told us that CBP
seeks to perform IP enforcement more efficiently, and the strategy
notes the importance of conducting IP enforcement while minimizing the
burden on front line resources whose priority is national security.
Several elements of the strategy were specifically designated as
activities to support STOP.
CBP's key STOP-related activity is the creation of a statistical
computer model that is designed to identify container shipments that
are at higher risk of involving IP rights violations. To develop the
model, CBP examined elements of past seizures and container
examinations and identified certain factors that were significant
characteristics of IP-infringing imports and that could be used to
identify future IP rights violations. CBP piloted this model on a
nation-wide basis for about one month in February 2005, but the pilot
revealed several issues that need to be addressed before the model can
be implemented. CBP plans to pilot the model again for up to 3 months
this summer at two land border ports and one seaport. CBP will use the
results of the second pilot to further evaluate the viability of the
model.
Another STOP-related activity for CBP is the use of post-entry audits
to assist with IP enforcement.[Footnote 21] CBP officials said using
such audits for this purpose is a new approach that is designed to
assess whether companies have adequate internal controls to prevent
them from importing goods that infringe IP rights. Initiated in fiscal
year 2005, these audits are a novel approach that is likely to work
best with established importers, but they may be less effective for
dealing with importers that are engaged in criminal activity and
deliberately take steps to evade federal scrutiny. CBP selected 40
known and potential IP-infringing companies to audit in fiscal years
2005-2006 and by July 2006, had completed 17 of these audits.[Footnote
22] In three audits, CBP found that the companies possessed or had
already sold infringing goods that were not seized at the border. In
two of these cases, CBP imposed penalties on the companies totaling
about $4.6 million.[Footnote 23] In the third case, the audit closed in
September 2005 but the decision on whether to impose penalties is still
pending in CBP. A CBP official said that some less significant IP-
infringing activity was found in several other audits, but CBP chose
not to impose penalties in these cases. CBP also found that internal
controls to prevent IP rights violations were lacking or inadequate for
most of the 17 companies, and has worked with them to improve these
controls.
A third STOP activity for CBP is the development of a system that
allows companies to electronically record their IP rights through CBP's
website. While trademark and copyright protection is obtained from
USPTO and the Copyright Office, respectively, these rights must be
separately recorded with CBP, for a fee.[Footnote 24] Recording with
CBP provides CBP officials with information about the scope, ownership,
and representation of protected IP rights being recorded. Although CBP
officials have said recordation is important because it helps CBP
effect legally defensible border enforcement, some companies fail to
record their rights with CBP, either because they are unaware of the
recordation requirement or because they choose not to. The electronic
recordation system, implemented in December 2005, is designed to
streamline the process, reduce processing times, and, ideally, increase
the number of recordations.[Footnote 25] A link to the recordation
system has been established on USPTO's website, and a link from the
Copyright Office is planned. CBP expects that most paper-based
applications will eventually be eliminated.[Footnote 26] While these
are important steps, we have not yet evaluated the impact of the new
recordation system. Several industry representatives have cited other
concerns about recordation generally, such as long recordation
processing times and the effective lack of border protection caused by
the inability to record copyrights with CBP before such rights are
issued by the Copyright Office. For example, one private sector
representative said that during the six to nine months it takes to
process a copyright, pirated master CDs may be allowed to enter the
United States because the rights holder has not yet been able to record
the title with CBP.[Footnote 27]
Initial Evidence Indicates That Resources for IP Enforcement Are
Shrinking:
CBP and ICE priorities and resource allocations changed dramatically
after September 2001, and our initial work indicates that some
headquarters and field resources for IP enforcement have declined since
then. As you indicated in your statement at the June 2005 IP hearing,
the ultimate success of STOP, and of IP enforcement generally, depends
on whether agencies are able to recruit, train, and retain the
necessary workforce to meet their objectives. You also noted that prior
hearings before this Subcommittee revealed that human capital issues
were hindering federal enforcement of trade laws. At several border
locations we visited, we found that resources for trade and IP
enforcement are thinly spread, certain IP enforcement positions had
been reduced or eliminated, and one location faced challenges in
filling vacant CBP Officer positions.
At CBP port operations, employees in two job categories are responsible
for IP enforcement --CBP Officers and Import Specialists. CBP Officers
are responsible for targeting incoming shipments for security and trade
purposes and conducting physical examinations of suspect goods. Import
Specialists are responsible for assessing the actual value and
composition of goods for duty and quota purposes and for making initial
determinations of whether goods are believed to be in violation of U.S.
IP rights laws. While CBP Officers are typically assigned to a single
port of entry, Import Specialists assigned to a large port may be
responsible for covering other smaller ports that report to the larger
port. ICE field office agents investigate IP infringement cases.
We have not yet gathered comprehensive data on the number of CBP
Officers, Import Specialists, and ICE agents devoted to IP enforcement,
but we found reduced resources, thinly spread, at several border
locations that we have visited.
* At the Port of Los Angeles/Long Beach, the largest U.S. seaport by
volume, two trade enforcement teams have been disbanded and their CBP
Officers shifted to national security details. Port officials said that
since the late 1990s, the number of CBP Officers performing trade-
related examinations has dropped by about 43 percent, and the number of
Import Specialists on an IP-devoted enforcement team has dropped by
half.
* The Port of San Francisco services multiple port facilities,
including two major seaports, two major airports, and seven smaller
port locations. CBP Officers at the San Francisco air cargo facility
said that 4 out of 13 CBP Officers are assigned to inspect cargo for
trade violations. These 4 officers share coverage of a 7-day work week,
such that about 2 CBP Officers perform trade inspections on any day. In
2001, there were about 12 CPB Officers assigned to trade inspections.
San Francisco's Director of Field Operations told us that filling 33
vacancies within his approximately 450 CBP Officer positions is a high
priority. Currently, there are 3 Import Specialists, down from 6 in
2003, that focus primarily on IP enforcement and service the seaports,
airports, and smaller ports within the Port of San Francisco's area.
* ICE also performs IP enforcement and houses the National IPR
Coordination Center (called the IPR Center) - a joint effort between
ICE and the FBI intended to serve as a focal point for the collection
of intelligence involving, among other things, copyright and trademark
infringement. Currently, 9 of the 16 authorized ICE positions are
filled and a 10TH is slated to be filled. Neither of the 2 CBP
authorized positions are filled. Additionally, in February 2006, 7 of 8
FBI positions were empty and the 8th position was filled by rotating
FBI staff. In July 2006, an FBI official told us that no FBI staff were
working at the IPR center because of limited physical space and
pressing FBI casework, but that some staff would return in September
2006.
* The ICE field office in Los Angeles, one of the largest field offices
in the country, had two commercial fraud enforcement teams before the
formation of the Department of Homeland Security but now has one. The
number of agents working on commercial fraud enforcement cases, which
include IP enforcement, dropped from about 14 to 9 since 2003. However,
an official from this office said resource changes have not affected
how the team addresses IP enforcement nor caused it to turn away any IP
enforcement cases.
In-Bond System Faces Persistent Control Weakness and Has Been Used to
Circumvent IP Laws:
The in-bond system has been identified by CBP and ICE officials as one
of the mechanisms used to circumvent import and IP laws and regulations
and presents an enforcement challenge. A significant portion of goods
received at U.S. ports do not immediately enter U.S. commerce but are
instead shipped "in-bond" for official entry at other U.S. ports or are
transported through the United States for export. [Footnote 28] When
goods are shipped in-bond, they are subject to national security
inspections at the port of arrival, but are exempt from U.S. duties or
quotas and formal trade inspections until they reach the final port
where they will officially enter U.S. commerce.[Footnote 29] For many
years, GAO and others have noted weaknesses in the in-bond system used
to monitor shipments between ports.[Footnote 30]
CBP and ICE officials recognize that the in-bond system has been used
by certain importers to bring counterfeit and pirated goods into the
United States by avoiding official entry at the port of arrival and
then diverting the goods afterwards. Some CBP officials said the in-
bond system may contribute to imports of counterfeits by allowing some
importers to "port shop" for ports that are less likely to identify IP
violations. Indeed, CBP has made sizable IP-related seizures from the
in-bond system, including 220 seizures valued at about $41 million in
fiscal year 2004, representing nearly 30 percent of the total estimated
domestic value of IP seizures in that year. In fiscal year 2005, there
were 126 seizures valued at about $14 million, representing about 15
percent of estimated domestic value of IP seizures that year.
We have found weakness in the past with the in-bond system and are
currently conducting follow-up work to determine whether these
weaknesses have been corrected. Our audit is still underway, but work
to date indicates that some previously identified weakness in tracking
and monitoring in-bonds remain. For example, in January 2004 GAO
reported that CBP collects significantly less information on in-bond
shipment than for regular entries and that this lack of information
makes tracking in-bond shipments more difficult.[Footnote 31] In our
recent work, CBP staff continue to observe that the limited information
required from importers on in-bond shipments makes it difficult for CBP
to assure that the shipments have reached their proper destinations.
Conclusions:
Intellectual property protection is an issue that requires the
involvement of many U.S. agencies, and the U.S. government has employed
a number of mechanisms to combat different aspects of IP crimes, with
varying levels of success. The STOP initiative, the most recent
coordinating mechanism, has brought attention and energy to IP efforts
within the U.S. government, and participants and industry observers
have generally supported the new effort. At the same time, the
challenges of IP piracy are enormous, and will require the sustained
and coordinated efforts of U.S. agencies, their foreign counterparts,
and industry representatives to be successful. Our initial observations
on the structure of STOP suggest that it is not well suited to address
the problem over the long term as the presidential initiative does not
have permanence or the accountability mechanisms that would facilitate
oversight by the Congress. Our ongoing work on IP protection efforts at
the U.S. border, one of the 5 areas identified by STOP, also
illustrates the types of challenges that need sustained attention to
make progress on the issue. We believe that our more detailed reports
to be released in the near future will contribute to continuing
Congressional oversight of these issues.
Mr. Chairman, this concludes my prepared statement. I would be pleased
to respond to any questions that you or other members of the
subcommittee may have at this time.
FOOTNOTES
[1] GAO, Intellectual Property: U.S. Efforts Have Contributed to
Strengthened Laws Overseas, but Challenges Remain, GAO-04-912
(Washington, D.C.: Sept. 8, 2004). GAO, Intellectual Property: U.S.
Efforts Have Contributed to Strengthened Laws Overseas, but Significant
Enforcement Challenges Remain, GAO-05-788T (June 14, 2005).
[2] The Special 301 process identifies foreign countries that deny
adequate and effective protection of IP rights or fair and equitable
market access for U.S. persons who rely on IP protection.
[3] The Organisation for Economic Co-operation and Development (OECD)
is conducting a study on IP, examining the extent to which counterfeit
goods are entering global trade and associated data reliability issues.
[4] U.S. IP rights policy efforts include use of the Generalized System
of Preferences (GSP) originally authorized under the Trade Act of 1974.
When GSP was re-authorized under the Trade and Tariff Act of 1984, new
"country practice" eligibility criteria were added, including a
requirement that beneficiary countries provide adequate IP rights
protection.
[5] GAO-04-912.
[6] 19 U.S.C. 2242.
[7] NIPLECC was mandated under Section 653 of the Treasury and General
Government Appropriations Act, 2000 (P.L. 106-58), 15 U.S.C. 1128.
[8] NIPLECC is also required to consult with the Register of Copyrights
on law enforcement matters related to copyright and related rights and
matters.
[9] GAO-04-912.
[10] The Consolidated Appropriations Act, 2005 (P.L. 108-447), Division
B Title II.
[11] This official may not serve in any other position in the federal
government.
[12] STOP and NIPLECC share the same member agencies, with the
exception of the Food and Drug Administration which is a member of STOP
but not NIPLECC.
[13] GAO will be issuing a report on STOP and NIPLECC in the fall at
the request of the Chairman of House Committee on Government Reform.
[14] The G-8 is an annual summit whose members include Canada, the
European Union, France, Germany, Italy, Japan, Russia, the United
Kingdom, and the United States.
[15] GAO, International Trade: Federal Action Needed to Help Small
Businesses Address Foreign Patent Challenges, GAO-02-789 (Washington,
D.C.: July 17, 2002).
[16] Under the Department of Justice's Operation Fast Link, on April
2004, law enforcement authorities executed over 120 total searches
during the previous 24 hours in 27 states and in 10 foreign countries.
Four separate undercover investigations were simultaneously conducted,
striking all facets of the illegal software, game, movie, and music
trade online.
[17] Early next year, GAO will provide a detailed report to this
Subcommittee on our findings related to IP border enforcement and a
separate report to the Congress on our findings related to the in-bond
system.
[18] Each seizure action is counted as one seizure, regardless of the
amount of goods seized.
[19] It is important to note that total estimated seizure value in any
given year is a function of the type of goods seized, which varies from
year to year. CBP estimates the value of IP-related seizures using
"domestic value." CBP defines domestic value of goods as landed cost
plus profit (the cost of the merchandise when last purchased, plus all
duties, fees, broker's charges, profit, unlading charges, and U.S.
freight charges to bring the goods to the importer's premises).
[20] In this estimate, CBP counted seizures that were based in whole or
in part on infringement of IP rights owned by motor vehicle
manufacturers; manufacturers of motor vehicle parts, equipment, tools,
and supplies; and manufacturers of automotive chemicals and other
products used in the production, repair, and maintenance of all motor
vehicles. CBP did not include seizures of IP-infringing products that
are not used in production, repair, and maintenance of motor vehicles,
such as key chains, toys, and wearing apparel, or counterfeit goods
used in the interior of a motor vehicle, such as car organizers, can
holders, sunshades, steering wheel covers, and floor mats.
[21] CBP's Regulatory Audit Division in the Office of Strategic Trade
performs various types of audits on importing companies. "Quick
Response Audits" are designed to address single-issue trade compliance
or enforcement concerns. The IP enforcement audits are a type of Quick
Response Audit that examines importer controls to prevent IP
infringement. They are referred to as post-entry audits because they
examine controls over goods that have already entered the country.
[22] The same computer model being developed to detect high-risk
shipments was used to help select some companies for the post-entry
audits in fiscal year 2005.
[23] CBP imposed penalties under 19 U.S.C. 1595a(b), which allows it to
assess penalties equal to the domestic value of any articles introduced
or attempted to be introduced into the United States contrary to law.
[24] The recordation fee is $190 per trademark or copyright
application, or, if a trademark application covers more than one class
of protected goods, the fee is $190 per class of goods to be recorded.
[25] Pendency times for paper-based recordation applications could be
months long, according to a CBP official.
[26] CBP would still offer paper-based recordation to accommodate
companies that lack Internet access.
[27] A CBP official said that an exemption to allow companies to record
certain copyrights with CBP based on the copyright application, rather
than the issued copyright, awaits approval in CBP.
[28] CBP regulations provide for three different types of "in-bond"
shipments: (1) immediate transportation (IT) in-bond, which allows
goods arriving at one U.S. port to move to another U.S. port where they
enter U.S. trade; (2) transportation and exportation (T&E) in-bond,
which allows goods arriving at a U.S. port to be transported through
the United States for export to another country, and; (3) immediate
exportation (IE) in-bond, which allows goods arriving at a U.S. port to
be shipped to a foreign port without transport through the United
States. In our 2004 report, GAO found that in-bond entries comprised
about 58 percent of total entries in Miami, 60 percent in New York, and
46 percent in Los Angeles. Recent work confirmed that in-bond shipments
continue to account for a considerable share of all cargo arriving
through these ports.
[29] The in-bond system allows arriving cargo that is intended for
export to other countries to move through the United States without
being subject to formal U.S. entry, duties, and quotas.
[30] GAO, International Trade: U.S. Customs and Border Protection Faces
Challenges in Addressing Illegal Textile Transshipment, GAO-04-345
(Washington, D.C.: January 23, 2004).
[31] GAO-04-345.
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