[Senate Hearing 108-661]
[From the U.S. Government Publishing Office]
S. Hrg. 108-661
EVALUATING INTERNATIONAL INTELLECTUAL PROPERTY PIRACY
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HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JUNE 9, 2004
__________
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COMMITTEE ON FOREIGN RELATIONS
RICHARD G. LUGAR, Indiana, Chairman
CHUCK HAGEL, Nebraska JOSEPH R. BIDEN, Jr., Delaware
LINCOLN D. CHAFEE, Rhode Island PAUL S. SARBANES, Maryland
GEORGE ALLEN, Virginia CHRISTOPHER J. DODD, Connecticut
SAM BROWNBACK, Kansas JOHN F. KERRY, Massachusetts
MICHAEL B. ENZI, Wyoming RUSSELL D. FEINGOLD, Wisconsin
GEORGE V. VOINOVICH, Ohio BARBARA BOXER, California
LAMAR ALEXANDER, Tennessee BILL NELSON, Florida
NORM COLEMAN, Minnesota JOHN D. ROCKEFELLER IV, West
JOHN E. SUNUNU, New Hampshire Virginia
JON S. CORZINE, New Jersey
Kenneth A. Myers, Jr., Staff Director
Antony J. Blinken, Democratic Staff Director
(ii)
C O N T E N T S
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Page
Witnesses
Bainwol, Mitch, chairman and CEO, Recording Industry Association
of America, Washington, D.C.................................... 13
Prepared statement........................................... 15
Holleyman, Robert W., II, president and CEO, Business Software
Alliance, Washington, D.C...................................... 22
Prepared statement........................................... 24
Lowenstein, Douglas, president, Entertainment Software
Association, Washington, D.C................................... 30
Prepared statement........................................... 32
Valenti, Jack, president and CEO, Motion Picture Association of
America, Washington, D.C....................................... 5
Prepared statement........................................... 7
Additional Material Submitted for the Record
Report Submitted by the International Criminal Police
Organization, INTERPOL
The Links Between Intellectual Property Crime and Terrorist
Financing.................................................. 56
(iii)
EVALUATING INTERNATIONAL INTELLECTUAL PROPERTY PIRACY
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Wednesday, June 9, 2004
U.S. Senate,
Committee on Foreign Relations,
Washington, D.C.
The committee met, pursuant to notice, at 9:32 a.m. in Room
SD-419, Dirksen Senate Office Building, Hon. Richard G. Lugar,
chairman of the committee, presiding.
Present: Senators Lugar, Allen, Voinovich, Alexander,
Coleman, Biden, Boxer, and Nelson.
OPENING STATEMENT OF HON. RICHARD G. LUGAR,
U.S. SENATOR FROM INDIANA
The Chairman. This hearing of the Senate Foreign Relations
Committee is called to order. It is my pleasure to welcome this
morning our distinguished witnesses and our guests to this
hearing, which will examine the issue of intellectual property
piracy.
Our economy depends increasingly on the work of authors,
artists, inventors, programmers, and many others who create
intellectual products of high value. Theft of intellectual
property results in competitive disadvantages to United States
industries and job losses for American workers. In addition,
while intellectual property is not adequately protected, the
incentives to invest in innovation are reduced. As the sharing
of goods and ideas transcends national boundaries, it is vital
that intellectual property protections are applied on a global
basis.
Existing international agreements seek to provide
substantial protections for intellectual property. Under an
annex to the WTO charter, known as Trade Related Aspects of
Intellectual Property Rights, or the TRIPS agreement, all WTO
members must provide minimum standards of protection for
intellectual property rights. The TRIPS agreement also requires
effective enforcement of each nation's domestic intellectual
property regulations.
Two copyright treaties developed under the auspices of
United Nations World Intellectual Property Organization, WIPO,
are also in force. These treaties, the WIPO Copyright Treaty
and the Performances and Phonographs Treaty, help raise the
minimum standards of intellectual property protection around
the world, particularly with respect to Internet-based delivery
of copyrighted works.
Most of our trading partners have domestic laws protecting
intellectual property, and many are parties to the TRIPS and
WIPO agreements. Yet the existence of laws protecting
intellectual property does not guarantee that piracy will not
occur. Often, the intent of statutes is undermined by lack of
enforcement. Counterfeiting of copyrighted products in digital
and other formats, as well as counterfeiting of all types of
trademarked products, has grown to an enormous scale because
these illegal activities offer a very high rate of return.
Pirates can establish operations with a small capital
investment, and, in many countries, they face little risk of
apprehension. Even when pirates are apprehended, the penalties
in some nations are too minor to continue or to constitute a
deterrent.
Although intellectual property piracy occurs in numerous
countries, the records of four nations are particular
troubling. Piracy is rampant in China, Russia, Brazil, and
Pakistan. All of these nations are on the Administration's
Special 301 Priority Watch List, which designates what
countries are failing to provide intellectual property
protection.
China has become a leading exporter of counterfeit and
pirated goods. At the April 2004 meeting of the Joint
Commission on Commerce and Trade, the Chinese Government
pledged to undertake a series of actions to reduce infringement
of intellectual property rights. But the piracy activities in
China have continued unabated for at least the past decade,
despite the seizure and destruction of millions of pirated
products, often in highly publicized steam-rollings of
counterfeited discs.
Piracy in Russia is a growing problem. Up until the late
1990s, only a few pirate optical disc factories existed in
Russia. But today, reports indicate that Russia has more than
30 such factories that churn out pirated products. This
activity ruins the Russian market for American rights-holders
and substantially reduces the value of other markets in Europe,
as well. The Russian Government has promised to solve this
problem, but meaningful results have yet to occur. Russia
recognizes that its domestic laws and enforcement measures
still do not meet the requirements of the TRIPS agreement.
Brazil continues to fall short in providing adequate and
effective enforcement of intellectual property. Despite some
positive developments, including enhancement of domestic laws,
enforcement is not significantly improved. Brazil is one of the
largest markets for legitimate copyrighted products, but it's
also one of the world's largest pirate markets. The U.S.
copyright industry estimates that losses in Brazil are the
largest in the hemisphere, exceeding $785 million in 2003.
Pakistan is a recent addition to the priority watch list.
It's become one of the world's leading exporters of pirated
sound recordings, motion pictures, business software, and
published materials. In 2003, Pakistan was the fourth largest
source of counterfeit and piratical goods seized by the U.S.
Customs and Border Protection. Pakistan has taken some initial
steps to improve protection of intellectual property, but these
steps have fallen far short of what is required for effective
enforcement.
Today we will discuss not only the problem of piracy, but
potential solutions. In particular, we would like for our
witnesses to give their views on how global enforcement can be
improved. What enforcement methods should be utilized that are
not now being employed? Would revisions to our international
agreements and treaties improve enforcement? Can the United
States provide willing partners in other nations with greater
assistance in enforcing intellectual property laws?
We look forward to the insights of our distinguished panel.
We welcome back Jack Valenti, the President and CEO of the
Motion Picture Association of America; Mitch Bainwol, the
Chairman and CEO of the Recording Industry Association of
America; Robert Holleyman, the President and CEO of the
Business Software Alliance; and Doug Lowenstein, President of
the Entertainment Software Association.
Gentlemen, we look forward to your testimony, but, for the
moment, I would like to call upon the distinguished Ranking
member of our committee, Senator Biden, for his opening
statement.
STATEMENT OF HON. JOSEPH R. BIDEN,
U.S. SENATOR FROM DELAWARE
Senator Biden. Well, thank you very much, Mr. Chairman,
for inviting us to the Jack Valenti hearing.
Hey, Jack, it's great to see you. You guys are important,
but not as important as Jack. Jack, it's hard to believe
they're talking about you leaving. I'm going to put you under
oath and find out where you're going to be living, so I want to
know where to go hang out.
Mr. Chairman, thank you very, very much for holding this
hearing. And I'd like to, first of all, recognize the important
list of witnesses you have here today. And in recent years, you
and I have spent a lot of time studying intellectual property
piracy and counterfeiting, and the issue straddles two of the
major committee interests I have had in my career. One is
fighting crime, and managing our relations with foreign
countries--the Judiciary and the Foreign Relations Committees.
And in February of 2002, in my joint capacity back in those
good old days when I was Chairman of the Subcommittee on Crime
and Chairman of this committee--although if I can't be
Chairman, I want you to be--we held hearings entitled the Theft
of Intellectual Property, Fighting Crime Abroad and at Home,
and we issued a report which some of you have seen--I may ask
you a little bit about it, if I may--and on the status of this
fight against what is simply, straightforwardly a crime. What I
wrote in the report, and what we highlighted at the hearing, is
that every day thieves steal millions of dollars of American
intellectual property from its rightful owners, and it's not
only an economic issue, it's a matter of diplomacy, it's a
crime. It is, pure and simply, a crime.
Innovation has been the key to American economic growth
throughout our entire history. And the Founding Fathers were
fairly prescient and had the foresight to provide for
protection of intellectual property, giving Congress the power
to promote the progress of science and useful arts through such
tools as copyrights and trademarks. American innovation and
creativity need to be protected now more than any time in our
history, in my view, no less than--no less than--our personal
property, our homes, or our streets. American intellectual
property is an immensely valuable resource, and failing to
protect it is equivalent to letting coal be stolen from our
mines, water taken from our streams and our rivers, and oil out
of the ground in this country. We don't approach it as if it
were a natural resource being stolen. If, all of a sudden, the
Chinese were coming over with large freighters and going into
the Oregon forest and taking out hundreds of thousands of tons
of timber, we'd say, ``My God, what are they doing?'' Well,
they're doing the same thing. They're doing the same thing.
They're mining on the West Coast, they're mining in this
country in a way that would be no different than if, in fact,
they were taking the oil out of our ground.
And last October, I joined with Senator Smith and
Congressmen Goodlatte and Schiff to found the Congressional
International Anti-Piracy Caucus. Now, we all know--you all
have been around long enough--those caucuses don't mean much,
except one thing--once we get to the point we establish a
caucus, it means you've kind of broken through the ether, in
terms of getting people to focus on something that heretofore
has not been viewed as as consequential a problem as this is. I
don't want to overstate the significance of this caucus. It has
70 members. But what we're trying to do is draw attention to
the international aspects of this problem and then work with
our friends overseas to stem the tide of this crime.
In the months the caucus has been in existence, we've
gotten off to a good start. We've released a Watch List of five
countries with piracy problems. We wrote to Secretary of
Commerce Evans, Congressmen Thomas and Rangel, as well, to draw
attention to the problem of piracy in China. We wrote to the
governments of each of these Watch List countries to encourage
actions against piracy. And we hosted counterparts, our
counterparts, from Brazil, who are working to stem the tide of
piracy in their countries.
I kind of equate this--you're gonna not like this--equate
this to the drug trade. Those countries who, heretofore, on the
drug problem--and I remember having this conversation with the
President of Colombia in 1977--him saying, ``Look, this is your
problem. Our folks are growing the stuff, you guys are
consuming the stuff, and it's really not our problem. It's not
our problem.'' And I remember writing a report then saying,
``It's going to become your problem, because you're going to
become consumers. You're going to become consumers.''
Well, piracy is the same way. The Brazilians are starting
to figure it out. If they pirate what, in fact, we--our
intellectual property, they are going to pirate the very--
they're going to snuff out the possibility of being able to
compete and grow internationally, and that is develop in their
own countries a base of intellectual innovation that, in fact,
will become the victim of the very thing we're being victimized
by now. But it's a hard sell. It's a hard sell. But it's real.
It's just like the drug problem, in terms of the impact on the
country that is engaged in the piracy or the--let me put it
this way--not fully engaged in eliminating the piracy in their
own country.
Unfortunately, however, we don't have to look overseas to
find that it's being stolen. That's why, in 2002, I introduced
a bill to plug a hole in our federal law that permitted some
counterfeiters of authentication features to go unpunished in
the United States. And I thank Jack for bringing that idea to
my attention. Unfortunately, the bill fell prey to a struggle
between the content providers and the Internet service
providers, among others, over the content. And I have
reintroduced that legislation this year, and I'm hopeful that
Congress will see fit to enact an Anti-Counterfeiting Act of
2004 into the law.
America is a place where we encourage diverse ideas. And
with the encouragement, we must protect those ideas. They are
the source of every concept we conceive, every product we
create, and all that is American culture and all that is
American knowhow. We need to protect these ideas. It'll save
jobs, improve the economy, fight crime, and, above all, it's
just simply the right thing to do.
I would like to thank you, Mr. Chairman and our witnesses,
for taking the time to be with us today, and I look forward to
hearing their testimony.
The Chairman. Thank you very much, Senator Biden.
I'll ask the witnesses to testify in the order that I first
mentioned them in my statement.
Let me say, at the outset, that your full statements will
be made a part of the record, and so you need not ask for that
to occur; it will happen. And we'll ask that you summarize your
statements and proceed in the best way you can. We'll not be
rigorous with regard to time constraints because we want to
hear you. We want to hear the arguments that we've tried to
suggest in our opening statements and in the call for the
hearing.
I call now upon Mr. Jack Valenti, President and CEO of the
Motion Picture Association of America, for his testimony.
Jack?
STATEMENT OF JACK VALENTI, PRESIDENT AND CEO, MOTION PICTURE
ASSOCIATION OF AMERICA, WASHINGTON, D.C.
Mr. Valenti. Thank you, Mr. Chairman.
As a reader of Churchill, I remember reading he once said
that the Germans transported Lenin in a sealed train, like a
plague bacillus, from Switzerland to Russia. Well, I think, in
Russia, this new world called the Internet, which I think has
an astonishing potential to be the greatest distribution system
ever struck off by the hand and brain of man, another plague
bacillus has invaded that Internet, and, I might say,
terrestrial, as well. It is--in the interest of full disclosure
and honest disclosure, it has to be called thievery, thievery
on a scale so immense in its reach, thievery which can be the
slow undoing of America's greatest trade export, and thievery
which I think requires the Congress and this government to be a
sleepless, formidable, and steady guardian of this asset.
Now, how big an asset is it? Let me put it to you this way.
Intellectual property, which is composed of the people here at
this table, exceeds more than 5 percent of the GDP of this
country. We bring in more international revenues, Mr. Chairman,
than agriculture, than automobiles and auto parts, and
aircraft. We are creating new jobs--new jobs--not minimum-wage
jobs--at three times the rate of the rest of the economy. And
the movie industry alone has a surplus balance of trade--
surplus balance of trade--with every single country in the
world. I don't believe there's another American enterprise that
can make that statement.
So that puts it on a level that we can understand. It
nourishes this economy. It's an awesome engine of economic
growth. And to have it despoiled, stolen, and spirited away by
other countries is just something we just can't tolerate.
Now, let me, in order to keep within this time limit, I
want to focus today on two countries, China and Russia. Many
other places, like Brazil and Pakistan and Thailand and
Malaysia and Taiwan, also face serious problems, and both you,
Mr. Chairman, and the Ranking Member, brought this out. But
making progress on these, I will highlight today, I think,
would make a significant difference.
Stolen films, which are usually captured by sophisticated
camcorders in theaters or in special preview sites, are
uploaded onto the Internet and/or find their way to these
countries. In the international arena, the great majority of
these crimes are in the hands of enterprising criminal
organizations. Now, how much of this revenue flows to
terrorists is hard to measure, but international policy forces
believe it is significant.
China, I'm unhappy to say, is thick with fraudulent copies
of our films. I've been to China five times in the last seven
years, and I know all of you have visited there. On every
street corner, in the kiosk of first-class hotels, stolen
American films are sold without any intervention. China has
emerged as an export center with pirate DVDs migrating their
way to the U.S., as well as the U.K. and other countries around
the world. At the end of April, Vice Premier Wu Yi, whom I have
known for a long time, before she ascended to her Olympian
status in China today--Madam Wu Yi came here and pledged to
Secretary Evans and to U.S. Trade Representative Zoellick, that
China would significantly reduce piracy. I think the pledge
that China must keep, and my intimate knowledge--my friendship
with Wu Yi tells me that she will keep that pledge. I pray that
is so.
But China's got to also focus on something else, the
paralyzing effect of market access restrictions that remain
over the entire film community in China. Underlying this piracy
problem are some of the most onerous market-access restrictions
anywhere in the world. For example, there's a government
monopoly on film imports, there's a 20-film limit a year.
That's all we can bring into China. There's a very slow
censorship process, a bottleneck on theatrical distribution,
limits on the retail sale of legal home entertainment, and the
restrictions on foreign investments, foreign channels, and
foreign TV content. And now there's a serious new problem that
has just erupted within the last several weeks that places in
question China's commitment to those lower piracy rates. China
has decided that major U.S. blockbuster, the big, epic films
that we're ready to bring into China this summer, will not be
shown in China during a key period this summer when our member
companies release these blockbuster films. As everyone knows,
it's impossible to fight piracy if there's no legitimate
product in the marketplace.
So when audiences in China are anxious to see these
blockbusters, the decision not to give playing time to these
big films only benefits the pirates by guaranteeing them a
monopoly on the exhibition of our works, because, I promise
you, by the time those films finally get in, when the summer is
over, millions and millions of copies will be already on the
streets of China.
Now, in Russia, abducted films are transformed into illegal
DVDs. They are matchlessly copied--I'm astonished and
bewildered at how good this copying is--and then exported into
Eastern Europe, Central Europe, and now invading the European
Union, as well as Turkey, Ukraine, Israel, Bulgaria, Estonia,
Slovakia, Hungary, and Finland. It's a rising flood that seems
to have no end. And although Russian enforcement authorities
raided three DVD plants so far this year, and seized their
production lines, frankly criminal prosecutions don't follow
the raids, so there's little deterrence. Moreover, the long-
awaited reform to Russia's copyright law alas, alas has been
stalled in the final stages of its long legislative journey.
Brazil has been infected with huge thievery, and I'll go
into some others, but I think I've probably used up my five
minutes, Mr. Chairman.
The Chairman. Go right ahead.
Mr. Valenti. All right, thank you, sir.
Good laws in Brazil are in place. What is missing? The
resolve to enforce them. And these laws are, at best, vapory
and sometimes nonexistent. So the ratio of convictions to raid
is less than 1 percent.
The kidnapping of American creative works in most of the
known world is richly rewarding. We've been told by U.S. law
enforcement agencies that today if you want to really make a
lot of money in illegal activity and you don't want to get shot
at in gang wars, get out of the drug business and go into the
intellectual property thievery business. You can make three to
four times the amount of money, and you live a nice, warm life,
because there's no risk to it. The rewards are great. And if
you get caught, which is seldom, you get a slap on the wrist,
and you go about your business. It's nirvana for criminals, and
this is why it's growing and enlarging all over the world.
Now, I think the theft of movies right now is a pandemic. I
want to praise the work of Ambassador Robert Zoellick. I think
he and his merry band of trade representatives have done a
terrific job. They're small in number, but they do herculean
things. I deeply appreciate the hard work of these men and
women, and particularly those serving at our embassies abroad,
as well as their colleagues at the State Department and the
Commerce Department.
Now, my written testimony goes into the entrails of all of
this, Mr. Chairman. I hope that members of this committee and
their aids will read this testimony, because I think it's very
important to absorb. Because in the final end of it all, the
only way we're going to deal with international piracy is with
the full support and the resolve of our Congress.
Thank you, sir.
[The prepared statement of Mr. Valenti follows:]
Prepared Statement of Jack Valenti
THE ECONOMIC WORTH OF THE COPYRIGHT INDUSTRIES
The copyright industries are responsible for over five percent of
the GDP of the nation. Over the past quarter century, these industries'
share of GDP grew more than twice as fast as the remainder of the
economy. They earn more international revenues than automobiles and
auto parts, more than aircraft, more than agriculture. The copyright
industries have been creating new jobs at three times the rate of the
rest of the economy. The movie industry alone has a surplus balance of
trade with every single country in the world. No other American
industry can make that statement. And all this comes at a time when the
US is suffering from some $400 billion in trade deficits.
THE SCOPE OF THE PROBLEM
The spread of theft of America's creative works flows like a
swiftly running river in every nook and cranny of this planet. Today
I'd like to focus on China and Russia, where the problems are large and
growing at an alarming rate. In both countries, organized criminal
groups play a large role in the replication and distribution of pirated
DVD. And, in both countries, the piracy problems are spilling out
beyond their borders to infect markets all around the world.
We also have serious piracy problems in Brazil, Pakistan, Malaysia,
Taiwan and Thailand, as well as many other countries. Without a
coordinated national effort to tackle the unbridled theft of American
creative works, and lacking effective prosecutions and deterrent
sentencing, Brazil's serious piracy problems show no signs of
improving. Illegal production and export of pirated optical discs also
plague Pakistan and Thailand. Malaysia, too, has a very significant
production and export problem, but enforcement authorities there have
been working very hard to tackle the problems, conducting impressive
raids against pirate factories and pirate retail markets. Laudable
efforts of Taiwan's enforcement authorities are being undermined by the
lack of progress in Taiwan's Legislative Yuan in adopting urgently
needed legislative reform. For a full list of our concerns, I commend
to you the 2004 Special 301 Report on Global Copyright Protection and
Enforcement submitted by the International Intellectual Property
Alliance on February 13, 2004.\1\ Nevertheless, if we were to make
progress in the two countries I will highlight today, that would put a
significant dent in global piracy.
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\1\ (An electronic version of IIPA's Special 301 report is
available at http://www.iipa.com/special301_TOCs/
2004_SPEC301_TOC.html.)
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Stolen films, usually captured by sophisticated camcorders in
theaters, or in special preview screenings, are uploaded to the
Internet and are available for individuals to download in any country
around the world. At last month's Cannes Film Festival, representatives
of cinema studios, production houses, infrastructure providers and film
directors from the United States, Europe, India, China, and Russia
gathered under the auspices of French Minister of Culture and
Communication Renaud Donnedieu de Vabres and President of the Cannes
Film Festival Gilles Jacob to call for the launch of strong, urgent and
coordinated action to fight the scourge of piracy. The participants
underlined in particular the threat that the free downloading of
protected works through Internet peer-to-peer systems represents to the
world's creators. Taiwan and Korea are two countries with high levels
of internet access and rapidly growing internet piracy; neither have
fully updated their legal infrastructure to address the growing
problems.
Camcorded copies of our films also find their way to the pirate DVD
production centers, including China, Russia, Malaysia, Thailand and
Pakistan, where they are used as the master copies in the illegal
replication plants.
In the international arena, international trade in pirated optical
discs is in the hands of enterprising criminal organizations. According
to Ron Noble, the international police network's secretary general at
the first Global Congress on Combating Counterfeiting in Brussels last
month, ``Interpol believes there is a significant link between
counterfeiting and terrorism in locations where there are entrenched
terrorist groups.'' How much of the revenues flow to terrorists is hard
to measure, but doubtless it is there.
CHINA
For a decade, American film companies have engaged in a concerted
effort to penetrate the Chinese entertainment market. Despite a pair of
trade agreements, strong support from the US Government, steady
investments in relationships and projects, and a continual dialogue
with Chinese authorities, the predicament of American filmed
entertainment industry in China is grim. Piracy has reached a level not
seen since 1995, and market access barriers continue to thwart efforts
to deliver legitimate film and home entertainment programming to
Chinese audiences.
Chinese policy has continued to lag far behind what has been
promised by authorities. Earnings by MPAA member companies in China
from theatrical distribution have fallen; in 1998, the average US film
distributed to Chinese cinemas on a revenue-sharing basis earned $1.9
million for the member company, but by 2002 that amount had fallen to
$500,000, and per company earnings for American filmmakers fell by 20%
during the period.
Formal market access barriers remain in place, including a
government monopoly on film importation, quantitative limits on
imports, a slow and cumbersome censorship process, a theatrical
distribution duopoly, limits on the retail sale of legal home
entertainment, and restrictions on foreign investment, foreign channel
carriage, and programming content in the television sector. Ironically,
these restrictions further tilt the market environment in favor of
pirates, who obey none of the government's regulations, while reaping
at least 95% of the market's sales.
Making a bad situation even worse, word leaked in late May that
major U.S. blockbusters would not be given screen time in China during
a key period when MPA member companies release their summer
blockbusters to cinemas in the United States and the world. Several of
our member companies had been working diligently to ensure that Chinese
consumers were able to enjoy these films in cinemas at the same time as
the rest of the global audience.
If audiences to not have the an option of going to see a legitimate
film in the cinemas, illegal home video product will flow in to fill
the demand. By discouraging consumers from seeking their entertainment
at the cinema, this decision damages the revenue streams of China's
cinemas and diminishes the value of the both local and U.S. investments
in new multiplexes in China. Only the criminal elements behind piracy
will benefit from this decision while legitimate businesses are
deprived of success.
Meanwhile, piracy problems are only becoming more severe. In 2002,
the piracy rate in China for American films, home video and television)
was about 91%. In 2003, the pirates captured at least 95% of that
market. The current level of piracy is worse than it has been at any
time since 1995, when the rate was 100%. In fact, China leads the Asian
region in piracy; the rate of piracy in China is higher than that of
other countries that traditionally have been plagued by piracy,
including Malaysia, Indonesia, India, and the Philippines, as
illustrated on the following chart.
China is again becoming a source of pirate discs circulating in
world markets--just as it was in 1995. For example, during the first
three quarters of 2003, customs officials in the United Kingdom saw an
alarming escalation in seizures of pirated DVDs originating from China.
During the first quarter, UK Customs officials seized fewer than 1,300
pirated discs from China--but in the following three quarters, seizures
jumped to a combined total of over 94,000. As of April 30, 2004, UK
Customs seized 78,666 pirated disc from China compared with 1,238
pirated discs seized during the same period of year 2003 (a rapid
increase of 6,254%). Despite the seizure in China of 34 optical disc
production lines and two mastering lines in 2003, source piracy has
still received insufficient attention from Chinese authorities to deal
with the rapidly increasing export problem.
Domestically, rampant piracy continues to fill the void created by
slow and limited access to the legitimate market. Far less legal filmed
entertainment is entering China than the market demands. Restrictions
on access and bureaucratic obstacles to distribution in the theatrical,
home entertainment and television marketplace provide a vacuum that is
readily filled by pirates, who ignore time-consuming bureaucratic
obstacles like censorship procedures and pay no taxes.
While DVD piracy has been crippling to foreign films, this rampant
piracy is equally devastating for the local Chinese film industry. Many
Chinese studios are on the verge of collapse. No supplier of legal
films, local or foreign, can compete with pirates who pay no taxes,
endure no censorship obligations, and who carry none of the costs of
running a studio and paying actors and actresses.
Television piracy is also a major concern. The government runs 38
provincial broadcast television stations and 368 local stations, which
commonly broadcast unauthorized content, often in reliance on
counterfeit ``letters of authorization'' or ``licenses'' from companies
in Hong Kong, Thailand or Taiwan, which purport to convey broadcast
rights. In addition, the more than 1,500 registered cable operators in
China routinely include pirated product in their program schedules.
Actions Needed
In order to curtail the excessive levels of piracy in China, China
must take the following steps:
Strengthen focus, coordination and effectiveness of the
various Chinese enforcement agencies through strong direction
from the top Chinese leadership.
Build consumer awareness of the dangers and penalties of
engaging in piracy.
Establish credible legal deterrents to piracy to include the
lowering of the criminal threshold for copyright violations.
Create strong, well-coordinated local enforcement entities
such as that in Shanghai.
Sharp improvement in the transparency regarding enforcement
raids, criminal case proceedings and court sentencing results.
Set a fixed timetable for bringing piracy rates steadily
down from current levels exceeding 95%. An immediate goal
should be to bring piracy below 50% by the end of 2004.
Take immediate action to stop the rising volume of pirate
exports from China.
Take concrete steps to improve market access and eliminate
obstacles to distribution in the theatrical, home video and
television markets.
China is slowly enunciating policy goals that provide some room for
cautious optimism that these items may be addressed. In April 2004, at
the conclusion of the U.S.-China Joint Commission on Commerce and
Trade, Chinese Vice Premier Wu Yi specifically committed to reduce
rates of piracy. She also pledged to lower the criminal threshold for
piracy and to increase the number of infringing acts subject to
criminal penalties by the end of the year. These criminal law
commitments are important in correcting some of the biggest structural
impediments to criminal prosecutions and deterrent sentencing for IP
crimes in China. China also indicated that they would be conducting a
nationwide enforcement campaign, stepping up border enforcement and
launching a public education campaign. Finally, China will adopt and
implement the WIPO Internet treaties.
RUSSIA
Background
There has been an explosion of large-scale factory production of
pirate DVDs in Russia over the past few years. The export of pirate
DVDs to both developed and growing markets across Europe has
eviscerated any progress that had been made in Russia towards the
creation of a healthy legitimate audiovisual market. The known local
DVD plants have an estimated annual production capacity of over 30
million DVDs, well over ten times the level of legitimate local demand.
These discs are clearly being made for export to markets across Europe,
carrying multiple language tracks and subtitles. Moreover, the local
Russian market is saturated with pirate DVDs, with the level of piracy
estimated at 92% in 2003. Sales of legitimate DVDs have fallen back to
1999 levels despite a significant increase in the number of households
with DVD players, and despite efforts by foreign producers to move
legitimate product into the Russian market much earlier than in prior
years. In 2002, we reported the seizure of over 226,000 pirate DVDs in
raids on warehouses and outlets across Russia. That number jumped in
2003 to over 1.4 million.
Laws and Enforcement
Russia's laws remain TRIPs incompatible and effective anti-piracy
action by law enforcement agencies is substantially deficient. Russia
has yet to effectively enforce the laws it has in place at a level
necessary to have any appreciable effect on piracy. On-the-ground
enforcement by police and prosecutors remains lacking. As a result,
Russia has some of the highest rates of copyright infringement in the
world.
Russia has made progress recently in improving its intellectual
property protection regime. The Government has recognized the
seriousness of the piracy problem, legislative reforms have been
adopted and enforcement efforts have been increased. In recent months
ex officio enforcement actions began to be conducted almost daily and
have been widely reported by local media. Three pirate DVD plants have
been raided so far this year and have had their DVD lines seized.
Moreover, Russian officials recognize the importance of improving IP
protection in the context of accession to the WTO. However, despite the
efforts to date of the Russian Government, pirate production and export
continue to grow unabated. The organized criminal groups that control
most of the manufacture and distribution of pirate product continue to
grow in wealth, strength and influence. Piracy is acknowledged by
everyone to be one of the most profitable criminal businesses in
Russia. Much more needs to be done on an urgent basis to have even a
nominal impact on this problem.
The criminal groups running piracy operations are well-funded and
highly organized. Such groups cannot be effectively opposed by
rightsholders alone or by local organizations acting on their behalf,
regardless of the dedication, bravery or expertise of their personnel.
The committed help of the Russian Government is required to face down
such criminal syndicates. The only way to combat the syndicates is by
effective criminal enforcement. Unfortunately, Russia's criminal
enforcement system is the weakest link in its intellectual property
protection regime. Raids are not followed up by criminal prosecutions.
Prosecutors drop cases for no reason, or cite a lack of public
interest. When cases are prosecuted, the penalties imposed are not at
deterrent levels. Prison sentences are usually suspended. There have
been welcome exceptions, of course, but police and prosecutors are
generally discouraged by their experiences from investigating and
prosecuting more offenders.
Another problem that needs urgent Russian Government attention is
the unacceptable return to the marketplace of confiscated pirate
product. It is estimated that up to three quarters of the pirate
product seized in raids finds its way back onto the market.
Actions Needed
To put into effect its stated commitments to tackle its piracy
crisis, the Russian Government should take the following steps:
Inspect, on a regular, unannounced and continuous basis,
each of the known optical disc plants, and immediately close
down any plant and seize any machinery found to be used to
produce pirate product or operating without a license;
Introduce, either via executive order or legislation, the
necessary modifications of the current optical disc licensing
regime so that it provides for more effective control over the
operations of plants, including stricter controls on the
importation of polycarbonate and machinery, mandatory seizure
and destruction of machinery used to produce pirate materials,
and the introduction of criminal penalties for the owners of
such plants;
Pledge to investigate all complaints from copyright owners
in respect of the commercial replication, distribution or
export of pirate optical discs;
Act through Customs to prevent the continued export of
pirate discs to other countries;
Pass the long-awaited amendments to the Copyright Law and
ensure full consistency with international standards as set out
in the WIPO Internet Treaties and the WTO TRIPs Agreement; and
Adopt a decree setting forth sentencing guidelines for
judges to advise the Courts to impose penal sanctions as
provided under the penal code as amended (Article 146).
OTHER COUNTRIES WITH SIGNIFICANT PIRACY PROBLEMS
Brazil
Brazil, our most important South American market, is beset with
piracy. One out of every three tapes or DVDs is pirate. Our member
companies lose an estimated $120 million every year in Brazil to
piracy. Street market sales of locally ``burned'' recordable DVDs (DVD-
Rs) and low quality recordable CDs (CD-Rs) are ubiquitous and internet
sales of pirated optical discs are also increasing rapidly. While
Brazil has good copyright laws, their enforcement is abysmal. Even in
those jurisdictions where police have conducted raids, criminal
prosecutions are rare, and deterrent sentences even less common. Less
than 1% of all raids result in convictions, and even those few
sentences are so light that future crimes are not deterred.
A special Brazilian Congressional Investigation Commission on
Piracy and Contraband provides one bright spot in an otherwise dismal
piracy situation in Brazil. Since June of last year, this Commission
made extraordinary efforts to investigate and attack piracy. They
exposed a major criminal organization led by a naturalized Brazilian of
Chinese nationality, Lao Kin Chong. Chong, who produces contraband
optical discs for the Brazilian market and sells them in three large
commercial shopping centers, was finally arrested last week after
trying to bribe the head of the Congressional Commission. The
Commission also investigated and arrested public agents for corruption,
demonstrating that the reach that organized crime of piracy can have
with official organizations. They encouraged private authorities to
carry out search-and-seizure operations against commercial outlets
known for pirated material, which triggered an increase in the number
of operations by police and administrative authorities. The Commission
welcomed the participation of the private sector in supporting the
fight against piracy.
The Parliamentary Inquiry Committee is scheduled at the end of June
to submit its final report to the Lula Administration for strengthening
the national system for combating piracy. In their dual role as members
of the Parliamentary Front to Combat Piracy, a permanent body that
enjoys the participation of the private sector, these Brazilian
legislators will play a key role in pressing their Government to ensure
that the proposals of the Parliamentary Inquiry Committee are
effectively implemented.
We hope that the U.S. Government will also engage the Government of
Brazil in serious effort to secure more effective protection of filmed
entertainment and other copyrighted works, using all appropriate trade
tools, including through negotiation of high IP enforcement standards
in trade agreements and by utilizing the leverage provided by
preferential tariff programs such as the Generalized System of
Preferences. The Administration is facing a decision shortly with
regard to a petition filed by the International Intellectual Property
Alliance, which proposes that the United States withdraw Brazil's GSP
eligibility for failure to provide adequate and effective protection of
intellectual property.
Malaysia
Malaysian enforcement authorities have shown remarkable courage and
tenacity in actions against unlicensed optical disc factories and
street markets retailing pirate DVDs. Continued vigilance, including of
the licensed factories, will be necessary to reduce pirate production.
Malaysia also made a significant dent in the export of pirated DVDs by
means of express delivery services. Malaysia's next major challenge on
the route to ridding itself of the scourge of organized, criminal
optical piracy will be the successful prosecution and sentencing at
deterrent levels of guilty parties.
Pakistan
Pakistan has become a major producer and exporter of optical discs
as shown by the increasingly large seizures of pirate product by
customs services in Europe and Africa. Pakistan has at least eight
active plants with 25 lines, including one DVD plant.
Pakistan is now the leading source of pirated DVDs seized by UK
Customs. In the first quarter of this year, UK Customs intercepted over
94,000 pirate DVDs pirate discs that originated in Pakistan. To
circumvent the Customs controls in the UK the pirates have been seeking
to exploit perceived weak points in the European Union's common
external border. So far this year pirate shipments from Pakistan have
been detected at EU entry points in France, Netherlands, Spain, and
Belgium, in addition to the UK. With the accession of 10 new countries
to the EU last month, our fear is that this trend will continue. South
African Customs has also intercepted several large shipments of pirated
DVDs originating in Pakistan; which were transiting that country and
heading for other markets in Africa.
Taiwan
The story in Taiwan is mixed. Large-scale factory production of
pirated DVDs is largely a problem of the past in Taiwan. The organized
criminal piracy organizations switched to production of blank
recordable discs, a legal product, but one that provides the raw
material for illegal commercial ``burning'' (copying) of our home
entertainment in smaller, more dispersed labs in Taiwan and throughout
the world. Taiwan's enforcement officials recently conducted a raid
against a major ``burning'' lab and have also helped reduce the overt
retail sales of pirated goods in street markets. Unfortunately, no
progress has been made in the long awaited legislative reforms. Taiwan
needs to ensure that its enforcement officials have all the legal tools
necessary to continue their enforcement against hard goods piracy and
to successfully tackle on-line theft. Instead of moving forward with
these amendments, Taiwan is flirting with adoption of a compulsory
license on internet transmission of sound recordings, a step that would
be inconsistent with Taiwan's TRIPS obligations and set an unacceptable
international precedent.
Thailand
Thailand remains one of the few major optical disc production
centers in Asia that has failed to adopt effective optical disc
regulations to stem the growing production problems. Unless Thailand
significantly steps up its fight against the large factories that are
churning our pirated copies of DVDs, MPAA will not be able to support
the Free Trade Agreement, which our countries are preparing to
negotiate.
CONCLUSION
What we often refer to as ``piracy'' is more clearly and accurately
defined as ``outright thievery.'' It is thievery that our country
cannot afford to tolerate.
I thank you, Mr. Chairman, and members of the committee, for your
interest and your assistance in helping us illuminate this dark corner
of illegal commerce.
The Chairman. Well, thank you very much, Mr. Valenti. I'd
like to call now on Mr. Mitch Bainwol, Chairman and CEO of the
Recording Industry Association of America.
Mr. Bainwol?
STATEMENT OF MITCH BAINWOL, CHAIRMAN AND CEO, RECORDING
INDUSTRY ASSOCIATION OF AMERICA, WASHINGTON, D.C.
Mr. Bainwol. Thank you.
Chairman Lugar, Ranking Member Biden, members of the
committee, I'm Mitch Bainwol of the RIAA. Our members create,
manufacture, and distribute 90 percent of the music in this
country.
American music dominates the globe, with fans in every
language, in every culture, in every corner of the world. I'm
also proud to be part of Jack's backup band. Thank you, Jack.
As America pays tribute to the life of Ronald Reagan,
George Will's Sunday column noted the former President's words
in Moscow, where he said, ``Mankind was emerging from the
economy of muscle and entering the economy of mind.'' His
description was typically elegant and instructive.
America's future is, in fact, rooted in the economy of
mind. Our comparative strength globally increasingly is derived
from the products of our imagination--music, movies, software,
and games--all represented before you today. As you well know,
piracy plagues each of our industries, but, from my industry,
music, the proportion of impact of piracy is perhaps most
severe. The story of music piracy, thus, presents a wake-up
call for all policymakers who believe that America's engines of
imagination are worthy of defense.
Our story, succinctly, is this. Music sales quadrupled
during the 1980s and the 1990s, to about $40 billion globally,
but hit a wall in 1999. Sales tumbled by about a third,
compromising thousands of jobs and resulting in significant
reductions in artist rosters.
Prior to 2000, piracy abroad was dramatically worse than it
was here in the United States. Still, the music industry was
able to prosper. That piracy gap still exists, but is closing.
As we've seen international piracy accelerate, domestic piracy
has spiraled out of control. Why? There are two key triggers.
First, the enormous wave of illegal file-sharing and so-called
P-to-P networks, conditions tied to America's superior
broadband penetration, and, second, the widespread
proliferation of CD burners, making it easy and inexpensive to
produce high-quality recordings.
But technology is not the problem. There will always be
ways to steal. The relevant question, therefore, is whether our
society chooses to value products of the mind, as Reagan noted,
equivalently with products of muscle. For if we don't respect
IP here in the United States, we both undercut the vibrancy of
our comparative strength in a global marketplace, and,
necessarily, we jeopardize our moral authority to demand that
foreign countries take IP seriously, and seriously they must.
Worldwide pirated sales of music total about two billion
units--two billion units. Two in five units abroad are pirated.
Optical-disc manufacturing has quadrupled to about 50 billion
units, far exceeding legitimate demand. And those same triggers
that deepened our domestic challenge are taking hold abroad.
Along with MPAA, BSA, and ESA, we belong to the
International Intellectual Property Alliance, IIPA. In its
recent 301 recommendations to USTR, we identified copyright
protection and enforcement problems in 56 countries across the
globe. But, as you noted, Mr. Chairman, four countries stand
out. And I just want to take you on a very, very quick tour and
touch on these.
In Russia, record-industry losses in '03 totaled about $400
million with a piracy rate of 64 percent. Russia dubiously
leads the world in the export of pirate CDs. Piracy there is a
growth business. The number of CD plants has more than doubled
in the last three years. Production capacity has more than
tripled. Eight of the 34 known plants are on military
facilities. Russian manufacturing capacity now stands at 342
million CDs and 28 million DVDs, even as the legitimate market
represents only about 10 percent of that production. Russia's
anti-piracy efforts are severely hampered by flawed
legislation, ineffective enforcement, and inadequate
deterrents.
If, by the end of this month, the Russian Government is not
meeting the benchmarks outlined in my written testimony, the
President should determine that Russia does not provide
adequate and effective IP protection, and, thus, fails to meet
the standards for receiving duty-free GSP benefits.
In China, record-industry losses in 2003 were about $300
million, with a physical market that is, at 90 percent, almost
entirely pirate. Internet piracy is soaring, with 70 million
Chinese online. Unlike the Russians, the Chinese have taken
significant steps to disrupt the export of pirate products, but
they have not adequately tackled the IP problems within their
borders. Moreover, the Chinese present, as Mr. Valenti attested
to, a series of disruptive market access and investment
barriers. Given these challenges, we were heartened to see
April's announcement with the Chinese, and we call up on China
to cut its piracy levels in half by the end of this year.
Brazil used to be a profitable and vibrant nation for U.S.
sales. It's collapsed. Record-industry losses in 2003 totaled
about $350 million, with a piracy rate of over 50 percent. Its
greatest deficiency is criminal enforcement. Over the last six
years, fewer than 1 percent of the raids generated convictions.
When they did, judgments were inadequate.
The Brazilian Congress recently established a parliamentary
inquiry on piracy, members of which recently visited
Washington. They committed themselves to a joint declaration,
as Mr. Biden suggested. But they have a long way to go. As in
the case of Russia, unless Brazil takes the steps outlined in
my written testimony, President Bush should determine that
Brazil fails, also, to meet the standards for receiving GSP
benefits.
Finally, Pakistan. Unfortunately, Pakistan reflects the
export problems of Russia and the domestic challenges of China.
Record-industry losses in 2003 were about 70 million, with 100
percent piracy rate. Eight known facilities in Pakistan
produced upward of 180 million CDs in 2003, of which 160
million were exported to at least 46 nations all around the
globe. The government of Pakistan has taken only cosmetic steps
to curtail production and export of pirated product.
Accordingly, the U.S. Government should accept the IIPA 2001
petition to remove preferential trade benefits--tariff benefits
for that country, and commence the appropriate investigation.
Let me try to summarize. While defensive IP is weak,
dreadfully weak in dozens of countries across the globe, these
four nations represent the most salient piece of the piracy
puzzle, and they warrant special attention. So we appreciate
the hearing today.
At the same time, as we seek to address piracy abroad, we
need to do more to get our own house in order. The domestic
music industry is struggling. We cannot endure the twin cancers
of rising piracy abroad and society indifference to IP in the
United States.
In sum, to move forward I would suggest the following. One,
determine that Brazil and Russia fail to meet the standards for
receiving GSP benefits unless immediate steps are taken. Two,
hold the Chinese accountable for the 50 percent improvement in
piracy rates. Three, advance a GSP petition, vis-a-vis,
Pakistan. Four, provide USTR in Commerce in particular, and
other agencies providing support, like, Senator Allen in your
initiative with the State Department, with the resources
necessary to advance our distinctly American economy of the
mind. And, five, vigorously defend the rights of content-
holders here in the United States as a core and unassailable
foundation of our domestic commitment to our own comparative
strength.
And, with that, I will close, and thank you, members of the
committee.
[The prepared statement of Mr. Bainwol follows:]
Prepared Statement of Mitch Bainwol
Mr. Chairman and members of the committee, on behalf of the
Recording Industry Association of America, I appreciate the opportunity
to testify today about international intellectual property piracy.
I am Chairman and CEO of the Recording Industry Association of
America (RIAA), the trade group that represents the U.S. recording
industry. RIAA's mission is to foster a business and legal climate that
supports and promotes our members' creative and financial vitality. Our
members are the record companies that comprise the most vibrant
national music industry in the world. RIAA members create, manufacture
and/or distribute approximately 90% of all legitimate sound recordings
produced and sold in the United States.
Music is the world's universal form of communication. It touches
every person of every culture on the globe to the tune of $32 billion
annually, and the U.S. recording industry accounts for more than one-
third of that world market. Our members create employment for thousands
of people, including singers, musicians, producers, sound engineers,
record promoters and retail salespersons, to name only a few.
THE IMPORTANCE OF THE U.S. RECORDING INDUSTRY, AND INTELLECTUAL
PROPERTY PROTECTION, TO THE U.S. ECONOMY
International markets are vital to our companies and our creative
talent. Exports and other foreign sales account for over fifty percent
of the revenues of the U.S. record industry. This strong export base
sustains American jobs.
The protection of our intellectual property rights abroad is vital
to promoting America's competitive advantages in world commerce. As our
trade deficit has soared, we call upon Congress to consider more
closely the relationship between our widening trade and current account
deficits and copyright piracy and to take steps to enable us to more
effectively protect our intellectual property rights at home and
abroad.
An important part of our nation's competitive strength lies in the
creation of knowledge-intensive intellectual property-based goods and
services. This is one of those economic activities that Americans do
better than the people of any other nation. The ``core'' U.S. copyright
industries account for more than five per cent of U.S. GDP. Employment
in our industries has doubled over the past 20 years, growing three
times as fast as the annual growth rate of the U.S. economy as whole.
The foreign sales and exports of U.S. copyright industries were nearly
$90 billion in 2001, an amount greater than almost any other industry
sector, including automobiles and auto parts, agriculture and aircraft.
The intellectual property of the United States is like a warehouse
of ideas and creativity. For people to walk in and steal them is no
more tolerable than theft of physical goods. And the sale of our
recordings abroad makes a major contribution to America's current
account balances. Each and every sale of a pirated product abroad that
substitutes for the sale of a legitimate American product increases our
current account deficit. As a result, Americans employed in competitive
industries like ours are denied financial benefits that should have
occurred but did not.
THE EFFECT OF MUSIC PIRACY
The piracy of music is almost as old as the music industry itself,
but historically it was difficult for the criminal to reproduce copies
as good as the real thing. Now with the advent of digital recordings,
criminals can reproduce near perfect copies of any recording. There is
massive manufacture and traffic of illegal CDs, both in the form of
molded CDs that are produced in large plants, and CD-R's produced with
blank optical discs and readily available computer CD-R burners
Annual world-wide pirate sales approach 2 billion units; worth an
estimated $4-$5 billion. Globally, 2 in 5 recordings are pirate copies.
Total optical disc manufacturing capacity (video/audio CDs, CD-ROMs and
DVD)--stands at 45 billion units, having quadrupled in the past five
years and greatly exceeds legitimate demand. This creates a business
environment ripe for exploitation by criminal syndicates and even
international terrorist groups, at times shielded by governments
hostile to our interests. Given that the pirate producer has few or
none of the overheads associated with genuine production, the profit
margin is substantial.
The battle against intellectual property theft must be unrelenting.
Digital technology and internet piracy have greatly exacerbated our
problems. High levels of piracy, in conjunction with market access
barriers in certain countries plague our industry. Our country must
employ every tool at its disposal, including the critically important
leverage provided by international trade agreements. This is why your
hearing today is so critical to us.
RIAA belongs, along with MPAA, BSA and ESA, to a copyright-based
umbrella organization called the International Intellectual Property
Alliance. In its recent Special 301 recommendations to USTR, IIPA
identified serious copyright protection and/or enforcement problems in
56 countries. We face major piracy problems in such countries as
Mexico, Paraguay, Thailand, Malaysia, Taiwan and Ukraine. But four
countries--Russia, China, Brazil and Pakistan--stand out. My testimony
today focuses on these nations.
RUSSIA
Russia's copyright piracy problem is enormous. The performance of
the Russian government over the past decade can be summed up as
representing a legacy of failed commitments of obligations to the
United States and the broader international community.
The record industry lost $405 million and suffered a 64% piracy
rate in 2003. Russia is the world's largest exporter of pirate CD's.
This production has devastated the domestic Russian market, and exports
of pirated Russian CDs are causing serious damage to the legitimate
market for recorded music worldwide. Russian pirated CDs have been
found in more than 26 countries. Russia's criminal enforcement system
has failed to stem persistent commercial piracy. Overall copyright
industry losses have well exceeded $6 billion for the past seven years.
The number of CD plants in Russia has more than doubled in the last
three years to 34 known to us. Production capacity has nearly tripled
as criminal operations have encountered little hindrance in expanding
their activities. Even more troubling, eight production plants are
located on the facilities of Russian military-industrial enterprises.
Russia's annual manufacturing capacity now stands at 342 million CDs
and 28 million DVDs, despite the fact that only 30 million legitimate
music CDs were sold in Russia in 2003.
Russia's anti-piracy efforts are severely hampered by flawed
legislation, ineffective enforcement by the Russian authorities and
insufficient deterrent penalties in the courts.
In order to address these problems effectively and in a timely
manner, we propose a series of benchmarks for Russian Government to
meet. We advocate that failure by Russia to show substantial progress
on these issues by July 1, 2004 should result in the immediate
suspension of Russia's preferential duty-free ``GSP'' benefits on their
products imported into the United States. The Administration's July 1
decisions on Russia and other GSP cases are fast approaching. In
addition, we commend the U.S. Administration for conditioning Russia's
accession to the World Trade Organization on full compliance of its
copyright regime, both from a legislative and enforcement standpoint,
with the WTO TRIPS obligations. It is imperative that the
Administration continue to do so.
We propose the following benchmarks. Russia should:
1. Immediately commence inspections, on a regular, unannounced and
continuous basis, each of the 34 known optical disc plants,
and immediately close down any plant and seize any
machinery found to be used to produce pirate product or
operating without a license;
2. Adopt a decree setting forth sentencing guidelines for judges-
advising the Courts to impose penal sanctions as provided
under the penal code as amended (Article 146);
3. Pledge to investigate all complaints from copyright owners in
respect of the commercial replication, distribution or
export of pirate optical discs;
4. Introduce, either via executive order or legislation, the
necessary modifications of the optical disc licensing
regime so that it provides for more effective control over
the operations of the plants, including stricter controls
on the importation of polycarbonate and machinery,
mandatory seizure and destruction of machinery used to
produce pirate materials, and the introduction of criminal
penalties for the owners of such plants;
5. Announce, from the Office of the President, that fighting
copyright piracy is a top priority for the country and
particularly for Russia's law enforcement agencies and the
General Procurator's Office, which fighting piracy must be
priority task. The Office of the President should also
instruct the Inter-Ministerial Commission, headed by the
Prime Minister, to deliver reports every three months to
the President on what steps have been taken to address the
problem; and
6. Sign into law the copyright law amendments that have already had
their third reading in the Duma.
These steps, if taken, should provide a sufficient basis for
maintaining Russian participation in the GSP program. They will not,
however, resolve the situation, and progress towards more completely
addressing the range of continuing problems--both legal and enforcement
related, must be closely monitored. Russia's anti-piracy efforts remain
severely hampered by flawed legislation, ineffective enforcement by the
Russian authorities and insufficient deterrent penalties in the courts.
We are hopeful that Russia will meet the benchmarks set forth above. In
the longer term, the Russian government will need to address legal
reforms in the copyright law (even after the adoption of the current
amendments), the criminal code, the criminal procedure code, and the
administrative code, as well as to press for stronger and more
effective enforcement compatible with WTO TRIPS and the WIPO digital
treaties.
CHINA
RIAA has a long history of active involvement in intellectual
property negotiations between the United States and China. We
participated in negotiations led by the Office of the U.S. Trade
Representative in 1995 and 1996 undertaken pursuant to Section 301
investigations, resulting in exchanges of letters obligating China to
close factories producing and exporting pirate CDs that were causing
catastrophic disruption of our global markets. While the Chinese
government did indeed successfully disrupt the exportation of pirate
products, it has not yet seriously tackled the problem of piracy within
its borders, an obligation that was undertaken in these bilateral
agreements, as well as in their World Trade Organization (WTO)
commitments.
Last year, despite China's various bilateral and multilateral
commitments to the United States, the record industry lost $286 million
and suffered a 90% piracy rate in China. We face three significant and
related problems there:
1. The Chinese internal market remains almost entirely pirate (at
over 90%) despite many raids, seizures and administrative
fines that clearly have been inadequate to deter continued
piracy.
2. Internet piracy is growing rapidly in China. Many websites offer
downloading of pirated music files, some for a financial
charge, others for free. At any moment in time,
approximately 70 million Chinese citizens are online--a
huge number.
3. A series of market access and investment barriers prevent our
members from serving the Chinese market in a timely manner,
which perversely only increases consumer demand for pirated
product.
China's Recent Commitments
On April 21, China made a series of commitments to the United
States via a meeting of the U.S.-China Joint Commission on Commerce and
Trade. China promised to:
Significantly reduce IPR infringement levels.
Increase penalties for IPR violations by taking the
following actions by the end of 2004:
- Subject a greater range of IPR violations to criminal
investigation and criminal penalties.
- Apply criminal sanctions to the import, export,
storage and distribution of pirated and counterfeited
products.
- Apply criminal sanctions to on-line piracy.
Crack down on violators by:
Conducting nation-wide enforcement actions, city-by-
city, against piracy and counterfeiting, stopping the
production, sale and trade of infringing products, and
punishing violators.
Increasing customs enforcement action against the
import and export of infringing products and making it
easier for rights-holders to secure effective
enforcement at the border.
Improve protection of electronic data by ratifying and
implementing the World Intellectual Property Organization
(WIPO) Internet Treaties as soon as possible.
Launch a national campaign to educate its citizens about the
importance of IPR protection. The campaign will include press
events, seminars and outreach through television and print
media.
Establish an intellectual property rights working group
under the JCCT. Under this working group, U.S. and Chinese
trade, judicial and law enforcement authorities will consult
and cooperate on the full range of issues described in China's
IPR action plan.
China has committed to tangible, specific steps to address the
rampant piracy of copyrighted works. If fully implemented, this will be
a landmark announcement and a real victory for composers, record
companies, artists and other copyright owners in China. The U.S. Trade
Representative and Commerce Department deserve enormous credit.
This announcement may be an important first step, but we look to
the Chinese Government to ensure that future deeds match present words
and commitments. Immediate action by the Chinese authorities to address
these problems is critical. Chinese commitments in prior years have not
been fully implemented. We will closely monitor implementation of these
new commitments. We call upon China to ensure that this program reduces
piracy by 50 percent from its current levels by the end of the year,
with further verifiable and significant reductions in the following
years so that the legitimate business can expand and TRIPS level
enforcement be achieved.
We have also advocated that China remove existing barriers to
market access for legitimate sound recordings. Thus far, China has not
done so. The vacuum in the marketplace caused by China's market
barriers will always be filled by pirates who, by the nature of their
illegal activities, do not adhere to legitimate rules. We strongly urge
that China immediately begin to remove practices that limit market
entry and the distribution of legitimate materials. For example,
shortening the time for censorship approvals and permitting wholly-
owned foreign investments in all aspects of sound recording activity
would be welcome steps to ensure that China reaches its potential for
generating legitimate commerce in copyrighted materials.
BRAZIL
In past years, Brazilian pirates stole the entire music cassette
market. They are now doing the same to the CD market, destroying what
was once a vibrant and profitable market for our members. Our industry
lost an estimated $340 million from piracy in Brazil in 2003, a 52%
piracy rate.
Organized criminal elements, from within and outside Brazil,
exercise control over the production and distribution of infringing
copyrighted products. Brazilian pirates produce much pirated product on
blank CD-R, which is imported or smuggled from abroad, and enters the
Brazilian market through Brazil's weak border controls.
The most serious deficiency in Brazil involves ineffective, non-
deterrent criminal enforcement. While good laws are in place, enforcing
these laws has met with abysmal results. Although a few Brazilian
police units have conducted a substantial number of raids, these raids
have resulted in very few criminal prosecutions. Over the last six
years, the ratio of convictions to the number of raids run each year is
less than one percent. In those few cases that reach judgment, the
sentences are not deterrent.
A GSP decision with respect to Brazil is due on July 1. We believe
it is time for the U.S. Administration to conclude that which has been
evident for quite some time; that Brazil fails to provide adequate and
effective intellectual property protection as required under the U.S.
GSP statute.
While there has been some welcome cooperation between certain
Brazilian authorities and our industry, consistent and systematic anti-
piracy results from the Brazilian government have been thus far quite
inadequate. We are very pleased that the Brazilian Congress has
established a Brazilian Parliamentary Inquiry on Piracy.
Representatives from this Inquiry recently visited Washington and
signed a joint declaration with members of the U.S. Congress'
International Anti-Piracy Caucus committing themselves to improving
copyright protection in Brazil. This Inquiry is due to expire at the
end of this month. We strongly support its re-chartering and
continuation. We praise the positive, effective actions this Inquiry
has already taken against piracy in Brazil and will do all we can to
help them in their continuing efforts.
The remainder of the Brazilian Government should follow this
example and undertake an effective national anti-piracy plan to reduce
copyright piracy. The Brazilian Government should:
General Enforcement
Conduct a vigorous national anti-piracy campaign.
Significantly improve and implement deterrent criminal
enforcement, including persistent raiding, effectively
prosecuting in a speedy manner and convicting copyright pirates
in all industry sectors.
Establish federal task forces across the country, creating
an anti-piracy coordinator in each State office, which would
include formal and specific operational coordination with
industry sectors.
Create a centralized unit of police officers to work on
important copyright cases, and provide them with specific
guidelines to conduct their cases.
Direct the Federal Police and Customs to intensify
inspections along country borders, and adopt more efficient
norms to intercept contraband, blank CD-R's and pirate recorded
CD imports. Require Customs authorities to keep statistical
records of seizures of products.
Expedite issuance of search warrants, especially in criminal
cases where sometimes it has taken up to six months to obtain
such warrants.
Support the various enforcement agencies working with
copyright industries in anti-piracy actions, use organized
crime units in intellectual property actions, and increase
resources and training for these agencies.
Prosecution
Speed up criminal copyright infringement prosecutions and
expedite judicial orders to destroy confiscated piratical and
counterfeit products.
Assign dedicated prosecutors in each State to lead anti-
piracy campaigns that include major investigations of organized
crime groups as well as keeping major commercial areas free of
pirate product street vendors.
Secure convictions against businesses that are replicating
and distributing optical discs illegally.
Criminal Convictions/Civil Judgments
Apply the new criminal code amendments in copyright
infringement cases.
Assign piracy cases to judges trained and experienced in
intellectual property cases with a view to establishing
specialized IP courts.
Reduce bonds and increase timely decisions in civil
copyright infringement cases.
Create a specialized court which adjudicates copyright
infringement cases.
Politically
The recommendations of the CPI should be issued this summer
and promptly acted upon.
The CPI itself or a comparable body should be made permanent
and continue acting aggressively against piracy.
PAKISTAN
Eight known facilities in Pakistan produced upwards of 180 million
discs in 2003, nearly all illegal, about 160 million of which were
exported to at least 46 countries. Our industry lost $70 million to
piracy in Pakistan in 2003, and suffered a 100% piracy rate.
The Pakistan government to date has taken only cosmetic steps to
curtail production or export of pirated product. In 2001, the IIPA
filed a petition with USTR to remove Pakistan's preferential tariff
benefits under the U.S. ``GSP'' program because of the frightening
growth of production of pirated optical discs in Pakistan. Acceptance
of this petition and initiate an investigation remains ``pending''
before the U.S. Executive Branch. We urge that an investigation be
promptly commenced and vigorously pursued.
It is crucial in the context of our larger bilateral relationship
that Pakistan live up to its obligations to provide adequate and
effective copyright protection and take immediate steps to eradicate
piracy in all forms, including optical disc piracy. Its failure to
address this large and growing organized criminal activity will have
far reaching implications for the rule of law in general, and will
undermine Pakistan's ability to provide a stable democratic regime.
Pakistan's inadequate enforcement system fails to ``prevent
infringements'' and fails to provide ``remedies that constitute a
deterrent to further infringements,'' as required by the WTO's
``TRIPS'' agreement. Despite skyrocketing production, distribution and
export of pirate optical discs, Pakistan has not initiated meaningful
actions--criminal, civil or administrative--against its fast-growing
pirate optical disc producers.
The Government of Pakistan should:
1. Shut down known production facilities (if necessary, by temporary
order). Permit production only upon demonstration of
licenses to produce legitimate materials (whereupon
supervised access to the plant should be granted to permit
the legitimate production).
2. Stop all pirate exports of optical discs from Pakistan.
3. Issue a directive to courts on the seriousness of copyright crime
and the need to impose deterrent penalties in cases of
commercial piracy. Train police, prosecutors and judges on
these issues. Strengthen and impose maximum criminal fines.
4. Pass and implement an effective optical disc law to control
production, including monitoring and control on imports of
production equipment and raw materials (including
polycarbonate), and require use of unique source
identifiers (SID Codes) to track the location of
production.
5. Pass a law to implement the WIPO ``Internet'' treaties, and join
the treaties.
OTHER COUNTRIES WHERE PIRACY IS SEVERE
As noted, the U.S. recording industry also suffers major piracy
losses in Mexico, Taiwan, Thailand, Malaysia, Paraguay and Ukraine.
Mexico: Piracy of sound recordings in Mexico in 2003
resulted in $360 million in estimated losses, with piracy
levels of 61%. While the Office of the Attorney General has
provided excellent support, Mexico needs to improve
investigations and raids against pirates; organize actions with
municipal and state authorities that will limit the
distribution of pirate product through over 50,000 street
vendors; encourage prosecutors to bring cases swiftly and press
for maximum sentences in order to improve deterrence.
Taiwan: Over the last 5 years, piracy rates, including on-
line piracy, increased to the point of severely threatening the
economic health of other local and international copyright-
based businesses. Piracy of sound recordings in Taiwan resulted
in $58 million in losses in 2003, with piracy levels of 40%.
Taiwan should adopt needed amendments to its copyright law
including more effective and deterrent enforcement tools,
establish clear liability for secondary infringements online
and an effective notice and takedown system to fight all
traditional, digital and Internet piracy. Taiwan must prevent
adoption of negative amendments that would impose compulsory
licenses on internet transmissions of copyrighted works. Taiwan
should continue a sustained copyright enforcement campaign
throughout 2004 against all pirates, particularly against the
organized criminal syndicates and bring effective enforcement
against Internet piracy generally and make significant
enforcement inroads against peer-to-peer piracy.
Thailand: Our industry lost $26 million to piracy in 2003,
with a 41% piracy rate. Thailand is a capable of significantly
reducing piracy but, with rare exceptions, has not shown the
political will to do so. As a potential free trade agreement
partner, Thailand must provide much better copyright
protection. It should take swift action against its many pirate
optical disc factories; clean up street markets and malls and
keep them clean, and pass an effective optical disc law and
implementing regulations that make changes to the 2002 bill
needed to make it effective.
Malaysia: Piracy rates have declined markedly, from $110
million in 2002 to $40 million in 2003. Malaysia needs to do
more to ensure the sustainability of their enforcement efforts,
particularly by criminally prosecuting the more egregious
pirates. We also urge Malaysia not to impose price controls on
our products.
Paraguay: The new government seems well-intentioned. Yet,
enforcement efforts taken by Paraguayan authorities, however
well intentioned, continue to be largely ineffective. Piracy
rates remain at 99% and our losses exceed $150 million.
Paraguay must improve border enforcement by intercepting and
seizing pirate goods, enacting legislation to increase criminal
penalties for copyright infringement (elevating IPR violations
to be ``major crimes''), control the points of entry for the
importation of CD-R's, and audit for tax evasion large-scale
importers of blank CD-R's who are suspected suppliers to pirate
organizations.
Ukraine: Our industry loses $125 million annually and the
piracy level is 75%. Ukraine is a major transit country for
illegal optical discs that predominantly originate in Russia
and Ukrainian optical disc manufacturers are still suspected of
pirate activity. Despite private sector and USG assistance and
training, Ukraine continues to fail to provide adequate
regulation and effective enforcement of optical media
production and distribution facilities. Moreover, pirates
benefit from prosecutorial delays, slow and cumbersome criminal
proceedings and the absence of deterrent sentencing, as well as
very ineffective border enforcement.
CONCLUSION
On behalf of the entire music industry, I thank you for your
concern about the devastating effect of piracy on America's composers,
performers and producers and the thousands of hard working Americans
whose jobs are linked to our industry. Piracy robs Americans of the
fruits of their creative genius while negatively affecting our
international competitiveness. We urge you to speak out about this
problem to foreign leaders that you encounter in your work. Please
raise piracy, particularly with leaders of the countries mentioned in
my statement, at every opportunity. These governments must come to
realize that music piracy undermines our culture and their own. The
leaders of these countries will only take this matter seriously if they
come under pressure from every person in every branch of the American
government that piracy of the magnitude they currently permit is simply
unacceptable to the United States government, and that failure to
address it is not without consequence.
An official from WIPO recently said that: ``The correlation between
the progress of the human race and its ability to invent and innovate
is indisputable. Intellectual property is at the heart of the
endeavor.''
If intellectual property is the heart of progress, we are its soul,
and our very livelihood is dependent upon our ability to protect the
works that we create. Unless we are able to do something about rising
piracy levels across the globe, we will no longer have the ability to
invest in the creation of new recordings. That will represent a silence
that is most assuredly not golden.
Thank you.
The Chairman. Thank you very much, Mr. Bainwol.
I'd like to call now upon Mr. Robert W. Holleyman II,
President and CEO of Business Software Alliance, here in
Washington, DC.
Mr. Holleyman, will you please proceed?
STATEMENT OF ROBERT W. HOLLEYMAN II, PRESIDENT AND CEO,
BUSINESS SOFTWARE ALLIANCE, WASHINGTON, D.C.
Mr. Holleyman. Thank you, Mr. Chairman.
It's a pleasure to have the opportunity to talk this
morning with you and members of this distinguished committee
about some of the international challenges we face in fighting
the theft of business software.
The members of the Business Software Alliance produce
productivity software that is used in roughly 90 percent of the
global market. We're the leaders not only in products in
American business, but also the distinct leaders around the
globe.
I'd like to thank this committee for scheduling this
hearing, because the theft of intellectual property is, I
think, the single biggest problem facing the growth of the
American software industry, both internationally and it's also
a significant problem here in the United States.
Piracy is costing our industry billions of dollars a year.
It's resulting in lost tax revenues, it's resulting in lost
investments in future innovative products, and it harms the
economy.
I'd also like to thank members of this committee, the
Ranking Member, and Senator Allen for sponsoring anti-
counterfeiting measures--as well as Senator Allen's efforts to
ensure that the State Department has the tools to provide
training to our key allies overseas in fighting piracy. This
really is a collective and a global effort.
Why does it matter? In the U.S., the IT sector employs 2.6
million people, and they're in high-wage, high-skill jobs. We
raise $342 billion in taxes annually, and contribute $405
billion each year to the U.S. economy. But we can't achieve our
full economic potential, due, in large part, to the pervasive
problem of piracy. Piracy costs the software industry $2
billion in the U.S. alone; and worldwide each year piracy costs
the software industry in excess of $13 billion. Nearly 40
percent of the business software in use around the globe is
pirated.
One of the things that BSA has done to try to build more
partners internationally for our efforts is examine the extent
of the software piracy problem. We commissioned a report last
year by the respected research firm, IDC, that looked at more
than 50 countries and analyzed the impact of piracy on their
local economies--what it meant for local job losses, what it
meant for local tax losses. And what we concluded through the
IDC report is that if we could reduce global piracy rates for
software by ten points--and I would say that that is imminently
achievable--that could result in one-and-a-half million new
jobs around the world, $64 billion in new taxes, and $400
billion in economic growth. So there's a strong incentive, not
only for the U.S. to do this, but for our key partners to do it
as well.
Software piracy is very similar to many of the types of
piracy that my colleagues have talked about and are well
familiar with. We have counterfeit software. Internet piracy is
a rapidly-growing form of piracy for software that's quickly
moving to the peer-to-peer environment. Last year alone, we
sent 170,000 notices about piracy of our members' software that
we are finding through use of a web crawler, and we share the
concerns of our colleagues on those key issues. But I will note
that, distinguishable from our colleagues, the biggest form of
piracy that we face today for business software is
organizational end-user piracy, and that is when otherwise
legitimate businesses, governments, universities are deploying
far more copies of their business software than they have
licensed. And so we share the concerns of our colleagues here,
but we also have an additional concern that is very important
and unique to business software.
We do think technology will be part of the solution. Our
members are increasingly deploying very simple technological
activation tools to try to prevent the piracy of their
products. They are very consumer friendly, and they are very
fast--under a minute--to deploy. And we think that activation
technologies will reduce some of the casual copying of
software.
But specifically to make broader improvements for both
software and for all of our industries, we feel that there are
three things that are important. One is to ensure that there is
full TRIPS implementation. Governments have obligation under
the WTO TRIPS treaty to both have laws that protect
intellectual property, but also effective enforcement of those
laws. We believe that those two elements are critical, and the
effect will deter piracy. And that's why we believe and support
the 50 percent reduction in China that my colleagues have
talked about as being a necessary part of an effective
deterrence to meet TRIPS obligations.
The WIPO copyright treat implementation is also a key
negotiating objective for the U.S. Government should encourage
every nation to both ratify and implement that treaty to ensure
that there's adequate enforcement in the digital age. We also
believe that countries should adopt laws that are fundamentally
consistent with principles that we've adopted here after
ratifying the treaty, specifically the U.S. Digital Millennium
Copyright Act that contains key enforcement efforts, measures
that should be adopted by our trading partners. And, finally,
we have to devote adequate resources. They have to be dedicated
resources, they have to lead to the prosecution of piracy in
all its forms, and they need coordination, training of law
enforcement and judges, and cooperation across borders. And
that's why the U.S. opportunity for leadership in providing
help and training of both prosecutors and law enforcement
officials is critical globally.
The recent FTAs that the U.S. has negotiated have been
instrumental in setting the type of framework that the U.S.
will insist upon from all of our trading partners. IP chapters
have been included in all of those agreements. They reference
laws like the USDMCA, and they are critical to pave the way for
the type of progress we want to achieve.
In conclusion, Mr. Chairman, let me comment on a reference
that you made in your opening statement to international
partners. I returned from a trip to Japan last week. And I will
say that the software piracy rate in Japan has declined from 66
percent in 1994 to 35 percent in 2002. Now, that's still way
too high, and unacceptable, and it results in one and a half
billion dollars in losses a year. But we believe that Japan can
be, and should be, an ally for the U.S. Government on anti-
piracy issues.
When I was in Tokyo, I met with the Secretary General for
Intellectual Property Strategy, which is part of the cabinet
secretariat in Japan. He indicated to me that piracy of
Japanese intellectual property, particularly in China, was
paramount. And, in fact, for the first time, they were charging
their Ministry of Foreign Affairs with having their embassies
in places like Beijing establish intellectual property bureaus,
making this a chief negotiating objective for Japan.
So I do think that there are allies like Japan and other
countries who will engage with us as partners, and that we can
then use our multilateral tools and our bilateral tools to help
reduce software piracy and to help benefit the entire U.S.
intellectual property sector.
The work of this committee in all of those areas is
absolutely critical. We look forward to continued engagement.
Thank you for your help, and I appreciate your efforts on
behalf of the American software industry.
Thank you.
[The prepared statement of Mr. Holleyman follows:]
Prepared of Robert Holleyman
Good morning. My name is Robert Holleyman. I am the President and
CEO of the Business Software Alliance.\1\ The Business Software
Alliance is an association of the world's leading software companies
and their key hardware partners. BSA's members create approximately 90%
of the office productivity software in use in the U.S. and around the
world.
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\1\ The Business Software Alliance (www.bsa.org) is the foremost
organization dedicated to promoting a safe and legal digital world. BSA
is the voice of the world's commercial software industry and its
hardware partners before governments and in the international
marketplace. Its members represent one of the fastest growing
industries in the world. BSA programs foster technology innovation
through education and policy initiatives that promote copyright
protection, cyber security, trade and e-commerce. BSA members include
Adobe, Apple, Autodesk, Avid, Bentley Systems, Borland, Cisco Systems,
CNC Software/Mastercam, Entrust, HP, IBM, Intel, Internet Security
Systems, Intuit, Macromedia, Microsoft, Network Associates, RSA
Security, SolidWorks, Sybase, Symantec, UGS and VERITAS Software.
---------------------------------------------------------------------------
I thank the committee for the opportunity to testify here today.
The theft of intellectual property, commonly known as ``piracy,'' is a
matter of great concern to the business software industry. Piracy costs
the industry billions of dollars in lost revenues each year. It reduces
investment in creativity and innovation. And it harms national
economies including our own.
In my testimony, I intend to give a brief overview of the
contributions that the business software industry has made and
continues to make to the global economy and to describe how piracy has
undermined those contributions. I will next describe the evolving
challenges the software industry faces with respect to piracy and
explain the steps industry is taking to address these challenges.
Finally, I will summarize the lessons that we have learned regarding
how best to end piracy both here at home and abroad.
First, though, let me begin by thanking the members of the
committee for hosting this hearing. BSA and each of its member
companies commend you for recognizing the software industry's important
contributions to the global economy and the serious threat posed to the
industry by software piracy.
SOFTWARE INDUSTRY CONTRIBUTIONS AND THE IMPACT OF PIRACY
Information technology has changed the world in which we live. It
has made us more efficient, more productive and more creative. Software
has been at the heart of this technology revolution. Software
facilitates the dissemination of knowledge, drives global communication
and promotes continued innovation. It helps us to solve problems and
generate new ideas, gives us the power to create and to collaborate and
fosters self-expression in a range of spheres.
The information technology sector, driven by the software industry,
has also proven to be a remarkable engine for global economic growth. A
recent economic survey (attached) by IDC, a major IT research firm,
reports that worldwide the IT sector employs more than nine million
people in high-wage, skilled jobs, raises more than $700 billion in
taxes annually and contributes nearly a trillion dollars each year to
global economic prosperity. Between 1996 and 2002, the IT sector grew
26%, creating 2.6 million new jobs and adding a cumulative $6 trillion
to economies around the world. Each year, the packaged software sector
alone contributes in excess of $180 billion to the global economy.
While these numbers testify to the economic force of the software
industry, this sector has yet to reach its full economic potential.
This is due, in large part, to piracy. In 2002 we measured the global
piracy rate at 39%. In many countries the piracy rate exceeded 75%,
reaching highs of over 90% in some markets. Although piracy levels in
the U.S. historically have been low as compared to other countries, the
figure is far from negligible. In 2002 the U.S. piracy rate was 23%.
Nearly one in every four copies of business software in use in this
country today is stolen. There are few industries that could endure
theft of its products at this level.
Piracy inflicts significant financial harm on U.S. software
companies. Piracy in the U.S. alone cost the software industry almost
$2 billion in 2002. Worldwide, piracy led to estimated losses of over
$13 billion. Those figures cover only the market for packaged PC
applications. If our survey were expanded to cover the broader PC
market, including operating systems, we would expect to see even higher
dollar losses. Publishers invest hundreds of millions of dollars every
year and immeasurable amounts of creativity in designing, encoding and
bringing new products to market. They depend upon the revenue they
receive from those products to obtain a return on their investment and
to fund the development of new products. Piracy undermines this model.
Of course, the impact of piracy extends beyond lost sales. Pirates
steal jobs and tax revenues as well as intellectual property. The IDC
survey cited above found, as a general rule, that there is an inverse
relationship between software piracy rates and the size of the IT
sector as a share of the gross domestic product. As piracy is reduced,
the software sector grows. This creates a ripple effect that stimulates
other parts of the IT sector and of the economy overall. The equation
is a basic one: the lower the piracy rate, the larger the IT sector and
the greater the benefits. Putting this into real numbers, the IDC
survey concludes that a 10 point reduction in the global piracy rate
between 2002 and 2006 could deliver 1.5 million new jobs, $64 billion
in taxes and $400 billion in new economic growth. In North America
alone, benefits would include 145,000 new jobs, $150 billion in
additional economic growth and more than $24 billion in tax revenues.
Reducing piracy delivers indirect benefits as well. Society
benefits from new technological innovations. Consumers benefit from
more choices and greater competition. Internet users benefit from new
ways of communication and expanded creative content made available
online. And national economies benefit from enhanced productivity
leading to higher standards of living.
Piracy: Defining the Problem
In its simplest terms, ``software piracy'' generally refers to the
reproduction or distribution of copyrighted software programs without
the consent of the copyright holder. In most countries around the
world, the law makes clear that when a person copies or distributes
software, they must have authorization from the copyright holder
through a license agreement or otherwise, unless the copyright law
provides a specific exception for such activity. Otherwise, such
activities constitute piracy.
Piracy of software can take several forms:
Organizational end-user piracy
Counterfeiting of software and Internet piracy are significant
concerns to the software industry, just as they are for the
entertainment industry. However, the business software industry's worst
piracy problem traditionally has involved its primary users--large and
small corporate, government and other enterprises--that pirate our
members' products by making additional copies of software for their own
internal usage without authorization. We commonly refer to this
activity as ``organizational end-user piracy''.
Organizational end-user piracy occurs in many different ways. In
what is perhaps the most typical example, a corporate entity will
purchase one licensed copy of software, but will install the program on
multiple computers. Other forms of end-user piracy include copying
disks for installation and distribution, in violation of license terms;
taking advantage of upgrade offers without having a legal copy of the
version to be upgraded; acquiring academic or other restricted or non-
retail software without a license for commercial use; and swapping
disks in or outside the workplace. Client-server overuse--when too many
employees on a network have access to or are using a central copy of a
program at the same time, whether over a local area network (LAN) or
via the Internet--is another common form of end-user piracy.
It is impossible to describe the typical organizational end-user
pirate. This activity goes on in enterprises large and small, public
and private. While end-user pirates do not generally make copies for
resale or commercial distribution, they nonetheless receive an unfair
commercial advantage because the money that they save on legitimate
software licenses reduces their operating costs and increases the
profitability of their enterprise. In some cases, the piracy is
attributable to negligence and poor asset management practices.
Enterprises can also be victimized by unscrupulous computer
manufacturers and dealers who install copies of software onto the
internal hard drive of the personal computers they sell without
authorization from the copyright holder. In many cases, however,
organizational end-user piracy is undertaken willfully, with management
fully aware and supportive of the conduct.
Counterfeiting
Counterfeit software continues to pose a serious problem for BSA's
members. The most flagrant software counterfeiters produce CD-ROMs that
look very similar to those of the software publisher. These counterfeit
CD-ROMs often bear reproductions of the manufacturer's logo and other
labeling, and are distributed with counterfeit packaging, manuals,
security features and other documentation. Sophisticated counterfeiters
often replicate these CD-ROMs at dedicated pirate facilities, using the
same type of equipment and materials used by legitimate software
manufacturers. A single CD-ROM replication facility can produce more
than a million discs every day, at a per-unit cost of less than two
dollars. In other cases, counterfeit CD-ROMs have been traced to
``legitimate'' replicating plants that have contracted directly with
counterfeiters.
Over the past several years, BSA has seen a dramatic increase in
the amount of high quality counterfeit software imported into the U.S.
from overseas, especially from Asia. International counterfeiting rings
have become even more sophisticated in their methods of producing
``look alike'' software and components. For example, raids in Hong Kong
uncovered evidence of advanced research and development laboratories
where counterfeiters reverse-engineered the security features of at
least one member company's software media. Another approach used by
counterfeiters is to obtain genuine security features illegally, and
use them on pirate copies of software. All of these activities are
often connected with serious criminal organizations, as investigations
in Asia, Europe, and Latin America have revealed. Compared to other
similarly lucrative crimes like narcotics trafficking or arms dealing,
software piracy is easy to pursue and low-risk; chances of getting
caught are slim and, if caught, penalties are often light. Even in the
U.S., the criminal laws can and should be augmented to assure that
counterfeiters who engage in practices like the illicit use of genuine
security features can be brought to justice. Legislation like S. 2227
can serve as a model for other countries to follow in combating piracy,
and we thank Senators Biden and Allen for sponsoring this important
measure.
Compilation CD-ROMs also pose a problem. These CDs typically
contain a large selection of software programs published by different
software companies. Compilation CDs are typically sold for very little
money (relative to the value of the legitimate software) at swap meets,
flea markets, mail order houses, and over Internet auction and software
web sites. Compilation software can be replicated using a relatively
inexpensive (less than $1,000) CD recorder which, when connected to a
personal computer, employs a laser to ``burn'' installed software
programs onto a blank disc. Although compilation CDs do not exactly
replicate the packaging and logos of genuine software, unsophisticated
consumers are often led to believe that compilation CDs are legitimate
promotional products.
Internet piracy
The Internet is the future of global communication and commerce. It
creates tremendous opportunities for faster, more efficient and more
cost-effective distribution of information, products and services
across the globe. As technology innovators, BSA's members are at the
forefront of these developments. Software is not only sold and
delivered over the Internet, but also comprises a key component of the
Internet infrastructure and provides the basic tools used to offer
virtually any good or service online.
Unfortunately, in addition to creating significant social and
economic opportunities, the borderless and anonymous character of the
Internet makes it an ideal forum to engage in criminal conduct. As we
have seen, the emergence of the Internet has added a new dimension to
software piracy by permitting electronic sales and transmission of
illegal software on a global scale. Instead of pirated copies being
sold one at a time, millions of pirated copies can be downloaded every
day. Geography no longer matters. A pirate based in Washington, D.C.
can sell to someone in Australia or Norway with ease. Internet users
can readily employ a search engine to find both legitimate and
illegitimate sellers of software and the resulting transaction can take
place in the privacy of their home or office. The ability of Internet
pirates to hide their identities or operate from remote jurisdictions
often makes it difficult for right holders to find them and to hold
them accountable.
Over the past two years, BSA's Internet investigators have
witnessed the global spread and growth in the online piracy of
software. Today, computer users can and do download infringing copies
of BSA members' products from hundreds of thousands of locations on the
Internet--from websites in China to shared folders on peer-to-peer
systems in France. Pirated software is available on auction sites in
Brazil and is offered through spam email solicitations that originate
in Russia. To cite but one figure, during the month of February, BSA's
Internet crawler system identified 173,992 infringing software programs
being offered in 149 different countries.
There are three primary forms of Internet piracy: (i) the
transmission and downloading of digitized copies of pirated software,
through web sites, IRC channels, newsgroups and peer-to-peer systems;
(ii) the advertising and marketing of pirated software on auction and
mail order sites and through e-mail spam, involving delivery on
physical media through the mails or other traditional means; and (iii)
the offering and transmission of codes or other technologies used to
circumvent copy-protection security features. There are, of course,
many variations on these general themes. All of these activities cause
significant harm to our industry, as they do to other creative sectors.
Among these variants of Internet piracy, peer-to-peer piracy (P2P)
has been the subject of significant public debate over the past two
years. BSA takes P2P piracy very seriously. We are engaged in concerted
action to address this threat. While BSA and its members deplore this
activity, however, we believe it is essential to distinguish the
illegal uses of the technology from the technology itself. There is no
doubt that P2P technologies have been abused to spread illegal content
including pirated software, pornography and personal information. At
the same time, however, P2P technologies have also created exciting new
opportunities for legitimate users. One of the earliest examples of P2P
technology is the SETI@Home project, which uses over 4 million
computers worldwide to search radio signals captured from space for
signs of intelligent life. Stanford is using P2P technology to help
find cures for diseases such as Alzheimer's, cystic fibrosis and BSE
(mad cow disease). Software companies are also looking to P2P
technologies to undertake routine tasks such as distributing updates
for installed software including anti-virus and firewall software; in
this way, software can be constantly updated in response to new
Internet threats.
Industry Efforts against Piracy
The Business Software Alliance and its individual members devote
significant financial and human resources to preventing piracy
worldwide. Our efforts are multi-faceted.
First, we are engaged in extensive educational efforts, designed to
increase public understanding of the value of intellectual property and
to improve overall awareness of copyright laws, on a global basis. For
example, in March BSA launched ``Netrespect,'' a free educational
resource to encourage responsible Internet behavior amongst young
people. This initiative, first rolled out in Ireland, responds to a
growing need to promote cyber education, beginning with encouraging
teenagers to value creativity, respect intellectual property and
practice responsible computer behavior. In the U.S., BSA offers
parents, teachers and students a variety of free materials and tools on
cyber ethics, including its curriculum, ``Play It Safe In Cyberspace.''
The curriculum is available for free download at
www.PlayitCyberSafe.com and was co-produced by the children's publisher
Weekly Reader. Since its initial distribution in 2002, the curriculum
has reached more than 13 million kids, parents and teachers. In
addition to our broad-reach educational campaigns, BSA offers many
tools to facilitate compliance. Among other resources, we provide
guides and technologies that assist end-users in ensuring that their
installed software is adequately licensed. We likewise offer tips to
consumers so that they can be confident that the software they acquire
on-line is legitimate.
Second, we work closely with national and international bodies to
encourage adoption of laws that strengthen copyright protection and
promote an environment in which the software industry can continue to
innovate. BSA has provided input into the most important international
agreements protecting intellectual property, including the World
Intellectual Property Organization's Copyright Treaty and the World
Trade Organization's Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPs). We are active at the national level as well,
both in the area of law reform and through the provision of training
and other assistance to public authorities including police,
prosecutors and judges. And we have worked directly with governments
worldwide, including the U.S. Government, to adopt and implement
software asset management programs in order to prevent software piracy
in the public sector and to set an example for the private sector to
follow.
Finally, where appropriate, BSA undertakes enforcement actions
against those involved in the unlawful use, distribution or sale of its
members' software. On the Internet, for example, BSA conducts a far-
reaching ``notice and takedown'' program. Operating on the basis of
referrals from members, complaints from consumers and infringing
activity identified through our own proactive searches, BSA's team of
Internet investigators identifies infringing sites and takes action to
have these sites removed or disabled. Last year alone, BSA sent tens of
thousands of notices to Internet service providers. BSA's members have
also filed suit against individuals offering pirated software for free
download and over auction sites. BSA also engages in civil litigation
against corporate end-users who are using our members' products without
authorization. To this end, and consistent with the WTO TRIPs
Agreement, we conduct civil ``ex parte'' (surprise) searches against
corporate targets across the globe. We also work closely with local,
national and international law enforcement bodies to protect the
intellectual property rights of our members.
Of course, technology plays a role in protecting intellectual
property rights as well. Content owners must take responsibility to
ensure that their works are not easily subject to theft, rather than
rely wholly on others to protect their intellectual property.
Accordingly, BSA's members have invested hundreds of millions of
dollars and thousands of engineering hours in developing technologies
to protect content and intellectual property. Our companies have worked
diligently, voluntarily and cooperatively with content providers and
consumer electronics companies to create systems that will foster the
legitimate distribution of digital content. Experience clearly
demonstrates, however, that there is no silver bullet technological
solution that will solve the problem of piracy. Nor are government
mandates the answer. Technology develops most effectively in response
to market forces; government mandates would stifle innovation and
retard progress.
The Role of Government
The ability of countries to reap high economic benefits from the
software sector is highly dependent on their ability to promote
protection and enforcement of intellectual property rights.
Multilateral and bilateral trade alliances must be fully backed by
governments' firm commitment to respect and enforce intellectual
property rights within the public and private sectors; to treat the
manufacture and sale of counterfeit software as a crime warranting
tough enforcement and penalties; and to ensure that its laws and
enforcement regimes adequately address all forms of piracy. This
committee can help promote this commitment to intellectual property
protection by:
- ensuring that governments worldwide fulfill their obligations under
the WTO TRIPs Agreement by adopting and implementing laws that
provide for effective enforcement against piracy;
- encouraging implementation of the WIPO Copyright Treaty and strong
criminal enforcement of the measures therein; and
- urging countries to dedicate resources to the investigation and
prosecution of piracy in all its forms, as well as to training,
technical assistance and mutual cooperation.
Strong, workable enforcement regimes, as required by TRIPs
While substantive copyright protections are essential to bring
piracy rates down, experience has demonstrated that these protections
are meaningless without adequate mechanisms to enforce them. The 1994
World Trade Organization Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPs) provides the framework for such
mechanisms.
TRIPS requires that intellectual property rights enforcement
regimes meet specific ``results-oriented'' performance standards.
Specifically, each member's enforcement regime must ``permit effective
action against infringement'' and ``constitute a deterrent to further
infringements.'' Moreover, enforcement procedures cannot be
``unnecessarily complicated or costly,'' or ``entail unreasonable time
limits or unwarranted delays.'' Thus, in assessing TRIPs compliance, it
is critical to review and monitor all aspects of a country's
enforcement regime, including the adequacy of procedural remedies and
penalties, as well as their effectiveness in deterring piracy.
In addition to establishing general standards for enforcement,
TRIPs specifically requires that countries provide an effective civil
system of enforcement, provisional remedies to preserve evidence,
extensive customs procedures to stop infringing goods at the border,
and criminal penalties for counterfeiting and piracy. Given the
emergence of organized criminal counterfeiting operations, it is
imperative that all governments fulfill their obligation under the WTO
TRIPs Agreement to enact and enforce strong criminal remedies against
piracy, including tough, effective penalties. Moreover, to combat
rampant piracy among corporate end-users, these criminal laws must be
supplemented by civil remedies that allow software publishers to obtain
civil ``ex parte'' search orders and adequate damages, without
significant judicial delays or overly burdensome bond requirements.
Full and faithful implementation of the WIPO Copyright
Treaty
In direct response to the growing threat of Internet piracy, the
international community in 1996 adopted the WIPO Copyright Treaty to
ensure protection of copyrighted works in the digital age. The Treaty
came into force just over five years later, in March 2002, following
ratification by 30 member countries. Among other measures, the WIPO
Treaty (i) makes clear that a copyrighted work can be placed on an
interactive network only with the consent of the relevant right holder;
(ii) makes clear that the Berne Convention's reproduction right applies
to electronic uses of works; (iii) protects all forms of expression of
computer programs; and (iv) prohibits ``hacking'' of technical
protections that have been applied to works. These measures ensure that
authors' rights will be respected in cyberspace.
The United States was one of the first countries to implement the
WIPO Copyright Treaty by enacting the Digital Millennium Copyright Act
(DMCA). In addition, Congress has enacted legislation that criminalizes
online distribution of pirated software and increases penalties for
Internet piracy. To ensure that these laws have real impact, U.S. law
enforcement agencies have elevated the priority given copyright
offenses including Internet piracy, resulting in important prosecutions
against criminal pirates and counterfeiters. Following on these
measures, the number of Americans on the Internet has nearly doubled,
from 70 million people to 137 million. The copyright industry has
expanded at a rate of 10% each year. And last year, copyright
industries contributed $535 billion dollars to the U.S. economy--more
than 5% of the gross domestic product.
Similar measures are urgently needed need on a global basis. While
many countries have taken steps toward improving and enforcing laws in
this regard, much more remains to be done.
Dedicated resources to fight piracy
Ending the theft of intellectual property is a low priority in many
countries. Piracy investigations are often delegated to law enforcement
units with little or no training in intellectual property crime and
given local rather than national attention, in competition with many
other types of crime for attention and resources. Although copyright
crimes often involve cross-border activities, there is frequently a
lack of coordination among various countries' law enforcement agencies
when investigating and prosecuting pirates. Even where procedures for
cross-border coordination do exist, such procedures can be cumbersome
and ineffective.
To ensure effective action against piracy, national authorities
should establish specialized intellectual property enforcement units at
a national rather than local level, who can react quickly and
knowledgeably to incidents of IP crime. Better training of law
enforcement and the judiciary is equally important, to ensure these
bodies are equipped to deal with these cases. Likewise, better cross-
border cooperation among police and other government officials, and
improved availability of evidence and judgments for cross-border use,
are also essential.
In this regard, BSA would like to take this opportunity to thank
Senator Allen for the amendment he sponsored to the foreign assistance
bill. This amendment authorizes the Secretary to pursue various
activities to combat piracy in non-OECD countries and calls for the
appropriation of $5 million for the training of law enforcement and
judicial authorities and the provision of assistance to these countries
in complying with international treaties on copyright. Efforts like
these promise to reduce global piracy and protect American industry and
American innovation.
CONCLUSION
Software contributes profoundly to the world in which we live. It
allows us to share, to create and to innovate in ways previously
unimaginable. Software-driven productivity strengthens national
economies, including our own, and makes them more competitive and more
prosperous. Unfortunately, piracy prevents the software industry from
realizing its full potential. We urge the U.S. Government and other
governments worldwide to help us solve this problem. We thank you for
the efforts made to date.
Thank you again for the opportunity to testify here today. I look
forward to your questions and to continued dialogue on this important
topic in future.
The Chairman. Thank you very much, Mr. Holleyman.
I'd like to call now upon Mr. Douglas Lowenstein, President
of the Entertainment Software Association.
Mr. Lowenstein?
STATEMENT OF DOUGLAS LOWENSTEIN, PRESIDENT, ENTERTAINMENT
SOFTWARE ASSOCIATION, WASHINGTON, D.C.
Mr. Lowenstein. Mr. Chairman, thank you.
It's always difficult to follow a panel like this, because
they've pretty much said everything there is to be said, and it
probably is in everyone's best interest for me to say I just
agree with everything that they've said, and move on, although
I'm not sure I agree with the part of Jack's testimony where he
talked about the entrails of his written testimony. I'm not
sure about that part.
(Laughter.)
Mr. Lowenstein. I am really glad to be here, Chairman
Lugar, Senator Biden, Senator Allen, Senator Alexander, and
Senator Voinovich, and Senator Boxer. All of you have played
very important leading roles in protecting intellectual
property and helping to wage this important battle.
You know, two years ago, we were here to talk about the
problems that global piracy causes our entertainment software
industry, and since we last appeared, when Senator Biden
actually released his report on the subject, there has been
progress toward implementing some of the report's key
recommendations. But overall piracy levels and the underlying
problem of deeply entrenched criminal enterprises controlling
the worldwide piracy trade remain as serious as ever.
The ESA represents the $10 billion U.S. video and computer
game industry. We have members, some of the leading names in
software and technology in the world today--names like Sony,
Microsoft, LucasArts, Electronic Arts, the fourth largest
capitalized software company in the world. They're all part of
this growing industry. Collectively, our members produce much
of the $25 billion in software that powers this worldwide
entertainment software market. We've doubled in size since the
mid 1990s, and we're one of the fastest growing economic
sectors in this country, generating thousands of creative and
technology jobs here.
It takes as long as three years and an average of anywhere
from five- to ten-million dollars, and sometimes double and
triple that, to make a blockbuster video game or computer game
these days. But, unfortunately, in our highly competitive
market, very few of the roughly 1400 games published a year
actually turn a profit. And that brings me to piracy. Billions
of dollars worth of pirated entertainment software circulate
freely in markets abroad, countries like China, Malaysia,
Thailand, and Russia, Brazil, as you've mentioned, all host
pirate optical disc and pirate cartridge factories that flood
the world with illegal games. Sophisticated criminal
enterprises are behind much of the pirate game trade in these
countries, and sophisticated criminal enterprises are also
behind the pirate trade in countries like Mexico and Spain.
Like our colleagues here, we have market access problems in
countries like China, and my written statement does go into
some great detail, on a country-by-country basis, as to where
we face problems.
But, at the end of the day, all this piracy essentially
means that distribution of legal copies in large parts of the
world is impossible. Essentially, our industry competes now in
only four regions--Western Europe, North America, Australia,
New Zealand, and Japan. Much of the rest of the world is
literally shut down due to illegal copies. And if you'd just
imagine the growth numbers I was just talking about that we're
generating in just a tiny portion of the world, you can imagine
how much growth is still out there if we can get our hands
around this problem.
But, clearly, piracy and the revenue it siphons away from
this industry makes it that much more difficult to generate the
revenue required to fund the R&D to create the top titles
required to power the market.
I want to focus, rather than on a country-by-country
discussion of our problems, on a couple of specific
recommendations, perhaps to respond to some of the comments you
made in your opening statement, Mr. Chairman. First, I would
like to say that despite the very determined and effective
efforts of the Justice Department, the FBI, the Customs Service
to fight IP crimes in recent years--and these efforts have been
quite heroic and quite important--the bottom line, in my view,
is that these agencies can only do so much as they face
understandably competing priorities that divide their energies.
But, in my view, given piracy's enormous cost to our economy,
given the increasing evidence that some terrorists are using IP
piracy and counterfeiting to finance their operations, and
given the fact, as Jack said, that America's copyright
industries represent more than 5 percent of our gross domestic
product, it's time to bring to this fight against piracy the
same kind of laser-like approach which the Drug Enforcement
Administration has aimed at global drug production and
smuggling operations.
So we recommend that this committee consider directing our
government's IP enforcement resources be pooled into a
centrally-directly campaign against international pirate
operations. We also know that criminal organizations that are
deeply involved in this hard-goods piracy are generally located
in countries where local law enforcement officials are
unwilling or unable to target them in a meaningful way. So we
recommend that the single-minded enforcement effort I just
suggested be combined with a clear and unambiguous directive to
our law enforcement community to pursue investigations and
enforcement actions against pirate syndicates operating beyond
our borders, and these law enforcement agencies should seek
whatever additional authorities they need from this Congress to
conduct those operations. America's top law enforcement
agencies should explore the most effective and cooperative
ways, consistent with national sovereignty, to assist local
authorities in bringing criminal enterprises to arrest and
detention.
I just can't emphasize this more. We will be here year in
and year out talking about this problem unless something is
done to get at the root of it, which is criminal enterprises
that are masterminding the global piracy trade. That is the
root of the problem.
Now, we have major issues, of course, on the Internet, and
that also ties into organized crime as perhaps we might get
into.
My final suggestion would be the creation of a stand-alone
intellectual property office within the USTR that has dedicated
and adequate staff that's charged not only with negotiating
strong IPR agreements--and they've done a great job with that
over the years in bilateral negotiations, with FTAs and so
forth--but we also have to make sure these agreements are
enforced, as well. Much could be gained from holding countries
to strict compliance with the obligations they have already
signed up to, whether under TRIPS, whether they're under
regional agreements, or whether they're under bilateral FTAs.
Again, I want to be clear, USTR has done an extraordinary job
negotiating these free-trade agreements and other agreements,
but it relies on personnel from other federal agencies to
perform its monitoring duties. This approach is clearly not
optimal. Without constant and consistent oversight, we cannot
trust many countries to fulfill their IPR treaty obligations,
and, therefore, we risk sacrificing the progress we've achieved
through these hard negotiations that our men and women that
Jack referred to at USTR and the State Department and elsewhere
have worked so hard to bring to fruition.
I also want to align myself particularly with Mitch's
comments about the use of the GSP authority. I think it's a
very, very powerful lever for us to use against countries that
are simply not stepping up to their responsibilities.
In the end, global piracy, as we've all made clear,
undermines our economic security. And we are so grateful, Mr.
Chairman and the members of this committee, that you continue
to dedicate time and energy to solving this problem,
particularly when this country and this committee is addressing
so many other serious threats to our national security.
Thank you.
[The prepared statement of Mr. Lowenstein follows:]
Prepared Statement of Douglas Lowenstein
I. INTRODUCTION
Chairman Lugar, Senator Biden, and members of the committee, I
thank you for the opportunity to address issues related to
international intellectual property theft and its devastating impact on
the entertainment software industry. I appreciate the opportunity to
testify again before this committee on these important issues, as I did
in February 2002, when then-chairman Biden released a very
comprehensive and compelling report on the problem of international
intellectual property piracy.
The Entertainment Software Association (ESA) serves the business
and public affairs interests of companies that publish video and
computer games, including games for video game consoles, personal
computers, handheld devices, and the Internet. ESA members published
more than 90 percent of the $7 billion in entertainment software sold
in the United States in 2003. In addition, ESA's member companies
produced billions more in exports of American-made entertainment
software, helping to power the $25 billion global game software market.
The entertainment software industry is one of the nation's fastest
growing economic sectors, more than doubling in size since the mid-
1990s and generating thousands of highly skilled jobs in the creative
and technology fields.
Our industry makes a tremendous investment in its intellectual
property. For an ESA member company to bring a top game to market, it
often requires a team often exceeding one hundred professionals in
size, including writers, animators, musicians, sound engineers,
software engineers, and programmers, to create an end product which,
unlike any other form of entertainment, is interactive, allowing the
user to direct and control the outcome of the experience. On top of an
average $5 to 10 million in research and development costs, publishers
may invest another $5 to $10 million to market and distribute the game,
with some games totaling $20-30 million in total costs. The reality is
that only a small percentage of these titles actually achieve
profitability, and many more never recover their front-end R&D costs.
In this type of market, it is easy to understand how devastating piracy
can be as it siphons the revenue required to sustain the enormously
high creative costs necessary to produce successful products. If the
profits from a hit game are stolen by pirates, the games--and the
jobs--subsidized by those profits are jeopardized.
In this testimony, I will review the many international
intellectual property piracy challenges we face today. I will also look
back to the recommendations we made two years ago in our testimony
before this committee, as well as some of the recommendations in
Senator Biden's report, to assess the progress made on these to date,
and suggest further steps the government can take to ensure greater
protection of our industry and of one of this nation's most valuable
assets--its intellectual property.
II. THE PIRACY PROBLEM
Due in part to the immense popularity of video games, entertainment
software piracy is a widespread problem in most countries throughout
the world. Piracy of entertainment software spans a wide range of
activities in all types of venues, both public and private. For ease of
analysis, however, we classify such activities into two general
categories: hard goods piracy (involving production and distribution of
physical copies) and Internet piracy (involving the reproduction and
transmission of copies in digital form). As pirate activities involving
game software continue to multiply, billions of dollars worth of
pirated entertainment software products circulate freely in markets
abroad, preempting the possibility of legitimate distribution channels
taking root and growing into healthy environments for ESA members'
games.
Hard Goods Piracy
Entertainment software programs are produced for a number of
different platforms, diverse in nature and technology, including video
game consoles, personal computers, handheld devices, and the Internet.
Hard goods piracy covers a variety of activities, the most pernicious
involving the illegal manufacturing of (1) counterfeit optical discs
for use in personal computers (PCs) and game consoles such as Microsoft
Xbox and the Sony PlayStation2, and (2) counterfeit game cartridges for
handheld devices such as the Nintendo Game Boy and Game Boy Advance.
Large-scale manufacturing of pirate games, whether in optical disc
or cartridge form has been a particularly damaging type of piracy
because of the involvement of organized crime, which has facilitated
the export and distribution of the pirate products in countries around
the world. The components of game cartridges (circuit boards, plastic
casings, counterfeit labels, packaging) are often each manufactured
separately in small discrete workshops in China and other countries in
southeast Asia, and then shipped abroad, either to be assembled in
workshops in the country where the games are to be sold, or in
countries where they are subsequently shipped in assembled form to
other countries where the games are then sold.
Optical media piracy is a particularly significant problem for the
industry, as it impacts games published on at least three platforms:
PCs, Xbox and PlayStation2. In many parts of the world, especially
Malaysia, China, Thailand, and Russia, pirate optical disc factories
produce huge numbers of illegal copies of popular games. In its Special
301 report to the Office of the U.S. Trade Representative (USTR) this
February, the International Intellectual Property Alliance (IIPA) (of
which ESA is a member) reported the unrelenting growth in the number
and capacity of optical disc production lines across the globe,
particularly in Southeast Asia. In addition to large-scale replication
of optical discs, the game industry has been confronted with an
explosion in the number of small-scale operations involving the
``burning'' of games or copying on CD and DVD burners, not only in
Asia, but in Europe and Central and South America as well. Although
each burning operation makes pirate copies on a much smaller scale than
an optical disc replication line, a growing swarm of pirate burning
centers in an individual market can cumulatively have an equally
devastating effect in elevating local piracy levels.
Hard goods piracy for game consoles is facilitated materially by
``mod chips'' \1\ and other circumvention devices which, when used or
installed, are designed to bypass the technological protection measures
in game platforms that limit their use to legitimate games. Mod chips
for the Xbox and PlayStation2 and the Flash Advance Linker and similar
devices for Game Boy and Game Boy Advance games are routinely marketed
in countries around the world to enable the use of pirate games on
these game systems. Many of these devices (as well as installation
services there for) are marketed and sold in the same venues that offer
the pirate game copies whose use they are intended to permit. As
described below, these circumvention devices also contribute to
increasing online piracy involving game software.
---------------------------------------------------------------------------
\1\ ``Mod chips'' are a particular type of circumvention device
that are installed into video game consoles chiefly for the purpose of
rendering the console capable of playing pirated games.
---------------------------------------------------------------------------
As noted earlier, criminal enterprises have become deeply involved
in the manufacture and global export and distribution of pirate games.
In its 2004 Special 301 report released in February, the IIPA reported
that because of the immense profits that pirates can make by stealing
intellectual property, criminal organizations have taken over pirating
operations in many countries, including Malaysia, Taiwan, Russia,
Mexico, and Spain. Such mass counterfeiting activity requires
relatively little capital investment, enjoys substantial profit margins
on each counterfeit product and poses little risk of arrest or
imprisonment as criminal sanctions for intellectual property violations
are rarely as severe as those for other kinds of criminal activity.
This is especially true compared to the risks associated with
trafficking in other forms of contraband, such as guns or narcotics.
Indeed, pirate enterprises seek out countries offering ``friendly''
host environments in which to base their counterfeit manufacturing
operations. These countries typically have outdated intellectual
property laws, few enforcement resources (if any) devoted to
intellectual property, a lack of understanding of intellectual property
among police, prosecutors and judges, and no provision for deterrent
penalties for intellectual property violations. In addition to the
``protection'' afforded by a weak intellectual property enforcement
regime, the organizations are often well-entrenched in these host
countries, enjoying a fair measure of social and political influence at
the local level. In some countries, these large pirate enterprises
operate in the open, raking in millions in illegal profits. For
example, Professor Daniel Chow of Ohio State University said in recent
congressional testimony that the intellectual property piracy problem
in China has reached a crisis level, with virtually the entire economy
of the Chinese city of Yiwu in Zhejiang Province now based on the trade
of pirated products.
Once the pirate product is manufactured, the global movement of
such illegal items across international borders is one of the general
strengths of organized crime, as they are often well-practiced in
distributing other kinds of illegal products. These organizations are
able to export not only to countries within their region but also to
countries in regions on the other side of the world. Malaysian pirates
are among the most efficient exporters of counterfeit optical disc
products, as we have seen their pirate games turn up throughout the
Western hemisphere from Canada to Argentina, as well as South Africa,
Western Europe and Australia. Russian pirates are expert at moving
illegally replicated product across borders and into nearby Eastern
European markets, including Poland. China is home to a number of
enterprises exporting pirate Game Boy and Game Boy Advance products.
The cumulative harm caused by organized crime's global trade in
illegal game products is staggering, with billions of dollars spent
annually on pirate copies of games instead of the legitimate versions.
These organizations are able to use illegal versions of games
downloaded from the Internet within days of a legitimate game's release
in Japan or the U.S. to manufacture and export thousands of copies to
countries where the game has not even yet been released. It is not
uncommon to see pirate copies of a game available on the streets of
many Southeast Asian cities within the first week of the game's
release. Needless to say, such activity has destroyed any chance for
the establishment of legitimate distribution channels in many countries
throughout the world, forcing game software publishers to rely on a
restricted number of markets from which to earn back their investment
in the games they release. Moreover, piracy's effective pre-emption of
legitimate distribution in many countries effectively serves to
exacerbate the U.S. trade deficit as U.S. game publishers are unable to
export their products to these markets.
Even with the high rate of piracy in many countries, ESA members
are not letting the absence of an equitable intellectual property
enforcement environment preempt efforts to get into these markets.
Instead, they are endeavoring, against difficult odds, to introduce
legitimate game product into these local markets, as they understand
the importance of the availability of legitimate product in the fight
against game pirates. However, such market entry efforts can only be
sustained for a limited period of time without being complemented and
supported by legal and enforcement regimes that deter pirate activity
through the swift and effective application of meaningful penalties.
Internet Piracy
Internet piracy of game software is very damaging to the
entertainment software industry as it frequently serves to accelerate
the access of pirate manufacturers and replicators to the latest
releases of games. Generally, interactive game piracy originates on the
Internet through the activities of one or more online groups, commonly
known as ``warez'' groups, which are usually composed of individuals
spread across not only different countries but different continents. A
number of warez groups exist and function with a special focus on game
software products.
The pattern for a typical warez group's pirate activities is as
follows: A member of the group will purchase a game the first day of
its release, first thing in the morning--if they haven't already
obtained a pre-release beta version. As soon as they're back home, they
run a program that produces a mirror copy of the CD, perhaps a 10-15
minute process. The group member will then transmit this mirror copy,
usually through a broadband line, to another person in the group, known
as a ``cracker.'' Within an hour or two of release, the cracker is hard
at work breaking the technological protection measures placed on the
game which, depending on his or her skill, can be completed within 12
hours or less. The cracked game is then ready for distribution via
download and use without an original disk. By late evening of the
release day, IRC and newsgroups are advertising the cracked game's
availability to Internet users across the world. Depending on demand,
the cracked game may also be sold to pirate manufacturers for anywhere
from a few thousand dollars to considerably more. Thus, frequently
within 24 hours of a game's release, the pirate replication factories I
described earlier may be stamping out tens of thousands of illegal
copies for shipment throughout the world, with thousands of additional
downloadable copies of the game available on hundreds of Internet sites
across the world.
Although Internet piracy has been a serious problem for several
years, two technological factors have exacerbated the use of the
Internet for the reproduction and distribution of pirate games: (1) the
explosive growth of broadband access to the Internet and (2) the
emergence and popularity of peer-to-peer (P2P) networks.
While broadband Internet communication has created tremendous
opportunities for consumers to enjoy high-speed communication and
entertainment, it has also been a boon to pirates. High-speed Internet
has given pirates the ability to readily distribute entertainment
software around the globe. As digital files of games are large (600-900
megabytes), downloading game files over dial-up access to the Internet
requires days of uninterrupted connection, as dial-up permits receipt
of only a small amount of digital information at a time. However, with
the advent of broadband connections, download times for such files are
dramatically reduced, with the ability to download entire game files in
a matter of hours as opposed to days. In part, this explains why we
have seen a high incidence of downloadable game files on university
networks, as the great bandwidth available to students facilitates
their accessing their favorite games at no cost to them. Compounding
the accessibility and ease of downloading offered by broadband access
has been the astronomical increase in the number of households enjoying
such access across the world.
The accelerating spread of broadband access to the Internet has
been paralleled by the increasing use of P2P networks by larger
segments of the global population. P2P networks, such as Kazaa,
eDonkey, and DirectConnect, have become active interchanges for the
flow of pirate game files among network users. The use of such networks
for transmission of music and movie files is rapidly expanding to
include the copying and downloading of the latest pirate game releases,
many of which originated in the warez group channels. Although warez
group communication channels are usually tightly controlled with
restricted access, it does not take long for the latest pirate game
files to trickle out of these environments onto P2P networks where the
versatility and efficiency of these networks fosters the rapid copying
and dissemination of files among their users. In addition, over the
past year, new distributed network technologies, such as BitTorrent,
have further enhanced the ability of networked users to access and
download pirate game files and other illegal content. Use of BitTorrent
for illegal file transmissions is particularly damaging as it functions
as an unusually powerful and efficient P2P system, making download
times shorter.
Although pirate game files are available on a number of different
Internet protocols, such the World Wide Web, ftp sites, IRC channels,
auction sites and Usenet newsgroups, the incidence of game files on P2P
networks has far surpassed these. In the more than two years that have
passed since this committee last convened a hearing to review the
global intellectual property piracy situation, our online investigators
have seen astronomical growth in the incidence of illegal game files on
P2P networks. In one month earlier this year, based on a limited number
of game titles, our online monitoring service reported more than
477,000 new cases of P2P piracy (involving more than one million
infringing files) as compared to just over 12,000 new cases on all
other protocols combined.
In addition to fostering and featuring the downloading of pirate
game files, there are a number of other ways in which the Internet is
used to facilitate piracy of entertainment software products. The
Internet is also used as an advertising vehicle for services that offer
sales of pirated hard copies of disc and cartridge-based games,
circumvention devices, and circumvention services. As noted above,
installation of such circumvention devices In PlayStation2 and Xbox
consoles allow people to obtain their pirate PlayStation and Xbox games
through illegal downloads and then burn these onto CD-Rs or DVD-Rs for
use in the chipped consoles.
Internet Cafes
There has also emerged another rapidly growing global trend that
effectively represents a convergence of the parallel problems of hard-
goods and Internet piracy. Countries throughout the world have seen an
explosion in the number of Internet cafes, establishments that offer
for a fee the temporary use of computers on their premises to access
the Internet or any other applications resident on these computers,
including game software. It is clear that the ability to play games on
computers is an important attraction for these businesses as game-
playing attracts a great number of consumers who may not be able to
play games at home for a number of reasons. Moreover, as the computers
in Internet cafes are usually connected to the Internet (frequently via
a broadband connection) these offer the additional benefit of being
able to play games online against other Internet users. Unfortunately,
the operators of these establishments are frequently engaged in
infringement themselves, either loading pirate versions of games onto
their computers, or buying one legitimate copy of a game and loading
that one copy onto the fifty computers in their cafe (instead of buying
fifty legitimate copies). In addition, many cafe operators turn a blind
eye to customers who use their facilities to commit further
infringements, such as burning software and other copyrighted works
onto CDs. Internet cafes are multiplying quickly in a number of
countries in Asia, Eastern Europe and Central and South America. In
China, there are estimated to be more than 200,000 Internet cafes in
operation, many housing between 100 and 300 seats. This emerging form
of piracy should be addressed by these countries at both policy and
operational levels, as these cafes are likely to be, for the
foreseeable future, the way that much of the world obtains access to
the Internet.
III. GOVERNMENT RESPONSES TO THE PROBLEM
More than two years ago, when this committee held a hearing on the
topic of global intellectual property piracy, ESA (then IDSA) presented
a number of recommendations on possible government action for the
committee's consideration. In addition, Senator Biden issued a report
which also offered a number of recommended solutions to help address
the problem. Some of these solutions have been pursued, while others
have not. We think it would be useful to review all of these
recommendations and offer our assessment as to which of these still
have relevance and deserve the committee's continued consideration and
support and which of these have been overtaken by other developments
and therefore require re-examination and modification.
One of ESA's principal recommendations at that time was the renewal
of the GSP trade benefit program, as, at that time, the GSP program had
not been renewed, jeopardizing the trade leverage offered by the
possibility withholding of GSP benefits from countries that fail to
provide adequate intellectual property protection. This concern was
consistent with Senator Biden's recommendation that the U.S. government
take maximum advantage of existing trade mechanisms to motivate U.S.
trading partners to improve their intellectual property protection
efforts. Fortunately, last year, Congress renewed the GSP program,
reinstating the availability of such leverage for the U.S. government.
Currently, there are a number of GSP beneficiary countries under active
review which are scheduled for resolution in the coming year, including
Brazil, the Dominican Republic, Kazakhstan, Lebanon, Russia and
Uzbekistan. We continue to believe that the withholding of GSP benefits
can serve as a primary motivator for countries to make serious efforts
to reduce local intellectual property piracy and therefore should be
used purposefully to obtain material improvements in the results of our
trading partners' intellectual property enforcement efforts.
Another recommendation in Senator Biden's report regarding the use
of free trade agreements (FTAs) to obtain country commitments to
elevate their levels of intellectual property protection has proven to
be prescient as the past two years have seen substantial efforts and
progress achieved on this front. The U.S. has since signed free trade
agreements with Singapore, Chile, Morocco, Australia and most recently
Bahrain and the countries of Central America, all of which contain
specific commitments for the countries to elevate their intellectual
property laws and enforcement efforts to the highest levels. Although
in most cases these commitments have yet to be implemented, we believe
that these will have very beneficial results in the near future,
particularly if the U.S. can supplement these with training and
resources, as described below. These FTAs have also helped advance
another of ESA's earlier recommendations regarding getting countries to
adopt statutory notice-and-takedown provisions with respect to online
piracy, under which Internet Service Providers (ISPs) will be subject
to notices from rights holders regarding the infringing activities of
their subscribers. All of the FTAs negotiated by the U.S. have included
a commitment to adopt such a system, which will thereby facilitate
rights holders' own efforts to try and police Internet piracy in these
countries. We want to commend Chairman Lugar for all the support that
he has provided to augment the efforts to negotiate these productive
trade instruments.
Going forward, ESA would support efforts to negotiate an increasing
number of FTAs as these will greatly accelerate important upgrades of
the intellectual property protection environment in signatory
countries. The increased incidence of FTAs and the improved
intellectual property environments that these will produce will enhance
the interest of neighboring countries to take steps to improve their
legal and enforcement regimes for copyright and trademark, even in
advance of negotiating an FTA with the United States, as they will want
to compete for foreign investment in their local markets.
Another recommendation that was included in both ESA's hearing
statement and Senator Biden's report two years ago was to increase U.S.
government provision of training and resources for intellectual
property enforcement to foreign countries. Improving the quantity and
quality of on-the-ground enforcement efforts is a critical factor in
being able to make a significant dent in both hard goods and Internet
piracy. There has been good progress in this direction over the last
two years. We want to thank Senator Allen for his work as the lead
sponsor on a bill last year which, along with Senator Alexander, he
fought for to obtain State Department funding for non-OECD
(Organisation for Economic Co-operation and Development) countries to
strengthen anti-piracy efforts. The Allen-Alexander Amendment,
supported by Chairman Lugar and others on this committee, provided
important funding for equipment and training programs for foreign law
enforcement officials, including importantly judges and prosecutors,
and assistance in complying with intellectual property enforcement
obligations under various treaties and obligations. Senator Allen has
long taken a leadership role in fighting intellectual property theft
and we specifically want to applaud his efforts and those of Senator
Alexander with respect to obtaining State Department funding for this
purpose.
However, we believe that much more can and should be done in terms
of providing such training on a systematic and rational basis. We are
concerned that there seem to be different programs overseen by
different agencies aimed at providing training and training materials
to foreign countries' law enforcement groups operating independently of
one another. We recommend that there be coordination among such
programs in order to optimize the allocation of U.S. government
resources for these purposes. We also recommend that U.S. government
resources for training and education about intellectual property be
expanded to include judges, as these individuals play a crucial role in
dispensing justice with respect to intellectual property violations and
are generally insulated from political or trade pressure than are other
officials, making a training approach productive in elevating their
understanding and appreciation of intellectual property.
IV. NEW RECOMMENDATIONS
Looking beyond the recommendations made two years ago, we would
like to suggest two additional areas for the committee's consideration
based on certain trends and developments that arose since that hearing.
The first urges strengthening the position of USTR so that, in addition
to negotiating increased commitments from trading partners regarding
intellectual property protection and enforcement, it is also more
completely monitoring and enforcing countries' compliance with these
obligations. Our second recommendation calls for catalyzing formulation
of a unitary enforcement effort by U.S. law enforcement agencies
against major international syndicates which includes active
involvement in investigative and enforcement operations overseas. We
have great faith that this committee, under the leadership of Chairman
Lugar, will understand the intended benefits of such recommendations
and be able to obtain their adoption and implementation in an
appropriate fashion and time frame.
A. Strengthening USTR'S Position in Monitoring/Enforcing Intellectual
Property Commitments
In recent years, the USTR has done a tremendous job of successfully
negotiating free trade agreements that raise intellectual property
protection standards to the highest levels. However, with the
increasing burden of broadening the free trade sphere, USTR has not had
the resources or personnel to devote to an equally important mission:
monitoring compliance with and enforcing U.S. trade law and bilateral
trade agreements.
USTR relies on personnel from other federal agencies to perform its
monitoring duties. Moreover, intellectual property rights issues are
currently included in an office within USTR that also covers services
and investment issues. Given the enormous importance of intellectual
property to our economy, ESA recommends the creation of a stand-alone
intellectual property office with dedicated and adequate staff to
conduct multilateral and bilateral negotiations and also to ensure that
our trading partners comply with their intellectual property-related
obligations to the United States. Additional consideration should be
given to creating a special ambassador for intellectual property and
provide that official with adequate staff and resources dedicated to
the enforcement of existing agreements. We can not overstate the
importance of dedicating additional government resources to the
objective of enforcing FTAs and other trade agreements containing
commitments regarding intellectual property protection as we can not
rely on most countries to fulfill their treaty obligations without such
oversight.
Whatever approach is taken, the addition of new staff dedicated to
enforcement of agreements will materially strengthen USTR's ability to
monitor WTO/TRIPS compliance, and to fulfill the potential of the
Special 301 program through more aggressive use of out-of-cycle
reviews. Similarly, dedicated intellectual property staff could help
ensure that the GSP program is used as effectively as possible to
induce foreign nations to better protect intellectual property rights.
As noted above, ESA sees reinvigoration of the GSP review process and
the prospect of losing tariff-free trade benefits that reach into the
billions for certain nations as one of the best incentives for
countries to improve intellectual property protections.
In addition, the Special 301 process has been used to great effect
by USTR in encouraging other countries to improve intellectual property
protections and enforcement practices. We appreciate the Senate's
continuing support of Special 301--particularly its efforts to keep it
an up-to-date and powerful trade tool through improvements contained in
the Senate's version of the Miscellaneous Tariff Bill that was passed
by this body in early March. We urge the Senate to appoint conferees to
meet with the House to move early adoption of the important legislation
for the copyright industries.
B. Activating U.S. Law Enforcement Agencies Against Overseas Piracy
The U.S. Government has, in recent years, continued to elevate the
priority it attaches to combating intellectual property crime. While
scoring some critical successes in this area, agencies like Justice,
the FBI, and Customs, despite their diligent efforts, are
understandably pulled in many different directions, most recently to
the war on terrorism. Moreover, the impact of these enforcement efforts
has been blunted by the inability to press the campaign against pirates
overseas.
In contrast, over the years, the Drug Enforcement Administration
has proven how effective a focused, single-minded approach to attacking
global drug production and smuggling can be, particularly when dealing
with a problem which largely originates in foreign lands. We should
consider a similarly focused effort on intellectual property crime. We
know that there have been recent efforts to enhance coordination and
cooperation among various government agencies engaged in the war on
piracy. However, we believe that the problem is so large and complex
that it requires more than simply better coordination. Given the
enormous costs to our economy from piracy, given the increasing
evidence that terrorists are involved in intellectual property crimes
as a way to finance their operations, and given the fact that America's
copyright industries year-after-year represent more than 5 percent of
the nation's GDP, serious consideration should be given not just to
improved coordination and cooperation, but to pooling our government's
investigative and enforcement resources into a centrally directed
campaign against international pirate operations.
Moreover, the criminal organizations that are deeply involved in
hard goods piracy are generally located in countries where local law
enforcement officials are less willing or able to target them in any
meaningful way. We believe it is time to give clear and unambiguous
guidance to America's law enforcement community to pursue investigation
of and enforcement against pirate syndicates operating beyond our
borders when a determination has been made that local law enforcement
is not up to the task. Such an approach means that America's top law
enforcement agencies may need to become more actively involved in the
investigative operations at the local level that are required to bring
pirate enterprises to arrest and detention. At the same time, such
active involvement will help establish an important foundation for
local law enforcement officials from an experience and training
standpoint so that they can eventually acquire the necessary skills and
understanding to mount future investigative and enforcement efforts
against local pirates.
V. CONCLUSION
Mr. Chairman and members of the committee, it is clear from my
testimony that our industry has in the U.S. Government a strong and
effective partner in the battle against global entertainment software
piracy. Your committee's resolve to combat piracy is well-established.
We are grateful for your commitment, especially at a time when our
nation faces so many other threats to our security. But it is equally
clear that the global piracy problem remains deeply entrenched, and
that it directly endangers America's economic security as U.S.
companies see viable potential markets closed-off due to the
proliferation of pirated and counterfeit products. We need your
continued help, and we appreciate the opportunity to share some ideas
on additional steps that can be taken to protect America's greatest
export: our creative and intellectual property. Working together, I
believe we can fight piracy to protect what is one of America's most
dynamic and fastest growing creative industries.
The Chairman. Thank you very much, Mr. Lowenstein.
We'll now have a period of questions by our committee, with
a ten-minute limit. Let me just indicate that I know some
members have prepared statements in addition to questions.
Please use your ten minutes however you wish, with a statement
and the questions, and we will have another round if that is
required.
I'll begin the questioning by commenting that certainly
each of you have attempted to answer questions that were raised
in our opening statements as to the actions that ought to be
taken. I want to further explore your technical expertise in
two ways. First of all, Mr. Bainwol, in the music situation,
you point out that the piracy in the United States--often
attributed to teenagers, college students, and what have you
downloading music--is rampant. We read stories each day of
cases being processed against these persons. As a practical
matter, there appear to be hundreds of thousands of these
people, maybe millions for all we know. The Internet phenomenon
that Mr. Valenti described has unleashed all sorts of
situations. One of them, obviously, leaving aside piracy
abroad, is piracy at home. Some of you have touched on this in
other ways, which leads me to this question: Will, at some
point, the industries that are represented here, in fact, adopt
the necessary technical means to render this much more
difficult, if not impossible, or is this simply a forlorn hope?
I raise this because Americans, with common sense, looking
just at the music situation for a moment, would say this is
something that is totally out of control, despite threats,
lawsuits, conspicuous convictions, and so forth. There may be a
lack of moral fiber as to the fact that this is stealing that's
not perceived by many of the people doing the stealing. Without
there being some technical means of stopping it, it is likely
to continue. Therefore, the breaking of the law, and the common
feeling about that, might continue.
What can you say about this business? What sort of
technical shifts, what kind of research are you doing to stop
it?
Mr. Bainwol. A variety of--I'll try to be short on this
one. This is a big topic. First, I want to re-stipulate that
technology really is not the problem, at the end of the day.
Technology is the answer. The Internet is not our problem. In
the end, the Internet is the answer, as well. But what it
really does boil down to--and I'm going to talk about a
societal regard for property and then the impact of these
lawsuits--in order for us to succeed in what Reagan called the
economy of the mind, we've got to have, as a society--whether
it's policymakers, consumers, business--respect for property.
It's that simple. And that ultimately is a question of parents
talking to their kids, of the schools, the policymakers talking
to their constituents, saying that our American economy is
rooted in property rights, it's rooted in the profit motive,
you've got to have respect for property. It is our comparative
advantage globally, and it's a societal norm. We would have to
insist on it.
Two, the lawsuits. The lawsuits have been very, very
successful in terms of educating the public. A year ago, before
the lawsuits were launched, roughly a third of the folks in the
country knew that it was illegal to download music without
authorization. Now that number has skyrocketed; it's in the
70s. So we've had this transformative impact, just in terms of
awareness. That's step one.
Step two, then, is to get people to be responsive--parents
talking to their kids. The students who are 17 to 23 have their
value structure pretty much locked in. They fell in love with
music, and became fast on the computers at a point in time when
there was ambiguous information about what you could do. And so
they're locked in. But the kids behind them, we've got a shot
with. And really that's the hope.
Now, finally, technically. In the case of music, if you
want to be a commercial pirate, there's nothing we can really
do. In the case of music, with Kazaa and the other P-to-P
services, if you want to go online, and we really can't stop
that circumvention, so it does require personal commitment.
But the P-to-P services could use technology to make this
problem go away. There is technology called simply a filter,
which when the downloader says ``I want a copy of some popular
song,'' his request would go up against a database, and the
database would say, ``Ah, identified copyrighted song, you may
not download it unless you want to pay for it.'' The P-to-P
services could impose these filters right now. They exist.
There are prototypes on the market.
So technology exists in a fashion that would help this
problem, but it requires the P-to-P businesses that are
profiting on theft to go legitimate.
The Chairman. What are the P-to-P businesses? Please,
define this a little more.
Mr. Bainwol. P-to-P, peer-to-peer businesses. There are a
bunch around the world, but the most prominent is Kazaa, which
is based in Australia and in Vanuatu. And to give you a sense
of scope, there have probably been about 400 million downloads
of the Kazaa application, give or take, globally. It is the
most popular downloaded application on the Internet today. Four
of the top ten applications on the Internet are P-to-P
applications, so it is a very pervasive problem. These guys are
not, by and large, located in the United States. They exist
outside of our borders, and it's a very tough thing to track
down.
The Chairman. Okay. Well, then, we've gotten outside of our
borders, and, as you're saying, now technically the music can
be downloaded. If a company doesn't want to download it, it can
stop it, as you're suggesting, but if it does want to, and it's
operating in Australia, they proceed. And so, in essence, there
is no technical means to stop this. You have moral suasion by
parents in the United States, and you're all suggesting that we
send law enforcement people from the United States, to these
countries. We try to work out arrangements, I gather, in which
American law enforcement supplements what may not be happening
in terms of law enforcement in these countries. Now, they may
or may not accept that, but at least that's the suggestion as
to how you proceed vigorously: you have American law
enforcement people going after people in other countries.
Now, my hope always was that something short of that is
possible, because, as a practical matter, it would appear to me
that in some countries, American law enforcement people will
not be acceptable, will not be welcome. So then--that's why we
have treaties.
Now, what are the implications, let's say, of taking away
GSP authority, as some of you have suggested, as a sanction?
What other industries are affected? In other words, in terms of
the net sum for American business, are some other people
victims of the fact that the United States is retaliating in
order to solve the intellectual property situation? Anyone have
a comment on that?
Mr. Lowenstein. I don't know specifically. I think you'd
have to look on a country-by-country basis and, obviously,
weigh a variety geopolitical concerns of this country, as you
look at it. I think that my message--our message to you is that
it's a tool. It can't be a blunderbuss. It needs to be used
with sensitivity and delicacy, but it is a very effective way
to get people's attention. One would hope that it wouldn't have
to be used, at the end, because its mere presence being waved
in front of a country will bring some religion to the process.
If I could quickly add one other----
The Chairman. Yes.
Mr. Lowenstein (continuing). ----point to your comment
about technology, because I think it's very important. And I
think our industry is perhaps, unlike our colleagues here, an
industry that has spent a huge amount of time looking at
technological protection as a way to protect our intellectual
property. If you look at a typical video-game console by Sony
or Microsoft or Nintendo, the technological protection is
there. It's very advanced. It's built into the hardware. It's
an access control. The problem is, there are devices that
circumvent that technological protection. They're called mod
chips. There are other kinds of things that do it. And they're
widely available on the Internet. And these circumvention
devices are yet another tool that the international pirate
community develops, markets, and distributes to create piracy.
So technology is--and we're developing digital-rights
management tools, as is every industry on this panel--but it is
not, in and of itself, the silver bullet, because the pirates
are always jumping a step ahead.
The Chairman. One of the things that you've suggested is
diplomacy. You've mentioned Japan as a situation that's had
improvement. Is it possible that--and you're all suggesting
that it is, perhaps--that the nations of the world that have
the most at stake in all of this, in fact, might come together
and decide that it's in their national interest to do the job
domestically in their own countries, as well as allowing for
cooperation of police from the United States, or what have you,
to come through there, and perhaps to see how many countries
can be signed up to this? You know, it occurs to me, otherwise,
you would have a situation in which, even in Japan, you would
go from 64 percent to 35 percent or so forth. That's still a
huge amount of piracy, despite improvement and the pretty good
cooperation in a country that sees its own interests there. How
should diplomacy proceed?
Mr. Holleyman. Mr. Chairman, if I could comment on that, I
think that, you know, in Japan, we've seen a couple of factors.
We've seen a lot of public awareness, we've seen some effective
enforcement, and use of criminal prosecution as part of the
tool in Japan. In many of the high-piracy markets we see
today--China, for example--there are no criminal tools that can
be used against unauthorized copying of business software in a
corporate environment. And so part of what we have to do is to
work with our allies to get those tools in place, and I think
we have leverage through the WTO to do that.
Secondly, even in places like Japan, there are no statutory
damages, predetermined damages like we have in U.S. law. The
U.S. law provides a penalty of up to $150,000 per work
infringed, and we have been successful in many of our recent
FTAs in getting our allies to include similar requirements
appropriate to their own laws. Japan is lacking that. So when I
talked to the Secretary General last week, I said, ``If you
want to get your piracy rate down even further, one of the
things you need to look at is putting those type of statutory
damages in place.''
So I think there are a lot of examples that have worked
well in the U.S. that can work with our trading partners in
trying to instill those values.
Mr. Valenti. Mr. Chairman?
The Chairman. Really provide model language, model
statutes----
Yes, Mr. Valenti?
Mr. Valenti. Can I just add to that? I think that what is
being done in the FTAs is a good example of diplomacy. For
example, the USTR has concluded, and Congress has approved, the
Chile and Singapore FTAs. Morocco and Australia are awaiting
approval. Enclosed in these agreements are first-class
protections for intellectual property. And the more of these
FTAs we can do, then we establish in law the protective
embrace, and that's very, very important.
The second thing that's happening is that more and more
countries, where there is--and I'm speaking now for the movie
industry--where there is a visual storytelling industry, they
are now coming to the conclusion that pirates are equal-
opportunity thieves. They steal everything that's popular,
including their own films. For example, I know that the
government of France, led by President Chirac--because two
weeks ago, I was in France, and there with the Cultural
Minister of France and representatives from India and Russia
and China--France is leading now an anti-intellectual property
piracy effort in Europe, and it's trying, if you can believe
this, for the first time to join hip and thigh with the United
States in trying to get this issue of piracy on the G8 agenda
this weekend. So I think there is some progress there in those
countries that have a considerable stake in protecting their
own intellectual property.
The Chairman. Thank you.
Senator Boxer?
Senator Boxer. Thank you so much, Mr. Chairman. I couldn't
be more grateful than I am for you doing this. It's such an
important issue for California and for the country. And as Mr.
Valenti pointed out, it's an emerging issue for all countries,
and I'm going to touch on that in a minute.
Mr. Chairman, if you had called us together today because
there was an outbreak of thievery of American bicycles that
were being stolen abroad, people breaking into wherever there
were American bicycles, we would just say, ``Well, why are we
hearing that now? This is clearly a law enforcement issue, and
let's get those people and put them behind bars,'' and it
wouldn't be any question. Well, when you deal with the
intellectual property, you have to continue--and I hate to use
the word ``educate,'' because I'm not--that's not my job--but
we need to explain and understand, and the whole world has to
understand, this is thievery. In a way, it's even deeper
thievery than stealing one bike. You steal one bike, that's it.
You steal a movie, you steal a record album, you can make
millions of copies, so you're stealing a million bikes, if you
will. So this is really a very, very big issue for us.
Now, I'm passionate about this issue because I see what is
already happening, that we're already losing jobs, that we're
already suffering, and that when you look at our country today,
we've got twin deficits. We've got a trade deficit that is
enormous, and, it seems to me--here it is, in 2003, 535.7
billion in U.S. merchandise trade deficit. We cannot afford to
have our exports stolen. This is absolutely the worst thing
that can happen, and that's why I'm so grateful to you.
And Mr. Valenti put out some of the numbers. I'll put these
numbers on your plate again. Copyright-based industries--that's
motion pictures, sound recordings, software, books, and printed
material--accounted for 5 percent of GDP in 2001, adding 531
billion to the U.S. economy, employed 4.7 million people--4.7
million people--and responsible for exports of 89 billion. So
this is not some side issue. This is an issue that's pretty
central to America as, you know, one of the brightest spots on
the globe.
I have here a couple of examples I want to just pass it
over--my staff--Danny, would you do this? Would you--this is
the steal of a Mariah Carey disc. And this is a Chinese singer,
Hin. Anyway, the point is----
(Laughter.)
Senator Boxer (continuing). ----we're getting--he's very
popular in China. So the point that Jack Valenti made is well
taken. You know, now we're beginning to see the pirates steal
the Chinese works.
So what's the point of all this? We--us, this committee,
State Department, trade office--have to take this on, we have
to persuade the people in the other parts of the world--and it
looks as if France is getting it--that just because now we're
the ones taking the brunt of it, they're going to be the ones
getting the brunt of it.
And so, Mr. Chairman, I think what this committee can do,
in a bipartisan way, is to make sure that the discussion of
intellectual property theft is--has got to move up on the
agenda of our international relations. We have this trade
deficit. It's enormous. We have a lot of leverage over these
countries. My view is, you don't crack down on stealing, you
know, American property, then you're going to have to face some
repercussions. You know, it's enough to say, well, we're just
going to sit around in these nice State Department rooms and
have a soft conversation. I'm beyond that point. I think we
just can't see it.
I've heard, from the music people, that they're already
turning away bright, new artists--they can't back them--because
this is beginning to hurt the music industry. They can't take a
chance, because they're losing revenues.
So I think that our panel was exceedingly strong, but very
polite, and I think we need to really listen to what they're
saying in their nice way, and we have to see it for what it is,
which is thieving of our property here, of our people's
property, and we need to put this in a much higher level, in
terms of State Department affairs.
I have a question for Mr. Valenti. He touched on this. But
I think the importance of making the connection between the
criminal organizations and other countries that profit off this
intellectual property theft--could you expand on that and make
the point that there is a connection here, and that's another
reason why we should tell our foreign friends that they're
looking for trouble?
Mr. Valenti. Senator Boxer, police forces over the world,
including Interpol, have told us that there is--that criminal
organizations really control most of the vast majority of theft
that's going on abroad now, and that there is some evidence--I
don't know how tenuous or non-tenuous--that some of this money
is going to fund terrorist organizations. I cannot specify
that. I can only tell you what we have been told and do, in
part, believe.
Senator Boxer. Well, I think that's exceedingly important
information.
Mr. Holleyman, from the Business Software Alliance--and
Senator Lugar tried to get to this point, but there are a
number of countries who are not enforcing the laws they have
the books--could you give us a sense of this? Because this is
where I think we cannot continue to have these relations with
countries who are not enforcing the laws that protect our
intellectual property rights. Could you kind of put that into
perspective for us? How prevalent is that?
Mr. Holleyman. Well, I can give you a couple of examples,
Senator. Thank you for your question.
Brazil's been mentioned by several of my colleagues this
morning. You know, there has been only one conviction for
software piracy in Brazil in the past six years. But, as
Senator Biden mentioned earlier, and as the Chairman mentioned
in his opening statement, there was recently a delegation of
members of congress from Brazil who spent four days in the U.S.
They have returned home and are very committed to making
progress. This is an example of the type of engagement and
diplomacy that is extremely important. They want to do the
right thing, and I think their visit to the U.S. helped give
them the tools to do it.
I'll mention a market that has not come up this morning,
which is India--athriving market for software. There are good
laws in place in India. But, at the same time, we lost $342
million in 2002 due to piracy in India, because there's an
ineffective civil court system, criminal enforcement at the
state level is inconsistent and rarely leads to prosecutions,
and for the software industry we have never had a conviction
for software piracy in India. So even in markets like India,
where we do have close ties with the Indian software industry
and are very aggressive in trying to educate, we need more
pressure from the U.S. Government to get there.
Senator Boxer. Well, I'm glad you gave us that example,
because here we have a circumstance in America--we have a lot
of outsourcing of jobs. I'm not going to get into whether it's
good, bad, or indifferent. I guess if your job is outsourced,
it's bad. But we won't get into the macro-picture of that. But
here we have that circumstance going on, and, you know, I love
the--I have the most wonderful Indo-American constituents in my
state. The fact is, they've got to crack down on this. They're
getting rewards from our economy. The least they can do is
crack down when we see a problem.
And I would like to ask Mr. Bainwol a question on peer-to-
peer. I've got a lot of problems with peer-to-peer because--and
we don't have too much time here, but within my time I will
tell you, we have an alarming rate of child pornography being
distributed on peer-to-peer, and we are taking that up in the
Commerce Committee, as well as in Judiciary. But, that aside,
do you find that people are using these networks to download
music, and then sell it in counterfeit form worldwide?
Mr. Bainwol. I can't speak to whether they download it from
the Internet and then counterfeit it. They certainly could. I
mean, once you've captured the property, you can burn it, and
you can sell it. So my presumption is, that occurs. But it's
hard to document.
I would go back to the point you made, though, before, and
I just want to highlight a thought. We've talked a lot about
the economics here of the impact of cannibalizing a market, but
there's a huge cultural question here, as well. When the Brazil
local repertory market goes to pot because there's no
investment, it means there's less culture in Brazil that's
local. We have the same problem here. So I'd just like to throw
out the notion that the impact here of piracy is both economic
and very severe, but also cultural.
Senator Boxer. Thank you.
The last question I have is to Mr. Lowenstein. Regarding
the upcoming trade negotiations that the administration is
pursuing, which takes the highest priority for your
organization--what takes the highest priority for your
organization as it relates to intellectual property rights?
Mr. Lowenstein. Well, I think, for us, it's--probably the
most critical element to include in those FTAs is strong
language regarding anti-circumvention devices. As you know, we
have the Digital Millennium Copyright Act here in this country
which outlaws the trafficking, manufacturing, and distribution
of devices that circumvent copyright protections. It is
absolutely critical that these free-trade agreements have
explicit and strong language with respect to outlawing similar
devices. And, secondly, that these agreements have strong so-
called notice and takedown provisions--again, similar to what
we have in our DMC Act.
Senator Boxer. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Boxer.
Senator Allen?
Senator Allen. Thank you, Mr. Chairman, so very much for
holding this hearing on this very important subject, and I
appreciate your leadership and knowledge on this matter, which
is going to take a protracted perseverance in a variety of
fronts because it is an issue, in listening to the testimony of
our four witnesses here, all very articulate, knowledgeable,
and great insight--it's going to take awhile to get it through,
and we're going to have to be looking at better ways and
improved ways of enforcing these laws and these principles, the
property-rights principles, not just what--the emerging
developing countries, but others that are very developed and
don't seem to find any problem with taking this property. And
whether it's a copyrighted work or intellectual property in a
different sense, the reality is, it's harming jobs here in this
country, it's harming innovation, it's harming research and
development into new creative methods, and it's harming our
overall competitiveness, as well.
Serving on this committee, Mr. Chairman, as well as the
Commerce Committee, I'm aware of this issue from two different
aspects, and I'm glad to hear all our witnesses not blame
technology for it, or blame the Internet for this. This sort of
piracy and copyrighted materials being distributed illegally
has gone around since the days of the tape recorders, and then
there was the VCRs, then there was the DVDs, and CD burners
still are fairly popular, as well as the peer-to-peer networks
that are used for reproducing, stealing, and distributing
copyrighted works. That's a long-term problem.
I'll not go into all the costs and impacts. It's been said
before. What I want to look at here is what we can do more to
make sure that the laws are enforced. Each one of you all have
a different aspect of concerns, and obviously working with
other colleagues on this committee we were able to get $5
million to help out the other countries in the enforcement of
their laws, whether to pass laws--but it's one thing to pass
laws, but the key is enforce them, show will. These other
governments need to work with the technology community, with
the content producers, and so forth, but they need to have a
sincere will to enforce those laws. And some of them clearly
don't rightly care about it. There are other priorities for
them.
Listening to the stories on China, heck, you can't even get
legal products into China. It's restricted. The only way
they're going to get motion pictures are from those who have
stolen or pirated or illegally copyrighted production. And then
there's also closed markets and so forth in other areas, as
well.
The key--and a lot of the questions that I was going to ask
have been asked already--we need to have the necessary
resources in place. That's clear. There are ways that diplomacy
matters. There are technical deterrents to it--watermarks, for
example--on some of y'all's products.
An interesting idea was broached, and that has to do with
these GSPs, using that as an enforcement tool. Listening to all
four of our witnesses, who represent hundreds of thousands, if
not millions, of jobs, but clearly billions of dollars of
investment and revenue, the key violators seem to be in the
countries of China, Russia, and Brazil. Not to say others are
not violators, or allowing these laws to be broken or this
property to be stolen, or the thievery. Using GSPs--if any of
you all, or all of you all, will please comment on, as a
practical matter, and just share with us and the American
people--would these preferences--would the GSPs, which stands
for Generalized System of Preferences, which extends duty-free
treatment to certain products that are imported from designated
countries--how will this work? Because I think that we need to
look at ways of making sure the penalties are great. If all
they're getting is a slap on the hand, just like drug dealers--
drug dealers, unless you get after their assets, forfeit their
ill-gotten gains, sure, you ought to put them in prison, but if
you get after the--you know, and seize those yachts, art
objects, jewelry, bank accounts, everything from it, the same--
I'm not saying it's exactly the same, but the point is, is if
very few are caught, and, when they are caught, they get a slap
on the wrist, this is not a deterrent. Enforcement matters.
Penalties matter when trying to deter and defeat and, thereby,
prevent this kind of activity.
So any ideas that you have on increasing penalties, what
are those penalties--this means our diplomats need to be
encouraging those countries to pass such laws, then enforce the
laws. But if they do not, maybe these GSPs are an approach. But
I'd like to know what the full implications are if you take
away those preferences, because there may be consumers in this
country who count on that, and that could, in an inadvertent
way--or indirectly end up hurting our economy in a different
way. It may punish those countries, but it may somehow hurt
consumers here. But maybe not.
So some of you all brought that up--Mitch and others--so if
you all could comment on using any ideas on specifics,
enforcements and also on, in particular, on using the GSPs.
Mr. Valenti. I'll say a word, and then Mitch could respond.
The GSPs, of course, is an enticing target. The problem is,
from time to time you do collide with geopolitical interests
that sometimes are antagonistic to what we're trying to do in
the GSPs. And, number two, you pointed out quite accurately
that you have some repercussions back here in this country. But
Russia, Brazil, Pakistan, other countries like that where the
GSPs are very much alive, it could be a useful weapon. But it
is not an easy one to do.
Mr. Lowenstein. Senator Allen, let me--I said earlier, you
know, I think the GSPs are obviously a very aggressive tool,
and they need to be used very carefully in a very targeted way.
But they certainly need to be in our arsenal. But let me give
you another thing that relates to local law.
In Hong Kong, they have an organized crime statute. It's
similar to our RICO statute. Very few of these other countries,
where we have major criminal syndicates operating, have similar
statutes. So one thing we ought to be looking at in our
negotiations and in our bilateral discussions with these
countries is making sure that they, in fact, put on their books
the necessary enforcement tools, legal tools, that allow them
to go at the criminal syndicates. So that's one very specific
example where, in many cases, that you've just referred to--the
seizing of assets and seizing of homes and so forth--in many of
these countries, they don't have that legal authority. And so
we need to give it to them, and then, of course, the next step
is to encourage them to use it. So there's a very specific
example, short of, you know, a unilateral termination of GSP
benefits to consider.
Senator Allen. Any other comments?
Mr. Bainwol. I'd just simply note that, for Russia and
Brazil, the GSP decision is ripe, and so we'll all be watching
that carefully over the next few weeks. And I would also note
that there is some latitude on the part of the administration
to treat this with nuance. You can revoke in whole or in part.
And so the impact is really, I think, a function of how you
choose to exercise that authority.
Senator Allen. I would think that if it is done in a
nuanced way--but I'm not saying that you'd have any one of them
that doesn't deserve to have it revoked partially or for
certain products--but I do think that if we're going to be
serious about this as a country, and not just talk about it,
and not just debate about it and expend money--obviously, with
the five million in the last measure that the Chairman was very
helpful to us all on--that those, sort of, enforcement measures
does send a message to others that this is not just talk. Once
in awhile you actually do have to carry out a sentence, so to
speak, as a deterrent to criminal behavior.
Mr. Holleyman?
Mr. Holleyman. Sir, if I could add a comment, I think that
with GSP, like the special 301 provisions, the goal is to not
actually have to invoke sanctions or to withdraw those
benefits, but use that as one of the tools in our arsenal.
Also, the bilateral engagement that we're involved in as a
country is extremely important. I know that Secretary Evans is
heading to China later this month to continue part of the
discussions as part of the JCCT with Vice Premier Wu Yi and
others. There are some critical issues in China where we've
made some progress using the 301 provisions in the past, but
unfortunately, we see that progress being threatened. For
business software, for example, the single best market in China
right now is government agencies. But the Chinese Government is
considering a proposal that would require that Chinese
government agencies buy only Chinese business software. So in
what is the most lucrative market for our companies in China
now, in a very tough market, there's the threat that this
market is going to be taken away from us. And I know that
that's one of the issues that Secretary Evans is going to be
talking about.
Mr. Lowenstein. Senator Allen, if I could just add one last
very quick point, I think you're absolutely right, at some
point the authority needs to be exercised. It's like having a
child and threatening to ground them over and over and over,
and then you always find a reason not to, and pretty soon they
figure out there's no consequences. I think if you do it once,
a lot of other countries are going to get the message.
Senator Allen. Well, some countries may take more than
once, too.
Thank you, gentlemen. Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Allen.
Let me just mention that I received word that our roll-call
vote at 11:30 on the commemoration resolution for President
Reagan will require that Senators be in their seats to cast
that vote. That means, as a practical matter--and I ask this in
equity to everybody--that we conclude the hearing a moment or
two before 11:30 so that Senators may be in their seats. Now,
we have four Senators who are still to be heard, so I'm going
to ask your tolerance to cut the question period down to eight
minutes. In fairness, Senator Nelson, I am going to call on the
three Senators who have been here for a while, and then on
yourself, and hopefully each one of us will have had a chance
to ask our questions and to be present for the roll-call vote.
Senator Voinovich?
Senator Voinovich. Thank you very much. I'm glad to be
here today, and I'm glad you're holding this hearing on this,
because I've been concerned about this issue since I have been
in the United States Senate. As Chairman of the Oversight of
Government Management, Federal Workforce and the District of
Columbia of the Committee on Governmental Affairs, I've had
hearings in 2002, entitled ``Vital Assets: Human Capital in the
Federal Economic Regulatory Agencies''; on December 9, 2003,
``Fair or Fowl: The Challenge of Negotiating, Monitoring, and
Enforcing U.S. Trade Laws''; April 20, 2004, ``Pirates of the
21st Century, the Curse of the Black Market.''
I happen to believe that in terms of the global
marketplace, if you look at our competitors in terms of the
fact that they have lower labor costs, their companies don't
have healthcare costs, they don't have to comply with
environmental regulations, OSHA laws, and similar regulatory
burdens, about the only thing left for us to compete in that
global marketplace, and our edge, is in intellectual property
rights. And if they can destroy those, we're finished in terms
of competing in that marketplace.
The last hearing I had, I had several witnesses there, and
I asked them, What kind of help are you getting from the United
States Government? These were manufacturers. One said, ``We're
in China today. We spent $250,000 trying to protect
ourselves.'' And then a small business said, from Mansfield,
Ohio, a little manufacturer said, ``I get absolutely no help.''
And my observation is, we don't have our act together. I
called Secretary of Commerce Don Evans, and I said, ``What are
you doing about this?'' And he said, ``Well, you know, have 'em
call me.'' I said, ``They shouldn't have to call you; there
ought to be some mechanism in place that deals with
intellectual property violations.''
But if you think about it, we've got the USTR, we have
Customs, Department of Commerce, State Department, law
enforcement agencies. And, Mr. Lowenstein, you were talking
about pooling. But the question I really have is, Are we
organized properly in order to do something about this problem,
or is it so split up that we're never going to get anywhere?
And Senator Allen was talking about the Chinese. I was, in
1995, in China talking about intellectual property rights. All
you've got to do is just look at the record of China. They say
they're going to do it, then they don't; we threaten them, they
don't do it; we threaten them, and it just goes on and on, to
extent that I don't think they really believe that we're
serious.
And so I'd like your opinion on, Are we organized properly
and do we have the capacity--the GAO said the Department of
Commerce doesn't have the number of people and the quality of
people to get the job done. The USTR has had 200 people for the
last ten years. Is that enough, with Ambassador Zoellick making
all these trade agreements? I mean, it just seems to me like we
aren't organized to get the job done.
Mr. Lowenstein. Senator Voinovich, I think you hit on a
really critical point here, and I think it's a very--it's not
an easy answer. I mean, I think clearly some aspects, some
agencies of the government are very focused on this and are
trying to do a very good job, and are doing a very good job. We
just had the very effective Operation Fastlink operation that
the Justice Department, the FBI, worked on with respect to
Internet piracy. But I do believe that you're absolutely right
that they're--and what I talked about in my testimony--the
importance at USTR, where they actually--a lot of their
monitoring and enforcement function is a shared function, and
we need to centralize that within USTR so that there are people
who come to work every day at USTR who have nothing else to do
but figure out how do we monitor and enforce the agreements
that our country has entered into.
Senator Voinovich. Okay, but USTR's answer to me when I
asked them the same question is, ``It's all right. It's
working.'' And you're telling me it's not working.
Mr. Lowenstein. Well, I'm telling you that USTR does a
great job negotiating agreements, and I think they make a
tremendous effort to monitor those agreements through the 301
process and so forth, but I don't think there's any question
that more can be done, and it is a lack of resources, not a
lack of will. And I absolutely believe that, on a government-
wide basis--again, I'm focused right now more on the hard-goods
piracy problem, the organized-crime piracy problem, and that's
where I think, as a nation and as a government, we need to
collectively pool these resources and really target them.
That's what we've done with drug enforcement, and it's been
very effective. I'm not saying we need a DEA for intellectual
property. We have a lot of assets within the government. We
need to make sure they're talking together, we need to make
sure they're working cooperatively together, and we need to
make sure they're aimed at the same set of problems.
Senator Voinovich. Are we organized properly? Do we have
the resources to get the job done?
Mr. Holleyman. Sir, I think that the effectiveness of USTR
and our negotiators, as a team, over the years has been the
single biggest reason why piracy rates for business software
have declined from 70-something-percent of the global market
pirated a little more than a decade ago to 40 percent today.
But 40 percent is, of course, an outrageously high level of
theft. So we do support efforts to add additional resources, to
ensure that existing coordinating mechanisms within the Federal
Government work. The additional dollars devoted to helping
foreign officials train their law enforcement and their judges,
I think, is critical. And that does not always mean that we
have to have U.S. people stationed on the ground forever in
those countries, but to train them adequately.
And, finally, I would commend the efforts in the U.S. over
the past several years to ensure that the Justice Department
here has, for our domestic law enforcement, dedicated funds
that have been used to deploy in reducing piracy, because that,
then, is the example that I can finally take abroad as an
example of what our own government is doing.
Senator Voinovich. Mitch?
Mr. Bainwol. I speak from the vantage point of months, not
years. But my perspective is that this is more a question of
resource than structure. And if we're serious about our
becoming an economy of mind, we have to make an investment that
is consistent with that comparative strength that we have.
Senator Voinovich. Jack, you've been around awhile, what
do you think?
Mr. Valenti. I think that we do need some more resources.
We're up against something--for example, in the FBI, U.S.
Attorneys, they're so strained to the pencil line now because
of terrorists, that they haven't the resources to devote to
anti-piracy and putting people in jail and--convicting them
first, of course, and then putting them in jail.
(Laughter.)
Mr. Valenti. That's Judge Roy Bean justice I was just
talking about earlier.
I think that's very critical, and I don't know what you can
do about that because of these strains. I do believe that the
USTR is a small group of people. I think they're doing a
superlative job, but I think they could use more resources. I
think that's needed.
And, second, I think there needs to be, within the State
Department itself, more resources. For example, somebody
mentioned training. There has to be somewhere out of our own
embassies that people who are expert, who are knowledgeable,
who are professional in this area, where you can train jurists,
prosecutors, and others. What is lacking right now, Senator, is
the lack of resolve and political will to arrest people, try
them, and then put them in jail. Very few--very few--jail
sentences are meted out anywhere in the world.
Senator Voinovich. Well, I can tell you this, this is a
threat to the economy of the United States----
Mr. Valenti. It is.
Senator Voinovich (continuing). ----of America. And we have
the threat of terrorism, but our economy is in jeopardy today.
We're in a new marketplace, a new global marketplace where we
can get away with some of the stuff that we were able to get
away with in the past because we haven't done our enforcement,
but we'd better get it pretty quick or we're going to see this
economy of ours start to really shrink.
Mr. Valenti. Let me just add one thing that I didn't
mention here, Mr. Chairman, Senator. What's going on in the
technology world is both amazing and frightening. I visited
the--in October--the Cal Tech labs, their famous labs. And
there, Dr. Newman, in the lab, told me of an experiment
conducted some months earlier where Cal Tech brought down a
DVD-quality movie from the Internet in five seconds. Internet
II, which is a consortium of scientists headed by Dr. Molly
Broad, the President of the University of North Carolina, has
done an experiment. They sent 6.7 gigabytes, which is one-third
larger than a non-compressed DVD, halfway around the world,
12,500 miles, in one minute. Now, within 18 months to two
years, these experiments will be in the marketplace, and I dare
not want to consider, unless we have in place the kind of
technological rebuttals that are required, when you can bring
down a movie--forget five seconds or one minute--five minutes,
six minutes, we'll have a dark, new cloud over all of our
future.
The Chairman. Thank you very much, Senator Voinovich.
Senator Coleman?
Senator Coleman. Thank you, Mr. Chairman. And, again,
thank you for your leadership. This is an issue that's been a
great concern. The Permanent Subcommittee of Investigation,
which I chair, has been looking into the whole issue of digital
downloading, and this is important.
I want to associate myself with the comments of Mr.
Voinovich regarding the impact this has on America's global
competitiveness. We're not going to beat folks by low wages.
That's not what we're about. I was in Mexico at a conference
not too long ago with the Mexican foreign minister and others.
The issue was raised--concerns were raised--about the impact on
Mexico of low wages in China--I mean, on their economy. We will
succeed through our ability to be innovative, be creative, and
intellectual property is at the core of that. And I'm an
optimist. I think these trade agreements create great
opportunity, and the advance in technology creates great
opportunity, but recognize the challenges.
How do we get our arms around this? We could be so daunted
by the speed at which technology moves and the slowness at
which legislation moves that we might throw up our hands, but I
don't want to do that.
If I can divide it into two parts here and then lay out a
question. One, clearly on the issue of hard-disc piracy, we're
talking about an issue with ties to criminal organizations the
potential for support of international terrorism. I was just
recently overseas, and you walk out on the street, and there,
laid out in cloth after cloth are all the newest movies, and
they're right there. And they're not individual purveyors,
they're not all individuals--I clearly there are some
connecting links there.
I want to applaud Mr. Bainwol for his very specific
recommendations, both by way of the countries in question as
well as to us. I think we have to use the concern for GSPs and
use that as a tool to say, ``Hey, if you don't create that
environment''--and I believe one of the tests was--they talked
about piracy flourishes in friendly host countries, and what we
have to do is say that we will--if you are a friendly host
country, then you are somehow hurting your relationship with
the United States, and we have to deal with that. And I would
hope, then, that we would then coordinate the uses of law
enforcement. We have some differing agreements about the law
enforcement in this country and whether they should be involved
civilly in investigating these areas, but I think there's no
disagreement that DEA and FBI and all the various range of law
enforcement that have ties overseas should be coordinating
their efforts to focus on making it clear that those host
countries are no longer going to be friendly host countries and
we need to support them in that.
So I think we can all agree on that, and I hope that we
find a way to move forward aggressively and quickly because the
moment is coming; the window of opportunity, as technology
changes, to handle this gets tougher and tougher.
The question I would ask, though, as I look at some of the
other issues, and perhaps individual use, which is still
certainly a huge problem, you know, are we feeding the beast?
We have, you know, production of CD burners that goes way
beyond any legitimate use. We have production of blank CDs that
far exceeds legitimate use. What do we do about that? It's as
if we're turning--we understand the P-to-P issue, we're dealing
with that, we're talking about it. I hear very little
discussion about that. Very little discussion. It's as if we
turn a blind eye to something that we know is a problem.
I'll add to that. I can physically put my arm around a
blank CD. I can't physically put my arm around new MP3
technology, which we applaud, and we celebrate. I've got MP3,
my wife has one, and my son has one, and one's got iTunes, and
I've got Rio, and it's great. On the other hand, we clearly
have--are creating, through technology, opportunities to have
access to stuff in which there's almost no way you can stop
folks from getting it.
So I guess my question is--and maybe it goes to the
hardware manufacturers and others--but are there things that we
should be doing--is there a moral message--we're talking about
giving it to kids--is there a moral message to manufacturers
and is there something stronger than our moral message to
manufacturers to say, ``Hey, you're facilitating--clearly what
you're doing is facilitating the illegal spread of otherwise
protected materials?'' How do we approach that?
Mr. Holleyman?
Mr. Holleyman. Sir, if I can comment on that. Personal
computer software has always been digital, so many of the
problems that my colleagues are encountering, and it's growing
in the software industry, which is digital piracy, is something
we've encountered from the very beginning. Every personal
computer is a software-copying machine.
We do believe that, even with that, we can make substantial
progress in reducing levels of software piracy, and the history
of our industry has shown that we can make that progress. So we
don't think that there's a simple, single technological
solution to the problem. We think there are a variety of
mechanisms that will be deployed in the marketplace, like our
companies are using, that are very simple to use, product-
activation features that will make it harder for most customers
to inadvertently make an unauthorized copy of their software or
their other products. None of that, however, will stop the
determined organized criminals who want to be the
counterfeiters, and that's where I think we really have to look
to law enforcement and other solutions, not the technological
solutions.
Mr. Bainwol. I'd simply add that--and we've spent some time
talking about this--and it's a tricky question. I don't know
that it's just technology, and I certainly don't want to blame
CD burners. It makes the problem more difficult, but it's not
the burner's--you know, it's not the hardware.
I think, at the end of the day, it all boils down to
whether or not, as a society, we respect property, and that's a
message that needs to go from parents to kids and from
policymakers to constituents, and it boils down to that central
truism.
Mr. Lowenstein. I would say that sometimes it is the
hardware. I mean, there are devices out there that have no
other legitimate purpose but to bypass copy protection or steal
intellectual property. And I think we need to acknowledge that.
I also would note that in our industry, as Robert has
talked about business software, many of our companies are
experimenting with all manner of digital rights management
tools that are designed to provide additional layers of
protection in addition to whatever encryption is built into the
hardware or the software. So there isn't--as I said earlier,
there's no silver bullet to the issue, and I think that, you
know, there are devices that may, on the surface, facilitate
piracy. There may be ways that they can be dealt with through
appropriate technological protection measures, and I just think
we need to find a balance.
Senator Coleman. In one of them, we took--I think in your
tests, it was the written test--but I'm not sure whether you or
Mr. Holleyman talked about P-to-P and said, on the one hand,
clearly it's being used as a vehicle to facilitate illegal
transfer of copyrighted material; on the other hand, it's
important technology, and we should be very careful about
restraining that technology, and somehow figure out a way to
distinguish between the illegitimate use, and put brakes on
that that, at the same time, make sure that we don't, you know,
put shackles around the legs of great technological
opportunity.
Mr. Bainwol. Yeah, on that point, though, I think you do
need to look at how services and hardware are used. In the case
of P-to-P, if you look at the transactions that go across these
networks, infringing use is probably in the high 1990s. So P-
to-P as a technology is an efficient, impressive tool. But we
should recognize that it's been hijacked virtually completely.
Mr. Valenti. I think that--Mitch said it earlier--the P-to-
P, peer-to-peer, is where the problem is right now in this
country and around the world. A federal judge has already said
that--for example, that Kazaa is not infringing, because it's
software, it's not telling anybody to do anything. People use
it. We are appealing that decision, of course, and it--but that
needs to be clarified. But there are ways, very easily, I
think--Mitch talked about it earlier--with filtering mechanisms
in the peer-to-peer, forcing them to use this, and, thereby,
saying all non-infringing use, we need to glorify it, let it
reign. But for infringing uses, you must do this.
Now, I see--I don't understand why that can't be--why the
Congress can't deal with that, Senator, and make that a part of
the P-to-P experience. You put filters on, you filter out all
copyrighted material that is infringing. But on non-infringing,
let the gates open, and everybody enjoy it. And that's one way,
I think, that--a very simple way to cut off these intrusions on
private property.
Senator Coleman. Thank you.
The Chairman. Thank you very much, Senator Coleman.
Senator Nelson?
Senator Nelson. Thank you, Mr. Chairman.
In addition to all of these suggestions today that we need
to find some vehicle to help the industry stop the pirating of
intellectual property, there were a couple of comments in a
couple of your testimony that I want to pick up on, and that is
the right opportunity for terrorist financing through the
piracy of intellectual property.
I was struck, Mr. Chairman, the other day, in the paper, to
find out that the selling of tobacco products--buying
cigarettes in one state cheaply, selling them in another state
where you can sell them for a lot more, and the profits are now
thought to be going into the terrorist coffers. Indeed, as a
matter of fact, Interpol has come out with a concern about the
stealing of intellectual property and the raising of vast funds
for terrorists by the sale of knock-off goods--it being the
steal of a patent and replicating the Gucci bag or all--I don't
know all these terms for all of these things--and yet there's a
huge amount of money to be made there. We think of just
terrorists making money out of the drug trade, and yet the
amounts made by the sale of knock-off items, which is an
infringement of intellectual property rights, is so far much
more than what is made in the drug trade that more and more as
we try to shut the avenues of financing for terrorists, they're
going to continually go into this.
So, Mr. Valenti and also Mr. Lowenstein, both of you
mentioned it in your prepared statements, this piracy as a
source of terrorist financing, I wish you would pick up on
that.
Mr. Valenti. All right, sir. I have before me, which I was
going to send to the committee, and will send immediately--this
is probably the report that you're referring to, Senator, and--
by Ronald K. Noble of the International Criminal Police
Organization, Interpol, the links between intellectual property
crime and terrorist financing, and it goes into rather--detail
and specifics. For example, they estimate that in ten years, al
Qaeda received between $300 and $500 million from intellectual
property crime. And it cites country by country. I'm going to
pass this along to the committee.
[The information referred to follows:]
Report Submitted by the International Criminal Police Organization,
INTERPOL
the links between intellectual property crime and terrorist financing
by Ronald K. Noble, Secretary General of INTERPOL
6th april 2004
Introduction
Intellectual Property Crime (IPC) is the counterfeiting or pirating
of goods for sale where the consent of the rightsholder has not been
obtained. Terrorist financing is the generation of funds via licit or
illicit means that are then remitted to a terrorist organization or its
front organization via formal or informal financial channels. These
funds may be used for either the running costs of the organization or
to carry out attacks.
Scope and Purpose
This report seeks to examine the links between IPC and the
financing of terrorist organizations. It examines what is known to the
International Criminal Police Organization (Interpol).
The report is produced for the 58th Meeting of the Transatlantic
Dialogue held in Dublin, Republic of Ireland on 6th April 2004.
It should be read in conjunction with the public record of
testimony provided by Ronald K. Noble, Secretary General of Interpol,
to the House Committee on International Relations, One hundred Eighth
Congress, on 16th July 2003.
The purpose of this report is to provide an overview of
developments since July 2003.
Methodology
The report draws on information held in files at the Interpol
General Secretariat (Interpol), from Interpol Member States, trade
bodies, manufacturers and rights holders, and a range of open sources.
In this context the links between IPC and terrorist financing can
be categorised as follows:
Direct links where the group is implicated in the
production, distribution or sale of counterfeit goods and
remits a significant proportion of those funds for the
activities of the group. Terrorist organizations with direct
links include groups who resemble or behave more like organized
criminal groups than traditional terrorist organizations. This
is the case in Northern Ireland where paramilitary groups are
engaged in crime activities. These crime activities include
IPC. Involvement by these groups ranges from control or
investment in manufacturing or fabrication to taxing market
stalls where counterfeit goods are sold. It is possible for
illicit profit to be generated for terrorist groups at
different points in the process.
Indirect links where sympathizers or militants are involved
in IPC and knowingly remit some of the funds to terrorist
groups via third parties. Terrorist organizations whose
sympathizers are involved in IPC and who use some of the funds
generated from this activity to support the terrorist group are
included in this category. In many cases the funding is
indirect, involving unrecorded movements of cash via third
parties. This seems to be the case with some groups like
Hizbullah and radical fundamentalist groups.
Specific Examples
In July 2003 Interpol concluded that the link between organized
crime and counterfeit goods was well established and sounded the alarm
that IPC was becoming the preferred method of funding for a number of
terrorist groups. Developments since then have reinforced this view and
the following example illustrates how these activities continue to be a
cause for concern.
Lebanon
The Lebanon case is linked to Hizbullah and involves Bulgaria,
China, Dubai, Germany, Lebanon and Turkey.
In October 2003 two containers were examined in Beirut Harbour
after discrepancies were found in the documentation. While it appeared
the place of origin was China and the containers had been shipped from
Turkey, the goods were apparently made in Germany. The containers were
found to contain counterfeit brake pads and shock absorbers purportedly
manufactured by a German automobile manufacturer. Shortly after, a
truck carrying another container and originating from Dubai was
examined in Lebanon. It was found to contain counterfeit brake pads and
filters purportedly manufactured by the same German automobile company.
The equivalent retail value of genuine parts in these two consignments
would have been around 1,000,000 Euro.
With the assistance of the Lebanese law enforcement authorities
enquiries revealed that the persons responsible for the consignments
had business connections in Bulgaria, China, Dubai and Turkey and
travelled widely. They had access to a warehouse in Lebanon from which
it was suspected distribution of these and similar counterfeit products
would be organized. The warehouse was located in an area influenced by
Hizbullah. The suspects in this case are known to the International
Criminal Police Organization and are believed to have links with
Hizbullah and other Middle Eastern terrorist groups.
Other Examples
In July 2003 the The Interpol General Secretariat provided the
following examples of IPC and terrorist financing.
Northern Ireland
In Northern Ireland the counterfeit products market is estimated to
cost the economy in excess of US$167 million. In 2002, the police
seized in excess of US$11 million in counterfeit products. It is known
that paramilitary groups are involved in IPC, including counterfeit
cigarette trafficking. It is unknown how much of the money generated by
these counterfeiting operations goes to terrorist groups and how much
is retained as criminal profit.
Paramilitary involvement in IPC in Northern Ireland is through
their control of the markets where many counterfeit goods are sold.
Other aspects of the IPC in Northern Ireland appear to have no
terrorist involvement i.e. the importation and sale of counterfeit
clothing is dominated by individuals in the South Asian community in
Northern Ireland.
Chechen Separatists
Interpol is aware of a case in 2000 in Russia, where Chechen
organized crime groups and terrorist organizations were benefiting from
counterfeit good manufacturing and trafficking. In 2000, a joint
operation between Russian law enforcement agencies and private industry
resulted in the break-up of a CD manufacturing plant. According to the
police officials involved this counterfeit CD plant was a source of
financing for Chechen separatists. The CD plant was run by Chechen
criminals who then remitted funds to Chechen rebels. The average
monthly earnings of organization are estimated to have been US$500,000-
700,000. A number of explosives and arms were also confiscated by the
police during raids on the residences of the suspects.
North African Radical Fundamentalists in Europe
Interpol possesses information that indicates the following in
relation to IPC and terrorist financing in Europe in respect of radical
fundamentalist networks. Sympathizers and militants of these groups may
engage in a range of criminal activities including IPC and credit card
fraud. Sympathizers will indirectly pass a portion of the funds
generated from their illicit activity to radical fundamentalist
networks. The sympathizer passes money in the form of charitable giving
or zakat via Mosques, Imans or non-profit organizations who are
sympathetic to radical fundamentalist causes. The money is eventually
moved to the relevant radical fundamentalist group. These transactions
are predominantly cash-based leaving no paper trail or way of verifying
the origin or final destination of the funds.
In terms of radical fundamentalist militants, these persons may for
long periods of time not be directly involved in terrorist activity.
During these periods they support themselves through criminal activity
like IPC or credit card fraud. A portion of the money earned in these
activities is kept while a portion is remitted to radical
fundamentalist terrorist groups in cash form, in ways similar to the
methods used by sympathizers.
A militant active in Europe, known for his activities in radical
fundamentalist organizations over the last decade has recently been
convicted for trafficking in counterfeit goods. The individual's
counterfeiting associates are also known members of radical
fundamentalist groups. They are reported as still being involved in
large-scale counterfeit goods trafficking. This individual fits the
above profile of militants involved in criminal activity to support
themselves while not actually on active service duty. Funds are
remitted to the group to which they are aligned.
Al-Qaeda
Typically al-Qaeda and affiliated groups benefit from funds raised
by sympathizers. This includes funds originating in either licit or
illicit activities. One estimate is that over a ten year period al-
Qaeda received between $300 million and $500 million, averaging US$30
to US$50 million a year. According to the same source approximately 10%
of spending went on operations while 90% was used to maintain the
infrastructure of the network, including payments to other groups to
support them or to increase al-Qaeda's influence in a particular
region. For example, the payment of money to guarantee the protection
of the group in Afghanistan or Sudan.
One counterfeiting case has been reported in the media where there
are connections to al-Qaeda. IPSG has had contact with investigating
agencies in relation to this case. The investigation into a shipment of
fake goods from Dubai to Copenhagen, Denmark, suggests that al-Qaeda
may have indirectly obtained financing through counterfeit goods.
Danish customs intercepted a container, containing counterfeit
shampoos, creams, cologne and perfume. The sender of the counterfeit
goods is allegedly a member of al-Qaeda. A transnational investigation
involved agencies from three countries; Denmark, the United Kingdom and
the United States. It is difficult to know whether the funds from this
traffic went directly to al-Qaeda or whether only a part of them were
remitted. In general, it is possible that funds generated through IPC
are remitted to al-Qaeda indirectly through zakat-based (a religious
duty to give money). Although given the cash-based nature of this
giving it is difficult to establish the provenance of the funds.
Hizbullah
Interpol is aware of three cases of IPC related activity and
terrorist funding in South America. These cases involve ethnic Lebanese
who are involved in the remittance of funds to Hizbullah. As in the
case of European radical fundamentalist groups, funds are thought to be
indirectly remitted via organizations associated with Hizbullah.
Interpol's information suggests that these persons are involved in the
distribution and sale of counterfeit goods, not in the manufacturing or
fabrication of counterfeit goods. It is suspected that most counterfeit
manufacturing and fabrication is dominated by organized crime. Three
examples illustrate this:
Funds generated from IPC may be remitted to Hizbullah using
the following modus operandi. Counterfeit goods produced in
Europe are sent to a free-trade zone in South America by a
group of Lebanese criminals sympathetic to Hizbullah. The goods
are then smuggled into a third country, to avoid import duties,
where they are sold via a network of Palestinians. An unknown
amount of the money generated through this activity is
suspected to be remitted to Hizbullah.
In February 2000, an individual was arrested for piracy and
suspected fundraising for Hizbullah. The individual sold
pirated music CDs, Sega, Sony and Nintendo game discs to fund a
Hizbullah related organization. Among the discs recovered were
discs containing images and short films of terrorist attacks
and interviews with suicide bombers. The discs were allegedly
used as propaganda to generate funds for Hizbollah. Interpol is
in possession of some of these films. This individual is
currently a fugitive.
Another indivdual was arrested for his alleged ties with the
Hizbollah in Foz do Iguazu in June 2002 after evading arrest in
October 2001. The individual is wanted for tax evasion and the
collection and remittance of funds to extremist organizations.
Interpol files do not mention involvement in IPC. The IPC
connection is stated in open sources. Law enforcement sources
indicate that numerous letters from organizations, suspected of
being associated with Hizbullah in Lebanon, were found thanking
the individual for financial contributions.
Conclusions Presented to the House Committee on International Relations
On 16th July 2003 Interpol presented nine conclusions based on the
limited amount of information available from General Secretariat
criminal files and Interpol member countries on IPC and terrorist
financing. Based on the available information it was possible and
remains valid to state with a reasonable degree of certainty the
following:
1. IPC is global in its scale and scope, generating significant
amounts of illicit profit.
2. IPC is a low risk/high return activity, due to the low penalties
if caught, and the high return in relation to the initial
investment.
3. IPC is now dominated by criminal organizations, due to the
relatively low level of risk and comparatively high level
of profit.
4. IPC, as with other crime activities, involves a number of
different types of criminal actors from individuals to
organized criminal groups.
5. It is generally true that terrorist groups have multiple sources
of funding. These sources of funding include both licit and
illicit activities. One illicit activity could be revenue
generated from IPC. This can be from either direct
involvement in IPC, or indirect involvement where
supporters or sympathizers involved in IPC remit funds from
this activity to terrorist groups.
6. In general most terrorist groups do not take responsibility for
the development and control of counterfeit production and
distribution; rather they benefit indirectly from funds
remitted to them from sympathizers and militants involved
in IPC.
7. It is not possible to estimate the level of funds remitted to
terrorist groups from IPC. First, terrorist financing is by
its nature opaque. Second, the scale and scope of
intellectual property crime is difficult to realistically
estimate as the number of cases known to Interpol is
limited.
8. It is, however, possible to state with certainty that terrorist
groups in Northern Ireland have financially benefited from
IPC. Individuals in the Tri-border region in South America
have remitted funds generated from IPC to associated
Hizbollah organizations. Funds generated from the informal
economy, specifically IPC related activities may also find
their way indirectly to terrorist organizations.
9. It is possible to state that intellectual property theft is
likely to become a more important source of financing for
terrorist groups because it is low risk/high return. This
is probably more true for terrorist groups like those in
Northern Ireland due to the increasing resemblance of these
groups to organized crime groups.
Developments since July 2003
Increased Law Enforcement Focus on Links Between Intellectual Property
Crime and Terrorist Funding
More police forces are placing greater emphasis on the links
between IPC and terrorist funding by dedicating resources to these
investigations. The efforts of the Organised Crime Task Force in
Northern Ireland are well documented.
Another example is the Anti-Terrorism Section of the Police
Judiciare in Paris. The Section has police officers dedicated to these
investigations and they are examining the links between IPC and
terrorist groups including Islamic Jihad and GIA, an Algerian
Fundamentalist Group.
The International Criminal Police Organization--Interpol
The International Criminal Police Organization has recognized the
importance of this issue and that Interpol itself is uniquely placed to
provide leadership and coordinate international action against IPC. The
following action has occurred.
Interpol Intellectual Property Crime Action Group
The work of the Interpol Intellectual Property Crime Action Group
(IIPCAG) has been enhanced and developed. It includes a wide range of
stakeholders from customs, police and private industry. Under the
auspices of Interpol the Group continue to address the following IPC
enforcement issues:
1. Encouraging Interpol's 181 member countries to identify a
national law enforcement IPC central point of contact to
facilitate the exchange of IPC related information.
2. Enhancing the exchange of information and intelligence on IPC
between law enforcement agencies.
3. Enhancing and strengthening the operational contact network of
private and public partners throughout Interpol's four
regions--Africa, the Americas, Asia and Europe.
4. Maintaining and disseminating Interpol Intellectual Crime Best
Practice Guide to law enforcement agencies.
5. Developing and delivering training for IPC investigations to law
enforcement agencies.
6. Raising awareness of the issue of IPC and its link to terrorist
organizations and serious organized crime.
Interpol Intellectual Property Crime Model
Interpol will establish an initial three-year private/public
program of activities to tackle IPC. The initiative builds on the
achievements of the Interpol Intellectual Property Crime Action Group
and is based on a dedicated Interpol Intellectual Property Crime Unit
at the General Secretariat. The Intellectual Property Crime Unit will
be supported throughout Interpol's 181 member countries by a network of
dedicated Intellectual Property Crime liaison officers located in the
four Interpol Regions.
The aim of the program is to develop and maintain a private/public
IPC partnership to:
1. Develop strategies and programs to combat international criminal
activity linked to intellectual property infringement.
2. Raise awareness of IPC and its links to terrorism and serious
organized crime.
3. Facilitate and improve the exchange of information and
intelligence on IPC.
4. Coordinate international multi-agency investigations into IPC.
Funding
The program will be funded by an IPC Fighting Fund established by
Interpol to collect contributions from participants in the program. The
fund has been established with an injection of funds by Interpol and
the Netherlands Korps landelijke politiediensten (National Police
Agency Support). The IPC Fighting Fund has been established on the
reasonable expectation that costs will be shared. All the indications
suggest contributions to supplement a substantial financial investment
in these activities by Interpol will be forthcoming from private,
government and other interested parties.
Benefits
The program is well on the way to becoming fully operational in the
latter part of this year. A core number of IPC affected industries and
cross-industry bodies will be invited to be founder members of the
partnership and together with the global law enforcement community will
derive the following operational benefits:
1. Interpol has strong communication channels with national law
enforcement bodies and will encourage the effective
prioritisation of IPC at a national level.
2. Interpol will assist national law enforcement bodies to identify
appropriate IP rightsholders to facilitate the delivery of
swift and effective enforcement action.
3. Evidence in recent investigations has increasingly established
links between IP rights' violations and organized criminal
groups, and terrorist groups who previously generated
income by other forms of criminal activity including drug
trafficking and money laundering. The increased involvement
and focus of Interpol on these activites will ensure that
the international law enforcement community effectively
targets these highly efficient criminal and terrorist
networks.
4. Groups who engage in IPC do not typically limit themselves to one
form of product. A centralized point within Interpol for
the gathering and dissemination of information about these
groups will benefit all industries through more directed
targeting. It will also lead to more interventions by law
enforcement agencies.
5. The manufacture and distribution of goods which infringe IP
rights is a global trade which does not recognise, and is
certainly not restricted by, international boundaries.
Through the involvement Interpol there will be increased
opportunities to secure greater international cooperation
and ensure that all levels of IPC activity receive an
appropropriate response.
6. Interpol will use Intelligence Analysts to examine IPC trends and
patterns on a global basis. This method will deliver global
IPC strategic assessments and provide significant
advantages to national governments, law enforcement
agencies and the private sector.
Conclusion
The link between organized crime groups and counterfeit goods is
well established. There is now an increasing body of evidence to
indicate IPC is also linked to terrorist groups and their fund raising
activities.
The international dimension of this threat demands a collective
global partnership response and the Interpol Intellectual Property
Crime Model is a vehicle for achieving this objective.
Senator Nelson. And I might quote from that report, page
4, ``We think further work needs to be done to trace the
proceeds and to establish the links with groups benefitting
from these funds.'' This, right here, Interpol is telling us,
``Watch out.'' This is going to be a major source of financing
for terrorist organizations.
Now, this isn't the pirating of your intellectual property,
but it is the pirating of somebody else's intellectual
property, and if it can be done there, it can be done with your
intellectual property. So talk to us about this.
Mr. Valenti. Well, we have had reports--our anti-piracy
people--and we have constabularies in 60 countries in the
world--and we have had reports that we have not personally
investigated because we don't have the resources to do it, but
that the international police forces say that, not only in
counterfeit goods, Senator, but in movies and in music, it is a
low-risk, high-reward business where you don't get killed and
you don't get arrested, and if you are arrested, you're fined
$20 and you're on your way in 24 hours to resume your business.
So it is a ripe, rich, fat target for people to deal with. And
it stands to reason if there's something criminal that can be
done with low risk and high reward, criminals will do it for
all sorts of illicit reasons.
Senator Nelson. You look at the penalties of the drug
trade, and then, as you just suggested, Mr. Valenti, the
penalties for dealing with counterfeit goods. There's no
comparison. So the risk is very low. So if they can make so
much more anyway on knock-off items or on your property, and
the risk to them is very low, where's the terrorist going to go
to get their financing?
Mr. Bainwol?
Mr. Bainwol. I think you answered that question. But let me
just make one other specific reference. In Pakistan, there are
about eight pirate CD factories. We understand that two of them
are principally funded by a terrorist cell. So there are links
that are being established, and the simply proposition that the
zero-product cost makes it a pretty attractive thing to do, in
the context of minimal risk, is hard to argue against.
Senator Nelson. Mr. Lowenstein?
Mr. Lowenstein. Well, there's really not much to add. I
mean, I think that much of the information that we--that my
testimony was based on came from the Interpol report. We don't
have the same vast far-flung investigative networks that either
the motion-picture or the recording industry have, so we're
actually very grateful for some of the work that they do in
this area that helps inform us, as well.
I can tell you, after 9/11, there were anecdotal stories,
in the Washington Post and elsewhere, about video-game pirates
in Paraguay who were very much in business and supporting
terrorist operations, supporting the al Qaeda operations.
Again, that's not something we independently verified, but the
reports are out there. And, you know, where there's smoke,
there's usually fire.
Senator Nelson. It's food for thought, Mr. Chairman, as we
try to tackle this. I have a daughter that is a recording
artist. And, of course, I've seen this from her standpoint and
as a violation of her rights. But now this issue is getting so
much bigger. This is now involving national security, so we're
going to have to address this, Mr. Chairman.
Thank you.
The Chairman. Well, thank you very much, Senator Nelson. I
thank all Senators for their participation.
We especially thank our witnesses. Your initial papers were
very important and will be a matter of record and available to
our other members and our colleagues. And the dialogue and
question-and-answer we've had, I think, has been helpful in
terms of illuminating for us some action that we must take.
We thank you again, and the hearing is adjourned.
[Whereupon, at 11:20 a.m., the hearing was adjourned.]