[Senate Hearing 108-661]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-661

         EVALUATING INTERNATIONAL INTELLECTUAL PROPERTY PIRACY

=======================================================================

                                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

                              ----------                              
                                                                   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

                              ----------                              


                        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.
---------------------------------------------------------------------------
    \1\ (An electronic version of IIPA's Special 301 report is 
available at http://www.iipa.com/special301_TOCs/
2004_SPEC301_TOC.html.)
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.]

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