[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
   RESPONDING TO ORGANIZED CRIMES AGAINST MANUFACTURERS AND RETAILERS

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

                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON CRIME, TERRORISM,
                         AND HOMELAND SECURITY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 17, 2005

                               __________

                           Serial No. 109-36

                               __________

         Printed for the use of the Committee on the Judiciary


    Available via the World Wide Web: http://www.house.gov/judiciary

                                 ______

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                            WASHINGTON : 2005
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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  ADAM SMITH, Washington
MIKE PENCE, Indiana                  CHRIS VAN HOLLEN, Maryland
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel

                                 ------                                

        Subcommittee on Crime, Terrorism, and Homeland Security

                 HOWARD COBLE, North Carolina, Chairman

DANIEL E. LUNGREN, California        ROBERT C. SCOTT, Virginia
MARK GREEN, Wisconsin                SHEILA JACKSON LEE, Texas
TOM FEENEY, Florida                  MAXINE WATERS, California
STEVE CHABOT, Ohio                   MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida                  WILLIAM D. DELAHUNT, Massachusetts
JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
LOUIE GOHMERT, Texas

                      Jay Apperson, Chief Counsel

                  Michael Volkov, Deputy Chief Counsel

                        Elizabeth Sokul, Counsel

                          Katy Crooks, Counsel

                 Jason Cervenak, Full Committee Counsel

                     Bobby Vassar, Minority Counsel




                            C O N T E N T S

                              ----------                              

                             MARCH 17, 2005

                           OPENING STATEMENT

                                                                   Page
The Honorable Daniel E. Lungren, a Representative in Congress 
  from the State of California...................................     1
The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan.....................................     9
The Honorable Robert C. Scott, a Representative in Congress from 
  the State of Virginia, and Ranking Member, Subcommittee on 
  Crime, Terrorism, and Homeland Security........................    11

                               WITNESSES

Mr. Chris Swecker, Assistant Director, Criminal Investigative 
  Division, Federal Bureau of Investigation
  Oral Testimony.................................................    12
  Prepared Statement.............................................    14
Mr. Chris Nelson, Director of Asset Protection, Target 
  Corporation, on behalf of the Coalition Against Organized 
  Retail Theft
  Oral Testimony.................................................    15
  Prepared Statement.............................................    18
Mr. Paul D. Fox, Director, Global External Relations, The 
  Gillette Company, and Chair, Coalition Against Counterfeiting 
  and Piracy
  Oral Testimony.................................................    20
  Prepared Statement.............................................    22
Ms. Lauren V. Perez, Vice President, Regulatory Matters, Sandler, 
  Travis & Rosenberg, P.A., on behalf of the American Free Trade 
  Association
  Oral Testimony.................................................    25
  Prepared Statement.............................................    26

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Joseph Knollenberg, a 
  Representative in Congress from the State of Michigan..........     3
Letter from the Honorable Donald A. Manzullo, a Representative in 
  Congress from the State of Illinois, to the Honorable Howard 
  Coble..........................................................     5
Letter from the American Apparel & Footwear Association, 
  Automotive Aftermarket Industry Association, Gas Appliance 
  Manufacturers Association, et al., to the Honorable Joseph 
  Knollenberg....................................................     7

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Robert C. Scott, a 
  Representative in Congress from the State of Virginia, and 
  Ranking Member, Subcommittee on Crime, Terrorism, and Homeland 
  Security.......................................................    37
Prepared Statement of the Honorable Mark Green, a Representative 
  in Congress from the State of Wisconsin, and Member, 
  Subcommittee on Crime, Terrorism, and Homeland Security........    37
Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan..........    38
Prepared Statement of the Honorable Bob Goodlatte, a 
  Representative in Congress from the State of Virginia..........    38
Letter from Sandy Kennedy, President, Retail Industry Leaders 
  Association (RILA), to the Honorable Howard Coble..............    40
Prepared Statement of the National Electrical Manufacturers 
  Association (NEMA).............................................    44
Document entitled ``Organized Retail Crime: Describing a Major 
  Problem,'' by Read Hayes, Loss Prevention Research Council and 
  University of Florida..........................................    48
Response to post-hearing questions from Chris Swecker, Assistant 
  Director, Criminal Investigative Division, Federal Bureau of 
  Investigation..................................................   107
Response to post-hearing questions from Chris Nelson, Director of 
  Asset Protection, Target Corporation, on behalf of the 
  Coalition Against Organized Retail Theft.......................   110


   RESPONDING TO ORGANIZED CRIMES AGAINST MANUFACTURERS AND RETAILERS

                              ----------                              


                        THURSDAY, MARCH 17, 2005

                  House of Representatives,
                  Subcommittee on Crime, Terrorism,
                              and Homeland Security
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:17 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Daniel 
E. Lungren (acting Chair of the Subcommittee) presiding.
    Mr. Lungren. All right. The Subcommittee on Crime, 
Terrorism, and Homeland Security is having a legislative 
hearing today on crimes against manufacturers and retailers.
    We'll also have a markup of the bill H.R. 32, the ``Stop 
Counterfeiting in Manufactured Goods Act,'' as soon as we have 
a voting quorum, which will be nine.
    My intention is to begin the hearing from our witnesses, 
and at such time as we have a reporting quorum, to break the 
hearing here, have the vote on the proposed bill, and then go 
back into the hearing.
    The purpose of today's hearing is to examine the harm 
caused to consumers, manufacturers, and retailers by 
counterfeit products and organized retail theft. Because of the 
suspected involvement of organized crime and connections to 
terrorism in these activities, Federal law enforcement has 
undertaken a number of efforts to combat these crimes. Today, 
we will examine additional options for combating trafficking in 
counterfeited goods and organized retail theft. Both of these 
crimes produce staggering losses to businesses and, therefore, 
jobs across the United States and around the world. The level 
of organization required for these criminal activities and the 
established links to terrorism have made this a priority for 
the Federal Government.
    Task forces have been created by the Administration to 
direct resources to investigate and prosecute these crimes at 
the Federal level. The proliferation of counterfeit products in 
recent years creates not only a threat to legitimate businesses 
but also to the consumer. Many of the products that are falsely 
labeled are labeled with brand names or trademarks that 
consumers know and trust. Mislabeling of all often inferior 
products creates a false sense of security for consumers.
    Additionally, and as importantly, some of the counterfeited 
products, such as prescription or over-the-counter medications, 
could have serious health consequences if they are used by an 
unsuspecting consumer. FBI and Customs and Border agents 
estimate sales of counterfeit goods are lining the pockets of 
organized crime organizations to the tune of about $500 billion 
in sales per year. By mid-year of fiscal year 2003 the 
Department of Homeland Security already reported 3,117 seizures 
of counterfeit branded goods, including cigarettes, books, 
apparel, handbags, toys, and electronic games, with an 
estimated street value of about $38 million.
    According to the FBI's Financial Institution Fraud Unit, 
counterfeit products cheat the U.S. of tax revenues, adds to 
the national trade deficit, subjects consumers to health and 
safety risks, and leaves consumers without any legal recourse 
when they're financially or physically injured by counterfeit 
products. The FBI has identified counterfeit products not only 
in pharmaceuticals and automobile parts, but also in such 
products as airplane parts, baby formulas, and children's toys.
    Organized retail theft is another growing problem 
throughout the United States affecting a wide range of retail 
establishments, including supermarkets, chain drug stores, 
independent pharmacies, mass merchandisers, and convenience 
stores. It has become one of the most pressing security 
problems confronting retailers and suppliers and now accounts 
for over $30 billion of losses at store level annually, 
according to the FBI Interstate Theft Task Force.
    Organized retail theft is a separate and distinct crime 
from petty shoplifting. It involves professional theft rings 
that move quickly from community to community and across State 
lines to pilfer large amounts of merchandise that is then 
repackaged and sold back into the marketplace. Because of the 
prevalence of this criminal activity, the FBI created a task 
force to specifically focus on this problem. In addition to 
prosecutions under State laws, the Federal Government may use 
RICO laws to prosecute these large theft rings.
    In addition to the harm this crime causes for business, 
consumers are put at risk when these rings steal consumable 
products, especially over-the-counter medications and infant 
formula. In many cases, after the merchandise has been stolen, 
the products are stored under conditions that could threaten 
the integrity of the product. For example, extreme heat or 
extreme cold can affect the nutrient content or physical 
appearance of infant formulas. There is no guarantee that these 
products have not been stored or kept past the expiration 
dates. Expiration dates, lot numbers, and labels may have 
changed--may have been changed to falsely extend the shelf life 
of the product and to disguise the fact that the merchandise 
has been stolen.
    I find both of these crimes very troubling, not only 
because of their effect on businesses and our economy and our 
jobs, but also because of the real threat to consumers who may 
unknowingly receive these products. I am interested and the 
Committee is interested in hearing from each of the witnesses 
here today regarding appropriate efforts to prevent and 
prosecute these crimes.
    Also, I note that Congressman Knollenberg is unable to be 
in attendance. He is the author of H.R. 32, the ``Stop 
Counterfeiting in Manufactured Goods Act.'' I thank him for his 
contribution to this effort and ask for unanimous consent to 
submit a statement by Congressman Knollenberg in the record in 
support of his legislation, as well as a statement from 
Congressman Don Manzullo, and a letter from the Coalition 
Against Counterfeiting and Piracy. And without objection, it is 
so ordered.
    [The prepared statement of Mr. Knollenberg follows:]
       Prepared Statement of the Honorable Joseph Knollenberg, a 
         Representative in Congress from the State of Michigan
    Mr. Chairman and members of the Subcommittee, thank you for the 
opportunity to submit testimony for your hearing on ``Responding to 
Organized Crimes Against Manufacturers and Retailers.''
    The focus of my testimony today is the scourge of counterfeit 
manufactured goods. As you know, I have introduced the Stop 
Counterfeiting in Manufactured Goods Act, which you will markup 
following this hearing. I want to thank the subcommittee and, 
especially Chairman Coble, for taking up this important issue and 
considering my bill.
    The economy of my congressional district, as you would expect being 
located just northwest of Detroit, is largely centered around the auto 
industry, particularly auto suppliers. I represent quite a few large 
suppliers, such as Delphi and Arvin-Meritor. In fact, my district 
includes the headquarters of over one-fourth of the 100 largest auto 
suppliers in North America, as well as a host of small suppliers. To 
say that the manufacturing sector is important to my district and to 
the State of Michigan is an understatement. In my district alone, there 
are more than 1,500 manufacturing entities, and 93% of them have less 
than 100 employees.
    Early last year an association that represents auto parts suppliers 
came to my office and told me about the serious and growing problem of 
counterfeit auto parts. I was particularly struck by the impact that 
counterfeiters were having on the auto supplier industry.
    The numbers, in fact, are staggering. In addition to the obvious 
safety issues, counterfeit automobile parts cost the automotive 
supplier industry over $12 billion annually. It's estimated that if 
these losses were eliminated, the auto industry could hire 200,000 
additional workers.
    It's important to remember those numbers, because counterfeiting is 
not a victimless crime. In addition to selling bogus products, the 
counterfeiters are stealing jobs and money away from legitimate 
companies, destroying brand names, increasing warranty claims, and 
requiring legal fees and costly investigations.
    The fight against counterfeiters is not limited to the automotive 
industry. The impact of counterfeiters is broad. When it comes to the 
economy overall, the U.S. Customs Service has estimated that 
counterfeiting has resulted in the loss of 750,000 jobs and costs the 
United States around $200 billion annually. The International Chamber 
of Commerce estimates that seven percent of the world's trade is in 
counterfeit goods and that the counterfeit market is worth $350 
billion.
    That's why the Stop Counterfeiting in Manufactured Goods Act not 
only has united support from the auto industry, but from many, many 
other industries.
    Counterfeiting is a problem that is growing larger every day. We 
must take a more aggressive stand against it. And one of the ways we 
are going to do that is to give the government more tools to fight 
counterfeiters.
    My bill has two key provisions that will help stop criminals who 
use counterfeit trademarks.
    The first provision is the most important and gets at the roots of 
the problem--it requires the mandatory destruction and forfeiture of 
the equipment and materials used to make the counterfeit goods.
    Under current law, a convicted trademark counterfeiter is only 
required to give up the actual counterfeit goods, not the machinery. 
What's to stop them from going back to make more?
    My bill would require the convicted criminals to give up not just 
the counterfeit goods, but also the equipment they used to make those 
goods.
    In addition to this provision, my bill also prohibits trafficking 
in counterfeit labels, patches, and medallions that are not necessarily 
attached to a particular counterfeit good. This provision will close a 
loophole that was created through the case of the United States vs. 
Giles, also known as the ``Fabulous Fakes'' case.
    I believe that these simple changes will have a profound impact in 
combating counterfeit manufactured goods in many different ways.
    This bill will send a signal to counterfeiters that the United 
States is serious about fighting this growing problem. Passing this 
bill will give prosecutors more tools to go after the criminals here in 
the U.S. and punish them severely.
    This bill is also necessary to address the problem globally. Most 
of the counterfeit auto parts are coming from other countries, 
particularly China. Some countries are better than others at fighting 
counterfeiting, but we do have ways to prod the stragglers.
    However, we can't demand that other countries take steps to combat 
trademark counterfeiting that we have not taken ourselves. So, by 
passing my bill and improving our own law, Congress will empower our 
trade negotiators to press for stronger anti-counterfeiting provisions 
in other countries.
    As the United States is currently engaged in a variety of trade 
negotiations, it is critical to pass this bill as soon as possible so 
that it can have the greatest impact abroad.
    This bill has broad support, including the U.S. Chamber of 
Commerce, the National Association of Manufacturers, the Motor and 
Equipment Manufacturers Association, the National Electrical 
Manufacturers Association, the IACC, International Trademark 
Association and a host of major corporations.
    For these reasons, Mr. Chairman, I respectfully urge you and your 
colleagues on the subcommittee to pass H.R. 32, the Stop Counterfeiting 
in Manufactured Goods Act. As I have outlined, counterfeiting is a very 
serious worldwide problem that threatens public safety, hurts the U.S. 
economy and costs Americans thousands of manufacturing jobs. No one 
supports counterfeiters, and we must do everything we can to eliminate 
the problem. Passing my bill, the Stop Counterfeiting in Manufactured 
Goods Act is one important step we need to take. I look forward to 
working with all of you to advance this cause.

    [The letter from Mr. Manzullo follows:]
    
    
    
    
    [The letter from the coalition follows:]
    
    
    
    
    Mr. Lungren. At this time I would say that normally 
Congressman Coble would be presiding over this hearing, but 
Congressman Coble was required to appear to give a eulogy for a 
close friend of his in his district and otherwise would be in 
attendance.
    When Congressman Bobby Scott appears, I will recognize him 
for his opening statement. He is still on the floor, having 
just managed the Congressional Black Caucus amendment to the 
Budget Act.
    Mr. Conyers. Mr. Chairman?
    Mr. Lungren. Yes?
    Mr. Conyers. Might I make a brief opening statement in his 
absence?
    Mr. Lungren. In his absence, yes, sir. The gentleman is 
recognized.
    Mr. Conyers. I thank you very much. Always happy to see Dan 
Lungren sitting in the chair again. He took a leave of absence 
to be Attorney General in California, and now he is back on the 
Committee, I think his seniority is restored. And, of course, 
our good friend Bobby Scott of Virginia is the ranking 
Subcommittee person here, and he will be here shortly, I am 
sure.
    But this is a timely hearing. There has been, without 
question, more organized retail theft and trafficking in 
counterfeit trademarks that cause us to be here today. And we 
know that the numbers that Chairman Lungren brought to us, the 
FBI estimates and retail losses, are about where he said they 
are.
    We are here to talk about solutions to these problems, and 
I wanted to just throw out a couple of common-sense principles 
that might guide us as we proceed in this discussion.
    As we consider strengthening remedies against illicit 
counterfeiters, we want to be careful not to unnecessarily 
infringe on legitimate businesses and commercial activities. 
Many law-abiding companies operate in the parallel importation 
market which involves the selling and reselling of genuine 
goods and services, and in turn, they are then provided to 
customer--to consumers at competitive discount rates. Thus, any 
limits placed on such companies have a detrimental effect on 
consumers in search of bargains.
    And, finally, we should agree just as a general principle--
and I think that this does guide us most times. We don't want 
to add laws to the criminal code unless they are absolutely 
necessary. That goes back to the principles of federalism that 
dictate that we offer solutions only to those problems not left 
within the domain of the State, and the prosecution of 
shoplifters at the Federal level may not meet this requirement. 
And I am hoping that we'll be discussing somewhere along the 
line, Mr. Chairman, the verification of secondary sourcing.
    And with that, I ask that my statement be included in the 
record and return my time. Thank you very much.
    Mr. Lungren. It shall be. Thank you.
    Our first witness is Assistant Director of the FBI Criminal 
Investigative Division, Chris Swecker. The Criminal 
Investigative Division is responsible for coordinating, 
managing, and directing all criminal investigative programs 
nationwide. Mr. Swecker entered the FBI in 1982. Prior to being 
appointed to his current position by Director Mueller on July 
7, 2004, he served as the special agent in charge of the 
Charlotte, North Carolina, field office. A native of Spain?
    Mr. Swecker. Navy family.
    Mr. Lungren. Navy family, okay. A native of Spain, he 
received his early education in Virginia Beach, Virginia, 
earned a bachelor of science degree in political science and 
economics from Appalachian State University in North Carolina, 
and juris doctorate degree from Wake Forest School of Law.
    This is a little earlier than we thought we were going to 
have a vote. We will find out what it is.
    Upon graduating from law school, he became Assistant 
District Attorney for the First District of North Carolina 
September 1981.
    Our next witness is here today on behalf of the Gillette 
Corporation. Mr. Paul Fox is the Director of External Relations 
for the Gillette Corporation. Over the last 3 years, he has 
devoted specific focus to assisting Gillette identify the 
issues associated with the counterfeiting and theft of its 
products, developing wide-ranging programs designed to combat 
the impact of these crimes on Gillette's businesses, and is 
currently the Chair of the Coalition Against Counterfeiting and 
Piracy. Mr. Fox was educated in England.
    Our third witness, Mr. Chris Nelson, is the Director of 
Asset Protection for the Target Corporation. Before being 
appointed to this role, Mr. Nelson held the position of 
Director of Investigations for the Target Corporation. In this 
capacity, he led the corporation's investigative strategy and 
teams, including field investigations, corporate 
investigations, financial investigations, and intelligence. 
Prior to joining Target, he served as an officer of the U.S. 
Army Military Police. Assignments required him to serve all 
over the world, from South Korea to Washington, D.C., and even 
led him to command a military police company at Fort Riley, 
Kansas, and in Mogadishu, Somalia, supporting U.S. and UN 
operations during the Somalian conflict. He received his B.A. 
from St. Cloud State University in criminal justice, is a 
graduate of the military police skills officer basic and 
advanced course in combined arms and services staff school at 
Fort Leavenworth, Kansas.
    Our final witness, Ms. Lauren Perez, is Vice President on 
Regulatory Matters and an international trade adviser with 
Sandler, Travis, and Rosenberg, specializing in global 
regulatory issues.
    Again, I turn to my colleague, the distinguished gentleman 
from Michigan, to make a few remarks with respect to Ms. Perez.
    Mr. Conyers. We want to welcome Attorney Perez, who has now 
been promoted within her firm for her good work. And she is an 
old friend of intellectual property issues and has been before 
the Committee many times. And she conducts corporate seminars 
and deals with international protection of international--
intellectual property rights and has been very good in working 
with the Committee on the Judiciary. And I must say that we're 
always happy to have her come up from Florida to be with us.
    Thank you, Mr. Chairman.
    Mr. Lungren. Thank you, Ranking Member.
    It's the practice of the Subcommittee to swear in all 
witnesses appearing before it, so if you would please stand and 
raise your right hand.
    [Witnesses sworn.]
    Mr. Lungren. Thank you. Let the record show that each of 
the witnesses answered in the affirmative, and please be 
seated. I notice this was probably easier than the hearing they 
were having just down the hall. Some of you may have realized 
why you could have seats at this place. Canseco is down the 
hall.
    We have written statements from all the witnesses on this 
panel, which I will ask unanimous consent to submit into the 
record in their entirety, and without objection, so ordered.
    We have been informed that we have a vote on a motion to 
rise from the Committee considering the budget bill. The reason 
why we're surprised is we did not know--this was not scheduled. 
That is a 15-minute vote, I understand, and we will have to 
break and go over and vote and come back, and I apologize to 
our witnesses. We are a half-hour past when we wanted to, but 
this is what happens when you have hearings while we're also 
voting on something on the floor, the budget. And we shall 
adjourn and be back as soon as possible.
    [Recess.]
    Mr. Lungren. All right. We'll reconvene the Subcommittee 
hearing.
    First of all, I want to ask unanimous consent that the 
statement of Mr. Green be placed in the record. Without 
objection, so ordered.
    I recognize the Ranking Member of the Subcommittee, 
Congressman Bobby Scott.
    Mr. Scott. Thank you, Mr. Chairman. I apologize for being 
delayed. The amendment that was voted on previous to this last 
vote was an amendment that I had drafted, so I had to be there 
to answer questions. So although there was plenty of time to 
get back after people had an opportunity to vote, I felt 
compelled to stay. So I apologize.
    But I'm pleased to join you in convening this hearing on 
counterfeiting of manufactured goods and organized retail 
theft. We have Federal laws to address counterfeiting of 
manufacturing goods. H.R 32, the ``Stop Counterfeiting in 
Manufactured Goods Act,'' amends existing law in a manner 
designed to intensify the effort to prevent counterfeiting of 
goods. Counterfeited goods not only victimize the manufacturer 
but shortchanges the purchasers with substandard products, 
exposes us to--all of us to risks of unsafe products, and 
deprives Americans of jobs and other benefits of commerce of 
authentic goods.
    Yet there is concern that H.R. 32 as drafted may go too far 
and criminalizes legitimate, time-honored practices of law-
abiding merchants who legally purchase manufactured goods and 
repackage them in various ways to enhance sales of such goods. 
We have been able--we have able witnesses who may speak to 
these points, so I look forward to their testimony.
    For some now--for some time now, we've been hearing about 
the problem of organized retail theft, or ORT, from business 
representatives in my congressional district, so I am pleased 
that we'll be able to report to them that we're giving this 
issue attention in Congress. Theft of merchandise through 
shoplifting from retail outlets and through other means is not 
new and has traditionally been handled by State criminal laws. 
In Virginia, for example, any theft in excess of $200 is grand 
larceny, with a maximum penalty of 20 years. A third offense of 
petty larceny is by law in Virginia treated the same way as 
grand larceny. With the diligent enforcement activities, such 
measures are ordinarily adequate to--ordinary law enforcement 
activities are usually adequate to keep the problem of 
merchandising theft sufficiently in check.
    However, with organized theft rings deploying numerous 
individuals operating across State lines, ordinary enforcement 
approaches may not be adequate. These individuals can shoplift 
with acceptable risks by maintain--by remaining under the grand 
larceny threshold for each incident and steal thousands of 
dollars worth of merchandise for the ring. I expect that our 
witnesses will describe ORT as a problem of growing dimensions 
with organized crime, interstate, and international elements.
    As with counterfeiting of goods, we already have Federal 
laws which can be utilized, and I'm pleased to have a 
representative from the FBI to describe what the Federal 
Government is doing about it and what is needed for further 
effectiveness.
    So, Mr. Chairman, I look forward to hearing testimony from 
our witnesses and working with you and Chairman Coble to do 
what makes sense at the Federal level to curb both problems, 
including counterfeiting of manufactured goods and organized 
retail theft.
    Thank you.
    Mr. Lungren. Thank you very much.
    Now it becomes my duty to explain to you that even though 
you have waited here for almost 50 minutes, we're going to ask 
you to please confine your comments to 5 minutes apiece. The 
green light goes on to show you there's 5 minutes; the yellow 
light goes on with 1 minute; and I'll be as lenient as I 
possibly can, and then we'll have questions and answers. And we 
very much appreciate you being here. It is just a crazy 
schedule. And the absence of some Members is no reflection on 
the quality of your testimony. It is just the craziness of this 
Congress.
    Mr. Swecker, if we could begin with you, please.

   TESTIMONY OF CHRIS SWECKER, ASSISTANT DIRECTOR, CRIMINAL 
    INVESTIGATIVE DIVISION, FEDERAL BUREAU OF INVESTIGATION

    Mr. Swecker. Good afternoon, Mr. Chairman, Members of the 
Committee. I appreciate the opportunity to be here to talk 
about the problem posed by criminal enterprises involved in the 
theft, diversion, repackaging, and ultimate resale of consumer 
products to include such items as over-the-counter medications, 
prescription drugs, health and beauty aids, and infant formula.
    The problem is significant for the economic loss it brings 
to retailers and manufacturers, which are then passed on to 
consumers. Ultimately, the consumer ends up paying 
significantly higher prices for these products because of this. 
The problem is particularly acute in the area of organized 
retail theft by criminal enterprises. It is estimated that the 
retail industry loses between $15 to $30 billion annually to 
such theft.
    The unsuspecting consumer also faces potential health and 
safety risks from legitimate products which may have been 
mishandled by the criminal enterprises who stole them for 
resale to consumers. In many cases, stolen infant formula, 
pharmaceuticals, and other consumables are not stored under 
proper conditions. When these items are reintroduced into the 
retail market, they can pose a significant health hazard to the 
consumer. The potential threat to the health and safety of 
unsuspecting consumers is most evident in cases in which infant 
formula is stolen, repackaged, and then resold to both knowing 
and unknowing wholesalers, who then sell the infant formula to 
Government food programs and discount stores.
    The first phase of the initiative included the formation of 
a National Retail Federation/FBI Intelligence Network, which is 
a partnership between the FBI, State and local law enforcement, 
and corporate security entities, to establish an effective 
means of sharing intelligence information.
    Stolen prescription and over-the-counter medications and 
health and beauty aids are also sold to illegitimate 
wholesalers who specialize in repackaging and reintroduction of 
these products into the retail market, creating the same health 
and safety concerns. These illegitimate wholesalers also work 
with other criminal enterprises to facilitate the introduction 
of counterfeit prescription and over-the-counter medications 
and health and beauty aids to unsuspecting retailers and 
consumers. In addition to these concerns, the potential for 
intentional product tampering prior to the reintroduction of 
the stolen merchandise into the market is significant.
    These significant criminal enterprises can best be 
dismantled through a coordinated and cooperative effort between 
local law enforcement, Federal law enforcement, and the 
manufacturing and retail industry. In December of '03, we 
established the Organized Retail Theft Initiative to identify 
and ultimately to disrupt and dismantle the most sophisticated, 
multi-jurisdictional criminal enterprises, using the Federal 
statutes, including RICO and money laundering. Increased 
information sharing and cooperation between law enforcement and 
the private sector will enable both to gain a better 
understanding of the full nature and extent of this problem, as 
well as to identify the best methods for law enforcement and 
the industry to attack this serious problem.
    The FBI's initiative and the formation of the Intelligence 
Network has received strong support from the retail/food 
industry. Information obtained through this initiative has been 
furnished to FBI field offices to initiate investigations and 
facilitate a more effective, intelligence-driven investigative 
response to the significant problem.
    As part of the Intelligence Network, a Retail Loss 
Prevention--or, excuse me. As part of the Intelligence Network, 
the NRF has created a Retail Loss Prevention Intelligence 
Network Database. This database will provide retail entities 
and law enforcement with intelligence/information capability. 
The FBI is serving on the RLP--or on this committee in an 
advisory capacity.
    In addition to this initiative, the FBI is identifying and 
targeting multi-jurisdictional criminal enterprises utilizing 
major theft task forces. These task forces combine the 
resources of State, Federal, and local law enforcement as well 
as the industry to apply investigative techniques and 
strategies which the FBI successfully utilize to target 
traditional organized crime, including the development of a 
solid intelligence base and the use of undercover operations 
and various electronic surveillance techniques. These task 
forces increase the effectiveness of the effort.
    Currently there are nine FBI-led major theft task forces 
located in Houston, Memphis, Miami--where there are two--
Newark, New York, Philadelphia, San Juan, and the Washington 
field office. They're responsible for conducting investigations 
of all major theft violations including retail, cargo, vehicle, 
jewelry and gem theft. As of this date, the nine FBI-led task 
forces are staffed by FBI agents and other State, Federal, and 
local law enforcement.
    In FBI field offices that do not have a task force, 
significant investigations are being conducted by criminal 
enterprise squads. Many of these investigations are worked in 
coordination with State and local law enforcement and include 
assistance from the industry.
    In summary, major theft task forces are an extremely 
effective manner by which to combat organized retail theft 
enterprises. They ``force multiply'' the resources available, 
eliminate redundant investigative efforts, reduce concurrent 
jurisdictional issues, and encourage that information sharing 
that is so critical.
    The use of the task forces, coupled with a partnership with 
the industry, is seen as one of the most effective and 
efficient tools by which to identify, disrupt, and dismantle 
organized retail theft enterprises impacting the health, 
safety, and pocketbook of the American consumers.
    Thank you.
    [The prepared statement of Mr. Swecker follows:]
                  Prepared Statement of Chris Swecker
    Good morning Mr. Chairman and members of the Judiciary Committee. 
On behalf of the Federal Bureau of Investigation, I would like to 
express my gratitude to the committee for affording me the opportunity 
to speak with you concerning the FBI's efforts in addressing the 
nationwide problem posed by criminal enterprises involved in the theft, 
diversion, repackaging, and ultimate resale of consumer products, to 
include such items as over-the-counter medications, prescription drugs, 
health and beauty aids, and infant formula.
    This problem is significant for the economic losses it brings to 
manufacturers and retailers, which are then passed on to consumers. 
Ultimately, the American consumer ends up paying significantly higher 
prices for these products. This problem is particularly acute in the 
area of Organized Retail Theft (ORT) by criminal enterprises. It is 
estimated that the retail industry loses between $15 to $30 billion 
annually to such theft.
    The unsuspecting consumer also faces potential health and safety 
risks from legitimate products which may have been mishandled by the 
criminal enterprises who stole them for resale to consumers. In many 
cases, stolen infant formula, pharmaceuticals, and other consumables 
are not stored under proper conditions. When these items are 
reintroduced into the retail market, they can pose a significant health 
hazard to the consumer. The potential threat to the health and safety 
of unsuspecting consumers is most evident in cases in which infant 
formula is stolen, repackaged and then resold to both knowing and 
unknowing wholesalers, who then sell the infant formula to government 
food programs and discount stores.
    The first phase of the ORT Initiative included the formation of a 
National Retail Federation (NRF)/FBI Intelligence Network. This network 
is a partnership between the FBI, state and local law enforcement, and 
corporate security entities; to establish an effective means of sharing 
ORT information/intelligence; to discuss ORT trends as they relate to 
specific areas of the retail market; and, to identify and target the 
most significant ORT criminal enterprises, particularly those that may 
be involved in the funding and/or supporting of terrorist organizations 
or activities.
    Stolen prescription and over-the-counter medications and health and 
beauty aids are also sold to illegitimate wholesalers who specialize in 
the repackaging and reintroduction of these products into the retail 
market, creating the same health and safety concerns. These 
illegitimate wholesalers also work with other criminal enterprises to 
facilitate the introduction of counterfeit prescription and over-the-
counter medications and health and beauty aids to unsuspecting 
retailers and consumers. In addition to these concerns, the potential 
for intentional product tampering prior to the reintroduction of the 
stolen merchandise into the retail market is significant.
    These sophisticated ORT criminal enterprises can best be dismantled 
through a coordinated and cooperative effort between law enforcement 
and the manufacturing and retail industry. In December 2003, the FBI 
established an ORT Initiative to identify and ultimately to disrupt and 
dismantle the most sophisticated, multi-jurisdictional ORT criminal 
enterprises, using the Interstate Transportation of Stolen Property, 
Money Laundering, and RICO statutes. Increased information sharing and 
cooperation between law enforcement and the private sector will enable 
both to gain a better understanding of the full nature and extent of 
this crime problem, as well as to identify the best methods for law 
enforcement and the manufacturing and retail industry to attack this 
serious crime problem.
    The FBI's ORT Initiative and the formation of the Intelligence 
Network has received strong support from the retail/food industry. 
Information obtained through this initiative has been furnished to 
appropriate FBI field offices to initiate investigations and to 
facilitate a more effective, intelligence-driven investigative response 
to the significant problem of ORT criminal enterprises.
    As part of the Intelligence Network, the NRF is creating a Retail 
Loss Prevention Intelligence Network Database (RLPIN). This database 
will provide retail entities and law enforcement with an ORT 
information/intelligence sharing capability. The FBI is serving on the 
RLPIN committee in an advisory capacity.
    In addition to the ORT Initiative, the FBI is identifying and 
targeting multi-jurisdictional ORT criminal enterprises utilizing joint 
Major Theft Task Forces. These task forces, which combine the resources 
of local, state and federal law enforcement, as well as manufacturing 
or retail security personnel, are applying investigative techniques and 
strategies which the FBI has successfully utilized to target 
traditional organized crime, including the development of a solid 
intelligence base and the use of undercover operations and various 
electronic surveillance techniques. These task forces increase the 
effectiveness and productivity of limited personnel and logistical 
resources, avoid the duplication of investigation resources, and expand 
the cooperation and communication among federal and state law 
enforcement agencies.
    Currently there are 9 FBI-led Major Theft Task Forces located in 
the Houston, Memphis, Miami (2 Task Forces), Newark, New York, 
Philadelphia, San Juan, and Washington DC Field Offices. These task 
forces are responsible for conducting investigations of all major theft 
violations to include retail, cargo, vehicle, and jewelry and gem 
theft. As of this date, the 9 FBI-led Major Theft Task Forces are 
staffed by FBI Agents and other federal, state and local law 
enforcement officers.
    In FBI Field Offices that do not currently have formal Major Theft 
Task Forces, significant ORT investigations are being conducted by 
criminal enterprise squads. Many of these investigations are worked in 
coordination with state and local law enforcement agencies, and include 
assistance from manufacturing and retail security entities.
    In summary, Major Theft Task Forces are an extremely effective 
manner by which to combat ORT criminal enterprises. They ``force 
multiply'' federal resources, benefit local law enforcement efforts, 
eliminate redundant investigative efforts, reduce concurrent 
jurisdictional issues, encourage information sharing and intelligence 
development, and reduce substantial organized retail theft.
    The use of Major Theft Task Forces, coupled with a partnership with 
the retail industry, is seen by the FBI as one of the most effective 
and efficient tools by which to identify, disrupt and dismantle 
organized retail theft criminal enterprises impacting the health, 
safety and pocketbook of American consumers.
    Thank you.

    Mr. Lungren. Thank you very much.
    Mr. Nelson?

TESTIMONY OF CHRIS NELSON, DIRECTOR OF ASSET PROTECTION, TARGET 
   CORPORATION, ON BEHALF OF THE COALITION AGAINST ORGANIZED 
                          RETAIL THEFT

    Mr. Nelson. Thank you. Mr. Chairman, Members of the 
Subcommittee, Congressman Goodlatte, my name is Chris Nelson. 
I'm the Director of Asset Protection for Target Corporation, 
which is headquartered in Minneapolis, Minnesota. Thank you for 
conducting today's hearing on counterfeiting and organized 
retail theft. My statement today is presented on behalf of the 
Coalition Against Organized Retail Theft, This group, which has 
been together for close to 5 years, consists of national 
manufacturing and retail organizations as well as individual 
companies from both of these sectors. A listing of all the 
coalition members can be found at the end of my statement.
    Mr. Chairman, organized retail theft, or ORT, is a growing 
problem throughout the United States affecting many sectors of 
the retail community from supermarkets and chain drug stores to 
mass merchandisers and specialty stores. It is clearly the most 
pressing security problem facing our industry. Organized retail 
theft now accounts for up to $30 billion in losses at the store 
level annually, according to the FBI interstate task force.
    More importantly and most disturbing is the fact that the 
type of criminal activity can put consumers' health and safety 
at risk. For example, consumers are potentially at risk when 
professional shoplifting rings steal consumable products, such 
as over-the-counter medications and infant formula. Pilfered 
products may not be kept under ideal or required storage 
conditions, and they can threaten the product's integrity. 
Oftentimes these organized thieves will repackage and change 
labels of stolen merchandise or products to falsely extend that 
product's expiration date or to disguise the fact that that 
merchandise has been stolen.
    Additionally, we at Target and several retailers have been 
victimized by ORT groups involved in other illicit activities, 
including the distribution of narcotics and money laundering 
supporting overseas operations.
    After working last year in the Fort Worth-Dallas area to 
close down a very large organized retail theft group stealing 
and reselling baby formula, we were advised by law enforcement 
that the group has sent $6 million to the Middle East.
    Organized retail theft rings are highly mobile and 
sophisticated, moving from community to community, and across 
State lines stealing large amounts of merchandise from 
retailers. Typical retail security practices are not enough to 
deter these groups. At Target, we studied the tactics of these 
groups and responded by fielding a highly trained investigative 
team throughout the country specifically equipped to deal with 
these groups. Unfortunately, not all retailers are in a fiscal 
position to resource such an endeavor. This creates an 
environment where ORT groups have the advantage and 
significantly lessens their risk.
    ORT groups typically target everyday household products 
that can easily be sold through fencing operations, flea 
markets, over the Internet, swap meets, and shady storefront 
operations. In addition to infant formula and OTC medications, 
other items that are in high demand by these professional 
shoplifting rings include razor blades, camera film, batteries, 
DVDs, CDs, and smoking cessation public sector. These items are 
attractive because they are commodities which are easy to 
conceal and easy to sell on the secondhand market. High-end 
items including designer clothes and electronics are also 
popular items for theft by these gangs. ORT groups target the 
same trend or hot items that honest consumers want.
    The coalition wishes to express its gratitude to both the 
Justice Department and the FBI for their hard work and 
dedication to the organized retail crime front as well as 
outstanding efforts of State and local law enforcement. In 
particular, retailers and manufacturers are very pleased about 
the recent collaborative efforts between Federal and State law 
enforcement officials who have broken up a retail theft ring 
operating in North Carolina and Virginia that was responsible 
for moving more than $2 million worth of stolen infant formula 
and OTC products.
    The coalition views the apprehension of this theft ring as 
a very positive development, but more needs to be done because 
the problem is prevalent throughout the country and these theft 
rings are becoming increasingly more aggressive and violent in 
their behavior. Unfortunately, this goal may be elusive, and 
that's because there is no Federal statute currently on the 
books that specifically addresses organized retail theft 
crimes. The Federal statute most frequently utilized in dealing 
with professional theft rings is the Interstate Transportation 
of Stolen Property Act, but this law is limited to situations 
involving transportation of stolen goods. Thus, when 
professional thieves are apprehended for stealing large 
quantities of merchandise from a retail store, no Federal 
statute is readily available. This means the case is likely to 
be handled under State shoplifting law and usually treats such 
crimes as petty theft and a misdemeanor. As a result, organized 
retail theft cases are rarely prosecuted, and when they are, 
individuals who are convicted usually see limited jail time and 
are placed on probation if they have no prior arrests. That 
means they are back out on the street quickly, only to continue 
their illegal efforts and further injure both businesses and 
consumers.
    Retailers and manufacturers firmly believe that there is an 
overriding need to make organized retail theft a Federal felony 
as we believe it would serve as a strong deterrent against the 
commission of crimes of this nature in the future. The 108th 
Congress--or in the 108th Congress, our coalition endorsed such 
a bill, S. 1553, that was introduced by Senator Larry Craig.
    In addition to our support for an initiative that would 
make organized retail theft a Federal felony, the coalition 
offers the following legislative recommendations for 
consideration by the Congress:
    The establishment of a national database or clearinghouse 
to collect and track organized retail theft crimes. Such a 
national database would allow State and local law enforcement 
officials as well as retail stores to transmit electronically 
appropriate information into the database. The transmitted 
information would allow the FBI to quickly identify hot spots 
throughout the United States where ORT crimes are being 
committed and to deploy its agents and the resources more 
effectively in the field.
    Second is the authorization of funding for the 
establishment and maintenance of the national database, and for 
the purposes of educating and training Federal law enforcement 
agents for investigating, apprehending, and prosecuting 
individuals engaged in ORT activities.
    Third, the prohibition of the sale of certain products that 
are regulated by the Food and Drug Administration, such as 
infant formula and OTC medications, by flea markets and 
transient vendors unless such vendors have written 
authorization from the manufacturer to sell their products.
    And, finally, to amend Federal law to specifically 
reference organized retail theft as a Federal offense and to 
include a working definition of what constitutes organized 
retail theft so that Federal and State law enforcement agencies 
can identify these crimes and respond accordingly. In addition, 
better sentencing guidelines so that ORT crimes are not 
considered petty theft whereby individuals receive little jail 
time or probation.
    Mr. Chairman, this concludes my statement. Thank you for 
allowing me on behalf of Target Corporation and the Coalition 
Against Organized Retail Theft to participate in this important 
hearing.
    [The prepared statement of Mr. Nelson follows:]
                   Prepared Statement of Chris Nelson
                              introduction
    Mr. Chairman, Members of the Subcommittee, Congressman Goodlatte. 
My name is Chris Nelson, and I am Director of Asset Protection for 
Target Corporation, headquartered in Minneapolis, Minnesota. Thank you 
for conducting today's hearing on counterfeiting and organized retail 
theft. My statement today is presented on behalf of the Coalition 
Against Organized Retail Theft. This group, which has been together for 
close to five years, consists of national manufacturing and retail 
organizations as well as individual companies from both of these 
sectors. A listing of all Coalition Members can be found at the end of 
my statement.
               organized retail theft--a growing problem
    Mr. Chairman. Organized Retail Theft is a growing problem 
throughout the United States affecting many sectors of the retail 
community from supermarkets, and chain drug stores to mass 
merchandisers and specialty stores. It is clearly the most pressing 
security problem facing our industry. Organized Retail Theft now 
accounts for up to $30 billion in losses at store level annually 
according to the Federal Bureau of Investigation's (FBI) interstate 
task force.
    More importantly and most disturbing is the fact that this type of 
criminal activity can put consumer's health and safety at risk. For 
example, consumers are potentially at risk when professional 
shoplifting rings steal consumable products, such as over-the-counter 
medications and infant formula. Pilfered products may not be kept under 
ideal or required storage conditions which can threaten the product's 
integrity. And often times these organized thieves will repackage and 
change the labels of stolen products to falsely extend the product's 
expiration date or to disguise the fact that the merchandise has been 
stolen.
    Organized retail theft rings are highly mobile, moving from 
community to community, and across state lines stealing large amounts 
of merchandise from retail stores. They typically target everyday 
household products that can be easily sold through fencing operations, 
flea markets, over the Internet, swap meets and shady storefront 
operations. In addition to infant formula and OTC medications, other 
items that are in high demand by these professional shoplifting rings 
include razor blades, camera film, batteries, DVDs, CDs, and smoking 
cessation products. High end items including designer clothes and 
electronics are also popular items for theft by these brazen gangs.
    The Coalition wishes to express its gratitude to both the Justice 
Department (DOJ) and the FBI for their hard work and dedication on the 
organized retail crime front as well as the outstanding efforts of 
state and local law enforcement. In particular, retailers and 
manufacturers are very pleased about the recent collaborative effort 
between federal and state law enforcement officials who have broken up 
a retail theft ring operating in North Carolina and Virginia that was 
responsible for moving more than $2 million dollars worth of stolen 
infant formula and OTC products.
    The Coalition views the apprehension of this theft ring as a very 
positive development, but more needs to be done because the problem is 
prevalent throughout the country and these theft rings are becoming 
more aggressive and violent in their behavior. Unfortunately, this goal 
may be elusive, and that's because there is no federal statute 
currently on the books that specifically addresses organized retail 
theft crimes. The federal statute most frequently utilized in dealing 
with professional theft rings is the Interstate Transportation of 
Stolen Property Act, but this law is limited to situations involving 
the transporting of stolen goods. Thus, when professional thieves are 
apprehended for stealing large quantities of merchandise from a retail 
store, no federal statute is readily available. This means the case is 
likely to be handled under a state shoplifting law that usually treats 
such crimes as petty theft and a misdemeanor. As a result, rarely are 
organized retail theft cases prosecuted, and when they are, individuals 
who are convicted usually see limited jail time or are placed on 
probation if they have no prior arrests.
                       coalition recommendations
    Therefore, retailers and manufacturers firmly believe that there is 
an overriding need to make Organized Retail Theft a federal felony as 
we believe it would serve as a strong deterrent against the commission 
of crimes of this nature in the future. In the 108th Congress, our 
Coalition endorsed such a bill (S. 1553) that was introduced by Senator 
Larry Craig (R-ID).
    In addition to our support for an initiative that would make 
Organized Retail Theft a federal felony, the Coalition offers the 
following legislative recommendations for consideration by the 
Congress:

        1.  The establishment of a national data base or clearinghouse 
        to collect and track organized retail theft crimes. Such a 
        national data base would allow state and local law enforcement 
        officials as well as retail stores to transmit electronically 
        appropriate information into the data base. The transmitted 
        information would allow the FBI to quickly identify ``hot 
        spots'' throughout the United States where ORT crimes are being 
        committed and to deploy its agents and resources more 
        efficiently in the field.

        2.  The authorization of funding for the establishment and 
        maintenance of the national data base, and for the purposes of 
        education and training of federal law enforcement agents for 
        investigating, apprehending and prosecuting individuals engaged 
        in ORT crimes.

        3.  The prohibition of the sale of certain products that are 
        regulated by the Food and Drug Administration, such as infant 
        formula and OTC medications, by flea markets and transient 
        vendors unless such vendors have written authorization from the 
        manufacturer to sell their products.

        4.  Amend federal law to specifically reference organized 
        retail theft as a federal offense and to include a working 
        definition of what constitutes organized retail theft so that 
        federal and state law enforcement agencies can identify these 
        crimes and respond accordingly. In addition, better sentencing 
        guidelines so that ORT crimes are not considered petty theft 
        whereby individuals receive little jail time or probation.

    Mr. Chairman, this concludes my statement and thank you for 
allowing the Coalition Against Organized Retail Theft to participate in 
this important hearing.

                               __________

                COALITION AGAINST ORGANIZED RETAIL THEFT

Abbott Laboratories
Consumer Healthcare Products Association
Cosmetic, Toiletry and Fragrance Association
CVS/Pharmacy
Duane Reade
Eastman Kodak Company
Eckerd Corporation
Food Marketing Institute
The Gillette Company
GlaxoSmithKline
Grocery Manufacturers of America
International Formula Council
The Kellen Company
National Association of Chain Drug Stores
National Association of Convenience Stores
National Community Pharmacists Association
National Retail Federation
Retail Alliance of Virginia
Retail Industry Leaders Association
Security Industry Association
Wal-Mart Stores, Inc.
Walgreen Co.

    Mr. Lungren. Thank you, Mr. Nelson.
    Mr. Fox?

TESTIMONY OF PAUL D. FOX, DIRECTOR, GLOBAL EXTERNAL RELATIONS, 
      THE GILLETTE COMPANY, AND CHAIR, COALITION AGAINST 
                   COUNTERFEITING AND PIRACY

    Mr. Fox. Mr. Chairman, Members of the Subcommittee, my name 
is Paul Fox. I am Director of Global External Relations for The 
Gillette Company.
    Gillette is a large, publicly held consumer product company 
based in Boston with world-renowned branches such as MACH3, 
Venus, Right Guard, Oral-B, Duracell, and Braun.
    I am also Chair of the Coalition Against Counterfeiting and 
Piracy, a cross-industry group created by a joint initiative 
between the U.S. Chamber of Commerce and the National 
Association of Manufacturers to act as the interface between 
U.S. business and the U.S. Government's Strategy Targeting 
Organized Piracy Program. A list of member organizations to the 
coalition is attached to my written testimony. That written 
testimony also includes a copy of the report Gillette 
commissioned last year on the scale and impact of the illicit 
market in stolen and counterfeit goods on the fast-moving 
consumer goods sector.
    I am also Chair of the National Association of 
Manufacturers' Working Group on Counterfeiting.
    I am here today on behalf of both Gillette and the 
coalition to discuss counterfeiting and theft, two issues of 
intense concern to Gillette and U.S. businesses nationwide.
    First and foremost, I want to emphasize that counterfeiting 
and theft pose a significant threat to the economy of the 
United States and undermine the welfare, the security, and the 
safety of its citizens.
    Let me begin by focusing on the issue of counterfeiting.
    I have two packages of Duracell batteries here, one of 
which is counterfeit. You should know that I can tell you a lot 
about the real batteries in my right hand--where they were 
made, what's in them, how they perform, how much we and the 
retailer can expect to make on them; and last, but not least, 
the amount of tax that Federal and State governments make from 
their sale.
    On the other hand, all I can tell you about these fakes is 
that they will probably last one-tenth as long as the real 
ones, probably would sell for half as much, and that Gillette, 
the retailer, and the Government would get nothing from their 
sale. These counterfeit batteries are part of more than 34 
million that we seized during 2004. During that same period, we 
also seized more than 31 million fake Gillette shaving products 
and tens of thousands of Oral-B toothbrushes.
    When you apply these issues to the entire U.S. business 
community, the cost is staggering: an estimated $200 billion to 
the U.S. economy and a loss of 750,000 American jobs.
    Counterfeiting is clearly not a small problem, nor is it a 
victimless crime. We know that counterfeiting is used by 
organized crime and terrorist groups, including al Qaeda, to 
help fund their activities. But in addition to the risks from 
these organizations, our citizens also face direct health and 
safety dangers. These dangers range from fake, substandard auto 
and aircraft parts to fake pharmaceuticals that have no 
therapeutic value and may even cause direct harm.
    So what do we do and where do we start? First, we must make 
sure our law enforcement people have the resources they need to 
make a real impact, including the ability to seize and destroy 
the machinery used in making counterfeit products. A recent 
Gallup survey on consumer attitudes to counterfeiting revealed 
that more than 70 percent of American consumers wanted to see 
tougher laws against these criminals. And we urge the 
Department of Commerce to complete the counterfeiting study for 
which it earmarked funds 3 years ago, but for which work has 
not yet begun.
    And, second, we use an improved domestic posture to 
influence international action on counterfeiting, to enact 
mandatory confiscation and destruction laws, to strengthen 
criminal penalties, and to enhance global cooperation on this 
issue.
    In the end, this is not a problem we can solve overnight or 
alone. But as leaders in global commerce, we must take real 
steps to protect the integrity of U.S. brands and products. Our 
citizens and our businesses deserve nothing less.
    Now let me turn to the question of organized retail theft. 
Theft within the U.S. retail industry is a $30 billion problem 
often linked to the same organized crime syndicates that 
perpetrate the outrages connected with counterfeiting. It is 
the same shady middlemen who peddle counterfeit goods that also 
help fence stolen merchandise and put it back into the licit 
retail chain.
    The majority of goods are stolen not for personal use but 
by organized criminals intent on the resale of the goods or to 
use them as collateral for other consumables such as drugs.
    Increasingly, criminals use violence to enforce their 
activities and to conduct their crimes. Retail staff face 
serious physical threats from thieves intent on removing 
products from store shelves.
    Because petty shoplifting is generally a misdemeanor 
prosecuted only under State statutes, organized crime rings 
have been using shoplifting to feed large-scale, high-revenue 
theft. ORT kingpins recruit gangs of shoplifters, giving them 
lists of low-volume, high-value items to be stolen from retail 
outlets--items such as razor blades, batteries, over-the-
counter drugs, infant formula, and designer clothing.
    The individual shoplifter may not seem worth prosecuting by 
local authorities since the value of the goods stolen from the 
single store is usually, and purposely, below the dollar value 
that would make the single act of shoplifting a felony under 
State law.
    However, while each individual instance of theft may itself 
be relatively small, the combined impact of these gangs can be 
devastating. During one recent FBI investigation, theft 
amounting to more than $10 million over a 5-year period was 
conducted by one criminal enterprise.
    So what can Congress do? First, Congress should establish 
and provide ongoing funding for a national organized retail 
crime database that would allow the FBI to quickly deploy 
resources against these crimes. We have a national database for 
stolen cars. We need a national database on ORT as well.
    Second, we need a focused Federal criminal statute to give 
Federal prosecutors better tools and more incentive to go after 
these criminals. Right now, Federal prosecutors spend little 
time on individual shoplifting crimes even though this may be 
the most effective way to crack a much larger ORT ring.
    In short, the organized criminals are using the low level 
of attention paid to the crime of shoplifting as a cover for a 
massive theft effort that costs billions of dollars each year. 
For our part, American industry stands ready to assist you in 
any way possible.
    This concludes my submission, and I would like to thank you 
for your time.
    [The prepared statement of Mr. Fox follows:]
                   Prepared Statement of Paul D. Fox
    Mr. Chairman, Members of the Sub-Committee. My name is Paul Fox, 
and I am the Director of Global External Relations for The Gillette 
Company.
    Gillette is a large, publicly held consumer product company based 
in Boston with world-renowned brands such as MACH3, Venus, Right Guard, 
Oral-B, Duracell, and Braun.
    I am also Chair of the Coalition Against Counterfeiting and Piracy 
. . . a cross industry group created by a joint initiative between the 
US Chamber of Commerce and the National Association of Manufacturers to 
act as the interface between US business and the US Government's 
Strategy Targeting Organized Piracy Program. A list of member 
organizations to the Coalition is attached to my written testimony. 
That written testimony also includes a copy of the report Gillette 
commissioned last year on the scale and impact of the illicit market in 
stolen and counterfeit goods on the fast moving consumer goods sector.
    I also Chair the National Association of Manufacturers' Working 
Group on Counterfeiting.
    I am here today on behalf of both Gillette and the Coalition to 
discuss counterfeiting and theft--two issues of intense concern to 
Gillette and US businesses nationwide.
    First and foremost, I want to emphasize that counterfeiting and 
theft pose a significant threat to the economy of the United States and 
undermine the welfare, security and safety of its citizens.
    Let me begin by focusing on the issue of counterfeiting.
    I have two packages of Duracell batteries here . . . one of which 
is counterfeit.
    You should know that I can tell you a lot about the real batteries 
in my right hand--

        -- where they were made,

        -- what's in them,

        -- how they perform,

        -- how much we and the retailer can expect to make on them,

        -- and last, but not least, the amount of tax that federal and 
        state governments make from their sale.

    On the other hand, all I can tell you about these fakes is that 
they will probably last one-tenth as long as the real ones,

        -- probably would sell for half as much,

        -- and that Gillette, the retailer and the government would get 
        nothing from their sale.

    These counterfeit batteries are part of more than 34 million that 
we seized during 2004.
    During the same period, we also seized more than 31 million fake 
Gillette shaving products and tens of thousands of fake Oral-B 
toothbrushes--
    When you apply these issues to the entire US business community, 
the cost is staggering . . . an estimated $200 Billion to the US 
economy and a loss of 750,000 American jobs.
 counterfeiting is clearly not a small problem nor is it a victimless 
                                crime--
    We know that counterfeiting is used by organized crime and 
terrorist groups, including Al Queda, to help fund their activities
    But in addition to the risks from these organizations, our citizens 
also face direct health and safety dangers.
    These dangers range from fake, substandard auto and aircraft 
parts----

        -- to fake pharmaceuticals that have no therapeutic value and 
        may even cause direct harm.

    So what do we do and where do we start?
    First, we make sure our law enforcement people have the resources 
they need to have a real impact, including the ability to seize and 
destroy the machinery used in making counterfeit products,
    A recent Gallup survey on consumer attitudes to counterfeiting 
revealed that more than 70 percent of American consumers wanted to see 
tougher laws against these criminals.

        -- and we urge the Department of Commerce to complete the 
        counterfeiting study for which it earmarked funds three years 
        ago, but for which work has not yet begun.

    And second, we use an improved domestic posture to influence 
international action on counterfeiting,

        -- to enact mandatory confiscation and destruction laws

        -- to strengthen criminal penalties

        -- and to enhance global cooperation on the issue.

    In the end, this is not a problem we can solve overnight or alone.
    But as leaders in global commerce, we must take real steps to 
protect the integrity of US brands and products.
    Our citizens and our businesses deserve nothing less.
    Now let me turn to organized retail theft.
    Theft within the US retail industry is a $30 billion dollar problem 
often linked to the same organized crime syndicates that perpetrate the 
outrages connected with counterfeiting. It is the same shady middlemen 
who peddle counterfeit goods that also help fence stolen merchandize 
and put it back into the licit retail chain.
    The majority of goods are stolen not for personal use but by 
organized criminals intent on the resale of the goods or to use them as 
collateral for other consumables such as drugs.
    Increasingly, criminals use violence to enforce their activities 
and to conduct their crimes. Retail staff face serious physical threats 
from thieves intent on removing products from store shelves.
    Because petty shoplifting is generally a misdemeanor prosecuted 
only under state statutes, organized crime rings have been using 
shoplifting to feed large-scale, high-revenue theft.
    ORT kingpins recruit gangs of shoplifters, giving them lists of 
low-volume, high-value items to be stolen from retail outlets--items 
such as razor blades, batteries, over-the-counter drugs, infant 
formula, and designer clothing.
    The individual shoplifter may not seem worth prosecuting by local 
authorities, since the value of the goods stolen from the single store 
is usually, and purposefully, below the dollar value that would make 
the single act of shoplifting a felony under state law.
    However, while each individual instance of theft may itself be 
relatively small, the combined impact of these gangs can be 
devastating. During one recent FBI investigation, theft amounting to 
more than $10 million over a five year period was conducted by one 
criminal enterprise.
    So, what can Congress do?
    First, Congress should establish and provide ongoing funding for a 
national organized retail crime database that would allow the FBI to 
quickly deploy resources against these crimes.
    We have a national database for stolen cars. We need a national 
database on ORT as well.
    Second, we need a focused federal criminal statute to give federal 
prosecutors better tools and more incentive to go after these 
criminals. Right now, federal prosecutors spend little time on 
individual shoplifting crimes even though this may be the most 
effective way to crack a much larger ORT ring.
    In short, the organized criminals are using the low-level of 
attention paid to the crime of shoplifting as a cover for a massive 
theft effort that costs billions of dollars each year.
    For our part, American industry stands ready to assist you in any 
way possible.
    This concludes my submission and I would like to thank you for your 
time.
    I would be happy to answer any questions.

                               __________

         Coalition Against Counterfeiting and Piracy_Membership

Associations
 1.  AeA, Advancing the Business of Technology (AeA)
 2.  Advanced Medical Technology Association (ADVAMED)
 3.  American Apparel & Footwear Association (AAFA)
 4.  American Association of Exporters and Importers (AAEI)
 5.  American Intellectual Property Lawyers Association (AIPLA)
 6.  American Society of Association Executives (ASAE)
 7.  The Cosmetic, Toiletry and Fragrance Association (CTFA)
 8.  Consumer Electronics Association (CEA)
 9.  Entertainment Software Association (ESA)
10.  Food Marketing Institute (FMI)
11.  Gas Appliance Manufacturers Association (GAMA)
12.  Global Business Leaders Alliance Against Counterfeiting (GBLAAC)
13.  Grocery Manufacturers of America (GMA)
14.  International Anti-counterfeiting Coalition (IACC)
15.  Intellectual Property Owners Association (IPO)
16.  International Communications Industries Association (ICIA)
17.  International Trademark Association (INTA)
18.  Motor & Equipment Manufacturers Association (MEMA)
19.  Motion Picture Association of American (MPAA)
20.  National Association of Manufacturers (NAM)
21.  Recording Industry Association of America (RIAA)
22.  Toy Industry Association (TIA)
23.  U.S. Chamber of Commerce (USCC)
24.  U.S. Council for International Business (USCIB)
25.  U.S.-India Business Council
26.  Vision Council of America (VCA)
27.  U.S.--India Business Council
28.  Vision Council of America (VCA)
Corporations
 1.  Altria Corporate Services, Inc.
 2.  Amgen Inc.
 3.  American Standard Inc.
 4.  Aspen Systems Corporation
 5.  BellSouth Corporation
 6.  C&M International, LTD
 7.  Dayco Products, LLC
 8.  DuPont Security & Solution
 9.  Eastman Kodak Company
10.  Gillette
11.  News Corporation
12.  Oakley
13.  Pernod Ricard USA
14.  Robert Branand International
15.  SICPA Securink Corporation
16.  Stanwich Group LLC.
17.  The Fairfax Group
18.  Transpro, INC
19.  Underwriters Laboratories, Incorporated
20.  Xerox Corporation

    Mr. Lungren. Thank you very much, Mr. Fox.
    Ms. Perez?

   TESTIMONY OF LAUREN V. PEREZ, VICE PRESIDENT, REGULATORY 
 MATTERS, SANDLER, TRAVIS & ROSENBERG, P.A., ON BEHALF OF THE 
                AMERICAN FREE TRADE ASSOCIATION

    Ms. Perez. It's a privilege and honor to appear before the 
Subcommittee to offer these comments on behalf of the American 
Free Trade Association. AFTA is a nonprofit trade association 
of independent American retailers, distributors, importers, and 
wholesalers, committed to preserving the parallel market in 
order to assure American consumers cost competition and 
distribution of genuine and legitimate brand-name merchandise.
    To be honest, AFTA is never going to come before you and 
oppose legislation committed to eliminating organized crime or 
combating retail theft. AFTA supports any measures that's going 
to make American businesses and consumers safer and more 
profitable. AFTA, in fact, supports legislation that 
criminalizes counterfeiting activity, so long as that 
legislation does not also prove to the detriment of consumers, 
relying upon the benefit of a freely competitive marketplace. 
AFTA supports the intentions of H.R. 32 but has grave concerns 
about the unintended consequences of its language.
    I'm going to spend a couple of minutes talking about and 
briefly illustrating some of those concerns.
    The amendment to the definition of a counterfeit trademark 
in H.R. 32 is a dramatic amendment, and it's put in the context 
of a criminal statute. The bill's proposed amended definition 
of a counterfeit trademark ignores entirely the fact that, 
under certain necessary, lawful, and desired commercial 
transactions, parties other than the registered trademark owner 
need to and should be able to reproduce and refer to registered 
trademarks on product packaging, labeling, tags, stickers, or 
labels.
    Product retailers and wholesalers in the United States 
often consolidate and combine legitimate brand-name merchandise 
into gift sets. We love this, especially around holiday time. 
You get lipsticks with mirrors or perfumes with hairbrushes. 
And then what these traders do is they make packaging or 
labeling to combine these products, and on that packaging and 
labeling they reproduce or refer to the registered trademarks 
to accurately identify the genuine brand-name merchandise 
contained in those gift sets. There's nothing wrong with this. 
But H.R. 32 would potentially make that packaging counterfeit. 
It would turn the people who traffick in that packaging into 
criminals. That's not what legislation intended to stop 
counterfeiting should also do.
    We all love coupons, discount coupons. American consumers 
and retailers, everyone depends upon the availability of 
coupons. There are third-party service providers that, quote-
unquote, traffic in these promotional vehicles that necessarily 
contain registered trademarks that accurately refer to the 
genuine brand-name merchandise being sold at a discount. H.R. 
32 would potentially make these coupons counterfeit if they 
weren't manufactured under the authority of the registered 
trademark owner. That's not what this legislation should do.
    For many, many, many years, trademark owners and product 
manufacturers have rushed into court charging that parallel 
marketers and suppliers to the secondary marketplace are 
counterfeiters, and oftentimes they're just not right. That's 
just not true.
    There's one case I just want to briefly talk about, and it 
does deal with infant formula. I want to separate the issue of 
the health and safety of infant formula from the portion of 
this case that I think is germane to what I'm talking about.
    In that case, there was a third-party distributor that had 
in its possession unadulterated, untampered-with infant formula 
that was well still within its sell-by date. This infant 
formula was consolidated and combined, all of one single 
manufacturer, into a shipping container, a cardboard shipping 
container. The shipping container, the packaging, was made so 
that consumers could see that the products had not been 
tampered with. They could see that the products could still be 
consumed within the sell-by date and had on it the registered 
trademark accurately identifying the brand of the infant 
formula contained on those trays.
    The Government argued that the trays were counterfeit. They 
wanted this third-party distributor held criminally liable for 
counterfeiting under section 2320 of the Criminal Code. The 
court fortunately didn't buy it and said that the shipping 
trays that just actually reproduced the trademarks of the 
actual products, genuine products contained on the shipping 
trays were not counterfeit. H.R. 32 would reverse that 
decision.
    AFTA is absolutely convinced and remains convinced and 
confident that H.R. 32 is intended to stop illicit criminal 
counterfeit activity and supports that intention. Again, it's 
the failure of the legislation to distinguish between lawful 
and unlawful application of registered trademark that needs to 
be fixed. We need to work together to find an amendment that 
fixes it.
    While there's absolutely no question that all American 
trade groups and associations need to bind together to make 
sure that criminal counterfeiting activity stops, it's an 
inappropriate legislative remedy to stop also normal, 
desirable, and necessary commercial transactions.
    AFTA has submitted in its written testimony proposed 
amendment language that we ask the Subcommittee and the 
Committee to consider. This language attempts to preserve 
criminal penalties for counterfeit packaging, labels, tags, 
while it also exempts from criminal prosecution the lawful sale 
and resale of genuine products that merely contain packaging 
that reproduce the trademarks accurately reflecting those 
genuine brand-name products and merchandise. AFTA looks forward 
to working with the proponents and supporters of this 
legislation to stop retail theft, to stop organized crime, and 
to ensure that any amendment to H.R. 32 equally protects the 
rights of intellectual property rights owners with the rights 
of American consumers to continue to be able to enjoy the 
benefit of a competitive marketplace which is supported by the 
members of the American Free Trade Association.
    Thank you again for the opportunity to speak before you 
today.
    [The prepared statement of Ms. Perez follows:]
                 Prepared Statement of Lauren V. Perez
    It is a privilege and honor to appear before this Subcommittee to 
offer these comments on behalf of the American Free Trade Association 
(AFTA). The American Free Trade Association is a not-for-profit trade 
association of independent American importers, distributors, retailers 
and wholesalers, dedicated to preservation of the parallel market to 
assure competitive pricing and distribution of genuine and legitimate 
brand-name goods for American consumers.
    To be honest, there is no testimony or comments AFTA would ever 
offer opposing any legislation committed to eliminating organized 
crime. Summarily, AFTA supports any measures furthered by this 
subcommittee that makes our borders and our domestic businesses safer 
and more able to prosper and succeed. Specifically, AFTA supports any 
legislation that criminalizes counterfeiting activity so long as 
consumers remain the beneficiaries of a freely competitive marketplace. 
In that regard, AFTA fully supports the intentions of H.R. 32--although 
it seeks modification of the bill to ensure that lawful commercial 
activity will not unintentionally be obstructed by its provisions.
    Following is a brief discussion illustrating certain of AFTA's 
concerns:

        1.  The amendment to subsection (e)(1) of 18 U.S.C. Section 
        2320 as proposed in H.R. 32 would dramatically alter the 
        definition of a counterfeit trademark in the context of a 
        criminal statute. The Bill's proposed amended definition of a 
        counterfeit trademark ignores the fact that, under certain 
        necessary and desirable business conditions, applications of 
        registered trademarks to product packages, labels, containers, 
        stickers or wrappers by parties other than the U.S. trademark 
        owner must be protected as lawful business activities.

        2.  Product retailers in the U.S. often combine different 
        branded products into ``gift sets''--particularly around 
        holiday times. Perfumes are often combined with mirrors, or 
        lipsticks may be placed together with hairbrushes. The retailer 
        or wholesaler then affixes trademarks to the repackaged gift 
        sets to identify the ownership of intellectual property rights 
        and to inform consumers, at the point of sale, about the 
        branded products contained in those gift packs. As harmless as 
        this conduct is, and despite the fact that such activities are 
        intended only to facilitate sales of legitimate branded 
        merchandise, H.R. 32 would, nevertheless, create the 
        possibility that such combining or consolidation of genuine 
        brand name merchandise would become a criminal act if the third 
        party consolidator includes packaging or labeling bearing a 
        registered trademark that was not authorized for manufacture by 
        the original trademark owner.

        3.  Many retailers, wholesalers and other lawful product 
        distributors in this country offer discount coupons to 
        customers. This is not only a normal commercial transaction, 
        but is a practice depended upon by consumers who seek the best 
        bargains on branded goods. H.R. 32 would make this activity 
        illegal, though, because such coupons may be considered 
        counterfeit goods. That is, because the coupons contain a 
        reproduction of a registered trademark to identify the genuine 
        branded merchandise being offered at a discount and because 
        coupons are manufactured by third parties ``trafficking'' in 
        such promotional vehicles to assist sales of genuine 
        merchandise, a literal interpretation of H.R. 32 criminalizes 
        use of coupons by anyone other than the original trademark 
        owner.

        4.  It is true that, for many, many years, U.S. trademark 
        owners have attacked lawful parallel traders of genuine 
        merchandise with charges of counterfeiting activity. And, 
        perhaps, one such recent case, United States Of America versus 
        Ibrahim Elsayed Hanafy, et. al, 302 F.3d 485 (5th Cir. 2002), 
        in fact gave rise to the type of increased criminal 
        culpabilities sought to be established by passage of H.R. 32. 
        In this case, cans of genuine, unadulterated infant formula 
        were consolidated onto shipping trays or cardboard containers 
        by a third party distributor, in a manner where expiration 
        dates and the manufacturer's registered trademarks were 
        visible. The government argued that the plain language of 
        Section 2320 required a finding that even these truthfully 
        marked shipping trays were counterfeit goods and urged that the 
        distributors be found criminally culpable for such unauthorized 
        activities. Fortunately, the Appellate Court agreed that such 
        third party distributors could not be held criminally liable 
        for consolidating genuine products and selling them on a 
        shipping tray that referenced the registered trademarks used on 
        those same products! However, AFTA members are very concerned 
        that H.R. 32 will broaden the criminal liability statutes to 
        specifically include--even in a narrowly construed 
        interpretation--unauthorized application of a registered 
        trademark on a shipping tray, if that shipping tray that bears 
        the registered trademark was not manufactured under authority 
        of the U.S. trademark owner.
                     recommendation and conclusion
    AFTA is confident that H.R. 32 is not intended to do anything other 
than strengthen remedies against illicit counterfeiters. To repeat, 
AFTA's concerns with this legislation is not with its intentions, but 
with its unintended consequences on legitimate businesses and 
commercial activities. By not distinguishing between lawful and 
unlawful applications of trademarks by parties other than the 
registered trademark owner or those authorized by such rights holder, 
H.R. 32 would criminalize many legitimate, necessary and normal 
commercial activities. While there is no doubt whatsoever that all 
commercial traders should unite to defeat unlawful, criminal 
counterfeiting activities that deceive American purchasers and deprive 
rights holders from their just rewards, assessing criminal liability 
against legitimate traders for normal commercial practices that provide 
such benefits to the American consumer and the competitive marketplace 
is, respectfully, an inappropriate legislative remedy.
    AFTA recommends that the following be substituted as subsection (f) 
in H.R. 32:

        (f)  Nothing in this section shall entitle the United States to 
        bring a criminal cause of action alleging criminal trafficking 
        in counterfeit goods against lawful resale or otherwise legal 
        third party sale of genuine, unadulterated goods or services, 
        so long as such sales or resales do not utilize, rely upon or 
        refer to a trademark other than that trademark registered, used 
        or authorized for use by the original manufacturer or offerer 
        of such goods or services, even if reproduced by a party other 
        than the original trademark owner and whether or not in 
        combination with other, third party marks or designations.

This language attempts to preserve criminal penalties for counterfeit 
packaging, labels, containers, tags and similar accoutrements at the 
same time it specifically exempts from criminal prosecution at least 
certain of the lawful activities referred to in this testimony. AFTA 
continues to look forward to working with the proponents of this 
legislation to ensure that any amendment to H.R. 32 equally protect the 
interests of intellectual property rights holders and American 
consumers who deserve the continuing benefit of the competitive trade 
made possible through the lawful domestic secondary marketplace.
    Thank you again for the opportunity to offer our testimony before 
you today.

    Mr. Lungren. Thank you very much for your statement and the 
statements of all of you.
    Let me first ask Mr. Swecker whether or not--with all the 
focus of the FBI on terrorism, is it reasonable for us to 
expect that you can give sufficient attention to this problem?
    Mr. Swecker. It is more difficult in the current 
environment, sir, because we have had to divert resources from 
major theft operations around the country to terrorism 
investigations. We have less than half the number of agents 
working these major theft issues that we did prior to 9/11. 
We're still at it. We still have the task forces. We had 18 
task forces. We are actually down to nine. So it has had its 
impact.
    Mr. Lungren. What about the suggestion that current Federal 
statutes are insufficient for the Federal Government to move 
when they need to in these cases, that is, that you need 
something other than RICO and the money-laundering statutes, 
you would need a specific criminal statute dealing with 
organized retail theft?
    Mr. Swecker. We're happy to have any tool we can use to 
take cases into Federal court. RICO has been very easy to use. 
Predicate acts that are included in RICO have been easy to work 
with and pretty inclusive. I'm not sure--actually, I couldn't 
tell you if they included counterfeiting. I don't think it 
does. Money-laundering statutes do apply because they're--any 
hiding or changing the nature of criminal proceeds is--
constitutes money laundering.
    Mr. Lungren. No, I wasn't referring to the counterfeiting 
question. It was concerning the organized retail theft crime 
that we have heard others discuss.
    Mr. Swecker. The statute, Interstate Transportation of 
Stolen Property statutes have been adequate to work with, but 
we do welcome additional tools, as I said.
    Mr. Lungren. Has RICO been actually utilized in any cases 
involving organized retail theft?
    Mr. Swecker. I believe it has, but it has been in the 
larger context of a criminal organization where it was one of 
the predicate acts included in the RICO, particularly with 
organized crime.
    Mr. Lungren. Mr. Nelson, I know that you believe that we 
need a new statute. My question is this: Given the fact that we 
have this overwhelming threat on terrorism that we've diverted, 
and I think properly so, resources of the FBI toward that, 
we've taken the FBI and made them in more of a counterterrorism 
operation where they're analyzing intelligence--gathering 
intelligence, analyzing it, that there probably will be an 
inadequate dedication of resources to this particular problem.
    Is it still your feeling that a new law would be what would 
be most effective, or would greater attention to multi-level 
task forces or multi-jurisdictional task forces be perhaps a 
better answer to the problem?
    Mr. Nelson. Mr. Chairman, I think the answer lies in a 
combination of efforts, including laws, including a law that 
would be more readily available to be used, including task 
forces, including the database that we talked about.
    If you look back through history, in my days in the 
military we were fighting the war on drugs, and what happened 
with the war on drugs is there was a lot of task forces. There 
was very supportive laws. There was an effort across the board 
with multiple venues and multiple tools available. And the 
result was fairly successful. We put many people in jail who 
were trafficking in narcotics for 5 to 15 years. If you look at 
the time now, that 5 to 15 years has gone by, and what we're 
starting to see is people who maybe perpetrated those sort of 
offenses in the past are now coming over into organized retail 
theft.
    I fully understand the terrorism implications. We've 
actually had several times where money that was involved in our 
cases was going overseas, likely to support those type of 
activities. So I think if I dare say both, there's a piece here 
that we need to cover both.
    Mr. Lungren. I just want to be realistic. I want to be--I 
don't want to be Major League Baseball that promises something 
and doesn't show it, to use a timely topic these days.
    Mr. Fox, the Federal Criminal Code already provides for 
penalties for counterfeit products. Do you believe that H.R. 32 
would further that? Would you support H.R. 32 as something that 
is essential to the fight against counterfeit products?
    Mr. Fox. We would, Mr. Chairman, with absolute certainty. 
The whole question about intellectual property law, as it 
stands right now, there are plenty of laws that exist not only 
in the United States but around the world to protect IP. One of 
the issues that we do face, of course, is the penalties against 
those that breach those laws. And one of the areas that we 
really are--want to focus on is the question of the severity of 
the penalties for those people caught counterfeiting.
    My colleague Mr. Nelson made a reference to the drug-
trafficking issue, which is a very good example on perhaps two 
levels. One is this whole question about legislation 
enforcement and, if you like, an education program on the 
dangers of drug trafficking have proved to be an exceptionally 
useful and powerful argument in that fight against drugs.
    But, of course, what we're seeing now is that the rewards 
from counterfeiting far outweigh the rewards from drug 
trafficking. To give you an example, a kilo of drugs has a 
certain level of return for the criminals that undertake that 
activity. The returns from counterfeiting CDs or DVDs is far 
higher than that. So--and the risks are much lower. So it's not 
really surprising that those organized crimes are moving away 
from drug trafficking and moving toward counterfeiting because 
the rewards are so much higher for their enterprise, but the 
risks are so much lower in terms of penalties.
    So, no, we would absolutely support H.R. 32.
    Mr. Lungren. Thank you, Mr. Fox.
    Mr. Scott, you're recognized for 5 minutes.
    Mr. Scott. Thank you.
    Mr. Swecker, Mr. Nelson said that with organized retail 
theft there's no Federal law involved. Aren't there some 
Federal laws that you can look at?
    Mr. Swecker. The laws that address interstate 
transportation of stolen property, thefts from interstate 
shipment, the interstate theft-type laws--I couldn't name each 
individual statute--are there on the books. We use them. We 
also use, as I said, RICO. Most of the time we're working these 
cases, we're working in enterprise, a criminal enterprise.
    Mr. Scott. And what kind of penalty can be assessed against 
those who are found guilty?
    Mr. Swecker. I think those statutes range from 5 to 15 
years. RICO may go higher. I will say that anything--our 
ability to penetrate these enterprises is directly proportional 
to the sentences that these folks are facing when we try to get 
them to cooperate. So anything that addresses increased 
penalties increases our chances of getting cooperators and 
people who will help us penetrate the enterprise. And as I 
said, we're usually dealing with a criminal enterprise, 
organized crime of some type, so it would be--as I said, any 
tool--anything that puts another tool in the toolbox is a good 
thing for us.
    Mr. Scott. Well, I think you indicated if you had more 
funding you could do more investigations.
    Mr. Swecker. I have been told to stay away from budgetary 
issues, but---- [Laughter.]
    Anything that puts agents on the--boots on the ground is a 
good thing.
    Mr. Scott. Ms. Perez, you offered new language for the 
legislation before us. Can you tell us exactly what your 
language would do that the language on the bill on trademarks 
does not do?
    Ms. Perez. Yes. Let me read the language that we've put 
forward. ``Nothing in this section shall entitle the United 
States to bring''--``Nothing in this section shall entitle the 
United States to bring a criminal cause of action alleging 
criminal trafficking in counterfeit goods against lawful resale 
or otherwise legal third party sale of genuine, unadulterated 
goods or services, so long as such sales or resales do not 
utilize, rely upon or refer to a trademark other than that 
trademark registered, used or authorized for use by the 
original manufacturer of offerer of such goods or services, 
even if reproduced by a party other than the original trademark 
owner and whether or not in combination with other, third party 
marks or designations.''
    What that will do is that will still preserve the ability 
to go after parties who use counterfeit labels, who use 
counterfeit packaging, who are peddling counterfeit goods. It 
will protect from criminal prosecution parallel marketers, 
suppliers on the secondary marketplace who are supplying 
genuine merchandise and using packaging or labeling with 
registered trademarks to identify for the consumer what that 
brand-name merchandise is.
    Mr. Scott. Well, what activity is--do they get away with 
with the language that's in the bill that--well, I guess what 
language in the bill would be--would capture what you don't 
want captured?
    Ms. Perez. Okay. The bill--what the bill does is it amends 
the definition of a counterfeit trademark, as I said. And it 
includes language in here that--I'm going to try to find the 
exact phrase that's of concern. It's a spurious mark used in 
connection with the trafficking in any goods, services, label, 
patch that's identical or substantially indistinguishable from 
a registered trademark, that is applied to or used in 
connection with the goods or services for which the market is 
registered so that that label, package, or container is used in 
connection with genuine goods or is applied to or consists of a 
label, patch, sticker, wrapper, badge, emblem, medallion, 
charm, box, container, can, case, hangtag, documentation, or 
packaging of any type or nature that is capable of being 
applied to or used in connection with the goods or services. 
That language absolutely says that even if your packaging is 
used with genuine goods, it's a problem. And that label and 
that packaging may not be counterfeit. It may merely be 
accurately representing to the consumer the branded goods and 
the genuine goods contained inside.
    Mr. Scott. Mr. Fox, do you have a problem with that 
language?
    Mr. Fox. Elements of that. I think, you know, one of the 
issues with my colleague's proposition is that it does allow--
certainly not her member organizations, but certainly some of 
the illicit organizations to take things like stolen goods, 
repackage those and then put them back into the licit chain. 
That clearly would be of a major issue to us and law 
enforcement agencies.
    The whole question about the use of trademarks--trademarks 
and copyright is clearly, you know, the property of the brand 
owners themselves. Considerable millions of dollars have gone 
into the development of those brand names, and simply to allow 
a third party without authority to use those brand names in 
another way that a company cannot control, it's something that 
we wouldn't necessarily support.
    Mr. Scott. I take that to mean that you don't like her 
language; you like the language in the bill.
    Mr. Fox. We do indeed.
    Mr. Scott. How does the bill language prevent what you just 
said? Does the bill language prevent someone from doing what 
you just said, using the label--stolen goods and stuff like 
that?
    Mr. Fox. That's certainly the way that we interpret it.
    Mr. Scott. Okay. Mr. Swecker, the bill takes away the 
ability of the judge to exercise judgment in asset confiscation 
of counterfeit goods. By changing ``may'' to ``shall,'' it 
essentially requires the destruction rather than allow the 
destruction. Why is that a good idea?
    Mr. Swecker. Often we find with these forfeiture statutes 
that they neglect to provide a way to dispose of the property. 
There is no legitimate reason to keep the property around other 
than for evidentiary purposes. So it does give us the ability 
to dispose of the property when the case is over after there's 
no use for it as evidence.
    Mr. Scott. If you get rid of it, are there any proceeds? I 
mean, can you possibly sell the goods? Or you have to destroy 
the goods?
    Mr. Swecker. If it's counterfeit goods, I would suspect 
that the industry would argue that it shouldn't be sold 
anywhere out on the market anywhere. If it's stolen, that's 
another story. I think we're talking about two different 
things.
    Mr. Scott. I don't have any further questions.
    Mr. Lungren. Before I recognize the gentleman from Florida, 
Mr. Keller, Ms. Perez, I just would note that the bill as 
drafted has the language that you talked about, but it also has 
``and the use of which is likely to cause confusion, to cause 
mistake, or deceive.'' And then there is--the very last part of 
the bill says, ``Nothing in this section shall entitle the 
United States to bring a criminal cause of action for the 
repackaging, without deception, of genuine goods or services.'' 
I believe the drafters of the legislation believe that meets 
your concern, and I take it you don't think it does and want it 
to be more specific.
    We will look at what you are talking about, but there was 
an effort to try and address your concerns with that last part, 
basically saying that if there's no deception, which would be 
required to be part of the proof of the prosecution, there 
could not be a successful prosecution.
    Mr. Keller is recognized for 5 minutes.
    Mr. Keller. I thank the Chairman for yielding.
    Mr. Swecker, let me ask you a question in the context of 
counterfeit pharmaceuticals and drugs. It's an issue that we 
wrestle with, those of us from Florida, Congressman Feeney and 
myself. We have a lot of seniors. We want them to have drugs as 
cheap as possible, and we wrestle with whether to allow the 
reimportation of drugs from Canada and other countries. And in 
a nutshell, it comes down to this. We would like them to have 
safe drugs so they could be cheaper, but every time it comes 
up, we get letters from law enforcement agencies, DEA and FDA, 
telling us of the mass problems with counterfeit drugs. And 
when we raise that as an issue, others will say, no, you know, 
you're just saying that because the pharmaceutical companies 
made a contribution here or there and it's really not a 
problem, and they allow fruit in from other countries, why 
don't you allow these drugs in.
    So with that as the background--and I'm open-minded on this 
issue--in your experience is this problem with altered or 
counterfeit pharmaceutical drugs from other countries a real or 
an imaginary problem?
    Mr. Swecker. It actually is a fairly real problem. The 
problem is that you have a whole network of wholesalers and 
repackagers of pharmaceuticals. They rarely go directly from 
the manufacturer to the market. They fall into the hands of 
wholesalers, packagers, 6,500 or so of them out there that are 
unregulated. And so we don't know what's being--you know, when 
you introduce counterfeit or stolen--and stolen can involve 
drugs that are outdated, expired. There isn't much control over 
how these drugs are repackaged.
    So it is--the short answer is yes, it's a problem.
    Mr. Keller. Do you find a distinction in terms of the 
problem with drugs coming from Canada versus other countries? 
Are other countries a big concern and is Canada safer? Or are 
they all a concern? What do you find there?
    Mr. Swecker. You're actually getting into an area that's 
out of my area of expertise. I would be guessing.
    Mr. Keller. Okay. I just heard it suggested that there's a 
problem everywhere but Canada is less of a problem, but I'll 
explore that with someone else.
    Mr. Swecker. I know drugs are coming up from Mexico. No 
question about that.
    Mr. Keller. Okay. Beyond stiffening penalties, if we were 
concerned about this problem with the counterfeit 
pharmaceuticals coming into our country, let's say, from 
Canada, do you have some ideas that we should be looking at 
that would make us more likely to be able to reimport these 
drugs and make sure that they're safer?
    Mr. Swecker. Actually, I don't. I mean, I do think that the 
wholesalers--I'm sorry, the repackagers need to be addressed 
because that's a completely unregulated area, and that's where 
we find most of our problems. We're working some operations 
right now that have really highlighted that problem, and there 
are thousands of them, many in Florida, and we just don't know 
what's going back in. Once they repackage the drugs, you have 
no idea what's going into the final packaging.
    Mr. Keller. Do you believe this legislation before us today 
will help you at all with respect to giving you a tool to go 
after the repackagers?
    Mr. Swecker. It could be used to address that, yes.
    Mr. Keller. Okay. Thank you.
    Mr. Chairman, I'll yield back the rest of my time.
    Mr. Lungren. Mr. Conyers, do you have questions? Five 
minutes.
    Mr. Conyers. Thank you, Mr. Chairman.
    What I am curious about is how did the American Free Trade 
Association come into existence in the first place.
    Ms. Perez. You're way before my time. The American Free 
Trade Association has been around for well over 20 years, and 
it's served as amicus curiae on the two leading Supreme Court 
cases upholding the legality of the parallel market trade. It's 
served to support numerous lower court decisions. As you noted 
before, it's worked a lot with the Judiciary Committee and the 
Intellectual Property Committee on legislation and trying to 
work to preserve a competitive marketplace. It's a respected 
and well-known trade association, and as I said, started way 
before my professional career did.
    Mr. Conyers. Now, Ms. Perez, what about the unintended 
consequences of criminal laws and adding laws in this 
atmosphere that we find ourselves? Because, after all, there 
is, I think, more activity in these parallel markets than ever 
before. I suspect that it may be growing.
    Ms. Perez. I suspect you may be right, and I think a large 
part of that is frankly out of economic need. As I said before, 
the members of AFTA in particular--and it is a reputable trade 
association, and we're not going to favor or be in support of 
any criminal activity, anything that's going to make possible 
retail theft or organized crime. Any legislation that will work 
to cure those problems, we want to work with you on that. Our 
concern is, as I said before, that legislation not be couched 
in rhetoric that is going to stop organized crime or impede 
retail theft or be anti-counterfeiting, when, in fact, what it 
looks to do is to stop the parallel market trade so that 
intellectual property owners get much broader rights and 
remedies that they're legitimately entitled to under U.S. 
intellectual property laws.
    Mr. Conyers. Now, under the kind of business that many of 
your folks are in, repackaging with trademarks is standard 
operating procedure.
    Ms. Perez. It is. Also, I might add that the members who do 
the repackaging consult with the law firm I work with often to 
make sure that they're doing it right.
    Mr. Conyers. Who do they consult with?
    Ms. Perez. They consult with our law firm.
    Mr. Conyers. Sure.
    Ms. Perez. With their lawyers, with their counsel, to make 
sure that the intellectual property they are noting on their 
packaging is correctly attributed to the rightful owner. They 
add disclaimers where appropriate to make sure that there's no 
perceived deception or confusion as to the source of the 
repackaged product. So we talked about the repackaging 
deception in here, and our concern with that language is that 
it just doesn't, frankly, consider all possible commercial 
activities that need to be protected. I mean, as I said before, 
is affixing a shrink wrap over a gift set, is that repackaging? 
Is coming up with a shipping container or a cardboard 
container, is that repackaging? Is inserting a coupon, two-for-
one special, is that repackaging? And while, you know, we love 
the fact, frankly, that this Committee and the Subcommittee and 
the drafters of this bill obviously were concerned about 
legitimate commercial activities, we started to work on this 
bill a little bit, and we look forward to doing that.
    Mr. Conyers. Well, you seem like a firm that's been 
recommending and working in this area for quite a while, and I 
just wanted to ask Mr. Nelson about his understanding that 
there are activities engaged in by the companies that Attorney 
Perez represents that are perfectly lawful and support all the 
crime-fighting activity against trademarks and thefts that has 
been discussed here today and that it's good for consumers who 
are looking sometimes for bargains. I know that I am one of 
those that--I can cite that one place I went to told me that an 
educated consumer were their best customers, and I perked up 
immediately when I found out that I was in this very special 
group.
    What do you think about, you know, what they're doing and 
what they're----
    Mr. Nelson. Our primary concern would obviously be for the 
safety of the consumer so that what goes back into the market 
is, in fact, safe. Unfortunately, my area of expertise in this 
case is organized retail theft as opposed to the counterfeiting 
piece.
    Mr. Conyers. Sure. Well, you would--I know my time is up. I 
see the tendency that the Chairman has developed across the 
years to reach for his gavel and put a firmer grip around the 
handle is a tipoff of what might be happening soon. But you 
don't have any problem with an organization of this kind, a 
trade organization that tries to help you keep everybody in 
line? They're paying a pretty big firm in Florida to keep this 
thing, this show on the road, in good shape.
    Mr. Fox. Yes, and on its face, I wouldn't think they'd have 
a problem, but it would be unfair for me to comment on that 
because it's not my area of expertise.
    Mr. Conyers. Okay.
    Mr. Lungren. The gentleman's time has expired.
    Mr. Conyers. Thanks, Mr. Chairman.
    Mr. Lungren. Although the gentleman has not expired, so we 
appreciate that.
    [Whereupon, at 2:43 p.m., the Subcommittee proceeded to 
other business.]

                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

 Prepared Statement of the Honorable Robert C. Scott, a Representative 
      in Congress from the State of Virginia, and Ranking Member, 
        Subcommittee on Crime, Terrorism, and Homeland Security
    Thank you, Mr. Chairman. I am pleased to join you in convening this 
hearing on counterfeiting of manufactured goods and organized retail 
theft. We have federal laws to address counterfeiting of manufactured 
goods. H.R. 32, the ``Stop Counterfeiting in Manufactured Goods Act,'' 
amends existing law in a manner designed to intensify the effort to 
prevent counterfeiting of goods. Counterfeited goods not only 
victimizes the manufacturer, but short changes purchasers with 
substandard products, exposes us all to risks from unsafe products and 
deprives Americans of jobs and other benefits from the commerce of 
authentic goods.
    Yet, there is concern that H.R. 32, as drafted, goes too far and 
criminalizes currently legitimate, time-honored practices by law-
abiding merchants who legally purchase manufactured goods and repackage 
them in various ways to enhance sales of such goods. We have able 
witnesses who will speak to these points, so I look forward to their 
testimony for clarification of issues and concerns with the bill.
    For some time now, I have been hearing about the problem of 
organized retail theft, or ORT, from business representatives in my 
Congressional District, so I am pleased to be able to report to them 
that we are giving attention to this issue in the Congress. Theft of 
merchandise through shoplifting from retail outlets and through other 
means is not new and has traditionally been handled through state 
criminal laws. In Virginia, for example, any theft in excess of $200 is 
grand larceny with a maximum penalty of 20 years. And a third offense 
of petty larceny is, by law, treated the same as grand larceny. With 
diligent enforcement activities, such measures are ordinarily adequate 
to keep the problem of merchandise theft sufficiently in check. 
However, with organized theft rings deploying numerous individuals 
operating across state lines, ordinary enforcement approaches are 
inadequate. These individuals can shoplift with acceptable risks by 
remaining under the grand larceny threshold for each incident, and 
steal thousands of dollars worth of merchandise for the ring.
    I expect that our witnesses will describe ORT as a problem of 
growing dimension, with organized crime, interstate and international 
elements. As with counterfeiting of goods, there are already federal 
laws which can be utilized to address ORT. I am pleased that we have a 
representative from the FBI here to describe what the federal 
government is doing about it and what is needed for greater 
effectiveness.
    So, Mr. Chairman, I look forward to hearing the testimony of our 
witnesses and to working with you and Chairman Coble to do what makes 
sense at the federal level to curb both the problem of counterfeiting 
manufactured goods and organized retail theft. Thank you.
                               __________

  Prepared Statement of the Honorable Mark Green, a Representative in 
   Congress from the State of Wisconsin, and Member, Subcommittee on 
                Crime, Terrorism, and Homeland Security

    First, I want to thank Chairman Coble for bringing this bill up 
today. I also want to thank our colleague, Mr. Knollenberg, for his 
hard work and dedication to this legislation.
    From skyrocketing health care costs to excessive taxes, the hurdles 
U.S. manufacturers face today are larger than ever and that is why we 
must continue to do everything we can to help American manufacturers 
stay competitive. One way to do that is by getting tougher laws on the 
books to punish those who counterfeit our manufactured goods. By 
strengthening our laws we are strengthening the hands of our trade 
representatives to demand tougher penalties on foreign businesses that 
counterfeit U.S. goods.
    It is time we sent a strong message to foreign counterfeiters and 
the countries that ignore their criminal behavior: if you keep stealing 
our products, you're going to face harsh consequences. This legislation 
is an important part of that message and I encourage my colleagues to 
support it.
                               __________

Prepared Statement of the Honorable John Conyers, Jr., a Representative 
                 in Congress from the State of Michigan

    Let me begin by thanking Chairman Coble and Ranking Member Scott 
for convening this important and timely hearing. The recent rise in 
organized retail theft and the continued growth in trafficking in 
counterfeit trademarks are issues of great concern.
    Some security professionals estimate that the retail industry 
experiences as much as $15 billion a year in operating losses as a 
result of such thefts. And, I'm told those numbers continue to grow.
    With regard to counterfeit trademarks, the FBI estimates sales of 
counterfeit goods line the pockets of criminal organizations to the 
tune of about $500 billion per year.
    Today, we're here to talk about possible solutions to these growing 
problems. At the outset, I'd like to suggest that any such discussion 
be guided by two commonsense principles.
    First, as we consider strengthening remedies against illicit 
counterfeiters, we must be careful not to unnecessarily infringe upon 
legitimate businesses and commercial activities.
    Many law abiding companies operate in the parallel importation 
market which involves the selling and reselling of genuine goods and 
services. These goods and services, in turn, are then provided to 
consumers at competitive discount prices. Thus, any limits placed on 
such companies has an equally detrimental effect on consumers in search 
of bargains.
    Second, we should agree to refrain from adding any new laws to the 
current federal criminal code unless such new laws prove to be 
absolutely necessary. Principles of federalism dictate that we should 
only offer solutions to those problems not left within the sole domain 
of the state. And, the prosecution of organized shoplifters at the 
federal level simply does not satisfy this requirement.
    I would like to thank each of the witnesses for agreeing to appear 
before us today. I look forward to your testimony.

                               __________

Prepared Statement of the Honorable Bob Goodlatte, a Representative in 
                  Congress from the State of Virginia

    Mr. Chairman, thank you for holding a hearing on the important 
issues of organized retail theft and counterfeit products.
    There is a growing problem relating to organized retail theft (ORT) 
rings in America. It is estimated that professional organized retail 
theft rings are responsible for pilfering up to $30 billion in 
merchandise from retail stores annually.
    Organized retail theft groups typically target everyday household 
commodities and consumer items that can be easily sold through fencing 
operations, flea markets, swap meets and shady store-front operations. 
Items that are routinely stolen include over-the-counter drug products, 
such as analgesics and cold medications, razor blades, camera film, 
batteries, videos, DVDs, CDs, smoking cessation products, infant 
formula and computer software items. Thieves often travel from retail 
store to retail store, stealing relatively small amounts of goods from 
each store, but cumulatively stealing significant amounts of goods. 
Once stolen, these products can be sold back to fencing operations, 
which can dilute, alter and repackage the goods and then resell them, 
sometimes back to the same stores from which the products were 
originally stolen.
    When a product does not travel through the authorized channels of 
distribution, there is an increased potential that the product has been 
altered, diluted, reproduced and/or repackaged. These so-called 
``diverted products'' pose significant health risks to the public, 
especially the diverted medications and food products. Diverted 
products also cause considerable financial losses for legitimate 
manufacturers and retailers. Ultimately, the consumers bear the brunt 
of these losses as retail establishments are forced to raise prices to 
cover the additional costs of security and theft prevention measures.
    At the state level, organized retail theft crimes are normally 
prosecuted under state shoplifting statutes as mere misdemeanors. As a 
result, the thieves that participate in organized retail theft rings 
typically receive the same punishment as common shoplifters. The 
thieves who are convicted usually see very limited jail time or are 
placed on probation. I believe that the punishment does not fit the 
crime in these situations. Mere slaps on the wrists of these criminals 
has practically no deterrent effect. In addition, criminals who are 
involved in organized retail theft rings pose greater risks to the 
public because their intent is for the goods to be resold. Because the 
routes of these diverted products are extremely difficult to trace, 
there is a greater risk that these goods will be faulty, outdated and 
dangerous for consumer use. The punishment for these criminals should 
be greater than that for common shoplifters.
    In December of 2003, the FBI established an Organized Retail Theft 
initiative to combat this growing problem. While this is a good start, 
I look forward to hearing the FBI's plans to bolster its efforts to 
combat these crimes, which are increasing in frequency, posing greater 
threats to consumers, and resulting in greater losses to businesses. 
Recent busts have shown how widespread this problem truly is. Federal 
and state law enforcement broke up an organized retail theft ring in 
North Carolina and Virginia that was responsible for moving more than 
$2 million dollars worth of stolen infant formula and over-the-counter 
products. This arrest shows that these crimes come with huge potential 
costs and that they affect the most vulnerable among us. We need more 
arrests like this to effectively combat organized retail theft.
    I am pleased that we have witnesses today from the FBI and the 
private sector to describe this growing problem and what can be done to 
solve it. Thank you again, Mr. Chairman, for holding this important 
hearing.

     Letter from Sandy Kennedy, President, Retail Industry Leaders 
           Association (RILA), to the Honorable Howard Coble









             Prepared Statement of the National Electrical 
                    Manufacturers Association (NEMA)









    Document entitled ``Organized Retail Crime: Describing a Major 
    Problem,'' by Read Hayes, Loss Prevention Research Council and 
                         University of Florida























































































































   Response to post-hearing questions from Chris Swecker, Assistant 
     Director, Criminal Investigative Division, Federal Bureau of 
                             Investigation







Response to post-hearing questions from Chris Nelson, Director of Asset 
  Protection, Target Corporation, on behalf of the Coalition Against 
                         Organized Retail Theft





                                 
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