Intellectual Property: Initial Observations on the STOP
Initiative and U.S. Border Efforts to Reduce Piracy (26-JUL-06,
GAO-06-1004T).
U.S. goods are subject to substantial counterfeiting and piracy,
creating health and safety hazards for consumers, damaging
victimized companies, and threatening the U.S. economy. In 2004,
the Bush administration launched the Strategy for Targeting
Organized Piracy (STOP)--a multi-agency effort to better protect
intellectual property (IP) by combating piracy and
counterfeiting. This testimony, based on a prior GAO report as
well as from observations from on-going work, describes (1) the
range and effectiveness of multi-agency efforts on IP protection
preceding STOP, (2) initial observations on the organization and
efforts of STOP, and (3) initial observations on the efforts of
U.S. agencies to prevent counterfeit and pirated goods from
entering the United States, which relate to one of STOP's goals.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-1004T
ACCNO: A57501
TITLE: Intellectual Property: Initial Observations on the STOP
Initiative and U.S. Border Efforts to Reduce Piracy
DATE: 07/26/2006
SUBJECT: Border security
Copyrights
Crime prevention
Forgery
Importing
Intellectual property
Interagency relations
International trade regulation
Program evaluation
Property rights
Private sector
Program goals or objectives
Strategy Targeting Organized Piracy
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GAO-06-1004T
* Summary
* Background
* STOP Is One of Several Interagency IP Coordination Mechanism
* Coordination Efforts Involving Policy Initiatives and Techni
* IP Law Enforcement Coordination Efforts Have Faced Challenge
* STOP Was Created to Strengthen IP Enforcement
* STOP Has Energized U.S. Efforts, but Its Impact and Long-Ter
* STOP Has Fostered Coordination and Undertaken Some New Initi
* STOP Has Features That May Limit Its Long-Term Impact
* IP Enforcement Efforts at the Border Illustrate Challenges F
* CBP IP Seizures Have Increased in Number but the Estimated V
* CBP Has Taken Steps to Improve IP Enforcement, but Several A
* Initial Evidence Indicates That Resources for IP Enforcement
* In-Bond System Faces Persistent Control Weaknesses and Has B
* Conclusions
* Order by Mail or Phone
Testimony
Before the Committee on Homeland Security and Government Affairs,
Subcommittee on Oversight of Government Management, the Federal Workforce,
and the District of Columbia, United States Senate
United States Government Accountability Office
GAO
For Release on Delivery Expected at 3:30 p.m. EDT
Wednesday, July 26, 2006
INTELLECTUAL PROPERTY
Initial Observations on the STOP Initiative and U.S. Border Efforts to
Reduce Piracy
Statement of Loren Yager, Director International Affairs and Trade
GAO-06-1004T
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to appear again before the subcommittee to
discuss our work on U.S. efforts to protect U.S. intellectual property
(IP) rights. We appreciate the opportunity to contribute to the record
that this Committee has established on IP protection. The United States
dominates the creation and export of intellectual property-creations of
the mind-and provides broad protection for intellectual property through
means such as copyrights, patents, and trademarks. However, because
protection of intellectual property in many parts of the world is
inadequate, U.S. goods are subject to substantial counterfeiting and
piracy. Such goods are widely distributed in global markets, including
here in the United States. As you stated in this Subcommittee's June 2005
hearing on IP protection, the production and distribution of counterfeit
and pirated goods create health and safety hazards for consumers, damage
companies that are victims of this theft, and pose a threat to the U.S.
economy.
Since my last testimony before this committee, the United States has
continued to develop and implement its Strategy for Targeting Organized
Piracy, or STOP, which outlines priority IP enforcement efforts of six
agencies. To understand more fully how this strategy might contribute to
better protection of IP, I will address three topics: (1) the range and
effectiveness of multi-agency efforts on IP protection that preceded STOP;
(2) initial observations on the organization and efforts of STOP; and (3)
initial observations on the efforts of U.S. agencies to prevent
counterfeit and pirated goods from entering the United States, which
relate to one of STOP's goals.
To address these issues, we have drawn on a number of completed and
ongoing GAO studies, including a report on this subject that we published
in 2004 and updated in testimony before this committee last year.1 In
addition, we are presenting some initial and preliminary observations
based on three ongoing reviews related to IP protection. These include (1)
a study that we have initiated for this committee focusing on IP
enforcement at the U.S. border, (2) a study for the House Government
Reform Committee on interagency efforts to protect IP rights, and (3)
additional work on a Customs and Border Protection (CBP) program called
the "in-bond system" that allows goods to enter U.S. commerce at a port
other than the port of arrival. In conducting the GAO studies, we have
performed work at multiple U.S. agency headquarters in Washington, at U.S.
ports of entry, and in other nations. In addition, we have met with
representatives from multiple industry associations to obtain their views
on STOP. We obtained technical comments on this testimony from CBP and
Immigration and Customs Enforcement (ICE) officials and incorporated their
changes where appropriate. All work was conducted in accordance with
generally accepted government auditing standards.
1GAO, Intellectual Property: U.S. Efforts Have Contributed to Strengthened
Laws Overseas, but Challenges Remain, GAO-04-912 (Washington, D.C.: Sept.
8, 2004). GAO, Intellectual Property: U.S. Efforts Have Contributed to
Strengthened Laws Overseas, but Significant Enforcement Challenges Remain,
GAO-05-788T (June 14, 2005).
Summary
Prior to STOP's creation in 2004, the U.S. government established a number
of mechanisms and structures to coordinate interagency IP protection
activity, and they achieved varying levels of success. For example, as we
reported in 2004, the Special 301 process2 that is annually led by the
Office of the U.S. Trade Representative (USTR) was generally cited as
being quite effective in collecting input from multiple agencies,
identifying IP issues of concern in particular countries, and achieving
policy changes in many of those nations. On the other hand, U.S.
government efforts to improve IP enforcement under the National
Intellectual Property Law Enforcement Coordination Council (NIPLECC), a
multi-agency coordinating body, were generally believed to be ineffective,
having resulted in little more than the publication of an annual report
compiling individual agency submissions. STOP, a presidential initiative,
was, in part, a response to the need for further attention to IP
enforcement. The initiative is led by the White House under the auspices
of the National Security Council and involves collaboration on IP
protection and enforcement efforts among six federal agencies.
STOP has energized U.S. efforts to protect and enforce IP and has
initiated some new efforts, but its long-term role is uncertain. One area
where STOP has increased efforts is outreach to foreign governments. In
addition, STOP has focused attention on helping small- and medium-sized
enterprises to better protect their IP rights. Private sector views on
STOP were generally positive, although some said that STOP was a
compilation of new and on-going U.S. agency activities that would have
occurred anyway. As a presidential initiative, STOP was not created by
statute; has no formal structure, funding, or staff; and appears to have
no permanence beyond the current administration. STOP's lack of permanence
and of accountability mechanisms poses challenges for its long-term impact
and congressional oversight.
2The Special 301 process identifies foreign countries that deny adequate
and effective protection of IP rights or fair and equitable market access
for U.S. persons who rely on IP protection.
Certain weaknesses in agencies' IP enforcement efforts at the border
illustrate the challenges STOP faces in carrying out some of its
objectives. One of STOP's goals is to increase efforts to seize
counterfeit goods at the border, an undertaking that rests primarily with
CBP and ICE within the Department of Homeland Security. Though STOP
doesn't direct these agencies' efforts or resource allocations, and
national security remains a top priority, CBP continues to have a trade
enforcement role and is taking steps to improve its IP enforcement.
However, our initial work for this Committee indicates that significant
challenges remain. The overall task of assessing whether particular
imports are authentic has become more difficult as trade volume and
counterfeit quality increase. While the number of IP seizures has grown,
there is generally no similar trend in the estimated value of goods
seized. New tools that CBP has developed to better target suspect
shipments and deal with problem importers are largely works in progress
whose future impact is uncertain. CBP and ICE have undergone dramatic
restructuring to manage their new priorities, and our initial evidence
indicates that resources dedicated to IP enforcement are shrinking.
Finally, a range of internal control weaknesses continue to plague a
critical CBP system, called the in-bond system, that allows goods to enter
U.S. commerce at a port other than the port of arrival. These weaknesses
have been exploited by importers to smuggle counterfeit goods. In our
recent work, CBP staff continue to observe that the limited information
required from importers on in-bond shipments makes it difficult for CBP to
assure that these shipments have reached their proper destinations.
Background
Intellectual property is an important component of the U.S. economy, and
the United States is an acknowledged global leader in its creation.
However, the legal protection of intellectual property varies greatly
around the world, and several countries are havens for the production of
counterfeit and pirated goods. The State Department has cited estimates
that counterfeit goods represent about 7 percent of annual global trade,
but we would note that it is difficult to reliably measure what is
fundamentally a criminal activity.3 Industry groups suggest, however, that
counterfeiting and piracy are on the rise and that a broader range of
products, from auto parts to razor blades, and from vital medicines to
infant formula, are subject to counterfeit production. Counterfeit
products raise serious public health and safety concerns, and the annual
losses that companies face from IP violations are substantial.
Eight federal entities, the Federal Bureau of Investigation (FBI), and the
U.S. Patent and Trademark Office (USPTO) undertake the primary U.S.
government activities to protect and enforce U.S. IP rights overseas.
These eight entities are: Departments of Commerce, State, Justice, and
Homeland Security; USTR; the Copyright Office; the U.S. Agency for
International Development; and the U.S. International Trade Commission.
They undertake a wide range of activities that fall under three
categories: policy initiatives, training and technical assistance, and law
enforcement. U.S. policy initiatives to increase IP protection around the
world are primarily led by USTR, in coordination with the Departments of
State, Commerce, USPTO, and the Copyright Office, among other agencies.
These policy initiatives are wide ranging and include reviewing IP
protection abroad, using trade preference programs for developing
countries,4 and negotiating agreements that address intellectual property.
Key activities to develop and promote enhanced IP protection in foreign
countries through training or technical assistance are undertaken by the
Departments of Commerce, Homeland Security, Justice, and State; the FBI;
USPTO; the Copyright Office; and the U.S. Agency for International
Development. A smaller number of agencies are involved in enforcing U.S.
IP laws. Working in an environment where counterterrorism is the central
priority, the FBI and the Departments of Justice and Homeland Security
take actions that include engaging in multi-country investigations
involving intellectual property violations and seizing goods that violate
IP rights at U.S. ports of entry. Finally, the U.S. International Trade
Commission has an adjudicative role in enforcement activities involving
patents and trademarks.
3The Organisation for Economic Co-operation and Development (OECD) is
conducting a study on IP, examining the extent to which counterfeit goods
are entering global trade and associated data reliability issues.
4U.S. IP rights policy efforts include use of the Generalized System of
Preferences (GSP) originally authorized under the Trade Act of 1974. When
GSP was re-authorized under the Trade and Tariff Act of 1984, new "country
practice" eligibility criteria were added, including a requirement that
beneficiary countries provide adequate IP rights protection.
STOP Is One of Several Interagency IP Coordination Mechanisms
STOP is the most recent of several interagency IP coordination mechanisms
that address IP policy initiatives, training and technical assistance, and
law enforcement. Some of these have been effective, particularly the
Special 301 process that identifies inadequate IP protection in other
countries and the Intellectual Property Rights (IPR) Training Coordination
Group. However, U.S. law enforcement coordination efforts through NIPLECC
have had difficulties. STOP was, in part, a response to the need for
further attention to IP enforcement.
Coordination Efforts Involving Policy Initiatives and Technical Assistance Have
Been Generally Effective
Our September 2004 report found that coordination efforts through the
Special 301 process and the IPR Training Coordination Group have generally
been considered to be effective by U.S. government and industry
officials.5 "Special 301," which refers to certain provisions of the Trade
Act of 1974, as amended,6 requires USTR to annually identify foreign
countries that deny adequate and effective protection of IP rights or fair
and equitable market access for U.S. persons who rely on IP protection.
USTR identifies these countries with substantial assistance from industry
and U.S. agencies and then publishes the results of its reviews in an
annual report. Once a list of such countries has been determined, the
USTR, in coordination with other agencies, decides which, if any, of these
countries should be designated as Priority Foreign Countries, which may
result in an investigation and subsequent actions. As our report notes,
according to government and industry officials, the Special 301 process
has operated effectively in reviewing IP rights issues overseas. These
agency officials told us that the process is one of the best tools for
interagency coordination in the government, and coordination during the
review is frequent and effective.
The IPR Training Coordination Group is a voluntary, working-level group
comprised of representatives of U.S. agencies and industry associations
involved in training and technical assistance efforts overseas for foreign
officials. Meetings are held approximately every 4 to 6 weeks and are well
attended by government and private sector representatives. The State
Department leads the group, and meetings have included discussions on
training "best practices," responding to country requests for assistance,
and improving IPR awareness among embassy staff. According to several
agency and private sector participants, the group is a useful mechanism
that keeps participants informed of the IP activities of other agencies or
associations and provides a forum for coordination.
5 GAO-04-912 .
619 U.S.C. 2242.
IP Law Enforcement Coordination Efforts Have Faced Challenges
NIPLECC was created by the Congress in 1999 to coordinate domestic and
international intellectual property law enforcement among U.S. federal and
foreign entities.7 NIPLECC members are from five agencies and consist of:
(1) Commerce's Undersecretary for Intellectual Property and Director of
the United States Patent and Trademark Office; (2) Commerce's
Undersecretary of International Trade; (3) the Department of Justice's
Assistant Attorney General, Criminal Division; (4) the Department of
State's Undersecretary for Economic and Agricultural Affairs; (5) the
Deputy United States Trade Representative; and (6) the Department of
Homeland Security's Commissioner of U.S. Customs and Border Protection.
Representatives from the Department of Justice and USPTO are co-chairs of
NIPLECC.8
Coordination efforts involving IP law enforcement through NIPLECC have not
been as successful as other efforts. In our September 2004 report, we
stated that NIPLECC had struggled to define its purpose and had little
discernible impact, according to interviews with industry officials and
officials from its member agencies, and as evidenced by NIPLECC's own
annual reports.9 Indeed, officials from more than half of the member
agencies offered criticisms of NIPLECC, remarking that it was unfocused,
ineffective, and "unwieldy." We also noted that if the Congress wishes to
maintain NIPLECC and take action to increase its effectiveness, it should
to consider reviewing the council's authority, operating structure,
membership, and mission.
In the fiscal year 2005 Consolidated Appropriations Act, the Congress
provided $2 million for NIPLECC expenses, to remain available through
fiscal year 2006.10 The act also created the position of the Coordinator
for International Intellectual Property Enforcement, appointed by the
President, to head NIPLECC.11 The NIPLECC co-chairs are to report to the
Coordinator. In July 2005, Commerce Secretary Gutierrez announced the
presidential appointment filling the IP Coordinator position. Since then,
NIPLECC has added an assistant, a policy analyst, part time legislative
and press assistants, and detailees from USPTO and CBP. Since the
Consolidation Appropriations Act, NIPLECC has held two formal meetings but
has not issued an annual report since 2004.
7NIPLECC was mandated under Section 653 of the Treasury and General
Government Appropriations Act, 2000 (P.L. 106-58), 15 U.S.C. 1128.
8NIPLECC is also required to consult with the Register of Copyrights on
law enforcement matters related to copyright and related rights and
matters.
9 GAO-04-912 .
10The Consolidated Appropriations Act, 2005 (P.L. 108-447), Division B
Title II.
STOP Was Created to Strengthen IP Enforcement
In October 2004 the President launched STOP, an initiative to target
cross-border trade in tangible goods and strengthen U.S. government and
industry IP enforcement actions. The initiative is led by the White House
under the auspices of the National Security Council and involves
collaboration among six federal agencies: the Departments of Commerce,
Homeland Security, Justice, and State; USTR; and the Food and Drug
Administration.12 STOP has five general objectives: (1) empower American
innovators to better protect their rights at home and abroad, (2) increase
efforts to seize counterfeit goods at our borders, (3) pursue criminal
enterprises involved in piracy and counterfeiting, (4) work closely and
creatively with U.S. industry, and (5) aggressively engage our trading
partners to join U.S. efforts.
The IP Coordinator is also serving as the coordinator for STOP. Both
agency officials and industry representatives with whom we spoke
consistently praised the IP Coordinator, saying that he was effectively
addressing their concerns by speaking at seminars, communicating with
their members, and heading U.S. delegations overseas.
STOP Has Energized U.S. Efforts, but Its Impact and Long-Term Viability Are
Uncertain
STOP has energized U.S. efforts to protect and enforce IP and has
initiated some new efforts, however its long-term role is uncertain. One
area where STOP has increased efforts is outreach to foreign governments.
In addition, STOP has focused attention on helping small- and medium-sized
enterprises to better protect their IP rights. Industry representatives
generally had positive views on STOP, although some thought that STOP was
a compilation of new and on-going U.S. agency activities that would have
occurred anyway. STOP's lack of permanent status as a presidential
initiative and lack of accountability mechanisms could limit its long-term
impact. 13
11This official may not serve in any other position in the federal
government.
12STOP and NIPLECC share the same member agencies, with the exception of
the Food and Drug Administration, which is a member of STOP but not
NIPLECC.
STOP Has Fostered Coordination and Undertaken Some New Initiatives
Agency officials participating in STOP cited several advantages to the
initiative. They said that STOP energized their efforts to protect and
enforce IP by giving them the opportunity to share ideas and support
common goals. Officials said that STOP had brought increased attention to
IP issues within their agencies and the private sector as well as abroad,
and attributed that to the fact that STOP came out of the White House,
thereby lending it more authority and influence. Another agency official
pointed out that IP was now on the President's agenda at major summits
such as the G-8 and the recent EU-U.S. summits.14
STOP has initiated some new efforts, including a coordinated U.S.
government outreach to foreign governments that share IP concerns and
enforcement capacities similar to the United States. For example, the
United States and the European Union (EU) have formed the U.S.-EU Working
Group on Intellectual Property Rights, and in June 2006, the United States
and European Union announced an EU-U.S. Action Strategy for Enforcement of
IP Rights meant to strengthen cooperation in border enforcement and
encourage third countries to enforce and combat counterfeiting and piracy.
One particular emphasis of STOP has been to help small- and medium- sized
enterprises (SMEs) protect their IP in the United States and abroad
through various education and outreach efforts. In 2002, we reported that
SMEs faced a broad range of impediments when seeking to patent their
inventions abroad, including cost considerations and limited knowledge
about foreign patent laws, standards, and procedures.15 We recommended
that the Small Business Administration (SBA) and the USPTO work together
to make a range of foreign patent information available to SMEs. Within
the last year, an SBA official told us that SBA began working with STOP
agencies to distribute information through its networks and recently
linked SBA's website to the STOP website, making information about U.S.,
foreign, and international laws and procedures accessible to its clients.
13GAO will be issuing a report on STOP and NIPLECC in the fall at the
request of the Chairman of House Committee on Government Reform.
14The G-8 is an annual summit whose members include Canada, the European
Union, France, Germany, Italy, Japan, Russia, the United Kingdom, and the
United States.
15GAO, International Trade: Federal Action Needed to Help Small Businesses
Address Foreign Patent Challenges, GAO-02-789 (Washington, D.C.: July 17,
2002).
Many industry representatives with whom we spoke viewed STOP positively,
maintaining that STOP had increased the visibility of IP issues. For
example, one industry representative noted a coordinated outreach to
foreign governments that provided a more collaborative alternative to the
Section 301 process, whose punitive aspects countries sometimes resented.
Another indicated that his association now coordinates training with CBP
that is specific to his industry as a result of contacts made through
STOP. In addition, most private sector members with whom we spoke agreed
that STOP was an effective communication mechanism between businesses and
U.S. federal agencies on IP issues, particularly through the Coalition
Against Counterfeiting and Piracy (CACP), a cross-industry group created
by a joint initiative between the Chamber of Commerce and the National
Association of Manufacturers. Private sector officials have stated that
CACP meetings are their primary mechanism of interfacing with agency
officials representing STOP.
There were some industry representatives who questioned whether STOP had
added value beyond highlighting U.S. IP enforcement activities. Some
considered STOP to be mainly a compilation of ongoing U.S. IP activities
that pre-dated STOP. For example, Operation Fast Link16 and a case
involving counterfeit Viagra tablets manufactured in China, both listed as
STOP accomplishments, began before STOP was created. In addition, some
industry representatives believed that new activities initiated under STOP
would have likely occurred without STOP.
STOP Has Features That May Limit Its Long-Term Impact
As a presidential initiative, STOP was not created by statute; has no
formal structure, funding, or staff; and appears to have no permanence
beyond the current administration. NIPLECC, on the other hand, is a
statutory initiative, receives funds, and is subject to congressional
oversight. Recently, the lines between NIPLECC and STOP have blurred,
possibly lending STOP some structure and more accountability. For example,
as mentioned before, NIPLECC's IP Coordinator is also the focal point for
STOP. In addition, NIPLECC recently adopted STOP as the strategy it is
required to promulgate under the Consolidated Appropriations Act of 2005.
This legislation calls for NIPLECC to establish policies, objectives, and
priorities concerning international intellectual property protection and
intellectual property law enforcement; promulgate a strategy for
protecting American intellectual property overseas; and coordinate and
oversee implementation of these requirements.
16Under the Department of Justice's Operation Fast Link, in April 2004,
law enforcement authorities executed over 120 total searches over 24 hours
in 27 states and in 10 foreign countries. Four separate undercover
investigations were simultaneously conducted, striking all facets of the
illegal software, game, movie, and music trade online.
However, the nature of the relationship between STOP and NIPLECC is not
clear. Although the IP Coordinator has recently reported in congressional
hearings that NIPLECC adopted STOP as its strategy, there have been no
formal announcements to the press, industry associations, or agency
officials responsible for carrying out STOP activities. In addition, STOP
documents do not refer to NIPLECC. Our meetings with agency and industry
officials indicated that they are unclear about the relationship between
STOP and NIPLECC. The absence of a clearly established relationship makes
it difficult to hold NIPLECC accountable for monitoring and assessing the
progress of IP enforcement under STOP. We believe that accountability
mechanisms are important to oversight of federal agency efforts and can
contribute to better performance on issues such as IP protection.
IP Enforcement Efforts at the Border Illustrate Challenges Facing STOP
One of STOP's five goals is to increase federal efforts to seize
counterfeit goods at the border, but work we are conducting for this
Subcommittee illustrates the kind of challenges that STOP faces in
achieving its goals. CBP and ICE are responsible for border enforcement
efforts, but their top priority is national security. CBP has taken
several steps since fiscal year 2003, when it made IP matters a priority
trade issue, to update and improve its border enforcement efforts. While
CBP seizures of IP-infringing goods have grown steadily since fiscal year
2002, the total estimated value of seizures during that time generally did
not exhibit similar growth. Additionally, some steps that CBP is taking to
improve IP enforcement are works in progress whose impact on this STOP
objective is uncertain. CBP's ability to effectively enforce IP rights at
the border is also challenged by limited resources for such enforcement
and by long-standing weaknesses in its ability to track the physical
movement of goods entering the United States using the in-bond system.17
17Early next year, GAO will provide a detailed report to this Subcommittee
on our findings related to IP border enforcement and a separate report to
the Congress on our findings related to the in-bond system.
CBP IP Seizures Have Increased in Number but the Estimated Value Has Fluctuated
STOP documents cite increases in IP-related seizures as a positive
indicator of its efforts to stop counterfeit goods at the border. The
overall task of assessing whether particular imports are authentic has
become more difficult as trade volume and counterfeit quality increase.
The number of IP-related seizures has grown steadily, with CBP and ICE
together making about 5,800 seizures in fiscal year 2002 and just over
8,000 seizures in fiscal year 2005.18 However, there is no corresponding
trend in the estimated value of such seizures.19 The estimated value of
goods seized in fiscal years 2002 and 2003 was $99 million and $94
million, respectively. This figure jumped to a peak of about $139 million
in fiscal year 2004, but dropped back to the former level, about $93
million, in fiscal year 2005.
According to CBP officials, the agency's goal is to focus its resources in
part on high-value seizures, but a large percentage of annual seizure
activity does not result in a significant seizure value. For example,
nearly 75 percent of fiscal year 2005 seizures were small-scale shipments
made at mail and express consignment facilities (facilities operated by
companies that offer express commercial services to move mail and cargo,
such as the United Parcel Service) or from individuals traveling by air,
vehicle, or on foot. These seizures represented about 14 percent of total
estimated seizure value in that year. Conversely, about 14 percent of
fiscal year 2005 seizures involved large-scale shipments (i.e.,
containers) and accounted for about 55 percent of that year's estimated
seizure value. The number of seizures made on goods emanating from China
has risen from about 49 percent of the estimated domestic value of all IP
seizures in fiscal year 2002 to about 69 percent in fiscal year 2005.
While CBP seizes goods across a range of product sectors, in recent years,
seizures tend to be concentrated in particular goods, such as apparel,
handbags, cigarettes, and consumer electronics. CBP also seeks to increase
seizures of goods involving public health and safety risks, and its data
shows that the estimated domestic value of seized goods involving certain
health and safety risks, specifically pharmaceuticals, electrical
articles, and batteries, increased during fiscal years 2002-2005. However,
seizures in these and certain other health and safety categories
represented less than 10 percent of the total estimated domestic value of
seizures in fiscal year 2005, and seizures of other potentially dangerous
goods, such as counterfeit auto parts, remain relatively limited. For
example, CBP estimated in a letter to an automotive industry trade
association that it made 14 seizures in fiscal years 2003-2005 of certain
automotive parts.20 A representative from another automotive industry
trade association noted that CBP's ability to make seizures in this area
depends on its receiving quality information about counterfeiters from
companies.
18Each seizure action is counted as one seizure, regardless of the amount
of goods seized.
19It is important to note that total estimated seizure value in any given
year is a function of the type of goods seized, which varies from year to
year. CBP estimates the value of IP-related seizures using "domestic
value." CBP defines domestic value of goods as landed cost plus profit
(the cost of the merchandise when last purchased, plus all duties, fees,
broker's charges, profit, unlading charges, and U.S. freight charges to
bring the goods to the importer's premises).
CBP Has Taken Steps to Improve IP Enforcement, but Several Are Still Works in
Progress
In various STOP documents, CBP cites steps it has taken to improve IP
enforcement, but many of these are works in progress whose impact and
effectiveness are undetermined. CBP identified IP matters as a priority
trade issue in fiscal year 2003 and developed an agency-wide strategy for
IP enforcement. The strategy addresses several components of IP
enforcement, such as targeting (identifying high risk shipments),
international coordination, communication to employees, and industry
outreach. A CBP official who oversees the IP strategy told us that CBP
seeks to perform IP enforcement more efficiently, and the strategy notes
the importance of conducting IP enforcement while minimizing the burden on
front line resources whose priority is national security. Several elements
of the strategy were specifically designated as activities to support
STOP.
CBP's key STOP-related activity is the creation of a statistical computer
model that is designed to identify container shipments that are at higher
risk of involving IP rights violations. To develop the model, CBP examined
elements of past seizures and container examinations and identified
certain factors that were significant characteristics of IP-infringing
imports and that could be used to identify future IP rights violations.
CBP piloted this model on a nation-wide basis for about one month in
February 2005, but the pilot revealed several issues that need to be
addressed before the model can be implemented. CBP plans to pilot the
model again for up to 3 months this summer at two land border ports and
one seaport. CBP will use the results of the second pilot to further
evaluate the viability of the model.
20In this estimate, CBP counted seizures that were based in whole or in
part on infringement of IP rights owned by motor vehicle manufacturers;
manufacturers of motor vehicle parts, equipment, tools, and supplies; and
manufacturers of automotive chemicals and other products used in the
production, repair, and maintenance of all motor vehicles. CBP did not
include seizures of IP-infringing products that are not used in
production, repair, and maintenance of motor vehicles, such as key chains,
toys, and apparel, or counterfeit goods used in the interior of a motor
vehicle, such as car organizers, can holders, sunshades, steering wheel
covers, and floor mats.
Another STOP-related activity for CBP is the use of post-entry audits to
assist with IP enforcement.21 CBP officials said using such audits for
this purpose is a new approach that is designed to assess whether
companies have adequate internal controls to prevent them from importing
goods that infringe IP rights. Initiated in fiscal year 2005, these audits
are a novel approach that is likely to work best with established
importers, but they may be less effective for dealing with importers that
are engaged in criminal activity and deliberately take steps to evade
federal scrutiny. CBP selected 40 known and potential IP-infringing
companies to audit in fiscal years 2005-2006, and by July 2006 had
completed 17 of these audits.22 In three audits, CBP found that the
companies possessed or had already sold infringing goods that were not
seized at the border. In two of these cases, CBP imposed penalties on the
companies totaling about $4.6 million.23 In the third case, the audit
closed in September 2005, but the decision on whether to impose penalties
is still pending in CBP. A CBP official said that some less significant
IP-infringing activity was found in several other audits, but CBP chose
not to impose penalties in these cases. CBP also found that internal
controls to prevent IP rights violations were lacking or inadequate for
most of the 17 companies, and has worked with them to improve these
controls.
A third STOP activity for CBP is the development of a system that allows
companies to electronically record their IP rights through CBP's website.
While trademark and copyright protection is obtained from USPTO and the
Copyright Office, respectively, these rights must be separately recorded
with CBP, for a fee.24 Recording with CBP provides CBP officials with
information about the scope, ownership, and representation of protected IP
rights being recorded. Although CBP officials have said recordation is
important because it helps CBP effect legally defensible border
enforcement, some companies fail to record their rights with CBP, either
because they are unaware of the recordation requirement or because they
choose not to. The electronic recordation system, implemented in December
2005, is designed to streamline the process; reduce processing times; and,
ideally, increase the number of recordations.25 A link to the recordation
system has been established on USPTO's website, and a link from the
Copyright Office is planned. CBP expects that most paper-based
applications will eventually be eliminated.26 While these are important
steps, we have not yet evaluated the impact of the new recordation system.
Several industry representatives have cited other concerns about
recordation generally, such as long recordation processing times and the
effective lack of border protection caused by the inability to record
copyrights with CBP before such rights are issued by the Copyright Office.
For example, one private sector representative said that during the 6 to 9
months it takes to process a copyright, pirated master CDs may be allowed
to enter the United States because the rights holder has not yet been able
to record the title with CBP.27
21CBP's Regulatory Audit Division in the Office of Strategic Trade
performs various types of audits on importing companies. "Quick Response
Audits" are designed to address single-issue trade compliance or
enforcement concerns. The IP enforcement audits are a type of Quick
Response Audit that examines importer controls to prevent IP infringement.
They are referred to as post-entry audits because they examine controls
over goods that have already entered the country.
22The same computer model being developed to detect high-risk shipments
was used to help select some companies for the post-entry audits in fiscal
year 2005.
23CBP imposed penalties under 19 U.S.C. 1595a(b), which allows it to
assess penalties equal to the domestic value of any articles introduced or
attempted to be introduced into the United States contrary to law.
Initial Evidence Indicates That Resources for IP Enforcement Are Shrinking
CBP and ICE priorities and resource allocations changed dramatically after
September 2001, and our initial work indicates that some headquarters and
field resources for IP enforcement have declined since then. As you
indicated in your statement at the June 2005 IP hearing, the ultimate
success of STOP, and of IP enforcement generally, depends on whether
agencies are able to recruit, train, and retain the necessary workforce to
meet their objectives. You also noted that prior hearings before this
Subcommittee revealed that human capital issues were hindering federal
enforcement of trade laws. At several border locations we visited, we
found that resources for trade and IP enforcement are thinly spread,
certain IP enforcement positions had been reduced or eliminated, and one
location faced challenges in filling vacant CBP Officer positions.
24The recordation fee is $190 per trademark or copyright application, or,
if a trademark application covers more than one class of protected goods,
the fee is $190 per class of goods to be recorded.
25Pendency times for paper-based recordation applications could be months
long, according to a CBP official.
26CBP would still offer paper-based recordation to accommodate companies
that lack Internet access.
27A CBP official said that an exemption to allow companies to record
certain copyrights with CBP based on the copyright application, rather
than the issued copyright, awaits approval in CBP.
At CBP port operations, employees in two job categories are responsible
for IP enforcement - CBP Officers and Import Specialists. CBP Officers are
responsible for targeting incoming shipments for security and trade
purposes and conducting physical examinations of suspect goods. Import
Specialists are responsible for assessing the actual value and composition
of goods for duty and quota purposes and for making initial determinations
of whether goods are believed to be in violation of U.S. IP rights laws.
While CBP Officers are typically assigned to a single port of entry,
Import Specialists assigned to a large port may be responsible for
covering other smaller ports that report to the larger port. ICE field
office agents investigate IP infringement cases.
We have not yet gathered comprehensive data on the number of CBP Officers,
Import Specialists, and ICE agents devoted to IP enforcement, but we found
reduced resources, thinly spread, at several border locations that we have
visited.
o At the Port of Los Angeles/Long Beach, the largest U.S. seaport
by volume, two trade enforcement teams have been disbanded and
their CBP Officers shifted to national security details. Port
officials said that since the late 1990s, the number of CBP
Officers performing trade-related examinations has dropped by
about 43 percent, and the number of Import Specialists on an
IP-devoted enforcement team has dropped by half.
o The Port of San Francisco services multiple port facilities,
including two major seaports, two major airports, and seven
smaller port locations. CBP Officers at the San Francisco air
cargo facility said that 4 out of 13 CBP Officers are assigned to
inspect cargo for trade violations. These 4 officers share
coverage of a 7-day work week, such that about 2 CBP Officers
perform trade inspections on any day. In 2001, there were about 12
CPB Officers assigned to trade inspections. San Francisco's
Director of Field Operations told us that filling 33 vacancies
within his approximately 450 CBP Officer positions is a high
priority. Currently, there are 3 Import Specialists, down from 6
in 2003, that focus primarily on IP enforcement and service the
seaports, airports, and smaller ports within the Port of San
Francisco's area.
o ICE also performs IP enforcement and houses the National IPR
Coordination Center (called the IPR Center) - a joint effort
between ICE and the FBI intended to serve as a focal point for the
collection of intelligence involving, among other things,
copyright and trademark infringement. Currently, 9 of the 16
authorized ICE positions are filled and a 10th is slated to be
filled. Neither of the 2 CBP authorized positions are filled.
Additionally, in January 2006, 7 of 8 FBI positions were empty and
the 8th position was filled by rotating FBI staff. In July 2006,
an FBI official told us that no FBI staff were working at the IPR
center because of limited physical space and pressing FBI
casework, but that some staff would return in September 2006.
o The ICE field office in Los Angeles, one of the largest field
offices in the country, had two commercial fraud enforcement teams
before the formation of the Department of Homeland Security, but
now has one. The number of agents working on commercial fraud
enforcement cases, which include IP enforcement, dropped from
about 14 to 9 since 2003. However, an official from this office
said resource changes have not affected how the team addresses IP
enforcement nor caused it to turn away any IP enforcement cases.
In-Bond System Faces Persistent Control Weaknesses and Has Been
Used to Circumvent IP Laws
The in-bond system has been identified by CBP and ICE officials as
a mechanism that has been used to circumvent import and IP laws
and regulations, presenting an enforcement challenge. A
significant portion of goods received at U.S. ports do not
immediately enter U.S. commerce but are instead shipped "in-bond"
for official entry at other U.S. ports or are transported through
the United States for export.28 When goods are shipped in-bond,
they are subject to national security inspections at the port of
arrival, but are exempt from U.S. duties or quotas and formal
trade inspections until they reach the final port where they will
officially enter U.S. commerce.29 For many years, GAO and others
have noted weaknesses in the in-bond system used to monitor
shipments between ports.30
CBP and ICE officials recognize that the in-bond system has been
used by certain importers to bring counterfeit and pirated goods
into the United States by avoiding official entry at the port of
arrival and then diverting the goods afterwards. Some CBP
officials said the in-bond system may contribute to imports of
counterfeits by allowing some importers to "port shop" for ports
that are less likely to identify IP violations. Indeed, CBP has
made sizable IP-related seizures from the in-bond system,
including 220 seizures valued at about $41 million in fiscal year
2004, representing nearly 30 percent of the total estimated
domestic value of IP seizures in that year. In fiscal year 2005,
there were 126 seizures valued at about $14 million, representing
about 15 percent of estimated domestic value of IP seizures that
year.
We have found weaknesses in the past with the in-bond system and
are currently conducting follow-up work to determine whether these
weaknesses have been corrected. Our audit is still underway, but
work to date indicates that some previously identified weaknesses
in tracking and monitoring in-bonds remain. For example, in
January 2004 GAO reported that CBP collects significantly less
information on in-bond shipment than for regular entries and that
this lack of information makes tracking in-bond shipments more
difficult.31 In our recent work, CBP staff continue to observe
that the limited information required from importers on in-bond
shipments makes it difficult for CBP to ensure that the shipments
have reached their proper destinations.
Conclusions
Intellectual property protection is an issue that requires the
involvement of many U.S. agencies, and the U.S. government has
employed a number of mechanisms to combat different aspects of IP
crimes, with varying levels of success. The STOP initiative, the
most recent coordinating mechanism, has brought attention and
energy to IP efforts within the U.S. government, and participants
and industry observers have generally supported the new effort. At
the same time, the challenges of IP piracy are enormous, and will
require the sustained and coordinated efforts of U.S. agencies,
their foreign counterparts, and industry representatives to be
successful. Our initial observations on the structure of STOP
suggest that it is not well suited to address the problem over the
long term, as the presidential initiative does not have permanence
or the accountability mechanisms that would facilitate oversight
by the Congress. Our ongoing work on IP protection efforts at the
U.S. border, one of the five areas identified by STOP, also
illustrates the types of challenges that need sustained attention
to make progress on the issue. We believe that our more detailed
reports to be released in the near future will contribute to
continuing Congressional oversight of these issues.
Mr. Chairman, this concludes my prepared statement. I would be
pleased to respond to any questions that you or other members of
the subcommittee may have at this time.
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In-Bond System Faces Persistent Control Weaknesses and Has Been Used to
Circumvent IP Laws
28CBP regulations provide for three different types of "in-bond"
shipments: (1) immediate transportation (IT) in-bond, which allows goods
arriving at one U.S. port to move to another U.S. port where they enter
U.S. trade; (2) transportation and exportation (T&E) in-bond, which allows
goods arriving at a U.S. port to be transported through the United States
for export to another country; and (3) immediate exportation (IE) in-bond,
which allows goods arriving at a U.S. port to be shipped to a foreign port
without transport through the United States. In our 2004 report, GAO found
that in-bond entries comprised about 58 percent of total entries in Miami,
60 percent in New York, and 46 percent in Los Angeles. Recent work
confirmed that in-bond shipments continue to account for a considerable
share of all cargo arriving through these ports.
29The in-bond system allows arriving cargo that is intended for export to
other countries to move through the United States without being subject to
formal U.S. entry, duties, and quotas.
30GAO, International Trade: U.S. Customs and Border Protection Faces
Challenges in Addressing Illegal Textile Transshipment, GAO-04-345
(Washington, D.C.: January 23, 2004).
31 GAO-04-345 .
(320452)
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Highlights of GAO-06-1004T , testimony before the Subcommittee on
Oversight of Government Management, the Federal Workforce, and the
District of Columbia, Committee on Homeland Security and Government
Affairs, United States Senate
July 26, 2006
INTELLECTUAL PROPERTY
Initial Observations on the STOP Initiative and U.S. Border Efforts to
Reduce Piracy
U.S. goods are subject to substantial counterfeiting and piracy, creating
health and safety hazards for consumers, damaging victimized companies,
and threatening the U.S. economy. In 2004, the Bush administration
launched the Strategy for Targeting Organized Piracy (STOP) - a
multi-agency effort to better protect intellectual property (IP) by
combating piracy and counterfeiting. This testimony, based on a prior GAO
report as well as observations from on-going work, describes (1) the range
and effectiveness of multi-agency efforts on IP protection preceding STOP,
(2) initial observations on the organization and efforts of STOP, and (3)
initial observations on the efforts of U.S. agencies to prevent
counterfeit and pirated goods from entering the United States, which
relate to one of STOP's goals.
What GAO Recommends
GAO is not recommending executive action.
STOP is the most recent in a number of efforts to coordinate interagency
activity targeted at intellectual property (IP) protection. Some of these
efforts have been effective and others less so. For example, the Special
301 process - the U.S. Trade Representative's process for identifying
foreign countries that lack adequate IP protection - has been seen as
effective because it compiles input from multiple agencies and serves to
identify IP issues of concern in particular countries. Other interagency
efforts, such as those by the National Intellectual Property Law
Enforcement Coordination Council (NIPLECC), are viewed as being less
effective because they have produced little beyond a summary of agencies'
actions in the IP arena.
While STOP has energized IP protection and enforcement efforts
domestically and abroad, our initial work indicates that its long-term
role is uncertain. STOP has been successful in fostering coordination,
such as by reaching out to foreign governments and private sector groups.
Private sector views on STOP were generally positive; however, some stated
that it emphasizes IP protection and enforcement efforts that would have
occurred regardless of STOP's existence. STOP's lack of permanent status
and accountability mechanisms poses challenges for its long-term impact
and congressional oversight.
STOP faces challenges in meeting some of its objectives, such as
increasing efforts to seize counterfeit goods at the border - an effort
for which the Department of Homeland Security's Customs and Border
Protection (CBP) and Immigration and Customs Enforcement are responsible.
CBP has certain steps underway, but our initial work indicates that
resources for IP enforcement at certain ports have declined as attention
has shifted to national security concerns. In addition, prior GAO work
found internal control weaknesses in an import mechanism through which a
significant portion of imports flow, and which has been used to smuggle
counterfeit goods.
Examples of authentic and counterfeit products.
*** End of document. ***