Intellectual Property: Better Data Analysis and Integration Could
Help U.S. Customs and Border Protection Improve Border		 
Enforcement Efforts (26-APR-07, GAO-07-735).			 
                                                                 
U.S. government efforts to protect and enforce intellectual	 
property rights are crucial to preventing billions of dollars in 
economic losses and for mitigating health and safety risks from  
trade in counterfeit and pirated goods. The Department of	 
Homeland Security's Customs and Border Protection (CBP) leads	 
intellectual property (IP) enforcement activity at the U.S.	 
border. GAO was asked to (1) examine key aspects of CBP's process
to carry out border enforcement, (2) analyze CBP's border	 
enforcement outcomes during fiscal years 2001 to 2006, and (3)	 
evaluate CBP's approach for improving border enforcement. GAO	 
examined relevant documents, interviewed agency officials in	 
Washington, D.C. and seven port locations, and analyzed CBP data 
on trade and IP seizure and penalty activity. This is the public 
version of a law enforcement sensitive report by the same title  
(GAO-07-350SU). 						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-735 					        
    ACCNO:   A68848						        
  TITLE:     Intellectual Property: Better Data Analysis and	      
Integration Could Help U.S. Customs and Border Protection Improve
Border Enforcement Efforts					 
     DATE:   04/26/2007 
  SUBJECT:   Agency evaluation					 
	     Border security					 
	     Homeland security					 
	     Import restriction 				 
	     Intellectual property				 
	     International trade				 
	     International trade regulation			 
	     Law enforcement					 
	     Performance measures				 
	     Program evaluation 				 
	     Search and seizure 				 
	     Strategic planning 				 
	     Strategy Targeting Organized Piracy		 

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GAO-07-735

   

     * [1]Results in Brief
     * [2]Background

          * [3]Counterfeit Goods Pose a Cost to U.S. Economy and a Threat t
          * [4]CBP Leads IP Enforcement at the Border

     * [5]CBP Undertakes a Series of Steps, Amid Challenges, to Enforc

          * [6]CBP Operates in a Challenging Environment to Combat the Entr
          * [7]CBP Uses Various Targeting Methods, Depending on Port Practi

               * [8]Computer-Based Targeting
               * [9]Manual Targeting
               * [10]Both Targeting Methods Have Strengths and Limitations

          * [11]Other Targeting or Compliance Measurement Actions May Uncove
          * [12]Targeted Shipments Are Subject to Examination, but Determini

               * [13]Physical Exams Are Performed to Determine IP Violations
               * [14]Identifying IP Violations Can Be Difficult
               * [15]Uneven Quality of Exam Data Limits CBP's Ability to
                 Analyze

          * [16]CBP's Key IP Enforcement Actions Entail Seizing Goods and Is

     * [17]IP Enforcement Outcomes Have Been Concentrated in Certain Ar

          * [18]Majority of IP Seizure Actions Occurred in Air Transportatio
          * [19]Seizures Have Been Concentrated among Certain Types of Produ
          * [20]Ten or Fewer Ports Have Accounted for the Bulk of IP Enforce

     * [21]CBP's Approach to Improving IP Enforcement Lacks Integration

          * [22]CBP's Strategic Plan Lacks Performance Measures for IP Enfor
          * [23]Legacy OT Offices Have Led Certain IP Improvement Efforts, b

               * [24]Effectiveness of New Targeting Model Cannot Be
                 Determined
               * [25]Audits Have Resulted in Some Seizures and Penalties, but
                 The
               * [26]New Penalty Guidance Reduces the Number of Uncollectible
                 Pen

          * [27]CBP Has Not Analyzed Variations in Port Enforcement Outcomes

               * [28]CBP Has Not Analyzed Yearly Fluctuations in Port
                 Enforcement
               * [29]CBP Has Not Analyzed Relative IP Enforcement Outcomes
                 among

          * [30]Lack of Integration across Key Offices Impedes Further Impro

     * [31]Conclusions
     * [32]Recommendations for Executive Action
     * [33]Agency Comments and Our Evaluation
     * [34]GAO Comments
     * [35]GAO Contact
     * [36]Staff Acknowledgments
     * [37]GAO's Mission
     * [38]Obtaining Copies of GAO Reports and Testimony

          * [39]Order by Mail or Phone

     * [40]To Report Fraud, Waste, and Abuse in Federal Programs
     * [41]Congressional Relations
     * [42]Public Affairs

Report to the Ranking Member, Subcommittee on Oversight of Government
Management, the Federal Workforce, and the District of Columbia, Committee
on Homeland Security and Governmental Affairs, U.S. Senate

United States Government Accountability Office

GAO

April 2007

INTELLECTUAL PROPERTY

Better Data Analysis and Integration Could Help U.S. Customs and Border
Protection Improve Border Enforcement Efforts

GAO-07-735

Contents

Letter 1

Results in Brief 3
Background 6
CBP Undertakes a Series of Steps, Amid Challenges, to Enforce IP Rights at
the Border 12
IP Enforcement Outcomes Have Been Concentrated in Certain Areas and
Reflect Pockets of Activity 24
CBP's Approach to Improving IP Enforcement Lacks Integration and Has
Produced Limited Results 32
Conclusions 43
Recommendations for Executive Action 45
Agency Comments and Our Evaluation 45
Appendix I Scope and Methodology 48
Appendix II Analysis of Top Six Ports' IP Enforcement Outcomes 52
Appendix III Comments from the Department of Homeland Security 57
GAO Comments 62
Appendix IV GAO Contact and Staff Acknowledgments 65

Tables

Table 1: Percent of Total Estimated Domestic Value Seized by Commodity,
Fiscal Years 2001-2006 29
Table 2: Top 10 Ports' Percent of Seizure and Penalty Outcomes, Fiscal
Years 2001-2006 31
Table 3: CBP IP Penalty Amounts Assessed versus Collected, Fiscal Years
2001-2006 37
Table 4: IP Seizure Rates of Top 25 Ports (by IP Import Value), Fiscal
Year 2005 42

Figures

Figure 1: Import Value by Mode of Transport, Fiscal Year 2005 10
Figure 2: Number of Trade, Compliance Measurement, and Nontrade Exams CBP
Performed, Fiscal Years 2001-2005 11
Figure 3: Overview of CBP's Process for Conducting IP Border Enforcement
14
Figure 4: Percent of IP Seizure Actions and Domestic Value by
Transportation Mode, Fiscal Years 2003-2006 26
Figure 5: Trends in Number of IP Seizure Actions and Estimated Domestic
Values, Fiscal Years 2001-2006 27
Figure 6: Top 25 IP-Importing Ports' Seizure Rates: Percent of IP Seizures
in IP Imports (by Value), Fiscal Year 2005 41
Figure 7: IP Enforcement Outcomes for Top Six Ports, Fiscal Years
2001-2006 54

Abbreviations

ATS Automated Targeting System
CBP U.S. Customs and Border Protection
DHS Department of Homeland Security
HTS Harmonized Tariff System
ICE U.S. Immigration and Customs Enforcement
IP intellectual property
MSRP Manufacturer's Suggested Retail Price
OFO Office of Field Operations
OT Office of International Trade
STOP Strategy Targeting Organized Piracy

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United States Government Accountability Office
Washington, DC 20548

April 26, 2007

The Honorable George V. Voinovich
Ranking Member
Subcommittee on Oversight of Government Management,
  the Federal Workforce and the District of Columbia
Committee on Homeland Security and Governmental Affairs
United States Senate

Dear Senator Voinovich:

The illegal importation and distribution of counterfeit and pirated goods
poses an increasing cost to the United States economy and threatens the
health and safety of its citizens.1 The United States dominates the
creation and exportation of intellectual property (IP)--creations of the
mind--and provides broad protection for IP through means such as
copyrights, patents, and trademarks. However, IP protection in many parts
of the world is inadequate, and as a result, U.S. goods are subject to
substantial counterfeiting and piracy in other countries.2 The Department
of Justice has reported on the growing threat of IP crime in the United
States, noting that IP has become increasingly more critical to our
country's economic security. Other federal agencies have testified that
the economic benefits of capitalizing on IP goods have drawn the attention
of counterfeiters and pirates, and that the magnitude and complexity of IP
rights violations have increased in recent years.3 In an effort to protect
American public health and safety and safeguard the U.S. economy, a number
of federal agencies are involved in keeping IP-infringing goods from
entering the country and investigating or prosecuting those responsible
for their importation. The Department of Homeland Security's (DHS) U.S.
Customs and Border Protection (CBP) leads enforcement activity at the U.S.
border by detecting and seizing counterfeit or pirated goods that enter
the United States through its 300-plus ports of entry and assessing
penalties against IP rights offenders.4

1Counterfeit goods carry a false trademark identical to, or substantially
indistinguishable from, a U.S. registered trademark (See Timothy P.
Trainer and Vicki E. Allums, Protecting Intellectual Property Across
Borders, 2006 ed. (Eagan, MN: Thomson/West, 2006).) Pirated goods are
reproduced without authorization, especially in infringement or copyright.

2GAO, Intellectual Property: U.S. Efforts Have Contributed to Strengthened
Laws Overseas, but Challenges Remain, [43]GAO-04-912 (Washington, D.C.:
Sept. 8, 2004).

3Officials from the Departments of Commerce, the U.S. Trade
Representative, and Homeland Security have all recently reported on the
growing threats to the United States from increases in counterfeit goods.

In response to your request to review federal enforcement efforts of IP at
the borders, this report (1) examines key aspects of CBP's process to
carry out border enforcement, (2) analyzes CBP's border enforcement
outcomes during fiscal years 2001 through 2006, and (3) evaluates CBP's
approach for improving border enforcement. We plan to report on CBP and
other federal agencies' activities and resources devoted to IP enforcement
later in 2007.

To address these issues, we met with CBP officials in Washington, D.C.,
and at seven port locations and reviewed relevant agency documents to
understand CBP policies and practices related to IP border enforcement. At
the ports, we examined port organizational structures and practices for
enforcing IP rights, and we spoke with various CBP personnel who are
responsible for identifying, examining, seizing, and assessing penalties
on goods that involve IP violations. We analyzed CBP data on the volume
and value of trade entering U.S. ports and on its IP seizure and penalty
activity. Most of this analysis was based on data covering fiscal years
2001 through 2006, but some data were only available for fiscal years 2003
through 2006. We identified certain limitations in the seizure and penalty
data but found them sufficiently reliable to indicate broad trends in
enforcement outcomes. We discussed CBP's efforts with knowledgeable agency
officials and obtained information on certain steps CBP has taken to
improve its efforts. Our work focused on tangible goods that cross U.S.
borders, rather than goods that are pirated over the Internet. We
conducted our work from November 2005 through January 2007 in accordance
with generally accepted government auditing standards. The original
version of this report was issued on March 20, 2007, as a restricted
report, copies of which are available for official use only.5 This public
version of the original report does not contain certain information that
DHS regarded as law enforcement sensitive and requested that we remove.

4Given its role in overseeing the import and export of physical goods,
CBP's efforts are primarily directed toward counterfeit goods manufactured
overseas and, occasionally, the means to create or finish them in the
United States. Computer- or Internet-based piracy of copyrighted media,
such as music, movies, or software, is also a significant problem, but
because these activities usually have no link to the border, CBP is not as
involved in fighting this form of IP infringement. Our use of the term
"counterfeit" in this report refers broadly to violations that may involve
a range of IP infringement.

5GAO, Intellectual Property: Better Data Analysis and Integration Could
Help U.S. Customs and Border Protection Improve Border Enforcement
Efforts, GAO-07-350SU  (Washington, D.C.: Mar. 20, 2007).

Results in Brief

CBP undertakes a series of steps to enforce IP rights at the U.S. border
and faces numerous challenges throughout this process. CBP's process
includes three key functions: (1) targeting suspicious shipments, (2)
examining goods to determine their authenticity, and (3) enforcing IP laws
through seizure and penalty actions. CBP's Office of International Trade,
formed in October 2006, focuses on trade policy and program development
and the Office of Field Operations oversees port operations and implements
CBP policies; both play important roles in carrying out key IP functions.
To help determine which of the millions of shipments entering the United
States each year require further review, CBP relies on two primary
targeting methods, computer-based and manual, but both have certain
strengths and limitations for targeting IP violations. Both offices use
computer-based targeting to electronically identify commercial shipments
by known or suspected violators, which typically enter the country via
sea, air, and truck. However, the primary computer method used for IP
targeting does not work for noncommercial shipments, has limited
usefulness in express consignment (e.g., Federal Express) and
international mail processing environments, and has uncovered a relatively
small portion of IP violations. Manual targeting involves skilled port
employees making real-time decisions based on instinct and experience and
can be used for any transport mode, but it requires dedication of time and
resources, and its role in uncovering IP violations cannot be determined.
Once a shipment has been targeted, CBP examination techniques range from
document reviews to physical exams, with physical exams being the best
method for evaluating potential IP violations. Determining whether
infringement has occurred can be a challenging process in which port staff
may require input from CBP's legal and product experts and from the rights
holders themselves. Although port staff are required to enter exam results
in CBP's data systems, CBP officials said that information on IP exams has
been unevenly recorded across ports, making it difficult for CBP to fully
analyze the effect of its targeting efforts in this area. CBP's IP
enforcement process concludes by ports seizing infringing goods and, if
warranted, assessing penalties against offenders.

The bulk of CBP's enforcement outcomes in recent years have been generated
by pockets of activity within certain modes of transport and product types
as well as among a limited number of port locations. Although both seizure
numbers and estimated values have increased in recent years, the increase
in numbers can be attributed almost exclusively to seizures of small-value
shipments made from air transportation, particularly express consignment
and international mail. This type of seizure grew particularly rapidly in
2006, leading to a near doubling in the number of seizure actions compared
with those in the prior year, an outcome that may reflect a shift in
smuggling techniques that has forced CBP to be more reliant on manual
targeting methods. In contrast, more than half of estimated seizure value
has been generated by a much smaller number of seizures from ocean-going
cargo containers, a transportation mode in which computer-based targeting
is used. The sheer size of some of these seizures has caused total
estimated seizure values to fluctuate from year to year, reaching a high
in 2006. Wearing apparel, cigarettes, footwear, and handbags have
accounted for the majority of seizure value in the past 6 years. A limited
number of ports have produced the bulk of seizure and penalty activity
since 2001, with nearly three-fourths of aggregate seizure value and 84
percent of penalty cases opened accounted for by the top 10 ports as
ranked by those outcomes.6 These are a mix of ports, including a few of
the nation's largest and some that are smaller. Six of these ports have
consistently driven enforcement outcomes over time.

Despite recent increases in seizure outcomes, CBP lacks an integrated
approach across key offices for further improving border enforcement
outcomes, causing it to focus on certain efforts that have produced
limited results while not taking initiative to understand and address the
variations among ports' enforcement outcomes. Although CBP's strategic
plan highlights the importance of IP enforcement, the plan lacks any
performance measures in this area to guide agencywide efforts and measure
outcomes. CBP offices that formed the Office of International Trade have
led certain initiatives to improve IP enforcement processes, including
developing a statistically driven risk-assessment model to improve
targeting, auditing certain importers' internal controls for preventing
importation of infringing goods, and issuing guidance to give ports more
discretion in deciding when to issue penalties in cases where collection
is unlikely. However, these efforts have produced limited results: poor
data collection during port-based pilots prevents CBP from fully assessing
the effectiveness of its risk model; the audits have produced some
enforcement actions, but are time consuming and many are not yet complete;
and the guidance, while reducing new penalty amounts as expected, has not
helped to bridge the large gap between amounts assessed and those
collected. Beyond these efforts, CBP has not analyzed existing data to
identify factors that might account for variations in enforcement outcomes
within or among certain ports, in part because port priorities and
practices are highly decentralized. In addition to identifying a
concentration of IP enforcement outcomes among certain ports, we also
compared IP seizures to "IP imports" (goods that have been monitored by
CBP for IP violations and goods that are similar to them) across a larger
number of ports. We determined that, of 25 ports that represented 75
percent of the value of fiscal year 2005 IP imports, just 8 had seizure
rates (seizure value as a percent of import value) that were higher than
the group average. Surprisingly, the port with the highest seizure rate
also had the smallest value of IP imports among the ports we examined. In
contrast, the IP seizure rates for several of the ports with relatively
larger IP import values were well below the group average. This
illustrates the type of analysis that CBP could perform using existing
data to better understand and potentially improve port enforcement
outcomes. Such analysis would likely be conducted by the Office of
International Trade, but overseeing and influencing port operations is the
purview of Office of Field Operations.

6We ranked ports according to their aggregate number of seizure actions,
estimated seizure values, IP penalty cases opened, and IP penalty amounts
assessed during fiscal years 2001 through 2006. The top 10 ports for each
category differ, but there is considerable overlap among the ports so
ranked in each category.

To develop a more effective approach to IP border enforcement, in the law
enforcement sensitive report we recommended that the CBP Commissioner
direct the Offices of International Trade and Field Operations to work
together to (1) include in CBP's strategic plan measures to guide and
assess IP enforcement efforts, (2) improve CBP's data on IP enforcement,
and (3) analyze the data to better understand ports' IP enforcement
activities and outcomes and link ports' performance to CBP's strategic
plan.

We provided a draft of the law enforcement sensitive report to DHS for
review by CBP and ICE. In commenting on that report, CBP generally agreed
with our recommendations. CBP and ICE also provided technical comments,
which we incorporated into the law enforcement sensitive report as
appropriate. We also provided a draft of this report to DHS for
sensitivity review by CBP and ICE, which agreed that we had appropriately
removed law enforcement sensitive information.

Background

Counterfeit Goods Pose a Cost to U.S. Economy and a Threat to Health and Safety

Intellectual property is the result of human innovation and creation to
develop products that people consume every day, whether it is the music we
listen to, the books we read, the cars we drive, or the medicine we take.
The protection of IP is recognized as important to continuing that
innovation and creativity, and the United States has several laws aimed at
protecting IP rights. Copyrights, patents, and trademarks are the most
common forms of protective rights for IP.7 Protection is granted by
guaranteeing owners limited exclusive rights to whatever economic reward
the market may provide for their creations and products. According to the
U.S. Intellectual Property Rights Coordinator, industries that relied on
IP protection were estimated to account for over half of all U.S. exports,
represented 40 percent of U.S. economic growth, and employed about 18
million Americans in 2006, making IP protection important to protecting
our nation's economy.8 It is difficult to reliably measure criminal
activity, but industry groups suggest that counterfeiting and piracy are
on the rise and that a broader range of products, from auto parts to razor
blades, and from medicines to infant formula, are subject to counterfeit
production. The threat to America's health and safety from the theft of IP
and counterfeiting of products is an increasing concern for many
reasons--counterfeit batteries can explode, counterfeit car parts can fail
to perform, and counterfeit pharmaceuticals can lack the ingredients
necessary to cure deadly diseases.9 In addition to public health and
safety concerns, the annual losses that companies face from IP violations
are substantial.

7A copyright provides protection for literary and artistic works such as
books, musical compositions, computer software, and cinematographic works
(movies). A copyright is a property right in an original work of
authorship that arises automatically upon creation of such a work and
belongs, in the first instance, to the author. A patent protects an
invention by giving the inventor the right to exclude others from making,
using, or selling a new, useful, nonobvious invention during a specific
term. Trademarks are words, phrases, logos, or other graphic symbols used
by manufacturers or merchants to identify their goods and distinguish them
from others. Other types of intellectual property include trade secrets,
industrial designs, and geographic indications. Geographic indications are
names used to identify products with quality, reputation, or other
characteristics attributable to the origin of the product.

8Statement by Chris Israel, U.S. Intellectual Property Rights Coordinator,
before the Senate Committee on Homeland Security and Governmental Affairs
Subcommittee on Oversight of Federal Management, the Federal Workforce,
and the District of Columbia on July 26, 2006.

9The World Health Organization estimates that 10 percent of all
pharmaceuticals worldwide are counterfeit.

CBP Leads IP Enforcement at the Border

Multiple federal agencies play a role in combating counterfeiting and
piracy, and their efforts were wrapped into the administration's Strategy
Targeting Organized Piracy, launched in October 2004. One objective of
this effort is to improve border enforcement, and CBP is the agency
primarily responsible for such enforcement, given its authority to detain
and examine shipments and seize goods that violate U.S. law. CBP's current
mission has two goals: preventing terrorists and terrorist weapons from
entering the United States while facilitating the flow of legitimate trade
and travel; and its priority mission is to ensure homeland security.10

CBP is responsible for enforcing antiterrorism, trade, immigration, and
agricultural policy, laws, and regulations at more than 300 ports of
entry. Two CBP offices play a role in carrying out policies and procedures
related to IP enforcement:

           o Office of International Trade (OT) - Established in October
           2006, this office consolidates the trade policy, program
           development, and compliance measurement functions of CBP into one
           office.11 This office is responsible for providing uniformity and
           clarity for the development of CBP's national strategy to
           facilitate legitimate trade and managing the design and
           implementation of strategic initiatives related to trade
           compliance and enforcement, including IP rights.

           o Office of Field Operations (OFO) - This office houses CBP's
           border operations and is comprised of 20 field offices under which
           are CBP's 325 ports of entry.12 Overseeing more than 25,000
           employees, including more than 20,000 CBP officers, OFO is
           responsible for carrying out CBP's cargo and passenger-processing
           activities related to security, trade, immigration, and
           agricultural inspection.

           Daily management of port operations is highly decentralized, with
           field offices overseeing but not directly managing port
           operations. CBP's port operations oversee an array of cargo- and
           passenger-processing environments, and port management structures
           are not uniform. For example, some ports' management oversees a
           single port of entry while others oversee multiple ports of entry
           (e.g., a seaport and nearby airport).

           o Seaports - CBP operations in the sea environment primarily
           consist of cargo container processing, but may include passenger
           processing for cruise ships. Cargo containers arriving at seaports
           may be transported to interior ports for processing via an import
           mechanism called the in-bond system.13 CBP receives manifest
           information 24 hours before lading at foreign ports so that it may
           screen cargo container data to identify high-risk shipments.14 
           o Airports - CBP processes passengers and cargo at U.S. airports
           with international flights. CBP's air environment includes air
           cargo, express consignment carriers, such as Federal Express, and
           international mail. Air cargo shipments are generally larger in
           size than express consignment or international mail shipments. CBP
           receives manifest information in the air environment 4 hours prior
           to arrival.

           o Land Border Crossings - CBP processes passengers, commercial
           truck and rail, and personal vehicles at land border crossings.
           CBP receives manifest information for commercial truck and rail
           shipments 30 minutes to 2 hours prior to arrival, depending on the
           transport mode.

           The volume of goods and people that CBP processes for entry into
           the United States every year is substantial and has been steadily
           increasing. For example, the number of "entries summaries" filed
           with CBP rose from nearly 24 million in fiscal year 2001 to nearly
           30 million in fiscal year 2005.15 In fiscal year 2005, CBP
           processed approximately 20 million sea, truck, and rail containers
           and about 450 million passengers and pedestrians.16 At the same
           time, the value of import trade has been growing, rising from
           about $1.2 trillion in fiscal year 2001 to about $1.7 trillion in
           fiscal year 2005, according to CBP statistics.17 The largest share
           of imports by value arrives at the United States via ocean-going
           cargo containers, followed by air transport, as illustrated in
           figure 1. According to CBP, the proportion of import value by
           transport mode has remained relatively static since fiscal year
           1999.

           Figure 1: Import Value by Mode of Transport, Fiscal Year 2005

           Note: "Land" includes imports that entered via truck or rail.
           "Other" includes imports that entered through foreign trade zones,
           warehouses, and other methods.

           Although all goods imported into the United States are subject to
           examination, CBP examines only a small portion of them.18 Most
           exams are conducted for security reasons, and these have been
           increasing each year, while the number of trade-specific exams has
           not grown since 2001, as shown in figure 2. In addition, CBP
           conducts a small portion of exams under its Compliance Measurement
           Program, which has components to address both security and trade
           compliance.19

           Figure 2: Number of Trade, Compliance Measurement, and Nontrade
           Exams CBP Performed, Fiscal Years 2001-2005

           Note: According to CBP, "nontrade exams" include exams conducted
           for security, narcotics, or agricultural reasons. These data
           include security exams conducted through nonintrusive inspection
           techniques such as mobile X-ray machines.

           After the formation of DHS and in light of homeland security
           priorities, CBP determined that it needed to focus its trade
           enforcement resources and activities on the most pressing trade
           issues. CBP has six Priority Trade Issues, one of which involves
           IP.20 According to CBP's Intellectual Property Rights Trade
           Strategy, the agency's goal is to improve the effectiveness of its
           IP enforcement activities; ensure a uniform enforcement approach
           across its multiple port locations; and focus on making seizures
           with high aggregate values, that threaten health and safety or
           economic security, or that have possible ties to terrorist
           activity. CBP is also responsible for enforcing International
           Trade Commission exclusion orders that arise from an
           administrative process in which the commission determines that
           certain products constitute infringement of a relevant U.S. law
           and should be excluded entry to the United States.21 CBP
           coordinates its efforts with DHS's U.S. Immigration and Customs
           Enforcement (ICE), which investigates IP violations and builds
           cases for prosecution.
		   
		   CBP Undertakes a Series of Steps, Amid Challenges, to Enforce IP
		   Rights at the Border

           CBP takes a series of steps to enforce IP rights at the border and
           faces a number of challenges throughout this process. Two key
           offices, OT and OFO, are responsible for carrying out these steps,
           which include (1) targeting suspicious shipments; (2) examining
           detained shipments to determine if they carry infringing or
           excluded goods; and (3) enforcing IP laws by seizing goods and, if
           warranted, assessing penalties against importers. CBP uses two
           primary methods to target IP violations: computer-based and manual
           targeting. Their use varies, depending on the individual port
           approaches and the transportation mode being targeted, and both
           methods have certain strengths and limitations. OT and OFO both
           use computer-based methods to target vast numbers of commercial
           shipments, but the primary computer method used for IP purposes
           has led to a relatively small percent of IP seizures. Manual
           targeting by port employees is more ad hoc and flexible than
           computer-based targeting, given its reliance on employee skill and
           availability, but determining its effect on IP enforcement is
           difficult. Ports conduct exams on targeted shipments, and
           determining whether infringement has occurred during an exam can
           be a challenging process that requires training and input from
           experts. Because of differing port practices, information on IP
           exams has been unevenly recorded across ports, according to
           officials, making it difficult for CBP to fully analyze the effect
           of its targeting efforts in this area. CBP's process for enforcing
           IP concludes with ports seizing infringing goods and, if
           warranted, referring cases to ICE and assessing penalties.
           According to CBP officials, storing and destroying infringing
           goods has been costly, and the penalty process has resulted in few
           collections. Agency IP enforcement efforts have primarily been
           focused on goods for which the trademark or copyright has been
           recorded with CBP.
		   
		   CBP Operates in a Challenging Environment to Combat the Entry of
		   Counterfeit Goods

           Because importing counterfeit goods is an inherently deceptive
           activity, it presents challenges to CBP's ability to process large
           volumes of goods and determine those that are legitimate. CBP
           regularly confronts nefarious importers who attempt to smuggle
           IP-infringing goods into the country through various means. For
           example, according to a CBP press release, in August 2006, the
           Norfolk seaport found fake Nike shoes concealed inside a
           refrigerated container behind the jellyfish and salt kelp declared
           on the manifest.22 In addition, CBP contends with counterfeiter
           practices that make it difficult to detect shipments containing
           IP-infringing goods or distinguish legitimate from unauthorized
           goods. The law enforcement sensitive report described some of
           these practices in greater detail.

           Amid these challenges, however, OT and OFO both have
           responsibility for executing a series of actions to (1) target
           potential IP infringing goods as they enter the United States, (2)
           examine suspicious goods, and (3) enforce IP laws through seizures
           and penalties, if warranted. Figure 3 depicts an overview of CBP's
           process.

           Figure 3: Overview of CBP's Process for Conducting IP Border
           Enforcement
		   
		   CBP Uses Various Targeting Methods, Depending on Port Practices and
		   Transport Modes, Each Having Strengths and Limitations

           CBP uses both computer-based and manual targeting approaches to
           target counterfeit goods either before or as they enter the United
           States--both methods have strengths and limitations related to
           scope, data accuracy and overall sophistication, and resource
           requirements. CBP ports vary in the degree to which they use these
           methods, depending on their overall approach to IP enforcement and
           the modes of transport that they oversee. The primary
           computer-based targeting method used for IP purposes has uncovered
           a relatively small share of IP seizures. The effect of manual
           targeting is more difficult to determine. In addition, CBP
           undertakes other targeting and compliance measurement actions
           that, while not intended for IP enforcement, have uncovered IP
           violations.
		   
		   Computer-Based Targeting

           CBP's computer-based targeting for IP violations is handled
           primarily through its Cargo Selectivity program, a system that
           targets commercial shipments, which are typically transported to
           the United States by sea, air, and truck.23 Commercial shipments
           may arrive to the United States via various modes of transport,
           but the largest shipments arrive via ocean-going cargo containers.
           When data about a particular shipment match the targeting criteria
           entered into the system, the port of entry is electronically
           notified, and the shipment is flagged for examination. Cargo
           Selectivity is not used to target noncommercial shipments, which
           typically enter the United States via express consignment,
           international mail, passengers, or private vehicle.

           Cargo Selectivity criteria can be developed to target on a
           nationwide basis or on a local, port-specific basis. National
           criteria for targeting suspected IP violations are developed and
           overseen by the Strategic Trade Center in Los Angeles (formerly in
           the Office of Strategic Trade and now under OT), where
           International Trade Specialists with expertise in particular
           industries develop criteria based on their analysis of recent
           seizure activity and information from industry representatives.24
           CBP officials said that Cargo Selectivity criteria are designed to
           target known or suspected violators and that criteria can be
           written to target on all or some of a limited number of data
           elements. Ports develop local criteria in a similar fashion;
           however, they differ in the degree to which they use national or
           local criteria.

           CBP's Automated Targeting System (ATS) is another computer-based
           targeting tool, but it is not used to systematically target for IP
           violations. ATS is a primary component of CBP's approach for
           security targeting.25 As we note later in this report, CBP has
           conducted one pilot test of an ATS module for targeting IP
           violations.
		   
		   Manual Targeting

           Manual targeting describes a range of activities in which
           individual employees at the ports or the Los Angeles Strategic
           Trade Center--based on their own knowledge, analysis, and
           experience--identify certain shipments for examination. According
           to CBP officials and based on our observations at select ports,
           manual targeting may involve CBP staff flagging shipments by:

           o conducting queries (such as in ATS) or executing analysis of
           electronically-filed manifest or entry data;
           o reviewing entry paperwork (including paper and electronic
           entries), which may be generated as a computer-based targeting;26 
           o visually observing packages in a processing or storage
           environment; and
           o receiving information from other CBP employees within their own
           port or at other ports regarding a given shipment, perhaps based
           on information obtained from law enforcement agencies or rights
           holders.
		   
		   Both Targeting Methods Have Strengths and Limitations

           Both Cargo Selectivity and manual targeting methods have certain
           strengths and limitations relating to their scope, usefulness, and
           feasibility:

           o Cargo Selectivity allows CBP to quickly screen vast volumes of
           commercial shipments on a nationwide basis, but it doesn't work
           for all types of shipments, and it has uncovered a relatively
           small share of IP violations since fiscal year 2003. Cargo
           Selectivity can use only a limited number of elements to target
           potentially infringing shipments, and getting criteria into the
           system takes time. According to CBP officials, the lack of
           sophistication and cumbersome process limits the system's overall
           usefulness for performing IP targeting.27 Also, CBP must use
           caution when developing its Cargo Selectivity targeting criteria
           in order to minimize the number of suspect shipments that are
           false positives, which can create unmanageable workloads for the
           ports, delay the movement of legitimate goods, and burden
           importers with exam costs. CBP data shows that IP targeting using
           Cargo Selectivity accounted for only about 3 percent of seizure
           actions made by CBP during fiscal years 2003 through 2006 and
           about 10 percent of the total estimated value of goods seized.
           More information on CBP's seizure outcomes is provided later in
           this report.

           o Ports use manual targeting to overcome some of the limitations
           of Cargo Selectivity. CBP officials at several ports we visited
           expressed the view that there is no substitute for the skills and
           experience of a well-trained CBP officer, but other officials
           noted that CBP can't rely on manual targeting to process vast
           volumes of trade. According to CBP officials, manual targeting is
           heavily dependent on employee availability and expertise;
           therefore, its use for IP targeting at some ports may be limited,
           particularly as CBP increasingly focuses its staff resources on
           security matters. CBP lacks data to fully determine the extent to
           which its seizure outcomes have resulted from manual targeting,
           but the portion could be large, given the relatively small portion
           that stems from Cargo Selectivity.
		   
		   Other Targeting or Compliance Measurement Actions May Uncover IP
		   Violations

           CBP undertakes other actions that, while not intended for IP
           enforcement, have uncovered IP violations, such as targeting for
           other trade violations or security reasons or actions that measure
           compliance with laws and regulations. For example, CBP's
           Compliance Measure Program, a statistical sampling program, is
           designed to examine randomly selected shipments for their
           compliance with a range of laws and regulations, including IP
           laws. According to CBP, IP violations have been found in a very
           small percent--less than one-tenth of 1 percent--of such exams.28
           In addition, Cargo Selectivity, when used to target for reasons
           such as terrorism or other trade issues, has revealed IP
           violations. Specifically, an additional 3 percent of seizure
           actions and 10 percent of estimated seizure value was uncovered
           from non-IP related criteria during fiscal years 2003 to 2005.
           Finally, any shipment that ATS identifies as high risk is
           automatically subjected to nonintrusive examinations using
           radiation detection and gamma-ray or X-ray scanning technologies.
           Such examinations may reveal unexpected results, such as contents
           that appear to differ from what is described in the manifest or
           entry data. When IP violations are suspected, the container is
           referred for further review to port personnel who handle trade
           enforcement. CBP could not provide data to show how often IP
           violations were found in this way.
		   
		   Targeted Shipments Are Subject to Examination, but Determining
		   Infringement Can Be Difficult, and Exam Results Are Unevenly
		   Recorded

           Once shipments have been targeted for examination, CBP personnel
           at the ports are to examine shipments and record the results of
           their exams in CBP's data systems. Because of high counterfeit
           quality and complex U.S. IP laws, determining whether IP
           infringement has occurred can be difficult. CBP provides some
           training to assist ports in this endeavor. Because of variations
           in port practices for recording IP exam results, CBP's exam data
           are uneven, according to CBP officials, and limits the agency's
           ability to assess CBP's targeting effectiveness.
		   
		   Physical Exams Are Performed to Determine IP Violations

           CBP uses the term "exam" to refer to a range of actions, including
           paperwork reviews, nonintrusive exams, and physical exams in which
           CBP examines all or a portion of the targeted goods. According to
           CBP officials, physical exams are the best means for assessing
           potential IP infringement. The procedures for conducting physical
           examinations differ according to the mode of transport and the
           movement of goods for examination.29

           o Sea Cargo Examinations. In the sea cargo environment, sea
           containers are generally transported and examined away from their
           point of arrival at CBP exam facilities located at some distance
           from the port itself. When multiple shipments are contained in a
           single cargo container, these are first moved to a container
           freight station for debundling and then targeted shipments within
           the container are moved to the examination warehouse.

           o Air Cargo Examinations. In the air environment, the examination
           location may vary. For example, air cargo shipments may be
           examined at their arrival location or moved to a CBP exam facility
           while international mail and express consignment shipments may be
           examined at their arrival location.

           o Land Border Crossing Examinations. At land border crossings,
           vehicles and packages are moved to examination areas while still
           under CBP's control.

           CBP personnel who perform physical exams at the ports have
           discretion over how intensive an exam will be. For example,
           according to CBP and ICE officials, decisions are made about how
           many boxes will be opened from a single ocean-going cargo
           container; which boxes will be opened; and whether the container
           will be partly or fully unloaded.

           CBP personnel are to follow a common set of procedures grounded in
           law and regulation once shipments are opened for examination. When
           CBP decides to examine goods, it has a 5-day period, following the
           date on which the goods were presented for examination, to decide
           whether it will detain or release them.30 If examining personnel
           can immediately identify goods as counterfeit, perhaps because
           they have recently seized similar goods or the violations are
           obvious, CBP initiates procedures to detain the goods. However,
           because this is often not the case, samples of the merchandise may
           be provided to commodity experts at the ports called Import
           Specialists who evaluate the goods for IP infringement. As a
           result of their evaluation, Import Specialists will either order
           the goods to be detained for further review or released.31

           When CBP decides to detain goods, it must notify the importer of
           the detention within 5 days after the decision was made, and may
           also notify the affected rights holder.32 The notice to the
           importer advises, among other things, the reason for the detention
           and the nature of any information or tests that CBP requires in
           order to process the matter. The importer and rights holder can
           take various actions, and communication with CBP may ensue for a
           period of 30 days. According to CBP officials, some rights holders
           are willing to negotiate with importers, which may involve
           financial compensation for the rights holder. If the importer's
           actions fail to secure release of the goods within 30 days or CBP
           finds them to be infringing, the agency proceeds with seizure and
           forfeiture actions.
		   
		   Identifying IP Violations Can Be Difficult

           Because of high counterfeit quality and the complexity of U.S.
           laws, making a determination of IP infringement in some instances
           is difficult. To help ports assess whether goods are authentic,
           CBP's agency regulations33 provide rights holders the option to
           record trademarks, trade names, or copyrights with CBP. CBP
           currently charges $190 for its recordation application. Through
           the fee-based recordation process, CBP collects information from
           an IP owner about specific registered trademarks, copyrights, or
           trade names, and then enters that information into an electronic
           database accessible by CBP officers at ports across the country.
           However, CBP officials said that some IP owners do not record
           their rights with CBP, meaning that CBP lacks information about
           their products and access to individuals within the company who
           can address potential infringement. Moreover, when counterfeit
           quality is quite good, even the rights holder may have to conduct
           research to distinguish real from fake.

           In addition, the complexity of U.S. IP laws and CBP's array of
           seizure authorities present challenges to port staff, according to
           CBP officials. CBP has an array of detention and seizure
           authorities for IP violations; port personnel must be aware of
           these authorities and ensure their actions are in accord with
           them. CBP advises the ports that the most appropriate seizure
           authority will depend on the type of IP right infringed, whether
           the right is federally registered, whether the right is recorded
           with CBP, and the type of alleged infringement.34 CBP is
           authorized, in some instances, to seize goods for which the right
           is registered with appropriate rights-granting authorities but not
           recorded with CBP; however, OT's lead IP attorney stated that
           because the statutory bases for such enforcement are established
           by criminal statutes that invoke certain limitations and
           evidentiary requirements, such seizures would be available only in
           cases involving clear instances of counterfeiting or piracy and
           would require CBP to establish more elements of the infringement
           than is required for recorded rights. Therefore, CBP directs ports
           to focus their IP enforcement on recorded goods. For certain other
           types of violations, CBP does not commence seizure actions either
           because of agency policy or the lack of proper authority.35

           CBP and rights holders offer training to port personnel to assist
           them in evaluations. For example, OT's IP attorneys train port
           personnel, including CBP Officers, Import Specialists, and others,
           on the legal and regulatory authorities in this area. Between 35
           and 40 ports received training in each of fiscal years 2005 and
           2006. In addition, private sector training is periodically
           arranged for CBP ports. Rights holder representatives give CBP
           staff advice about how to determine whether goods are counterfeit.
           For example, rights holders may tell CBP about security features
           they embed in their products or other methods they use to protect
           their IP.
		   
		   Uneven Quality of Exam Data Limits CBPï¿½s Ability to Analyze IP
		   Enforcement Efforts

           CBP maintains data systems in which port staff are required to
           record the results of exams they conduct, but the uneven quality
           of exam data has made it difficult for the agency to accurately
           analyze the results of IP targeting and to fully track all
           incidents of IP violations, according to CBP officials. CBP
           requires port staff to document exam results, whether or not
           violations were found, in order to contribute to the agency's
           repository of enforcement knowledge and for future targeting
           purposes. Officials in OT and its legacy offices familiar with the
           agency's data for IP-related exams told us the data are not
           uniform or timely and contains inaccuracies. For example, these
           officials said they have found instances where goods were seized
           for IP violations, but exam records did not indicate that any
           discrepancies were found. Also, officials said that staff at some
           ports quickly record exam results, but staff at other ports do not
           record exam results until several months after the goods have been
           detained or seized, if ever. Among ports that quickly record
           results, sometimes port staff must later revise the exam results
           if further investigation determines that the goods are legitimate.
           In addition, although port staff are directed to indicate in CBP's
           data systems whether IP violations were found and can add
           additional information about laws that were violated or a
           narrative description of the goods, officials in OT and its legacy
           offices that are familiar with the data said that whether and how
           they record this information varies. These officials were not sure
           what accounted for variations in the quality of exam results
           across ports, and we did not independently assess CBP's policies
           or port practices for recording exam results.
		   
		   CBPï¿½s Key IP Enforcement Actions Entail Seizing Goods and Issuing
		   Penalties

           CBP's process for enforcing IP rights concludes with the seizure
           of counterfeit goods and, if warranted, the assessment of
           penalties against the IP infringer. A seizure action, as defined
           by CBP, entails CBP taking control and/or possession of articles
           imported contrary to law. Penalties result in monetary fines
           imposed on the violator.36

           Once CBP officers have examined goods and determined that they are
           counterfeit, the legal process to seize goods is initiated. This
           process, carried out by Fines, Penalties, and Forfeiture offices
           at the ports, entails (1) resolving or deciding CBP compliance
           actions; (2) providing advice to other CBP officers on the various
           trade violations; (3) securing or maintaining seized property; and
           (4) making sure CBP's automated system accurately reflects
           description, location, value, and forfeiture status of seized
           goods. CBP calculates the domestic value of seizures to track the
           value of goods it intercepts.37 For penalties it issues under 19
           U.S.C. 1526(f), CBP calculates the Manufacturer's Suggested Retail
           Price (MSRP)--which would have been the value of the merchandise
           if it were genuine. CBP determines whether additional enforcement
           in the form of civil penalties should be assessed. It is CBP's
           policy not to assess a penalty, however, until all forfeiture
           proceedings have been completed, and the property, except for
           representative samples, has been destroyed. When assessing 19
           U.S.C. 1526(f) penalties against a first-time violator, the amount
           of the penalty may be equal to or less than the MSRP. In the event
           of a second or subsequent seizure, the amount of the penalty is
           assessed at twice the value of the merchandise, based on the MSRP
           at the time of seizure. For seizures valued over $100,000 in
           domestic value, OFO maintains responsibility for reviewing the
           case before any legal action is taken. For penalties that are
           assessed, CBP officials said that substantial resources are
           dedicated to processing penalty cases, but they also said that
           penalty amounts are seldom fully collected. CBP's collection
           issues are discussed later in this report.

           Depending on the size and value of a seizure, CBP officers
           coordinate with ICE agents who then consult the Department of
           Justice's U.S. Attorneys Offices to determine if criminal
           investigation and prosecution is warranted. For example, a repeat
           violator may warrant criminal action if ICE has enough information
           to initiate a criminal investigation and build a case.

           Seized goods have to be secured, as they have potential value but
           cannot be allowed to enter U.S. commerce. Storage may be prolonged
           by law enforcement actions, but the goods are generally destroyed
           or otherwise disposed of according to law when determined to be
           illegal and are no longer needed. According to CBP officials, as
           seizures have increased, the agency's storage and destruction
           costs have grown and become increasingly burdensome. CBP reports
           that it spent over $9.1 million to destroy seized property between
           fiscal years 2001 and 2006.38 CBP officials said that the
           environmental regulations for disposing of goods, particularly in
           states like California, prevent CBP from disposing of certain
           counterfeit goods in landfills. Often the goods are destroyed
           through incineration.
		   
		   IP Enforcement Outcomes Have Been Concentrated in Certain Areas
		   and Reflect Pockets of Activity

           The bulk of CBP's enforcement outcomes have been concentrated
           within certain modes of transport and product types and reflect
           pockets of activity among a limited number of ports. Although the
           total number of seizure actions has grown since fiscal year 2001,
           nearly doubling between fiscal years 2005 and 2006, most of these
           actions involved small-value seizures made from air-based modes of
           transport and may reflect a shift in smuggling techniques toward
           larger numbers of smaller-sized shipments. The total estimated
           domestic value of goods seized since fiscal year 2001, however,
           has fluctuated due to variations in seizure activity involving
           large, ocean-going containers in which the highest-value seizures
           tend to be made. While the types of goods seized have varied over
           time, wearing apparel, cigarettes, footwear, and handbags have
           accounted for the majority of estimated seizure value in the past
           6 years. Ten or fewer ports, including some of the nation's
           largest ports and others that are significantly smaller, have
           accounted for the bulk of seizure and penalty outcomes since 2001.
           Of these ports, six have made consistent contributions each year
           to IP enforcement outcomes.

           CBP measures IP seizure activity two ways: number of seizure
           actions and estimated domestic value of goods seized. The number
           of goods in one seizure action can range from a few items shipped
           via international mail to hundreds of boxes of goods in a
           ocean-going cargo container. CBP maintains the official seizure
           statistics for DHS, including those made by CBP, ICE, or jointly
           by the two agencies. CBP captures data on the transport mode or
           processing environment in which goods were seized, but in
           compiling seizure data, neither OT nor its legacy offices
           routinely verify this data field. In addition, there are certain
           limitations in CBP's seizure data, such as the precision of the
           estimates. However, we found CBP's data to be sufficiently
           reliable to indicate broad trends.
		   
		   Majority of IP Seizure Actions Occurred in Air Transportation
		   Environment While Value of Seized Goods Was Concentrated in Sea
		   Environment

           For fiscal years 2003 through 2006, most IP seizure actions have
           been concentrated in the air transportation environment, while
           most seizure value has been concentrated in ocean-going cargo
           containers.39 As shown in figure 4, about 78 percent of total
           seizure actions during fiscal years 2003 through 2006 occurred in
           air transportation processing environments.40 Significantly fewer
           seizure actions were made from ocean-going cargo containers or
           land-based transport modes, such as truck, train, or auto.
           Conversely, ocean-going cargo container seizures represented about
           60 percent of total estimated seizure value during those years,
           with significantly smaller portions of value generated by air- and
           land-based seizures.41 Even though about one-fourth of U.S.
           imports enter by land-based modes of transport, seizure actions
           and values in this mode were less than 5 percent of total
           seizures, as measured by either indicator.

           Figure 4: Percent of IP Seizure Actions and Domestic Value by
           Transportation Mode, Fiscal Years 2003-2006

           Note: According to CBP, "other" includes no transportation
           involved (often ICE seizures), "none listed" (often passenger
           seizures) and "other" (undefined).

           CBP seizure data show that the number of seizure actions has grown
           steadily from fiscal years 2001 to 2006, while domestic values
           have fluctuated. As shown in figure 5, there were over 3,500
           seizure actions in fiscal year 2001, increasing to over 14,000 in
           2006. Also shown in figure 5, the domestic value of goods seized
           in these years has fluctuated, reaching a high in 2006 of more
           than $155 million.42 Although the overall trend for both
           measurements is upward, these outcomes represent a small fraction
           of overall imports. For instance, in fiscal year 2005, the
           domestic value of IP seizures represented less than one-tenth of 1
           percent (0.02 percent) of the total value of imports of goods in
           product categories that are likely to involve IP protection.43 It
           is impossible to know whether these seizure outcome trends reflect
           improved enforcement actions or an increase in the share of
           counterfeit trade entering the United States during those years.

10Under the Homeland Security Act of 2002, border inspection functions of
a number of agencies, including the Immigration and Naturalization
Service, the U.S. Customs Service, and the Department of Agriculture were
transferred to DHS. P.L. 107-296, Title IV. CBP is responsible for
carrying out these functions by assessing and collecting customs duties,
excise taxes, and fees and penalties due on imported merchandise;
interdicting and seizing contraband; processing persons, baggage, cargo,
and mail; detecting and apprehending persons engaged in fraudulent
practices designed to circumvent Customs and related laws; protecting
American business and labor and IP rights; and, protecting the general
welfare and security of the United States by enforcing import and export
restrictions and prohibitions.

11The Office of International Trade was formed by merging CBP's Office of
Strategic Trade, Office of Regulations and Rulings, and certain
trade-related policy functions of the Office of Field Operations.

12U.S. Customs and Border Protection, Securing America's Borders at Ports
of Entry, Office of Field Operations, Strategic Plan Fiscal Years 2007
through 2011.

13Because of the in-bond system, a significant portion of goods received
at U.S. ports do not immediately enter U.S. commerce but are instead
transferred to other ports for official entry or are transported through
the United States to Mexico or Canada. For example, containers arriving at
the port of Los Angeles might be transferred via truck to the port of
Cleveland for official entry. In a recent report, GAO found that
weaknesses in CBP's management of the in-bond system persist and that CBP
does not adequately monitor and track in-bond shipments (see International
Trade: Persistent Weaknesses in the In-Bond Cargo System Impede Customs
and Border Protection's Ability to Address Revenue, Trade, and Security
Concerns, [44]GAO-07-561 (Washington, D.C.: Apr. 17, 2007).

14A manifest is a listing of the conveyance's cargo, e.g., goods within an
ocean-going container.

15A formal entry is required for imports greater than $2,500 in value, and
refers to information (usually in electronic format, but sometimes in
paper format) that is filed by the importer or broker. Entry data includes
the manufacturer's identification number, the importer's identification
number, country of origin of the goods, and a more precise description of
merchandise and is used by CBP to, among other things, assess customs
duties and determine when cargo will be cleared to leave a port.

16Performance and Accountability Report, Fiscal Year 2005, U.S. Customs
and Border Protection.

17Import Trade Trends, Fiscal Year 2005 Year End Report, U.S. Customs and
Border Protection.

18CBP is authorized by law (19 U.S.C. 1499(c)(1)) to examine all
merchandise entering the territory of the United States.

19The Compliance Measurement Program is a statistical sampling program
that randomly selects shipments for review and examination to determine
the degree to which they comply with relevant laws and regulations. The
program initially focused on trade compliance and revenue issues. In
fiscal year 2006, CBP expanded the program to also focus on supply chain
security.

20The number and focus of Priority Trade Issues has changed over time. As
of fiscal year 2006, the Priority Trade Issues included agriculture,
antidumping and countervailing duties, IP rights, penalties, revenue, and
textiles and wearing apparel.

21Section 337 of the Trade Act of 1930, as amended (Title 19 U.S.C. 1337),
makes it is unlawful to import into the United States articles that
infringe a U.S. patent, trademark, copyright or mask work.

22CBP, "U.S. Customs and Border Protection Intercepts "Cool" Counterfeit
Shoes Worth Over One Million Dollars," press release, Washington, D.C.,
August 3, 2006.

23Cargo Selectivity has been long used to help CBP and legacy Customs to
determine whether and how "intensively"--ranging from document review to
physical examination--it should examine certain shipments for various
types of violations. In addition to IP violations, CBP uses Cargo
Selectivity to target other types of trade issues, such as tariff
classification, quota issues related to textiles, and revenue matters.

24CBP has five Strategic Trade Centers located around the country, each
aligned with one of the agency's Priority Trade Issues. The Strategic
Trade Center in Los Angeles is responsible for addressing IP enforcement
and penalties.

25ATS is a complex model that calculates a risk score for each cargo
shipment arriving in the United States. The system is primarily used for
security targeting, but CBP is considering ways to expand its use to
include targeting for nonsecurity matters as well.

26CBP receives a large portion of manifest and entry data in electronic
format. According to CBP officials, CBP's data systems may require entry
packets to be generated from electronically filed data, but many shipments
are released without this requirement.

27According to some CBP officials, the lack of sophistication makes it
particularly difficult for the agency to enforce certain exclusion orders.
CBP uses national Cargo Selectivity criteria to specify which
manufacturers or products are subject to exclusion orders, but when the
orders are more general in nature and identify products to be excluded
based on certain production processes, it is very difficult to write
criteria to correctly target offending goods without creating a large
number of false positives and an unmanageable workload for the ports.

28Of about 287,000 Compliance Measurement exams conducted during fiscal
years 2000, 2001, 2003, 2004 and 2005, IP violations were uncovered in an
average of about 0.06 percent of them. The program was temporarily
suspended in fiscal year 2002. Reviewing the structure and implementation
of the Compliance Measurement program was outside the scope of this audit.

29CBP officials at certain ports said that sometimes targeted shipments do
not arrive as intended for examination because of human error or fraud.
Problems associated with the physical control over containers have been
identified in the past. (See DHS Inspector General, Audit of Targeting
Oceangoing Cargo Containers (Unclassified Summary), OIG-05-26 (Washington,
D.C., July 2005). In this audit, we did not review CBP's internal controls
for ensuring that targeted IP shipments were examined as intended.

3019 U.S.C. 1499 (c) (1).

31Import Specialists may use input from other experts in CBP, including
attorneys, commodity specialists, and laboratory technicians, as well as
rights holders or the U.S. agencies with which the rights are registered.

3219 U.S.C. 1499 (c) (2).

3319 Code of Federal Regulations, Part 133, Subparts A, B, and D.

34Customs Directive 2310-010A, December 11, 2000.

35For example, CBP advises staff to determine whether, in the case of
suspected trademark violations, the goods are counterfeit, "confusingly
similar," or "gray market." According to CBP, confusingly similar marks
are those that, while not identical to, or substantially indistinguishable
from, genuine marks, are nonetheless similar enough to the genuine mark so
as to constitute an infringement. Gray market goods are genuine
trademarked goods that were manufactured and intended for sale in another
country but were imported to the United States without the authorization
of the trademark holder. Customs Directive 2310-010A states that, where
the subject trademarks are recorded with CBP, the agency has authority to
seize violative goods based on either of those trademark violations. With
regard to marks not recorded with CBP, while the agency may seize goods
bearing counterfeit versions of trademarks registered on the Principal
Register of the U.S. Patent and Trademark Office but not recorded with
CBP, the agency refrains from seizing goods bearing nonrecorded
confusingly similar marks for policy reasons and lacks statutory authority
to seize restricted gray market goods bearing nonrecorded trademarks.

36CBP is granted the authority to seize goods under various statutes,
however 19 U.S.C. S 1526(e) is the statute under which CBP commonly seizes
counterfeit goods due to trademark violations. CBP has the authority under
19 U.S.C. S 1526(f) to assess monetary penalties for these violations.

37Domestic value is calculated as the 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
good to the importer's premises), a value generally lower than the price
at which the goods might sell to the final consumer.

38Between fiscal years 2001 and 2006, CBP spent about $2.5 million to
destroy apparel; about $662,000 to destroy electronics; about $500,000 to
destroy DVDs; about $382,000 to destroy shoes; and about $352,000 to
destroy batteries.

39Data on the mode of transport or processing environment in which
seizures were made were only available for fiscal years 2003 through 2006.
CBP's data reflect a number of modes and processing environments, some of
which we have grouped together. For example, data we report for the air
transportation environment include seizures made in air cargo, express
consignment, international mail, and private aircraft processing
environments. Data we report on the ocean-going cargo container
environment include seizures made from what CBP refers to as "commercial
vessels" and "private vessels." According to CBP, commercial vessels are
predominantly carried by ocean-going cargo containers and processed in the
seaport environment, but may also be transported via truck or rail to
interior ports of entry using the in-bond system.

40Seizures made in air transportation processing environments were the
predominant source of seizure actions in each of fiscal years 2003 through
2006, although their percent ranged from a high of about 85 percent to a
low of about 68 percent.

41Seizures made from ocean-going cargo containers were the predominant
source of seizure value in each of fiscal years 2003 through 2006,
although the percent ranged from a high of about 70 percent to a low of
about 53 percent.

42It is important to note that total estimated seizure value, the value
calculated by CBP, in any given year is a function of the type of goods
seized, which varies from year to year.

Figure 5: Trends in Number of IP Seizure Actions and Estimated Domestic
Values, Fiscal Years 2001-2006

Note: CBP data can be accessed at
http://www.cbp.gov/xp/cgov/import/commercial_enforcement/ipr/seizure/seizure_stats.xml.

According to our analysis, growth in the number of seizure actions was
fueled by increases in small-value seizures made in express consignment
and international mail facilities. CBP publicly cites an 83 percent
increase in the number of seizure actions from fiscal year 2005 to 2006 as
an indicator of its growing IP enforcement success. However, our analysis
shows that this growth was driven primarily by smaller-value seizures. For
example, to date, the largest number of seizures for international mail
occurred in fiscal year 2006, with the number of seizure actions and their
domestic value more than doubling from the previous year. CBP officials
said they believed that while some of these seizures are personal
shipments ordered from Internet sites that sell counterfeit merchandise,
others have contained quantities of goods too large for personal use. Some
officials also speculated that counterfeiters may be breaking commercial
shipments into smaller components to avoid detection and face more limited
losses in the event of a seizure. However, CBP has not conducted any
systematic analysis to support these observations.

43This ratio compares the total estimated domestic value of IP seizures
with the total declared value of IP imports. We defined IP imports as
products that involve or may involve IP protection and goods that are
similar to them. To do so, we reviewed the broad product groups that CBP
uses to categorize seizure actions and identified all products that are
covered by these groups in the U.S. harmonized tariff schedule. These
products include such items as shoes, wearing apparel, handbags and
luggage, computer hardware, and consumer electronics. The subset excludes
products such as agriculture and other raw goods. A complete description
of our methodology can be found in appendix I.

Our analysis also shows that several factors influence trends in seizure
value. Spikes in seizure value in fiscal years 2004 and 2006, accounting
for approximately 30 percent of seizure value in each of those years, were
largely due to shipments moving through the in-bond system.44 Also, CBP
data show that about 15 percent of seizure value during fiscal years 2003
through 2006 stemmed from seizures made by ICE during its investigations,
and OT and ICE officials said that ICE may have played a role in some of
the seizures attributed to CBP. Of note in fiscal year 2006, a combined
CBP and ICE initiative resulted in the seizure of 77 cargo containers of
fake Nike Air Jordan shoes and 1 container of fake Abercrombie & Fitch
clothing that were transported in part using the in-bond system (they
entered the Los Angeles seaport, transited through Arizona, and were
supposedly destined for export to Mexico). The estimated domestic value of
these goods was about $19 million, representing about 12 percent of total
domestic seizure value in fiscal year 2006.

Seizures Have Been Concentrated among Certain Types of Products

Although the types and quantities of seized goods vary over time, seizures
over the past 6 years have been highly concentrated among certain types of
products. For example, seizures of footwear, wearing apparel,
handbags/wallets/backpacks, and cigarettes accounted for over 60 percent
of the aggregate value of goods seized over the past 6 years.45 Table 1
shows that footwear and wearing apparel accounted for 57 percent of
domestic value of goods seized in fiscal year 2006, with the high percent
of footwear seized partially resulting from the large CBP/ICE seizure
described earlier. Health care products and pharmaceuticals accounted for
only 3 percent of such value. When asked why commodity seizures vary from
year to year, CBP officials stated that counterfeiters produce fake goods
depending on marketplace demand at any given time. However, it is
difficult to determine whether CBP and ICE seizures are representative of
the types of counterfeit products entering the United States in any given
year or merely reflect counterfeit products that CBP detected.

44We recently reported that weaknesses persist in CBP's management of the
in-bond system, impeding CBP's ability to ensure proper collection of
trade revenue and management of trade risks. In particular, CBP does not
adequately monitor and track in-bond shipments and does not consistently
perform in-bond compliance reviews to help identify program weaknesses.
See International Trade: Persistent Weaknesses in the In-Bond Cargo System
Impede Customs and Border Protection's Ability to Address Revenue, Trade,
and Security Concerns, [45]GAO-07-561 (Washington, D.C.: Apr. 17, 2007).

Table 1: Percent of Total Estimated Domestic Value Seized by Commodity,
Fiscal Years 2001-2006

                                                                         Aggregate 
                                                                         2001-2006 
                       2001     2002     2003     2004     2005     2006     total 
                   (percent (percent (percent (percent (percent (percent  (percent 
                         of       of       of       of       of       of        of 
                   domestic domestic domestic domestic domestic domestic  domestic 
Commodity            value)   value)   value)   value)   value)   value)   value)a 
Wearing apparel          14        9       15       37       17       16        19 
Cigarettes                8       38       44       17       10                 18 
Footwear                  5                 3        1       10       41        13 
Handbags/Wallets/                                                                  
                                                                                   
Backpacks                 6        3       12       17       16        9        11 
Media                    13       29        8        4                 4         9 
Consumer                                                                           
electronics                        5        4        6        9        5         5 
Computers/Hardware        7                          1        5        9         4 
Watches/Parts            10        4        4        2        3        2         3 
Toys/Electronic                                                                    
games                     8        2        2        3        9                  3 
Batteries                 9                          2                           1 
Sunglasses/Parts          6        1        1                                    1 
Headwear                           1        1                          2         1 
Pharmaceuticals                                               2        1         1 
Health care                                                            2         1 
Perfumes                                                      3                  0 
All other                                                                          
commodities              15        9        6       10       15        8        10 
Total estimated                                                                    
domestic value (in                                                                 
millions)               $57      $99      $94     $139      $93     $155      $638 
Total number of                                                                    
seizures              3,586    5,793    6,500    7,255    8,022   14,675    45,831 

45To determine categories of goods, CBP may not group commodities
according to Harmonized Tariff System (HTS) numbers because not all
seizure records contain HTS numbers. CBP officials said that the field for
which the HTS number is to be entered can accept both numbers and text,
and that seizing officers sometimes enter incorrect data. Therefore, the
Los Angeles Strategic Trade Center developed its own method for grouping
seizures into product groups.

Source: GAO presentation of CBP data.

Note: Percentages not provided indicate that CBP did not report the
commodity as a separate category in a given year. Seizures of these
commodities may be included in the "All other commodities" category. Due
to rounding, commodities may not total to 100 percent for any given fiscal
year.

a"Aggregate 2001-2006 total (percent of domestic value)" was calculated by
aggregating the reported estimated domestic value per commodity in each
year, and dividing this total by the total estimated domestic value of
seizures for fiscal years 2001to 2006.

CBP reports that seizures are also concentrated in one trading
partner--for fiscal years 2001 through 2006 combined, exports from China
account for 65 percent of total seized IP domestic value. Hong Kong and
Taiwan are distant seconds to China, accounting for 6 and 5 percent of
seizures in that period, respectively. The combined share of goods seized
that were exported from China and Hong Kong grew about 40 percent per year
during this period. Also listed among trading partners for which goods
were seized for IP violations in fiscal years 2001 through 2006 are Korea,
Pakistan, Russia, South Africa, and Singapore.

Ten or Fewer Ports Have Accounted for the Bulk of IP Enforcement Outcomes

CBP's IP enforcement outcomes, including seizures and penalties, have been
highly concentrated among a limited number of ports across the country. We
analyzed CBP's seizure and penalty data for fiscal years 2001 through 2006
and found that the bulk of enforcement activity was carried out by 10 or
fewer ports in each of four enforcement categories we reviewed: (1) total
number of seizures, (2) total seizures by domestic value, (3) total
penalty cases opened, and (4) total amount of penalties assessed. The top
10 ports for each category differ, but there is considerable overlap among
the ports so ranked in each category. Table 2 also shows that during
fiscal years 2001 through 2006, the top 10 ports ranked by total seizure
actions accounted for nearly two-thirds of those actions, and the top 10
ports ranked by total domestic seizure values accounted for nearly
three-fourths of those values. Table 2 shows even greater concentration
among the top 10 ports for penalty cases opened and penalty amounts
assessed. Our analysis indicates that, while seizure actions have been
more broadly disbursed among CBP's ports, fewer of them have accounted for
seizure values, and even fewer ports have assessed penalties for the
seizures they make. The mix of ports in these rankings is surprising
because they include some of the nation's largest ports as well as several
that are significantly smaller. Moreover, as we discuss later, some of the
ports among which seizures are concentrated are not among the top ports in
terms of IP import value; and conversely, some high IP-importing ports
have shown more limited seizure outcomes.

Table 2: Top 10 Ports' Percent of Seizure and Penalty Outcomes, Fiscal
Years 2001-2006

Dollars in millions                                                        
                                          Number or value of                  
Enforcement measures                 enforcement outcomes Percent of total 
Top ten ports' number of IP seizures               30,462              66% 
Top ten ports' domestic value of IP                                        
seizures                                           $463.2              73% 
Top ten ports' number of IP penalty                                        
cases opened                                        1,208              84% 
Top ten ports' penalty amounts                                             
assessed                                           $1,135              97% 

Source: GAO analysis of CBP data.

Notes: We analyzed CBP's seizure and penalty data for fiscal years 2001
through 2006. We used seizure data that captures various IP-related
violations and penalty data that captures only trademark violations where
penalties were assessed under 19 U.S.C. 1526(f).

In the law enforcement sensitive version of this report, ports were listed
in the table according to their rank order in each enforcement category we
analyzed. Port names have not been included in this table for law
enforcement reasons. While the top 10 ports in each category are not the
same, there is considerable overlap among them.

Some of the ports included in our analysis may have multiple processing
environments, and seizures associated with such ports may stem from more
than one processing environment. Because of inconsistencies in how CBP
records seizures by ports, we were unable to fully determine how many
processing environments are reflected in the above data.

Because of inconsistencies in the way CBP records seizures by port, it can
be difficult to determine precisely which processing environments
accounted for seizure outcomes. We were able to determine the seizure
reporting practices of the seven ports that we visited. For example, at
one port, CBP uses one port "code" to record IP seizures made at the
seaport and the nearby airport. Seizure data for another port includes
seizures made at the seaport and from the international mail processing
environment but does not include other air-based seizures made at the
nearby airport, which are reported separately. Neither OT nor its legacy
OFO office at the headquarters level could provide us information to
understand the seizure reporting practices of CBP's ports.

Among these top 10 ports, there is further concentration of activity. For
example, we found that four ports ranked in the top 10 for all four
categories and two ports ranked in the top 10 for three of the four
categories. This indicates that the majority of enforcement outcomes were
produced by a handful of ports over the 6-year time period. Appendix II
contains additional analysis of these six ports' enforcement outcomes.

Outside of the most active seizing ports, seizure outcomes have been more
disbursed and prone to fluctuation. CBP's seizure data showed that around
243 ports of entry made seizures at least once during the past 6 years.
About 190 of those ports reported fewer than 100 aggregate seizure actions
since 2001, and over 100 reported less than $100,000 in 6 years' aggregate
domestic value of seizures. Some of these ports had very little activity
for 2001 through 2006, while others had occasional spikes in their seizure
actions or domestic seizure values.

CBP's Approach to Improving IP Enforcement Lacks Integration and Has Produced
Limited Results

CBP lacks an integrated approach across key offices for improving border
enforcement outcomes, having focused on certain efforts that have produced
limited results while not taking the initiative to understand and address
the variations among ports' enforcement outcomes. While CBP's strategic
plan notes the importance of IP enforcement under two of CBP's strategic
goals, the plan lacks performance measures to guide CBP's IP border
enforcement efforts and assess its agencywide progress. CBP efforts to
improve its IP border enforcement process, led by OT or its legacy
offices, have produced mixed results: (1) poor data collection during
port-based pilots limits OT's ability to evaluate the effectiveness of a
new risk model for IP targeting; (2) audits conducted to assess certain
importers' IP-related controls have resulted in some penalties, but many
audits are not yet complete; and (3) actual collections on IP penalties
remain far below the assessed amounts. Meanwhile, CBP has not attempted to
understand variations within or among ports' enforcement outcomes. Using
CBP's own import and seizure data, we identified some factors that may
have influenced enforcement outcomes and some enforcement anomalies among
key ports that bear further investigation. We also performed a simple
analysis that could help CBP identify ports with higher or lower than
average seizure outcomes. For example, of 25 ports that accounted for over
75 percent of the value of total IP-type imports in fiscal year 2005, just
8 of them had higher than average shares of IP seizures (by value)
compared with their IP imports (by value). Such analysis could be further
refined by incorporating information about ports' import composition or by
making comparisons across similar processing environments. Lacking an
integrated approach, such analysis would likely be conducted by OT, but
the responsibility for overseeing and influencing port operations lies
with OFO.

CBP's Strategic Plan Lacks Performance Measures for IP Enforcement

In its agency strategic plan,46 CBP notes the importance of IP enforcement
under two strategic goals, however it has not included any performance
measures to guide its IP border enforcement efforts and assess progress on
its agencywide efforts. Leading organizations use strategic plans and
performance measures to communicate their vision and priorities on an
agency-wide basis and establish accountability. Under its strategic goal
to facilitate legitimate trade and travel, CBP identifies the enforcement
of relevant U.S. laws under its jurisdiction, including IP, as one of its
strategic objectives. Although IP is included as a strategic objective,
there are no specific IP performance measures under this goal. CBP also
addresses IP enforcement under its goal to protect America and its
citizens by prohibiting the introduction of illicit contraband,
counterfeit goods, and other harmful materials. However, performance
measures for this goal relate to prohibited agricultural items and
narcotics. For example, there are three separate measures that address
narcotics seizures, but none specific to IP.

CBP does measure and report internally on the number of IP seizure actions
and estimated seizure value and has other indicators related to IP
enforcement, but these measures and indicators are not included as
performance measures in its strategic plan. These measures and indicators
are found in CBP's IP Rights Trade Strategy, an internal document
classified as "For Official Use Only" with limited distribution across
CBP.47 In our discussions with CBP, agency officials responsible for
developing and overseeing the IP Rights Trade Strategy referred to it as
an internal planning document on IP enforcement. The internal nature of
this document, unlike an agency's strategic plan with performance
measures, limits its usefulness in holding CBP accountable to Congress for
its performance on IP enforcement.

46Protecting America: U.S. Customs and Border Protection 2005-2010
Strategic Plan.

47Due to the status of IP enforcement as a Priority Trade Issue, CBP
developed this internal planning document to articulate its approach for
addressing this issue.

Legacy OT Offices Have Led Certain IP Improvement Efforts, but These Have
Produced Mixed Results

Offices that are now part of OT have taken the lead in carrying out
certain efforts to improve IP border enforcement, but these efforts have
produced limited results. In its IP Rights Trade Strategy, CBP states that
its goal is to support the administration's Strategy Targeting Organized
Piracy (STOP) and to focus on high value seizures and seizures related to
public health and safety issues. Among the initiatives outlined in the
document, key IP border enforcement efforts include (1) improving
computer-based IP targeting, primarily by developing a statistical
risk-assessment model to complement Cargo Selectivity; (2) using audits to
assess certain importers' controls for preventing IP infringing imports;
and (3) issuing guidance to give ports more discretion on when to assess
IP penalties. Although computer-based targeting and audits are considered
STOP priorities, none of these efforts have thus far significantly
impacted CBP's efforts to focus on high value seizures or seizures related
to public health and safety.

  Effectiveness of New Targeting Model Cannot Be Determined

A key component of CBP's IP enforcement improvement efforts has been the
development of a statistically driven risk assessment model. However,
problems with implementation in the first field-based pilot test, and poor
data collection in a second pilot test prevents OT from fully evaluating
the model's results. CBP developed this model to improve its ability to
target unknown IP violators. The model figures prominently in CBP's
strategic plan and has been continually highlighted as one of CBP's main
contributions to STOP.

CBP's risk model differs from Cargo Selectivity in two key ways: first, it
uses statistical analysis of past seizures and certain other information
to target future shipments, whereas Cargo Selectivity relies on human
analysis to develop criteria. Second, CBP officials told us the model is
designed to identify unknown violators based on its analysis of past
seizure patterns, whereas Cargo Selectivity primarily targets known or
suspected violators. However, pilot tests conducted in 2005 and 2006
revealed problems and produced limited results:

           o In the first pilot, run for 1 month by the Los Angeles Strategic
           Trade Center, the model was more efficient at targeting IP
           violations than Cargo Selectivity, according to CBP. However,
           CBP's implementation methodology resulted in certain targeted
           shipments being released before they could be examined, affecting
           CBP's ability to fully evaluate the model's accuracy. Also, the
           model sometimes targeted the shipments of actual rights holders,
           forcing CBP analysts to intervene to prevent exams of authentic
           goods. The pilot helped CBP refine the risk threshold at which it
           should conduct examinations based on the model's targeting.
           o The second pilot was run for about 3 months at one seaport and
           two land border crossings, but OT is unable to determine how the
           model worked because of weaknesses and inconsistencies in the data
           that participating ports collected for the pilot, according to OT
           officials. For example, for some targeted shipments, the data does
           not contain any exam results, even though goods were ultimately
           seized from those shipments. In other instances, the data contains
           exam results for shipments that were too low risk to have been
           targeted by the model.

           Although CBP has already cited the model as an accomplishment, it
           does not know how well the model works. OT officials said they
           plan to develop and carry out a third pilot by having the Los
           Angeles Strategic Trade Center keep track of what the model has
           targeted and what the exams revealed. However, this may be
           difficult because the center will have to communicate directly
           with ports involved in the pilot to determine what exams were
           conducted and what results were found. It is not clear whether
           further revisions will improve the model or what role the model
           will play in CBP's overall IP targeting strategy.

           After the first pilot of the risk model, OFO officials said they
           began developing a set of rules to target IP violations using ATS.
           These rules were developed with input from the former Office of
           Strategic Trade (now part of OT) and were tested concurrently with
           the risk model during the second pilot. However, data collection
           weaknesses also limit CBP's ability to assess the effectiveness of
           these rules, and their role in future targeting is unclear.
		   
		     Audits Have Resulted in Some Seizures and Penalties, but Their
			 Efficacy Is Limited

           Another prominent undertaking that is discussed in CBP's strategic
           plan and represents a second CBP contribution to STOP is the use
           of audits to uncover IP violations among select importers. These
           audits, initiated by the former Office of Strategic Trade (now
           part of OT), are referred to as "post-entry" audits because they
           examine records of goods that have been imported and released into
           commerce. This single-issue audit is designed to evaluate the
           adequacy of an importer's internal controls over IP imports, test
           whether the internal controls provide reasonable assurance that
           the company is compliant with CBP laws and regulations, and
           potentially find previously undetected IP violations made by the
           importer. These audits are most likely to be effective when
           dealing with compliance problems of established importers and less
           so when dealing with importers that purposely evade federal
           scrutiny, as is the case for importers involved in counterfeit
           trade.

           The audits began in 2005 and have produced some enforcement
           outcomes, but they and the post-audit decision process have been
           time consuming. OT's Regulatory Audit Division, in consultation
           with the Los Angeles Strategic Trade Center, selected
           approximately 20 importers as audit candidates in each of fiscal
           years 2005 and 2006, some of which had a history of IP
           violations.48 Of these 41 audits, 23 have been completed, 12 are
           in progress, 4 were suspended because they involved companies that
           ICE was investigating, and 2 have not yet started. CBP has
           selected about half of the next 20 companies to be audited for
           fiscal year 2007. The completed audits found evidence that some
           companies had imported IP infringing goods, some counterfeit goods
           had been released into commerce, and other infringing goods
           remained in company warehouses. According to agency officials,
           based on these violations, CBP decided to assess penalties against
           certain companies, but the intra-agency review process for the
           penalties took about 1 year because of intra-agency discussions
           about the legal basis for assessing penalties on goods that had
           already entered commerce. Although CBP has moved forward with
           penalties in certain cases--four companies were assessed penalties
           totaling over $5.7 million--future penalty decisions must be
           deliberated on the facts in each case, according to CBP officials.
           CBP officials said they periodically monitor the import
           performance of these audited companies and found one additional
           instance of IP infringement. When audit findings are significant,
           CBP works with the importer to develop a Compliance Improvement
           Plan to help prevent further IP violations.

           At CBP's December 2006 Trade Symposium, the Assistant Commissioner
           for Trade discussed CBP's plan to conduct a greater share of its
           trade enforcement using these post-entry audits rather than cargo
           exams. The time consuming nature of these audits and their greater
           efficacy with established importers than with smugglers indicates
           the difficulties that the agency will face in making this kind of
           enforcement shift.
		   
		     New Penalty Guidance Reduces the Number of Uncollectible
			 Penalties, but Actual Collections Remain Low

           A third undertaking has been the development of new guidance to
           reduce the number of uncollectible penalties that CBP assesses,
           thereby freeing up port resources for other activities. CBP
           officials reported that significant resources are dedicated to
           processing penalty cases; however, they noted that few penalties
           are collected and such enforcement has little deterrent effect. We
           reviewed CBP penalty data and found that less than 1 percent of
           penalty amounts assessed for IP violations were collected annually
           during fiscal years 2001 through 2006 (see table 3).

           Table 3: CBP IP Penalty Amounts Assessed versus Collected, Fiscal
           Years 2001-2006

           Source: GAO analysis of CBP data.

           Note: Penalty data are based on penalties assessed under 19 U.S.C.
           1526(f). CBP also assesses penalties for IP violations under 19
           U.S.C. 1595a(b) and provided us information on these types of
           penalties, but because CBP could not identify which were IP
           related, these types of penalties are not included in the table.

           aFiscal year 2006 is reported based on data provided in January
           2007. CBP officials said that the amount collected may change
           because some open penalty cases are still being processed, but
           they said that future adjustments are unlikely to significantly
           change the disparity between penalty amounts assessed and
           collected.

           Various factors contribute to CBP's limited collection rates on IP
           penalties, including petitions for mitigation or dismissal by the
           violator, dismissal due to criminal prosecutions, and the nature
           of counterfeit importation. CBP officials said that many violators
           petition to have a penalty mitigated or dismissed, and these
           actions often reduce the amount of the penalty that CBP
           collects.49 One agency official explained that some penalties are
           dismissed as a result of the case going to criminal prosecution,
           in which the U.S. Attorney negotiates to have a penalty dropped in
           exchange for information or other evidence that will support the
           criminal case. Also, the deceptive nature of counterfeit
           importation makes it difficult for CBP to track violators and
           enforce penalties.

           To address the problem of poor collections, OFO communicated new
           CBP guidance to ports in 2006 that caused new penalty cases and
           assessed amounts to drop, but this has had limited impact on
           narrowing the gap between the amounts assessed and collected.
           CBP's guidance addresses 10 problem scenarios under which
           penalties are unlikely to be collected so that Fines, Penalties,
           and Forfeiture offices will be able to avoid assessing penalties
           in those circumstances. The objective of the guidance is to reduce
           resources spent assessing uncollectible penalties as well as to
           reduce the gap between penalties assessed and collected. The total
           penalties assessed declined by two-thirds between fiscal years
           2005 and 2006, from about $424 million to about $137 million,
           which CBP officials attribute to the new guidance. Despite an
           increase in the amount of penalties collected between fiscal year
           2005 to 2006, from about $406,000 to about $614,000, less than 1
           percent of the total penalties assessed was collected for each of
           the fiscal years we reviewed.
		   
		   CBP Has Not Analyzed Variations in Port Enforcement Outcomes

           Despite some of its improvement efforts, CBP has not undertaken
           any systematic analysis of its seizure and penalty activity to
           understand variations in enforcement outcomes within or across
           ports or to learn from ports that have been relatively more
           successful in capturing fraudulent IP goods. For example, CBP has
           not analyzed the potential reasons for fluctuations in seizure
           outcomes at key ports that have impacted its overall seizure
           outcomes, and it has not identified inconsistencies between
           seizure and penalty outcomes at certain ports. Performing this
           type of analysis raises questions about individual ports'
           performance outcomes and may help to inform CBP about potentially
           effective port practices for IP enforcement. For example, in our
           analysis of 25 ports that brought in over 75 percent of the total
           value of IP-type imports in fiscal year 2005, we identified 8
           whose seizure rate (i.e., the percent of IP seizures out of IP
           imports at that port, by value) was higher than the average for
           the top 25 IP-importing ports. We also found that some of the
           largest IP-importing ports had very small seizure rates relative
           to other IP-importing ports. Such analysis can be performed using
           existing data and could help CBP focus on identifying the handful
           of ports with relatively stronger enforcement records and
           determining whether their strategies and practices could be
           expanded and used at other ports.
		   
		     CBP Has Not Analyzed Yearly Fluctuations in Port Enforcement
			 Outcomes

           CBP has not analyzed year-to-year fluctuations in ports' seizure
           activity or other enforcement outcomes that may seem inconsistent
           with a port's overall IP enforcement profile. In some years,
           fluctuations at key ports have had a significant impact on the
           agency's overall enforcement results. For example, the number of
           seizure actions at one port has accounted for a growing share of
           all seizure actions since fiscal year 2001, representing nearly
           half of all seizure actions in fiscal year 2006, while seizure
           actions at another port have gone down over time, representing 18
           percent of total seizure actions in fiscal year 2002 and less than
           1 percent in fiscal year 2006. Two ports have been leading
           contributors to total estimated seizure values. However, while the
           value of seizures made by one of these ports has generally risen
           from fiscal year 2001 to 2006, the value of seizures made by the
           other port has fluctuated significantly, representing about 60
           percent of total seizure value in fiscal year 2002 and about 17
           percent of total seizure value in fiscal year 2005. The identities
           of these ports have not been included in this report for law
           enforcement reasons.

           In addition, CBP has not analyzed individual ports' seizure and
           penalty outcomes to identify potential inconsistencies in the use
           of certain enforcement tools. We identified some ports with high
           seizure outcomes that have not had correspondingly high penalty
           outcomes. While ports may not necessarily assess penalties on all
           of their seizure outcomes, particularly if the seizure value is
           limited, we identified ports with relatively high average seizure
           values but limited penalty outcomes. For instance, three ports
           ranked among the top 10 ports for seizure value for fiscal years
           2001 through 2006, with average seizure values ranging from about
           $83,000 to about $123,000, but none of these ports ranked among
           the top 10 for penalty cases opened, and only one of them ranked
           among the top 10 for penalty amounts assessed. The penalty cases
           these ports opened during this period ranged between 3 and 7
           percent of their seizures. In comparison, the second highest
           ranked port for seizure value, with an average seizure value of
           about $88,000, was also one of the most active ports for penalty
           actions, opening penalty cases for about 37 percent of its
           seizures. Moreover, during our audit, we identified a sharp drop
           in penalty outcomes for one of the top 10 ports, starting in
           fiscal year 2004, that neither OT nor OFO had identified. In
           investigating the reason for the drop, OFO determined that the
           port was not following proper procedures for assessing and
           reporting its IP penalties. We asked OT officials to explain these
           anomalies between seizure and penalty outcomes, and they responded
           that such analysis had not been conducted.

           We asked officials in OT and its legacy offices whether they had
           analyzed port enforcement outcomes in this way and to what they
           attributed these fluctuations and inconsistencies. These officials
           said that imports vary among ports, seizures fluctuate according
           to changes in the nature of counterfeit trade, and ports have
           different priorities for performing IP enforcement. Overall
           outcomes or fluctuations might also be due to variations in ports'
           enforcement techniques or changes in IP enforcement resources or
           the availability of skilled personnel. For example, an official at
           one port we visited told us that during fiscal year 2004, the port
           made an important change in its methods for performing
           trade-related targeting, by disbanding a seven-person team that
           had focused solely on trade targeting and shifting these resources
           to security targeting. During our February 2005 visit to this
           port, the port official stated that this change had contributed to
           significantly lower seizure activity at the port in 2005. When we
           discussed seizure outcomes at another port with OT
           officials--which have resulted predominantly from the manual
           targeting skills of port staff--they compared the workload created
           by these seizures with their limited impact given that these are
           predominantly small value seizures. OT officials said neither
           they, nor their legacy offices, have conducted any analysis of
           individual ports' seizure and penalty outcomes. Additional
           analysis of selected ports' enforcement outcomes are contained in
           appendix II.
		   
		   CBP Has Not Analyzed Relative IP Enforcement Outcomes among Ports

           CBP has also not conducted any analysis of ports' relative
           enforcement outcomes. One way to conduct this analysis is to
           identify ports whose seizure rate--the share of their IP seizures
           (by value) out of their total IP imports (by value)--is relatively
           higher or lower than other ports. For example, in fiscal year
           2005, we focused on the top 25 ports that account for over 75
           percent of the value of all IP imports into the United States.50
           Of these 25 ports, we found that 8 had seizure rates higher than
           the group average seizure rate of 0.015 percent. Surprisingly, the
           port with the highest seizure rate, seizing about 0.123 percent of
           its fiscal year 2005 IP import value, was also the port with the
           smallest value of IP imports among the ports we examined. This
           port accounted for only about 1 percent of all IP import value
           that year, but over 7 percent of total seizure value. In contrast,
           the IP seizure rates for several ports with relatively larger IP
           import values were well below the group average. Figure 6 shows
           the top 25 IP-importing ports by value in fiscal year 2005 and
           ranks them by their seizure rate that year. The eight ports in
           which the seizure rate is greater than the average (shown by the
           dotted line on the figure) are highlighted in grey. The figure
           also shows that many ports had very low seizure rates relative to
           the average. Port names have not been included for law enforcement
           reasons.

48In 2005, staff at the Los Angeles Strategic Trade Center chose nine
importers that were known IP violators, the statistical risk model was
used to select nine importers, and three were chosen both by the risk
model and because they were known violators. Since then, candidates chosen
were either known violators or suspects; selection was not linked to the
risk model.

Dollars in millions                                                   
                                   2001  2002  2003   2004   2005  2006a 
Total penalty amount assessed  $52.0 $65.0 $45.0 $442.9 $423.9 $136.6 
Total penalty amount collected  $0.5  $0.3  $0.4   $0.5   $0.4   $0.6 
Percent collected               0.90  0.48  0.91   0.11   0.10   0.45 

49When a collection action goes to court, the Department of Justice's U.S.
Attorney Offices are responsible for prosecuting the government's case.
However, according to several CBP officials, U.S. Attorney Offices
generally do not agree to pursue penalty cases because of their own
resource limitations or because they view CBP's penalty amounts as
excessive.

50These 25 ports account for 77 percent of the value of all IP imports
into over 300 ports of entry into the United States, as well as 71 percent
of the value of IP seizures in fiscal year 2005.

Figure 6: Top 25 IP-Importing Ports' Seizure Rates: Percent of IP Seizures
in IP Imports (by Value), Fiscal Year 2005

Note: Port names are not included in this figure for law enforcement
reasons.

Figure 6 illustrates the differences across ports in terms of IP seizures
compared with IP imports in fiscal year 2005, the most recent year for
which we had IP import data. We also examined these data over previous
years and found similar results. For example, Port A had the first or
second highest rate of any port in the top 25. Also, the eight ports with
above-average ratios in fiscal year 2005 are consistent with prior years.
Because of the wide range of factors that affect IP seizures (including
the unknown amount of goods actually involved in IP violations transiting
a given port), these data alone are not a complete measure of port
performance. Ports can be compared relative to each other, but port
performance in even those ports that appear relatively more successful
could still be potentially improved. For example, the majority of these
top 25 ports had IP seizures that accounted for less than one hundredth of
a percent of their IP import value. Table 4 further illustrates the
variability in seizure actions and the range of seizure rates among the
top IP-importing ports.

Table 4: IP Seizure Rates of Top 25 Ports (by IP Import Value), Fiscal
Year 2005

                 IP imports             IP seizures       IP seizure rate (IP 
                  (billions IP seizures  (thousands      seizures/IP imports) 
Porta              US$)a    (number)       US$)a                 (percent) 
Port A                            38                                 0.123 
Port B                           215                                 0.066 
Port C                           245                                 0.065 
Port D                         2,737                                 0.023 
Port E                           177                                 0.019 
Port F                           318                                 0.018 
Port G                           391                                 0.016 
Port H                            42                                 0.015 
Port I                             9                                 0.012 
Port J                            22                                 0.006 
Port K                           197                                 0.005 
Port L                            29                                 0.004 
Port M                            10                                 0.003 
Port N                            91                                 0.003 
Port O                           154                                 0.002 
Port P                            21                                 0.002 
Port Q                            52                                 0.002 
Port R                            62                                 0.001 
Port S                            17                                 0.001 
Port T                            16                                 0.001 
Port U                             1                                 0.000 
Port V                            13                                 0.000 
Port W                            22                                 0.000 
Port X                             1                                 0.000 
Port Y                             8                                 0.000 
Subtotal: Top                                                              
25 ports            $430       4,888     $66,419                     0.015 
Subtotal:                                                                  
Remaining                                                                  
ports               $125       3,134     $26,816                     0.021 
Total all                                                                  
ports               $555       8,022     $93,235                     0.017 

Source: GAO analysis of CBP data.

Note: Although we report fiscal year 2005 values here for illustration, we
conducted the analysis for each of fiscal years 2002 through 2005 and
found similar results. In each year, the top 25 ports identified here
accounted for between 75 and 78 percent of total IP imports and their
average ratio of IP seizures to IP imports ranged from 0.015 percent to
0.030 percent.

aPort names and data on the ports' fiscal year 2005 IP imports and value
of IP seizures are not included in this table for law enforcement reasons.
For fiscal year 2005, the IP import values for these ports ranged from
about $5 billion to about $89 billion. The domestic value of their IP
seizures ranged from about $1,000 to about $18.9 million.

Lack of Integration across Key Offices Impedes Further Improvements in IP
Enforcement

CBP lacks an integrated approach across key offices for further improving
border enforcement outcomes. Our analysis of CBP's data is one
illustration of the kind of work that the agency could do using existing
data to understand differences in IP enforcement outcomes across ports,
potentially identifying areas where improvements could be made, and more
effectively managing its resources to meet the agency's goals and
objectives. CBP could refine this analysis by comparing across similar
ports and processing environments, such as seaports to seaports and
airports to airports, however inconsistencies in how CBP currently
captures seizure activity across ports, as previously discussed, makes
this refinement more difficult. CBP could use its experience and practical
knowledge of some of the factors affecting trade flows at their ports to
further inform the analysis. When we discussed our analysis with CBP, OT
officials said they have not conducted this type of analysis because they
do not have any responsibility or authority to oversee and influence port
operations, which is under the purview of OFO. However, OT is responsible
for overseeing CBP's implementation of its Priority Trade Initiatives, and
it has access to data that could inform OFO's understanding of port IP
enforcement practices and outcomes and inform CBP's resource allocation
decisions.51

Conclusions

Enforcing IP protection at U.S. borders has become progressively more
challenging for CBP as the volume of trade entering the United States
increases, and as the of types of IP-infringing goods expand. CBP needs to
maximize its IP enforcement efforts in an environment strained by the need
to balance its primary mission to protect homeland security with trade
facilitation and enforcement of U.S. trade laws, among other objectives.
While CBP has publicly cited increases in enforcement outcomes based on
larger numbers and higher values of IP seizures, indicating its success,
it has not fully disclosed the composition of those seizures or analyzed
what has accounted for the increases. However, as indicated by our review,
a limited number of ports have driven overall IP enforcement activity.

51CBP is required under section 403 the Security and Accountability for
Every Port Act of 2006 (SAFE Port Act), P.L. 109-347, to develop a
Resource Allocation Model for determining optimum staffing levels required
to carry out CBP commercial operations, including IP enforcement. The
legislation requires CBP to submit the model to the Senate Finance
Committee and House Ways and Means Committee no later than June 30, 2007,
and every 2 years thereafter. In addition, the conference report (H. Rept.
No. 109-699) accompanying DHS' fiscal year appropriations legislation
(P.L. 109-295) directed CBP to submit, by January 23, 2007, a resource
allocation model for current and future years' staffing requirements that
specifically assesses optimal staffing levels at all land, air, and sea
ports of entry and provides a complete explanation of CBP's methodology
for aligning staffing levels to threats, vulnerabilities, and workload
across all mission areas. CBP has completed one component of the model for
air passenger processing and expected to complete others by March 31,
2007.

CBP's strategic plan lacks measures to guide agencywide IP enforcement
efforts, and the efforts of two key offices responsible for carrying out
IP enforcement, OT and OFO, are not well integrated. So far, the agency's
main efforts to improve IP enforcement have involved initiatives carried
out primarily by OT, and these have produced limited results. However,
neither OT nor OFO has been engaged in trying to assess the effectiveness
of CBP's core IP border enforcement efforts--namely, the targeting,
examination, seizure, and penalty activities undertaken by CBP's
front-line port operations. CBP's ability to fully assess ports' IP
enforcement activities is hampered by inconsistencies in the way IP
enforcement data are recorded at the ports. In addition, OT does not have
responsibility or authority to oversee or influence port operations.

As demonstrated by our own analysis of CBP data, the agency has sufficient
information available despite the data's limitations to conduct a more
comprehensive review of IP border enforcement outcomes in ways that would
provide insights about targeting, examination, seizure, and penalty
assessment practices across ports. Certain improvements to existing data
could make this type of review even more powerful. In addition, such
analysis could prove useful as CBP responds to congressional directives to
develop resource allocation models in order to determine the optimal
staffing levels needed to carry out its commercial operations and other
missions. CBP would be able to make more measurable links between its
strategic objectives and enforcement outcomes, leading to more effective
management practices and allocation of limited resources. Given the
challenging environment in which CBP must process a vast influx of goods
into the United States every day, it is particularly important that the
agency consistently collect key data, perform useful analysis of the data,
and use the data to better inform policies and practices and make
decisions to focus its use of limited resources.

Recommendations for Executive Action

To develop a more effective approach to IP border enforcement, we
recommended in the law enforcement sensitive report that the CBP
Commissioner direct the Offices of International Trade and Field
Operations to work together to take the following three actions:

           o Clarify agencywide goals related to IP enforcement activity by
           working with the Office of Management and Budget to include in its
           agency's strategic plan measures to guide and assess IP
           enforcement outcomes;
           o Improve data on IP enforcement activity by:

                        o Determining the completeness and reliability of
                        existing IP enforcement data and identifying aspects
                        of the data that need to be improved;
                        o Ensuring uniformity in port practices to overcome
                        any weaknesses in data reporting;

           o Use existing data to understand and improve IP border
           enforcement activity by:
		   
		                o Analyzing IP enforcement outcomes across ports and
                        other useful categories, such as modes of
                        transportation;
                        o Reporting the results of this analysis internally
                        to provide performance feedback to the ports, better
                        link port performance to performance measures in
                        CBP's Strategic Plan, and inform resource allocation
                        decisions.
		   
		   Agency Comments and Our Evaluation

           We provided a draft of the law enforcement sensitive report to DHS
           for review by CBP and ICE. Through DHS, CBP commented that it
           generally agreed with our recommendations and provided certain
           additional comments. Specifically, CBP said it would consider
           developing IP enforcement measures and include them in the
           agency's strategic plan to clarify agencywide goals. CBP concurred
           with our second recommendation to improve its IP enforcement data.

           Regarding our third recommendation, CBP generally agreed to use
           existing data to understand and improve IP border enforcement
           activity. It stated that strong data analysis and targeting are
           critical to successful IP enforcement and agreed to improve the
           linkages between the agency's IP enforcement objectives and port
           performance. However, CBP did not regard our analysis of ports' IP
           seizures relative to IP imports as a useful tool for addressing
           the threat of IP infringement and identified a range of
           limitations with our analysis. We disagree. This simple
           presentation can be a powerful tool to generate discussion among
           IP policymakers and port management and staff about IP seizure
           patterns, risks, and outcomes. CBP has not yet attempted to
           complete even this basic analysis or initiate such discussions.
           Doing so would invariably lead to potential refinements of the
           analysis; we suggest a number of these in the report, some of
           which CBP identifies in its comments. We encourage CBP to refine
           this analysis and develop and use other types of analysis to
           ensure that ports are helping the agency achieve its IP
           enforcement objectives.

           CBP made certain additional comments about the draft law
           enforcement sensitive report. For example, CBP said that our
           report focused on transaction-level seizures and penalties, while
           not fully recognizing the importance of additional elements of its
           IP enforcement approach. We focused on seizures and penalties
           because they are the core IP enforcement activities for which CBP
           is responsible, and we found that CBP had not systematically
           analyzed its own performance of these activities. However, we also
           discuss the risk model, the audits, and the new penalty guidance;
           and these elements are reasonable components of a broader
           approach, but we believe their effect on overall IP enforcement
           has been limited. Moreover, we believe that CBP needs to continue
           to ensure the robustness of its core enforcement activities. CBP
           also stated that our report failed to note that the formation of
           OT in October 2006 was designed in part to address the lack of
           integration between OT and OFO. We disagree that the formation of
           this office has, in itself, addressed the lack of integration that
           we identify in the report regarding IP enforcement. Although OT
           consolidates CBP's trade policy and program development functions,
           including those related to IP enforcement, front-line
           implementation of policies and programs continue to be carried out
           at the ports under the leadership of OFO. OT and OFO will need to
           work closely together to overcome the historic lack of integration
           regarding IP policy and program development and execution. CBP and
           ICE also provided technical comments, which we incorporated in the
           law enforcement sensitive report as appropriate.

           We also provided DHS a draft copy of this public report for a
           sensitivity review by CBP and ICE. CBP and ICE agreed that we have
           appropriately removed information that they considered law
           enforcement sensitive.

           We are sending copies of this report to appropriate congressional
           committees and the Librarian of Congress; the Secretaries of the
           Departments of Commerce, Homeland Security, Justice, and State;
           the Commissioner of U.S. Customs and Border Protection; the
           Assistant Secretary for U.S. Immigration and Customs Enforcement;
           the Directors of the U.S. Patent and Trademark Office and the U.S.
           Food and Drug Administration; the Chairman of the U.S.
           International Trade Commission; and the U.S. Trade Representative.
           We will make copies available to others upon request. In addition,
           the report will be available at no charge on the GAO Web site at
           http://www.gao.gov. We provided copies of the law enforcement
           sensitive report to the Secretary of the Department of Homeland
           Security, the Commissioner of U.S. Customs and Border Protection,
           the Assistant Secretary for U.S. Immigration and Customs
           Enforcement, and appropriate congressional committees with a need
           to know.

           If you or your staff have any questions about this report, please
           contact me at (202) 512-4347 or [email protected]. Contact points for
           our Office of Congressional Relations and Public Affairs may be
           found on the last page of this report. GAO staff who made major
           contributions to this report are listed in appendix IV.

           Sincerely yours,

           Loren Yager, Director
		   International Affairs and Trade
		   
		   Appendix I: Scope and Methodology

           The Ranking Minority Member of the Senate Subcommittee on
           Oversight of Government Management, the Federal Workforce and the
           District of Columbia, Committee on Homeland Security and
           Governmental Affairs asked us to (1) examine key aspects of the
           U.S. Customs and Border Protection's (CBP) process to carry out
           enforcement of intellectual property (IP) at U.S. borders; (2)
           analyze CBP's border enforcement outcomes during fiscal years 2001
           through 2006; and (3) evaluate CBP's approach for improving border
           enforcement.

           To examine key aspects of CBP's border enforcement process, we
           reviewed documents and interviewed officials at CBP headquarters
           in Washington, D.C., and at selected port locations. At
           headquarters, we met with officials in the Office of International
           Trade (OT) and Office of Field Office Operations (OFO) and
           obtained documents. We reviewed agency strategic plans, annual
           performance accountability reports, laws, regulations, and
           policies that addressed agency goals and the roles and
           responsibilities of these two key offices and field locations in
           enforcing IP rights at the border, including CBP's internal plan
           for addressing IP enforcement as a Priority Trade Issue. We also
           reviewed documents and interviewed officials at OT's Los Angeles
           Strategic Trade Center, which has been responsible for developing
           and implementing CPB's approach to IP enforcement since
           approximately 2002. We analyzed data that the center provided on
           the use and outcomes of using Cargo Selectivity criteria to target
           for IP violations. In addition, we reviewed documents and
           interviewed CBP officials at four field offices and seven ports
           (the names of the ports where we conducted field work are not
           included in this report for law enforcement reasons). We selected
           these ports in order to observe CBP's IP enforcement practices at
           ports with high and medium import levels (measured by value) and
           across a range of processing environments. Five of these ports
           were among the top 25 IP-importing ports in fiscal year 2005, and
           five of them were among the six most active CBP ports as measured
           by selected IP enforcement outcomes. We reviewed documents on
           CBP's organizational structures at these ports and the ports'
           approaches for carrying out their overall missions, including IP
           enforcement. The CBP officials we interviewed at these ports were
           responsible for identifying, examining, seizing, and assessing
           penalties on goods that involve IP violations. In addition, we
           reviewed relevant papers, studies, and our reports that addressed
           key aspects of CBP's mission and its IP border enforcement
           responsibilities. We also met with officials from the Department
           of Homeland Security's Immigration and Customs Enforcement, the
           Department of Commerce's Patent and Trademark Office, the
           Department of Justice, the U.S. Copyright Office, and the U.S.
           International Trade Commission, to discuss their respective roles
           in registering IP rights and investigating and prosecuting IP
           violations.
		   
		   To analyze CBP's border enforcement outcomes, we obtained and
           reviewed seizure and penalty enforcement data covering fiscal
           years 2001 through 2006. First, to measure the value of IP-related
           trade entering U.S. ports, we identified products, using detailed
           product codes, that are likely to embody intellectual properties
           and obtained CBP data on the importation of these products by port
           over fiscal years 2002 to 2005. In order to identify these
           products, we reviewed the broad product groups that CBP uses to
           categorize seizure actions and domestic value and then identified
           all individual products that are covered by these groups within
           the U.S. harmonized tariff schedule. We discussed our detailed
           product list with CBP, which concurred with our list, and we
           obtained import data from them according to the list. We reviewed
           these data for internal consistency and any known limitations on
           its quality. We determined that these data were sufficiently
           reliable to provide the value of IP imports by port over the time
           period we examined. Second, we assessed CBP's IP enforcement
           efforts on an aggregate, product, and port basis by analyzing its
           seizure and penalty data. Specifically, we obtained data from CBP
           on seizure and penalty outcomes for individual ports of entry for
           fiscal years 2001 through 2006. For fiscal years 2003 through
           2006, we obtained data on the mode of transport or processing
           environments in which seizure were made. Finally, we obtained data
           on seizures by product category and source country from CBP's
           external Web site.1 To assess the reliability of the seizure and
           penalty data, we examined them for internal consistency and
           discussed with CBP how the data are collected and reviewed. We
           also reviewed our prior work that reported on CBP's seizure data.2
           Based on this prior work and our discussions with CBP officials,
           we identified some limitations in the seizure data related to the
           precision of the seizure value estimates and the veracity of the
           fields that indicate product types and modes of transport or
           processing environments. We also found some inconsistencies in the
           various data sets we received, which we reported to CBP. The
           limitations and inconsistencies we identified, however, did not
           indicate large discrepancies in the data, and we found the data to
           be sufficiently reliable for the purposes of reporting on broad
           trends in seizures and penalties over time and among ports. Based
           on our discussions with CBP headquarters and port officials, we
           selected four types of enforcement actions by which to analyze
           port outcomes: (1) number of seizure actions, (2) domestic value
           of seizures, (3) number of penalty cases opened, and (4) penalty
           amounts assessed. We aggregated the data on these enforcement
           actions for fiscal years 2001 through 2006, ranked ports by each
           of the enforcement actions, and identified the top 10 ports for
           each of the categories.

           To evaluate CBP's approach for improving border enforcement, we
           discussed CBP's efforts with knowledgeable OT and OFO officials in
           Washington, D.C., and the field offices and ports we visited. We
           reviewed CBP's and OFO's strategic plans, CBP's annual performance
           and accountability reports, and CBP's internal plan for addressing
           IP enforcement as a Priority Trade Issue to identify CBP's goals,
           objectives, and plans for conducting and improving IP enforcement
           at the border. We also examined documents related to the
           administration's Strategy Targeting Organized Piracy. From this,
           we identified key initiatives that CBP has undertaken to improve
           the effectiveness of IP border enforcement and discussed the
           status of these initiatives with knowledgeable CBP officials. We
           also assessed the initiatives to determine how they relate to
           CBP's IP enforcement goals. We analyzed IP enforcement outcomes
           across ports, identified fluctuations that have significantly
           impacted CBP's overall IP enforcement outcomes and inconsistencies
           in outcomes at certain ports, and discussed these observations
           with CBP officials. We compared IP seizures with IP imports on a
           value basis for the top 25 IP-importing ports for fiscal years
           2002 through 2005, determined the average seizure rate for these
           ports, and compared the ports' individual seizure rates with the
           average. While estimated domestic value of seizures and values for
           IP imports are not equivalent measurements, we determined that
           these were sufficiently reliable proxies for the purpose of
           seizure to import comparisons. We also conducted interviews with
           CBP officials in headquarters and field locations to obtain
           information on how OT and OFO carry out their operations and in
           final meetings discussed ways in which OT and OFO could better use
           their data to improve IP enforcement.

           This report is based on a law enforcement sensitive report issued
           on March 20, 2007, as a restricted report, copies of which are
           available for official use only.3 This public version does not
           contain certain information that DHS regarded as law enforcement
           sensitive and requested that it not be included. We provided DHS a
           draft copy of this public report for a sensitivity review by CBP
           and ICE, which agreed that we had appropriately removed law
           enforcement sensitive information.

           We conducted our work from November 2005 through January 2007 in
           accordance with generally accepted government auditing standards.
		   
1http://www.cbp.gov/xp/cgov/import/commercial_enforcement/ipr/seizure.

2GAO, Intellectual Property: U.S. Efforts Have Contributed to Strengthened
Laws Overseas, but Challenges Remain, [46]GAO-04-912 (Washington, D.C.:
Sept. 8, 2004).

3GAO, Intellectual Property: Better Data Analysis and Integration Could
Help U.S. Customs and Border Protection Improve Border Enforcement
Efforts, GAO-07-350SU (Washington, D.C.: Mar. 20, 2007).
		   
		   Appendix II: Analysis of Top Six Portsï¿½ IP Enforcement Outcomes

           To analyze IP enforcement outcomes across ports, we selected four
           categories of enforcement outcomes from the data CBP provided: (1)
           number of seizure actions, (2) domestic value of seizure, (3)
           number of penalty cases opened, and (4) penalty amounts assessed.
           We analyzed data by port location for fiscal years 2001 through
           2006. For four of these categories, we found that six ports
           accounted for the bulk of enforcement activity (see fig. 7). Four
           of these ports ranked in the top 10 for all four IP enforcement
           categories and 2 ranked in the top 10 for three out of the four
           categories. These ports may include multiple processing
           environments (e.g., land, sea, air modes), and seizure associated
           with such ports may stem from more than one processing
           environment. Because of inconsistencies in how CBP records
           seizures by port, we were unable to fully determine how many
           processing environments are reflected in the enforcement data. We
           were able to determine the seizure reporting practices of the
           seven ports that we visited. For example, at one location, CBP has
           one port "code" that includes seizures made at the seaport as well
           as the nearby airport. However, seizure data for another location
           includes seizures made at the seaport and from the international
           mail processing environment, but does not include other air-based
           seizures made at the nearby airport, which are reported
           separately. Neither OFO nor OT officials at the headquarters level
           could provide us information to understand the seizure reporting
           practices of CBP's ports.

           As figure 7 illustrates, CBP's data can be used to compare
           enforcement outcomes across the ports (left to right) or compare
           outcomes within a single port (top to bottom). With the exception
           of Port D, the scales are uniform. When analyzing IP enforcement
           outcomes both across ports and within a single port, we found wide
           variability when comparing outcomes from year to year and among
           the enforcement categories. For example, the Port F experienced
           increases in the number of seizure actions for fiscal years 2002
           and 2004; but in alternating years, the number dropped, in some
           cases by as much as 50 percent. Penalty outcomes also fluctuated
           by port location. For example, Port G had relatively constant
           numbers of penalty cases opened and penalty amounts assessed until
           fiscal year 2005, when these outcomes peaked, and then fell off
           sharply in fiscal year 2006. When examining outcomes within a
           single port, we found that the fluctuations in seizure outcomes
           did not mirror fluctuations in penalty outcomes. For example, Port
           C had a relatively steady number of seizure actions between fiscal
           years 2003 and 2006, but the number of penalty cases opened
           fluctuated greatly during the same time period. While we did not
           expect to find a direct correlation between seizure and penalty
           outcomes, given that the seizure data consists of all IP-related
           activity and penalty data limited to only those assessed under 19
           U.S.C. 1526(f), we did not expect to find such wide variations
           within the most active ports during the 6-year time period we
           reviewed.
		   
Figure 7: IP Enforcement Outcomes for Top Six Ports, Fiscal Years
2001-2006

aThe scale for Port D is not uniform because it had substantially more
seizure actions compared with other ports, making it difficult to compare
in a uniform scale.

bPenalty data for Port F was not available for fiscal years 2003 through
2006 due to a change in the way the port records its IP-related penalties.
CBP was unable to provide more complete information for this port. As a
result, total IP penalty outcomes for this port are likely
underrepresented in the above figure.
		   
Appendix III: Comments from the Department of Homeland Security

See comment 1.

See comment 2.

See comment 3.

Note: GAO comments supplementing those in the report text appear at the
end of this appendix.

See comment 7.

See comment 6.

See comment 5.

See comment 4.

See comment 8.

See comment 9.

The following are GAO's comments on the Department of Homeland Security's
letter dated March 6, 2007, which commented on GAO's law enforcement
sensitive report.

GAO Comments

           1. We disagree that OT's formation has, in itself, addressed the
           lack of integration that we identify in the report regarding IP
           enforcement. Although OT consolidates its legacy offices' trade
           policy and program development functions--specifically, the Office
           of Strategic Trade, the Office of Regulations and Rulings, and a
           headquarters component of the Office of Field Operations,
           front-line implementation of policies and programs continue to be
           carried out at the ports under the leadership of OFO. Because
           there is still separation between the office that sets policy and
           the office that implements policy, there is no evidence that the
           creation of OT will address the lack of integration that initiated
           congressional action and that we identified in our review. OT and
           OFO will need to work closely together to overcome the lack of
           integration between policy development and implementation that we
           refer to in the report. Regarding CBP's comment that we
           inaccurately refer to OT throughout the report, we modified the
           report to clarify references to OT and its legacy offices.
           2. CBP mischaracterizes the purpose and usefulness of our analysis
           of IP imports and enforcement activity at its ports. Seizing IP
           infringing goods is a core IP enforcement activity for which CBP
           is responsible, but CBP has not conducted systematic analysis of
           its own data to examine variations in enforcement outcomes over
           time or among ports. This simple analysis can be a powerful tool
           to generate discussion among IP policymakers and port management
           and staff about IP seizure patterns, risks, and outcomes and to
           improve CBP's approach to IP enforcement. We do not suggest using
           it to target imports. We clearly state that our analysis is only
           illustrative of the types of analysis that CBP could undertake and
           that CBP should refine and develop its own approach. We support
           CBP's decision to follow our recommendation to conduct such
           analysis.
           3. Our measure of IP imports is broader than CBP suggests, but it
           is not intended as a measure of risk. CBP does not currently have
           such a measure, and we believe our measure, which we reviewed with
           CBP, is useful. Our measure is intended to identify the overall
           relative volume of potential IP traffic that ports process, which
           is lower than total import volume. Doing so enables us to examine
           IP seizure activity relative to a meaningful measure of port
           volume. Our measure is based not only on tariff classifications
           where CBP actually found IP violations but also their related
           products groups. These classifications may include both IP and
           non-IP goods that are not separated out in the tariff schedule.
           Doing so is appropriate because CBP cannot easily distinguish,
           based on the tariff information, whether goods involve IP
           protection, have been purposely misclassified, or are being used
           to smuggle infringing products. The draft report explained our
           selection process and methodology, but we added clarity to further
           explain our measure and how we developed it. We also state that
           this analysis is one logical way to examine port performance and
           do not suggest, as CBP states in its response to our third
           recommendation, that the seizures-to-imports ratio is, in itself,
           a complete performance measure.
           4. We also agree that CBP should consider the range of factors
           that affect IP goods in conducting its analysis. We clearly stated
           in the report that our analysis was only one way to examine port
           performance. Our analysis was not intended to be used for risk
           analysis or targeting, but only to provide a measure of seizure
           activity relative to port size, and we did not assume a direct
           correlation between the volume of IP imports and risk.
           5. We agree that CBP's import data does not fully capture IP
           import values at express consignment and mail facilities, but even
           with this likely underreporting of such imports, several ports at
           which such facilities are dominant ranked among the top IP
           importing ports. As we state in the report, we agree that CBP
           should take differences across port environments into account in
           developing its own analysis.
           6. We focused on "transaction-level seizures and penalties"
           because these are the core IP enforcement activities for which CBP
           is responsible, and we found that CBP had not systematically
           analyzed its own performance of these core activities. We also
           address additional elements of CBP's approach to improve IP
           enforcement that fell within the scope of our audit, including its
           IP audits. However, we found that these efforts have had a limited
           impact on overall IP enforcement, while perhaps drawing attention
           away from improvements to its core activities. For example, CBP
           acknowledges that its audits, completed thus far on 41 companies
           during a 2 1/2-year period, are most effective for improving IP
           enforcement among legitimate importers, but these importers likely
           do not account for the bulk of IP infringing goods that enter the
           United States.
           7. CBP mischaracterizes our analysis by asserting that our report
           states across-the-board that CBP lacks performance measures for IP
           enforcement. Our draft report stated that the agency's strategic
           plan lacks specific measures for IP enforcement, but noted that
           CBP does indeed measure and report internally on the number of IP
           seizure actions and estimated seizure value. The draft report also
           discussed certain actions that CBP has taken under its
           "Intellectual Property Rights Trade Strategy," an internal
           planning document that is the same as what CBP calls the "National
           IPR Trade Strategy" in its letter. However, we disagree with CBP's
           assertion that this document serves as an agencywide guide for
           CBP's IP enforcement efforts. In our discussions with CBP about
           this document, CBP officials said the document was written for
           internal planning purposes. We found that the distribution of this
           document has been limited. For example, CBP documents show that
           revisions to the IP Rights Trade Strategy have not been
           distributed to the field since 2003. Moreover, certain CBP
           officials told us that the ports are generally not familiar with
           this document. Finally, given the document's classification as
           "For Official Use Only," it is not distributed to Congress or the
           public, unlike the agency's strategic plan, which limits its
           usefulness for holding CBP accountable for its performance on IP
           enforcement. We added information in our report to clarify the
           importance of agencywide strategic plans and performance measures
           in communicating priorities on an agencywide basis and
           establishing accountability. We added information that the IP
           Rights Trade Strategy contains other indicators related to IP
           enforcement. We also modified our recommendation to clarify that
           we recommend that CBP include IP enforcement-related measures in
           its strategic plan. Given the Office of Management and Budget's
           role in the strategic planning process, we also clarified that CBP
           should work with the Office of Management and Budget to include
           IP-enforcement related measures in its strategic plan.
           8. See comment 7.
           9. See comments 2 and 3.

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Loren Yager, (202) 512-4128, or [email protected]

Staff Acknowledgments

In addition to the individual named above, Christine Broderick, Assistant
Director; Shirley Brothwell; Carmen Donohue; Adrienne Spahr; and Timothy
Wedding made significant contributions to this report. Virginia Chanley,
Jerome Sandau, Ernie Jackson, Karen Deans, Etana Finkler, and Jena
Sinkfield also provided assistance.

(320487)

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www.gao.gov/cgi-bin/getrpt?GAO-07-735 .

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and methodology, click on the link above.

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Highlights of [55]GAO-07-735 , a report to the RM, Subcommittee on
Oversight of Government Management, the Federal Workforce, and the
District of Columbia, Committee on Homeland Security and Governmental
Affairs, U.S. Senate

April 2007

INTELLECTUAL PROPERTY

Better Data Analysis and Integration Could Help U.S. Customs and Border
Protection Improve Border Enforcement Efforts

U.S. government efforts to protect and enforce intellectual property
rights are crucial to preventing billions of dollars in economic losses
and for mitigating health and safety risks from trade in counterfeit and
pirated goods. The Department of Homeland Security's Customs and Border
Protection (CBP) leads intellectual property (IP) enforcement activity at
the U.S. border. GAO was asked to (1) examine key aspects of CBP's process
to carry out border enforcement, (2) analyze CBP's border enforcement
outcomes during fiscal years 2001 to 2006, and (3) evaluate CBP's approach
for improving border enforcement. GAO examined relevant documents,
interviewed agency officials in Washington, D.C. and seven port locations,
and analyzed CBP data on trade and IP seizure and penalty activity. This
is the public version of a law enforcement sensitive report by the same
title (GAO-07-350SU).

[56]What GAO Recommends

In the restricted report, GAO recommended that the CBP Commissioner (1)
include measures to guide and assess IP enforcement outcomes in CBP's
strategic plan; (2) improve CBP's IP enforcement data; and (3) use
existing data to better understand ports' IP enforcement activities and
outcomes, and link ports' performance to measures in CBP's strategic plan.
CBP generally agreed with our recommendations.

CBP's Office of International Trade (OT), formed in 2006, and Office of
Field Operations (OFO) carry out IP border enforcement processes,
including targeting and examining suspicious shipments, seizing infringing
goods, and assessing penalties as warranted. CBP uses computer-based and
manual targeting to determine which shipments it will examine, and both
methods have strengths and limitations. Port practices for recording exam
results vary, making it difficult for CBP to fully assess the
effectiveness of its IP targeting efforts.

Since 2001, CBP's IP enforcement outcomes have been concentrated among
particular transport modes, product types, and ports. Rising numbers of
low-value seizures from mail facilities have driven growth in seizure
actions, but uneven seizures of high-value goods from sea containers have
caused the estimated value of seizures to fluctuate. The vast majority of
seizure and penalty outcomes in the last 6 years have been concentrated
among 10 or fewer of CBP's 300-plus ports. For example, 10 ports account
for 98 percent of the $1.1 billion in penalties assessed during fiscal
years 2001 to 2006.

CBP lacks agencywide performance measures in its strategic plan and an
integrated approach across key offices to guide and improve IP
enforcement. Narrowly focused initiatives led by offices now under OT have
had limited results. CBP has not done a broader analysis to examine
variances in port IP enforcement outcomes. For example, GAO found that
some of the largest IP-importing ports had very small seizure rates
relative to other top IP-importing ports. A lack of integration between OT
and OFO impedes using this type of analysis to identify potential IP
enforcement improvements.

Top 25 IP-Importing Ports' Seizure Rates: Percent of IP Seizures in IP
Imports (by Value), Fiscal Year 2005

Note: Port names are not included in the figure for law enforcement
reasons.

References

Visible links
  43. http://www.gao.gov/cgi-bin/getrpt?GAO-04-912
  44. http://www.gao.gov/cgi-bin/getrpt?GAO-07-561
  45. http://www.gao.gov/cgi-bin/getrpt?GAO-07-561
  46. http://www.gao.gov/cgi-bin/getrpt?GAO-04-912
  55. http://www.gao.gov/cgi-bin/getrpt?GAO-07-735
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