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Testimony: 

Before the Committee on Homeland Security and Government Affairs, 
Subcommittee on Oversight of Government Management, the Federal 
Workforce, and the District of Columbia, United States Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 3:30 p.m. EDT: 

Wednesday, July 26, 2006: 

Intellectual Property: 

Initial Observations on the STOP Initiative and U.S. Border Efforts to 
Reduce Piracy: 

Statement of Loren Yager, Director International Affairs and Trade: 

GAO-06-1004T: 

GAO Highlights: 

Highlights of GAO-06-1004T, testimony before the Subcommittee on 
Oversight of Government Management, the Federal Workforce, and the 
District of Columbia, Committee on Homeland Security and Government 
Affairs, United States Senate 

Why GAO Did This Study: 

U.S. goods are subject to substantial counterfeiting and piracy, 
creating health and safety hazards for consumers, damaging victimized 
companies, and threatening the U.S. economy. In 2004, the Bush 
administration launched the Strategy for Targeting Organized Piracy 
(STOP) – a multi-agency effort to better protect intellectual property 
(IP) by combating piracy and counterfeiting. This testimony, based on a 
prior GAO report as well as from observations from on-going work, 
describes (1) the range and effectiveness of multi-agency efforts on IP 
protection preceding STOP, (2) initial observations on the organization 
and efforts of STOP, and (3) initial observations on the efforts of 
U.S. agencies to prevent counterfeit and pirated goods from entering 
the United States, which relate to one of STOP’s goals. 

What GAO Found: 

STOP is the most recent in a number of efforts to coordinate 
interagency activity targeted at intellectual property (IP) protection. 
Some of these efforts have been effective and others less so. For 
example, the Special 301 process – the U.S. Trade Representative’s 
process for identifying foreign countries that lack adequate IP 
protection – has been seen as effective because it compiles input from 
multiple agencies and serves to identify IP issues of concern in 
particular countries. Other interagency efforts, such as the National 
Intellectual Property Law Enforcement Coordination Council (NIPLECC), 
are viewed as being less effective because little has been produced 
beyond summarizing agencies’ actions in the IP arena. 

While STOP has energized IP protection and enforcement efforts 
domestically and abroad, our initial work indicates that its long-term 
role is uncertain. STOP has been successful in fostering coordination, 
such as reaching out to foreign governments and private sector groups. 
Private sector views on STOP were generally positive; however, some 
stated that it emphasizes IP protection and enforcement efforts that 
would have occurred regardless of STOP’s existence. STOP’s lack of 
permanent status and accountability mechanisms pose challenges for its 
long-term impact and Congressional oversight. 

STOP faces challenges in meeting some of its objectives, such as 
increasing efforts to seize counterfeit goods at the border – an effort 
for which the Department of Homeland Security’s Customs and Border 
Protection (CBP) and Immigration and Customs Enforcement are 
responsible. CBP has certain steps underway, but our initial work 
indicates that resources for IP enforcement at certain ports have 
declined as attention has shifted to national security concerns. In 
addition, prior GAO work found internal control weaknesses in an import 
mechanism through which a significant portion of imports flow, and 
which has been used to smuggle counterfeit goods. 

Figure: Examples of authentic and counterfeit products. 

[See PDF for Image] 

Source: GAO. 

[End of Figure] 

What GAO Recommends: 

GAO is not recommending executive action. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-1004T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Loren Yager at (202) 512-
4128 or yagerl@gao.gov. 

[End of Section] 

Mr. Chairman and Members of the Subcommittee: 

Thank you for the opportunity to appear again before the subcommittee 
to discuss our work on U.S. efforts to protect U.S. intellectual 
property (IP) rights. We appreciate the opportunity to contribute to 
the record that this Committee has established on IP protection. The 
United States dominates the creation and export of intellectual 
property--creations of the mind--and provides broad protection for 
intellectual property through means such as copyrights, patents, and 
trademarks. However, because protection of intellectual property in 
many parts of the world is inadequate, U.S. goods are subject to 
substantial counterfeiting and piracy. Such goods are widely 
distributed in global markets, including here in the United States. As 
you stated in this Subcommittee's June 2005 hearing on IP protection, 
the production and distribution of counterfeit and pirated goods create 
health and safety hazards for consumers, damage companies that are 
victims of this theft, and pose a threat to the U.S. economy. 

Since my last testimony before this committee, the United States has 
continued to develop and implement its Strategy for Targeting Organized 
Piracy, or STOP, which outlines priority IP enforcement efforts of 6 
agencies. To understand more fully how this strategy might contribute 
to better protection of IP, I will address three topics: (1) the range 
and effectiveness of multi-agency efforts on IP protection that 
preceded STOP; (2) initial observations on the organization and efforts 
of STOP; and (3) initial observations on the efforts of U.S. agencies 
to prevent counterfeit and pirated goods from entering the United 
States, which relate to one of STOP's goals. 

To address these issues, we have drawn on a number of completed and 
ongoing GAO studies, including a report on this subject that we 
published in 2004 and updated in testimony before this committee last 
year.[Footnote 1] In addition, we are presenting some initial and 
preliminary observations based on three ongoing reviews related to IP 
protection. These include (1) a study that we have initiated for this 
committee focusing on IP enforcement at the U.S. border, (2) a study 
for the House Government Reform Committee on interagency efforts to 
protect IP rights, and (3) additional work on a Customs and Border 
Protection (CBP) program called the "in-bond system" that allows goods 
to enter U.S. commerce at a port other than the port of arrival. In 
conducting the GAO studies, we have performed work at multiple U.S. 
agency headquarters in Washington, at U.S. ports of entry, and in other 
nations. In addition, we have met with representatives from multiple 
industry associations to obtain their views on STOP. We obtained 
technical comments on this testimony from CBP officials and 
incorporated their changes where appropriate. All work was conducted in 
accordance with generally accepted government auditing standards. 

Summary: 

Prior to STOP's creation in 2004, the U.S. government established a 
number of mechanisms and structures to coordinate interagency IP 
protection activity, and they achieved varying levels of success. For 
example, as we reported in 2004, the Special 301 process[Footnote 2] 
that is annually led by the Office of the U.S. Trade Representative 
(USTR) was generally cited as being quite effective in collecting input 
from multiple agencies, identifying IP issues of concern in particular 
countries, and achieving policy changes in many of those nations. On 
the other hand, U.S. government efforts to improve IP enforcement under 
the National Intellectual Property Law Enforcement Coordination Council 
(NIPLECC), a multi-agency coordinating body, were generally believed to 
be ineffective, having resulted in little more than the publication of 
an annual report compiling individual agency submissions. STOP, a 
presidential initiative, was, in part, a response to the need for 
further attention to IP enforcement. The initiative is led by the White 
House under the auspices of the National Security Council and involves 
collaboration on IP protection and enforcement efforts among six 
federal agencies. 

STOP has energized U.S. efforts to protect and enforce IP and has 
initiated some new efforts, but its long-term role is uncertain. One 
area where STOP has increased efforts is outreach to foreign 
governments. In addition, STOP has focused attention on helping small- 
and medium-sized enterprises to better protect their IP rights. Private 
sector views on STOP were generally positive, although some said that 
STOP was a compilation of new and on-going U.S. agency activities that 
would have occurred anyway. As a Presidential initiative, STOP was not 
created by statute, has no formal structure, funding or staff, and 
appears to have no permanence beyond the current administration. STOP's 
lack of permanence and of accountability mechanisms poses challenges 
for its long-term impact and Congressional oversight. 

Certain weaknesses in agencies' IP enforcement efforts at the border 
illustrate the challenges STOP faces in carrying out some of its 
objectives. One of STOP's goals is to increase efforts to seize 
counterfeit goods at the border, an undertaking that rests primarily 
with CBP and the Immigration and Customs Enforcement (ICE) agency 
within the Department of Homeland Security. However, STOP doesn't 
direct these agencies' efforts or resource allocations and national 
security remains a top priority. Nonetheless, CBP continues to have a 
trade enforcement role and is taking steps to improve its IP 
enforcement. Our initial work for this Committee indicates that 
significant challenges remain. The overall task of assessing whether 
particular imports are authentic has become more difficult as trade 
volume and counterfeit quality increase. While the number of IP 
seizures has grown, there is generally no similar trend in the 
estimated value of goods seized. New tools that CBP has developed to 
better target suspect shipments and deal with problem importers are 
largely works in progress whose future impact is uncertain. CBP and ICE 
have undergone dramatic restructuring to manage their new priorities, 
and our initial evidence indicates that resources dedicated to IP 
enforcement are shrinking. Finally, a range of internal control 
weaknesses continue to plague a critical CBP system, called the in-bond 
system, that allows goods to enter U.S. commerce at a port other than 
the port of arrival. These weaknesses have been exploited by importers 
to smuggle counterfeit goods. In our recent work, CBP staff continue to 
observe that the limited information required from importers on in-bond 
shipments makes it difficult for CBP to assure that these shipments 
have reached their proper destinations. 

Background: 

Intellectual property is an important component of the U.S. economy, 
and the United States is an acknowledged global leader in its creation. 
However, the legal protection of intellectual property varies greatly 
around the world, and several countries are havens for the production 
of counterfeit and pirated goods. The State Department has cited 
estimates that counterfeit goods represent about 7 percent of annual 
global trade, but we would note that it is difficult to reliably 
measure what is fundamentally a criminal activity.[Footnote 3] Industry 
groups suggest, however, that counterfeiting and piracy are on the rise 
and that a broader range of products, from auto parts to razor blades, 
and vital medicines to infant formula, are subject to counterfeit 
production. Counterfeit products raise serious public health and safety 
concerns, and the annual losses that companies face from IP violations 
are substantial. 

Eight federal entities, the Federal Bureau of Investigation (FBI), and 
the U.S. Patent and Trademark Office (USPTO) undertake the primary U.S. 
government activities to protect and enforce U.S. IP rights overseas. 
These 8 agencies are: Departments of Commerce, State, Justice, and 
Homeland Security; USTR; the Copyright Office; the U.S. Agency for 
International Development; and the U.S. International Trade Commission. 
They undertake a wide range of activities that fall under 3 categories: 
policy initiatives, training and technical assistance, and law 
enforcement. U.S. policy initiatives to increase IP protection around 
the world are primarily led by USTR, in coordination with the 
Departments of State, Commerce, USPTO, and the Copyright Office, among 
other agencies. These policy initiatives are wide ranging and include 
reviewing IP protection abroad, using trade preference programs for 
developing countries,[Footnote 4] and negotiating agreements that 
address intellectual property. Key activities to develop and promote 
enhanced IP protection in foreign countries through training or 
technical assistance are undertaken by the Departments of Commerce, 
Homeland Security, Justice, and State; the FBI; USPTO; the Copyright 
Office; and the U.S. Agency for International Development. A smaller 
number of agencies are involved in enforcing U.S. IP laws. Working in 
an environment where counterterrorism is the central priority, the FBI 
and the Departments of Justice and Homeland Security take actions that 
include engaging in multi-country investigations involving intellectual 
property violations and seizing goods that violate IP rights at U.S. 
ports of entry. Finally, the U.S. International Trade Commission has an 
adjudicative role in enforcement activities involving patents and 
trademarks. 

STOP Is One of Several Interagency IP Coordination Mechanisms: 

STOP is the most recent of several interagency IP coordination 
mechanisms that address IP policy initiatives, training and technical 
assistance, and law enforcement. Some of these have been effective, 
particularly the Special 301 process that identifies inadequate IP 
protection in other countries and the Intellectual Property Rights 
(IPR) Training Coordination Group. However, U.S. law enforcement 
coordination efforts through NIPLECC have had difficulties. STOP was, 
in part, a response to the need for further attention to IP 
enforcement. 

Coordination Efforts Involving Policy Initiatives and Technical 
Assistance Have Been Generally Effective: 

Results of our September 2004 report found that coordination efforts 
through the Special 301 process and the IPR Training Coordination Group 
have generally been considered to be effective by U.S. government and 
industry officials.[Footnote 5] "Special 301," which refers to certain 
provisions of the Trade Act of 1974, as amended,[Footnote 6] requires 
USTR to annually identify foreign countries that deny adequate and 
effective protection of IP rights or fair and equitable market access 
for U.S. persons who rely on IP protection. USTR identifies these 
countries with substantial assistance from industry and U.S. agencies 
and then publishes the results of its reviews in an annual report. Once 
a list of such countries has been determined, the USTR, in coordination 
with other agencies, decides which, if any, of these countries should 
be designated as Priority Foreign Countries, which may result in an 
investigation and subsequent actions. As our report notes, according to 
government and industry officials, the Special 301 process has operated 
effectively in reviewing IP rights issues overseas. These agency 
officials told us that the process is one of the best tools for 
interagency coordination in the government, and coordination during the 
review is frequent and effective. 

The IPR Training Coordination Group is a voluntary, working-level group 
comprised of representatives of U.S. agencies and industry associations 
involved in training and technical assistance efforts overseas for 
foreign officials. Meetings are held approximately every 4 to 6 weeks 
and are well attended by government and private sector representatives. 
The State Department leads the group, and meetings have included 
discussions on training "best practices" responding to country requests 
for assistance, and improving IPR awareness among embassy staff. 
According to several agency and private sector participants, the group 
is a useful mechanism that keeps participants informed of the IP 
activities of other agencies or associations and provides a forum for 
coordination. 

IP Law Enforcement Coordination Efforts Have Faced Challenges: 

Coordination efforts involving IP law enforcement through NIPLECC have 
not been as successful. NIPLECC was created by the Congress in 1999 to 
coordinate domestic and international intellectual property law 
enforcement among U.S. federal and foreign entities.[Footnote 7] 
NIPLECC members are from 5 agencies and consist of: (1) Commerce's 
Undersecretary for Intellectual Property and Director of the United 
States Patent and Trademark Office; (2) Commerce's Undersecretary of 
International Trade; (3) the Department of Justice's Assistant Attorney 
General, Criminal Division; (4) the Department of State's 
Undersecretary for Economic and Agricultural Affairs; (5) the Deputy 
United States Trade Representative; and (6) the Department of Homeland 
Security's Commissioner of U.S. Customs and Border Protection. 
Representatives from the Department of Justice and USPTO are co-chairs 
of NIPLECC. [Footnote 8] 

In our September 2004 report, we stated that NIPLECC had struggled to 
define its purpose and had little discernible impact, according to 
interviews with industry officials and officials from its member 
agencies, and as evidenced by NIPLECC's own annual reports.[Footnote 9] 
Indeed, officials from more than half of the member agencies offered 
criticisms of NIPLECC, remarking that it was unfocused, ineffective, 
and "unwieldy." We also noted that if the Congress wishes to maintain 
NIPLECC and take action to increase its effectiveness, the Congress 
should to consider reviewing the council's authority, operating 
structure, membership, and mission. 

In the fiscal year 2005 Consolidated Appropriations Act, the Congress 
provided $2 million for NIPLECC expenses, to remain available through 
fiscal year 2006.[Footnote 10] The act also created the position of the 
Coordinator for International Intellectual Property Enforcement, 
appointed by the President, to head NIPLECC.[Footnote 11] The NIPLECC 
co-chairs are to report to the Coordinator. In July 2005, Commerce 
Secretary Gutierrez announced the Presidential appointment filling the 
IP Coordinator position. Since then, NIPLECC has added an assistant, a 
policy analyst, part time legislative and press assistants, and 
detailees from USPTO and CBP. Since the Consolidation Appropriations 
Act, NIPLECC has held two formal meetings but has not issued an annual 
report since 2004. 

STOP Was Created to Strengthen IP Enforcement: 

In October 2004 the President launched STOP, an initiative to target 
cross-border trade in tangible goods and strengthen U.S. government and 
industry IP enforcement actions. The initiative is led by the White 
House under the auspices of the National Security Council and involves 
collaboration among six federal agencies: the Departments of Commerce, 
Homeland Security, Justice, and State; USTR; and the Food and Drug 
Administration.[Footnote 12] STOP has five general objectives: (1) 
empower American innovators to better protect their rights at home and 
abroad, (2) increase efforts to seize counterfeit goods at our borders, 
(3) pursue criminal enterprises involved in piracy and counterfeiting, 
(4) work closely and creatively with U.S. industry, and (5) 
aggressively engage our trading partners to join U.S. efforts. 

The IP Coordinator is also serving as the coordinator for STOP. Both 
agency officials and industry representatives with whom we spoke 
consistently praised the IP Coordinator, saying that he was effectively 
addressing their concerns by speaking at seminars, communicating with 
their members, and heading U.S. delegations overseas. 

STOP Has Energized U.S. Efforts, but Its Impact and Long-Term Viability 
Are Uncertain: 

STOP has energized U.S. efforts to protect and enforce IP and has 
initiated some new efforts, however its long-term role is uncertain. 
One area where STOP has increased efforts is outreach to foreign 
governments. In addition, STOP has focused attention on helping small- 
and medium-sized enterprises to better protect their IP rights. 
Industry representatives generally had positive views on STOP, although 
some thought that STOP was a compilation of new and on-going U.S. 
agency activities that would have occurred anyway. STOP's lack of 
permanent status as a Presidential initiative and lack of 
accountability mechanisms could limit STOP's long-term impact.[Footnote 
13] 

STOP Has Fostered Coordination and Undertaken Some New Initiatives: 

Agency officials participating in STOP cited several advantages to 
STOP. They said that STOP energized their efforts to protect and 
enforce IP by giving them the opportunity to share ideas and support 
common goals. Officials said that STOP had brought increased attention 
to IP issues within their agencies and the private sector as well as 
abroad, and attributed that to the fact that STOP came out of the White 
House, thereby lending it more authority and influence. Another agency 
official pointed out that IP was now on the President's agenda at major 
summits such as the G-8 and the recent EU-U.S. summits.[Footnote 14] 

STOP has initiated some new efforts, including a coordinated U.S. 
government outreach to foreign governments that share IP concerns and 
enforcement capacities similar to the United States. For example, the 
United States and the European Union (EU) have formed the U.S.-EU 
Working Group on Intellectual Property Rights, and in June 2006, the 
United States and European Union announced an EU-U.S. Action Strategy 
for Enforcement of IP Rights meant to strengthen cooperation in border 
enforcement and encourage third countries to enforce and combat 
counterfeiting and piracy. 

One particular emphasis of STOP has been to help small-and medium-sized 
enterprises (SMEs) protect their IP in the United States and abroad 
through various education and outreach efforts. In 2002, we reported 
that SMEs faced a broad range of impediments when seeking to patent 
their inventions abroad, including cost considerations and limited 
knowledge about foreign patent laws, standards, and 
procedures.[Footnote 15] We recommended that the Small Business 
Administration (SBA) and the USPTO work together to make a range of 
foreign patent information available to SMEs. Within the last year, an 
SBA official told us that SBA began working with STOP agencies to 
distribute information through its networks and recently linked the 
Small Business Administration's website to the STOP website, making 
information about U.S., foreign, and international laws and procedures 
accessible to its clients. 

Many industry representatives with whom we spoke viewed STOP 
positively, maintaining that STOP had increased the visibility of IP 
issues. For example, one industry representative noted a coordinated 
outreach to foreign governments that provided a more collaborative 
alternative to the Section 301 process, whose punitive aspects 
countries sometimes resented. Another indicated that his association 
now coordinates training with CBP that is specific to his industry as a 
result of contacts made through STOP. In addition, most private sector 
members with whom we spoke agreed that STOP was an effective 
communication mechanism between business and U.S. federal agencies on 
IP issues, particularly through the CACP, the Coalition Against 
Counterfeiting and Piracy, a cross-industry group created by a joint 
initiative between the Chamber of Commerce and the National Association 
of Manufacturers. Private sector officials have stated that CACP 
meetings are their primary mechanism of interfacing with agency 
officials representing STOP. 

There were some industry representatives who questioned whether STOP 
had added value beyond highlighting U.S. IP enforcement activities. 
Some considered STOP to be mainly a compilation of ongoing U.S. IP 
activities that pre-existed STOP. For example, Operation Fast 
Link[Footnote 16] and a case involving counterfeit Viagra tablets 
manufactured in China, both listed as a STOP accomplishment, began 
before STOP was created. In addition, some industry representatives 
believed that new activities since STOP was created would have likely 
occurred without STOP. 

STOP Has Features That May Limit Its Long-Term Impact: 

As a presidential initiative, STOP was not created by statute, has no 
formal structure, funding, or staff, and appears to have no permanence 
beyond the current administration. NIPLECC, on the other hand, is a 
statutory initiative, receives funds, and is subject to Congressional 
oversight. Recently, the lines between NIPLECC and STOP have blurred, 
possibly lending STOP some structure and more accountability. For 
example, as mentioned before, NIPLECC's IP Coordinator is also the 
focal point for STOP. In addition, NIPLECC recently adopted STOP as the 
strategy it is required to promulgate under the Consolidated 
Appropriations Act of 2005. This legislation calls for NIPLECC to 
establish policies, objectives, and priorities concerning international 
intellectual property protection and intellectual property law 
enforcement; promulgate a strategy for protecting American intellectual 
property overseas; and coordinate and oversee implementation of these 
requirements. 

However, the nature of the relationship between STOP and NIPLECC is not 
clear. Although the IP Coordinator has recently reported in 
congressional hearings that NIPLECC adopted STOP as its strategy, there 
have been no formal announcements to the press, industry associations, 
or agency officials responsible for carrying out STOP activities. In 
addition, STOP documents do not refer to NIPLECC. Our meetings with 
agency and industry officials indicated that they are unclear about the 
relationship between STOP and NIPLECC. The absence of a clearly 
established relationship makes it difficult to hold NIPLECC accountable 
for monitoring and assessing the progress of IP enforcement under STOP. 
We believe that accountability mechanisms are important to oversight of 
federal agency efforts and can contribute to better performance on 
issues such as IP protection. 

IP Enforcement Efforts at the Border Illustrate Challenges Facing STOP: 

One of STOP's five goals is to increase federal efforts to seize 
counterfeit goods at the border, but work we are conducting for this 
Subcommittee illustrates the kind of challenges that STOP faces in 
achieving its goals. CBP and ICE are responsible for border enforcement 
efforts but their top priority is national security. CBP has taken 
several steps since fiscal year 2003, when it made IP matters a 
priority trade issue, to update and improve its border enforcement 
efforts. While CBP seizures of IP-infringing goods have grown steadily 
since fiscal year 2002, the total estimated value of seizures during 
that time generally did not experience similar growth. Some steps that 
CBP is taking to improve IP enforcement are works in progress whose 
impact on this STOP objective is uncertain. CBP's ability to 
effectively enforce IP rights at the border is also challenged by 
limited resources for such enforcement and by long-standing weaknesses 
in its ability to track the physical movement of goods entering the 
United States using the in-bond system.[Footnote 17] 

CBP IP Seizures Have Increased in Number but the Estimated Value Has 
Fluctuated: 

STOP documents cite increases in IP-related seizures as a positive 
indicator of its efforts to stop counterfeit goods at the border. The 
overall task of assessing whether particular imports are authentic has 
become more difficult as trade volume and counterfeit quality increase. 
The number of IP-related seizures has grown steadily, with CBP and ICE 
together making about 5,800 seizures in fiscal year 2002 and just over 
8,000 seizures in fiscal year 2005.[Footnote 18] However, there is no 
corresponding trend in the estimated value of such seizures.[Footnote 
19] The estimated value of goods seized in fiscal years 2002 and 2003 
was $99 million and $94 million, respectively. This figure jumped to a 
peak of about $139 million in fiscal year 2004, but dropped back to the 
former level, about $93 million, in fiscal year 2005. 

According to CBP officials, the agency's goal is to focus its resources 
in part on high-value seizures, but a large percent of annual seizure 
activity does not result in a significant seizure value. For example, 
nearly 75 percent of fiscal year 2005 seizures were small-scale 
shipments made at mail and express consignment facilities (facilities 
operated by companies that offer express commercial services to move 
mail and cargo, such as the United Parcel Service) or from individuals 
traveling by air, vehicle, or on foot. These seizures represented about 
14 percent of total estimated seizure value in that year. Conversely, 
about 14 percent of fiscal year 2005 seizures involved large-scale 
shipments (i.e., containers) and accounted for about 55 percent of that 
year's estimated seizure value. The number of seizures made on goods 
emanating from China has risen from about 49 percent of the estimated 
domestic value of all IP seizures in fiscal year 2002 to about 69 
percent of estimated seizure value in fiscal year 2005. 

While CBP seizes goods across a range of product sectors, in recent 
years, seizures tend to be concentrated in particular goods, such as 
wearing apparel, handbags, cigarettes, and consumer electronics. CBP 
also seeks to increase seizures of goods involving public health and 
safety risks, and their data show that the estimated domestic value of 
seized goods involving certain health and safety risks, specifically 
pharmaceuticals, electrical articles, and batteries, increased during 
fiscal years 2002-2005. However, seizures in these and certain other 
health and safety categories represented less than 10 percent of the 
total estimated domestic value of seizures in fiscal year 2005, and 
seizures of other potentially dangerous goods, such as counterfeit auto 
parts, remain relatively limited. For example, CBP estimated in a 
letter to an automotive industry trade association that it made 14 
seizures in fiscal years 2003-2005 of certain automotive 
parts.[Footnote 20] A representative from another automotive industry 
trade association noted that CBP's ability to make seizures in this 
area depends on its receiving quality information about counterfeiters 
from companies. 

CBP Has Taken Steps to Improve IP Enforcement, but Several Are Still 
Works In Progress: 

In various STOP documents, CBP cites steps it has taken to improve IP 
enforcement, but many of these are works in progress whose impact and 
effectiveness are undetermined. CBP identified IP matters as a priority 
trade issue in fiscal year 2003 and developed an agency-wide strategy 
for IP enforcement. The strategy addresses several components of IP 
enforcement, such as targeting (identifying high risk shipments), 
international coordination, communication to employees, and industry 
outreach. A CBP official who oversees the IP strategy told us that CBP 
seeks to perform IP enforcement more efficiently, and the strategy 
notes the importance of conducting IP enforcement while minimizing the 
burden on front line resources whose priority is national security. 
Several elements of the strategy were specifically designated as 
activities to support STOP. 

CBP's key STOP-related activity is the creation of a statistical 
computer model that is designed to identify container shipments that 
are at higher risk of involving IP rights violations. To develop the 
model, CBP examined elements of past seizures and container 
examinations and identified certain factors that were significant 
characteristics of IP-infringing imports and that could be used to 
identify future IP rights violations. CBP piloted this model on a 
nation-wide basis for about one month in February 2005, but the pilot 
revealed several issues that need to be addressed before the model can 
be implemented. CBP plans to pilot the model again for up to 3 months 
this summer at two land border ports and one seaport. CBP will use the 
results of the second pilot to further evaluate the viability of the 
model. 

Another STOP-related activity for CBP is the use of post-entry audits 
to assist with IP enforcement.[Footnote 21] CBP officials said using 
such audits for this purpose is a new approach that is designed to 
assess whether companies have adequate internal controls to prevent 
them from importing goods that infringe IP rights. Initiated in fiscal 
year 2005, these audits are a novel approach that is likely to work 
best with established importers, but they may be less effective for 
dealing with importers that are engaged in criminal activity and 
deliberately take steps to evade federal scrutiny. CBP selected 40 
known and potential IP-infringing companies to audit in fiscal years 
2005-2006 and by July 2006, had completed 17 of these audits.[Footnote 
22] In three audits, CBP found that the companies possessed or had 
already sold infringing goods that were not seized at the border. In 
two of these cases, CBP imposed penalties on the companies totaling 
about $4.6 million.[Footnote 23] In the third case, the audit closed in 
September 2005 but the decision on whether to impose penalties is still 
pending in CBP. A CBP official said that some less significant IP- 
infringing activity was found in several other audits, but CBP chose 
not to impose penalties in these cases. CBP also found that internal 
controls to prevent IP rights violations were lacking or inadequate for 
most of the 17 companies, and has worked with them to improve these 
controls. 

A third STOP activity for CBP is the development of a system that 
allows companies to electronically record their IP rights through CBP's 
website. While trademark and copyright protection is obtained from 
USPTO and the Copyright Office, respectively, these rights must be 
separately recorded with CBP, for a fee.[Footnote 24] Recording with 
CBP provides CBP officials with information about the scope, ownership, 
and representation of protected IP rights being recorded. Although CBP 
officials have said recordation is important because it helps CBP 
effect legally defensible border enforcement, some companies fail to 
record their rights with CBP, either because they are unaware of the 
recordation requirement or because they choose not to. The electronic 
recordation system, implemented in December 2005, is designed to 
streamline the process, reduce processing times, and, ideally, increase 
the number of recordations.[Footnote 25] A link to the recordation 
system has been established on USPTO's website, and a link from the 
Copyright Office is planned. CBP expects that most paper-based 
applications will eventually be eliminated.[Footnote 26] While these 
are important steps, we have not yet evaluated the impact of the new 
recordation system. Several industry representatives have cited other 
concerns about recordation generally, such as long recordation 
processing times and the effective lack of border protection caused by 
the inability to record copyrights with CBP before such rights are 
issued by the Copyright Office. For example, one private sector 
representative said that during the six to nine months it takes to 
process a copyright, pirated master CDs may be allowed to enter the 
United States because the rights holder has not yet been able to record 
the title with CBP.[Footnote 27] 

Initial Evidence Indicates That Resources for IP Enforcement Are 
Shrinking: 

CBP and ICE priorities and resource allocations changed dramatically 
after September 2001, and our initial work indicates that some 
headquarters and field resources for IP enforcement have declined since 
then. As you indicated in your statement at the June 2005 IP hearing, 
the ultimate success of STOP, and of IP enforcement generally, depends 
on whether agencies are able to recruit, train, and retain the 
necessary workforce to meet their objectives. You also noted that prior 
hearings before this Subcommittee revealed that human capital issues 
were hindering federal enforcement of trade laws. At several border 
locations we visited, we found that resources for trade and IP 
enforcement are thinly spread, certain IP enforcement positions had 
been reduced or eliminated, and one location faced challenges in 
filling vacant CBP Officer positions. 

At CBP port operations, employees in two job categories are responsible 
for IP enforcement --CBP Officers and Import Specialists. CBP Officers 
are responsible for targeting incoming shipments for security and trade 
purposes and conducting physical examinations of suspect goods. Import 
Specialists are responsible for assessing the actual value and 
composition of goods for duty and quota purposes and for making initial 
determinations of whether goods are believed to be in violation of U.S. 
IP rights laws. While CBP Officers are typically assigned to a single 
port of entry, Import Specialists assigned to a large port may be 
responsible for covering other smaller ports that report to the larger 
port. ICE field office agents investigate IP infringement cases. 

We have not yet gathered comprehensive data on the number of CBP 
Officers, Import Specialists, and ICE agents devoted to IP enforcement, 
but we found reduced resources, thinly spread, at several border 
locations that we have visited. 

* At the Port of Los Angeles/Long Beach, the largest U.S. seaport by 
volume, two trade enforcement teams have been disbanded and their CBP 
Officers shifted to national security details. Port officials said that 
since the late 1990s, the number of CBP Officers performing trade- 
related examinations has dropped by about 43 percent, and the number of 
Import Specialists on an IP-devoted enforcement team has dropped by 
half. 

* The Port of San Francisco services multiple port facilities, 
including two major seaports, two major airports, and seven smaller 
port locations. CBP Officers at the San Francisco air cargo facility 
said that 4 out of 13 CBP Officers are assigned to inspect cargo for 
trade violations. These 4 officers share coverage of a 7-day work week, 
such that about 2 CBP Officers perform trade inspections on any day. In 
2001, there were about 12 CPB Officers assigned to trade inspections. 
San Francisco's Director of Field Operations told us that filling 33 
vacancies within his approximately 450 CBP Officer positions is a high 
priority. Currently, there are 3 Import Specialists, down from 6 in 
2003, that focus primarily on IP enforcement and service the seaports, 
airports, and smaller ports within the Port of San Francisco's area. 

* ICE also performs IP enforcement and houses the National IPR 
Coordination Center (called the IPR Center) - a joint effort between 
ICE and the FBI intended to serve as a focal point for the collection 
of intelligence involving, among other things, copyright and trademark 
infringement. Currently, 9 of the 16 authorized ICE positions are 
filled and a 10TH is slated to be filled. Neither of the 2 CBP 
authorized positions are filled. Additionally, in February 2006, 7 of 8 
FBI positions were empty and the 8th position was filled by rotating 
FBI staff. In July 2006, an FBI official told us that no FBI staff were 
working at the IPR center because of limited physical space and 
pressing FBI casework, but that some staff would return in September 
2006. 

* The ICE field office in Los Angeles, one of the largest field offices 
in the country, had two commercial fraud enforcement teams before the 
formation of the Department of Homeland Security but now has one. The 
number of agents working on commercial fraud enforcement cases, which 
include IP enforcement, dropped from about 14 to 9 since 2003. However, 
an official from this office said resource changes have not affected 
how the team addresses IP enforcement nor caused it to turn away any IP 
enforcement cases. 

In-Bond System Faces Persistent Control Weakness and Has Been Used to 
Circumvent IP Laws: 

The in-bond system has been identified by CBP and ICE officials as one 
of the mechanisms used to circumvent import and IP laws and regulations 
and presents an enforcement challenge. A significant portion of goods 
received at U.S. ports do not immediately enter U.S. commerce but are 
instead shipped "in-bond" for official entry at other U.S. ports or are 
transported through the United States for export. [Footnote 28] When 
goods are shipped in-bond, they are subject to national security 
inspections at the port of arrival, but are exempt from U.S. duties or 
quotas and formal trade inspections until they reach the final port 
where they will officially enter U.S. commerce.[Footnote 29] For many 
years, GAO and others have noted weaknesses in the in-bond system used 
to monitor shipments between ports.[Footnote 30] 

CBP and ICE officials recognize that the in-bond system has been used 
by certain importers to bring counterfeit and pirated goods into the 
United States by avoiding official entry at the port of arrival and 
then diverting the goods afterwards. Some CBP officials said the in- 
bond system may contribute to imports of counterfeits by allowing some 
importers to "port shop" for ports that are less likely to identify IP 
violations. Indeed, CBP has made sizable IP-related seizures from the 
in-bond system, including 220 seizures valued at about $41 million in 
fiscal year 2004, representing nearly 30 percent of the total estimated 
domestic value of IP seizures in that year. In fiscal year 2005, there 
were 126 seizures valued at about $14 million, representing about 15 
percent of estimated domestic value of IP seizures that year. 

We have found weakness in the past with the in-bond system and are 
currently conducting follow-up work to determine whether these 
weaknesses have been corrected. Our audit is still underway, but work 
to date indicates that some previously identified weakness in tracking 
and monitoring in-bonds remain. For example, in January 2004 GAO 
reported that CBP collects significantly less information on in-bond 
shipment than for regular entries and that this lack of information 
makes tracking in-bond shipments more difficult.[Footnote 31] In our 
recent work, CBP staff continue to observe that the limited information 
required from importers on in-bond shipments makes it difficult for CBP 
to assure that the shipments have reached their proper destinations. 

Conclusions: 

Intellectual property protection is an issue that requires the 
involvement of many U.S. agencies, and the U.S. government has employed 
a number of mechanisms to combat different aspects of IP crimes, with 
varying levels of success. The STOP initiative, the most recent 
coordinating mechanism, has brought attention and energy to IP efforts 
within the U.S. government, and participants and industry observers 
have generally supported the new effort. At the same time, the 
challenges of IP piracy are enormous, and will require the sustained 
and coordinated efforts of U.S. agencies, their foreign counterparts, 
and industry representatives to be successful. Our initial observations 
on the structure of STOP suggest that it is not well suited to address 
the problem over the long term as the presidential initiative does not 
have permanence or the accountability mechanisms that would facilitate 
oversight by the Congress. Our ongoing work on IP protection efforts at 
the U.S. border, one of the 5 areas identified by STOP, also 
illustrates the types of challenges that need sustained attention to 
make progress on the issue. We believe that our more detailed reports 
to be released in the near future will contribute to continuing 
Congressional oversight of these issues. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to respond to any questions that you or other members of the 
subcommittee may have at this time. 

FOOTNOTES 

[1] GAO, Intellectual Property: U.S. Efforts Have Contributed to 
Strengthened Laws Overseas, but Challenges Remain, GAO-04-912 
(Washington, D.C.: Sept. 8, 2004). GAO, Intellectual Property: U.S. 
Efforts Have Contributed to Strengthened Laws Overseas, but Significant 
Enforcement Challenges Remain, GAO-05-788T (June 14, 2005). 

[2] The Special 301 process identifies foreign countries that deny 
adequate and effective protection of IP rights or fair and equitable 
market access for U.S. persons who rely on IP protection. 

[3] The Organisation for Economic Co-operation and Development (OECD) 
is conducting a study on IP, examining the extent to which counterfeit 
goods are entering global trade and associated data reliability issues. 

[4] U.S. IP rights policy efforts include use of the Generalized System 
of Preferences (GSP) originally authorized under the Trade Act of 1974. 
When GSP was re-authorized under the Trade and Tariff Act of 1984, new 
"country practice" eligibility criteria were added, including a 
requirement that beneficiary countries provide adequate IP rights 
protection. 

[5] GAO-04-912. 

[6] 19 U.S.C. 2242. 

[7] NIPLECC was mandated under Section 653 of the Treasury and General 
Government Appropriations Act, 2000 (P.L. 106-58), 15 U.S.C. 1128. 

[8] NIPLECC is also required to consult with the Register of Copyrights 
on law enforcement matters related to copyright and related rights and 
matters. 

[9] GAO-04-912. 

[10] The Consolidated Appropriations Act, 2005 (P.L. 108-447), Division 
B Title II. 

[11] This official may not serve in any other position in the federal 
government. 

[12] STOP and NIPLECC share the same member agencies, with the 
exception of the Food and Drug Administration which is a member of STOP 
but not NIPLECC. 

[13] GAO will be issuing a report on STOP and NIPLECC in the fall at 
the request of the Chairman of House Committee on Government Reform. 

[14] The G-8 is an annual summit whose members include Canada, the 
European Union, France, Germany, Italy, Japan, Russia, the United 
Kingdom, and the United States. 

[15] GAO, International Trade: Federal Action Needed to Help Small 
Businesses Address Foreign Patent Challenges, GAO-02-789 (Washington, 
D.C.: July 17, 2002). 

[16] Under the Department of Justice's Operation Fast Link, on April 
2004, law enforcement authorities executed over 120 total searches 
during the previous 24 hours in 27 states and in 10 foreign countries. 
Four separate undercover investigations were simultaneously conducted, 
striking all facets of the illegal software, game, movie, and music 
trade online. 

[17] Early next year, GAO will provide a detailed report to this 
Subcommittee on our findings related to IP border enforcement and a 
separate report to the Congress on our findings related to the in-bond 
system. 

[18] Each seizure action is counted as one seizure, regardless of the 
amount of goods seized. 

[19] It is important to note that total estimated seizure value in any 
given year is a function of the type of goods seized, which varies from 
year to year. CBP estimates the value of IP-related seizures using 
"domestic value." CBP defines domestic value of goods as landed cost 
plus profit (the cost of the merchandise when last purchased, plus all 
duties, fees, broker's charges, profit, unlading charges, and U.S. 
freight charges to bring the goods to the importer's premises). 

[20] In this estimate, CBP counted seizures that were based in whole or 
in part on infringement of IP rights owned by motor vehicle 
manufacturers; manufacturers of motor vehicle parts, equipment, tools, 
and supplies; and manufacturers of automotive chemicals and other 
products used in the production, repair, and maintenance of all motor 
vehicles. CBP did not include seizures of IP-infringing products that 
are not used in production, repair, and maintenance of motor vehicles, 
such as key chains, toys, and wearing apparel, or counterfeit goods 
used in the interior of a motor vehicle, such as car organizers, can 
holders, sunshades, steering wheel covers, and floor mats. 

[21] CBP's Regulatory Audit Division in the Office of Strategic Trade 
performs various types of audits on importing companies. "Quick 
Response Audits" are designed to address single-issue trade compliance 
or enforcement concerns. The IP enforcement audits are a type of Quick 
Response Audit that examines importer controls to prevent IP 
infringement. They are referred to as post-entry audits because they 
examine controls over goods that have already entered the country. 

[22] The same computer model being developed to detect high-risk 
shipments was used to help select some companies for the post-entry 
audits in fiscal year 2005. 

[23] CBP imposed penalties under 19 U.S.C. 1595a(b), which allows it to 
assess penalties equal to the domestic value of any articles introduced 
or attempted to be introduced into the United States contrary to law. 

[24] The recordation fee is $190 per trademark or copyright 
application, or, if a trademark application covers more than one class 
of protected goods, the fee is $190 per class of goods to be recorded. 

[25] Pendency times for paper-based recordation applications could be 
months long, according to a CBP official. 

[26] CBP would still offer paper-based recordation to accommodate 
companies that lack Internet access. 

[27] A CBP official said that an exemption to allow companies to record 
certain copyrights with CBP based on the copyright application, rather 
than the issued copyright, awaits approval in CBP. 

[28] CBP regulations provide for three different types of "in-bond" 
shipments: (1) immediate transportation (IT) in-bond, which allows 
goods arriving at one U.S. port to move to another U.S. port where they 
enter U.S. trade; (2) transportation and exportation (T&E) in-bond, 
which allows goods arriving at a U.S. port to be transported through 
the United States for export to another country, and; (3) immediate 
exportation (IE) in-bond, which allows goods arriving at a U.S. port to 
be shipped to a foreign port without transport through the United 
States. In our 2004 report, GAO found that in-bond entries comprised 
about 58 percent of total entries in Miami, 60 percent in New York, and 
46 percent in Los Angeles. Recent work confirmed that in-bond shipments 
continue to account for a considerable share of all cargo arriving 
through these ports. 

[29] The in-bond system allows arriving cargo that is intended for 
export to other countries to move through the United States without 
being subject to formal U.S. entry, duties, and quotas. 

[30] GAO, International Trade: U.S. Customs and Border Protection Faces 
Challenges in Addressing Illegal Textile Transshipment, GAO-04-345 
(Washington, D.C.: January 23, 2004). 

[31] GAO-04-345. 

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