Intellectual Property: Initial Observations on the STOP Initiative and U.S. Border Efforts to Reduce Piracy
Published: 2006-07-26T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: Thank you for the opportunity to appear again before the subcommittee to  discuss our work on U.S. efforts to protect U.S. intellectual property (IP)  rights. We appreciate the opportunity to contribute to the record that this  Committee has established on IP protection. The United States dominates  the creation and export of intellectual property—creations of the mind— and provides broad protection for intellectual property through means  such as copyrights, patents, and trademarks. However, because protection  of intellectual property in many parts of the world is inadequate, U.S.  goods are subject to substantial counterfeiting and piracy. Such goods are  widely distributed in global markets, including here in the United States.  As you stated in this Subcommittee’s June 2005 hearing on IP protection,  the production and distribution of counterfeit and pirated goods create  health and safety hazards for consumers, damage companies that are  victims of this theft, and pose a threat to the U.S. economy.
Since my last testimony before this committee, the United States has  continued to develop and implement its Strategy for Targeting Organized  Piracy, or STOP, which outlines priority IP enforcement efforts of six  agencies. To understand more fully how this strategy might contribute to  better protection of IP, I will address three topics: (1) the range and  effectiveness of multi-agency efforts on IP protection that preceded STOP;  (2) initial observations on the organization and efforts of STOP; and (3)  initial observations on the efforts of U.S. agencies to prevent counterfeit  and pirated goods from entering the United States, which relate to one of  STOP’s goals.
To address these issues, we have drawn on a number of completed and  ongoing GAO studies, including a report on this subject that we published  in 2004 and updated in testimony before this committee last year. In  addition, we are presenting some initial and preliminary observations  based on three ongoing reviews related to IP protection. These include (1)  a study that we have initiated for this committee focusing on IP  enforcement at the U.S. border, (2) a study for the House Government  Reform Committee on interagency efforts to protect IP rights, and (3)  additional work on a Customs and Border Protection (CBP) program  called the “in-bond system” that allows goods to enter U.S. commerce at a  port other than the port of arrival. In conducting the GAO studies, we have  performed work at multiple U.S. agency headquarters in Washington, at  U.S. ports of entry, and in other nations. In addition, we have met with  representatives from multiple industry associations to obtain their views  on STOP. We obtained technical comments on this testimony from CBP  and Immigration and Customs Enforcement (ICE) officials and  incorporated their changes where appropriate. All work was conducted in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: 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. Industry groups suggest, however, that  counterfeiting and piracy are on the rise and that a broader range of  products, from auto parts to razor blades, and from vital medicines to  infant formula, are subject to counterfeit production. Counterfeit products  raise serious public health and safety concerns, and the annual losses that  companies face from IP violations are substantial.
Eight federal entities, the Federal Bureau of Investigation (FBI), and the  U.S. Patent and Trademark Office (USPTO) undertake the primary U.S.  government activities to protect and enforce U.S. IP rights overseas. These  eight entities are: Departments of Commerce, State, Justice, and  Homeland Security; USTR; the Copyright Office; the U.S. Agency for  International Development; and the U.S. International Trade Commission.  They undertake a wide range of activities that fall under three categories:  policy initiatives, training and technical assistance, and law enforcement.  U.S. policy initiatives to increase IP protection around the world are  primarily led by USTR, in coordination with the Departments of State,  Commerce, USPTO, and the Copyright Office, among other agencies.  These policy initiatives are wide ranging and include reviewing IP  protection abroad, using trade preference programs for developing  countries, 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.
section_title: STOP Is One of Several Interagency IP Coordination Mechanisms
paragraphs: 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.
subsections: section_title: Coordination Efforts Involving Policy Initiatives and Technical Assistance Have Been Generally Effective
paragraphs: 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. “Special 301,” which refers to certain provisions of the Trade Act  of 1974, as amended, 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.
section_title: IP Law Enforcement Coordination Efforts Have Faced Challenges
paragraphs: NIPLECC was created by the Congress in 1999 to coordinate domestic and  international intellectual property law enforcement among U.S. federal  and foreign entities. NIPLECC members are from five agencies and  consist of: (1) Commerce’s Undersecretary for Intellectual Property and  Director of the United States Patent and Trademark Office; (2)  Commerce’s Undersecretary of International Trade; (3) the Department of  Justice’s Assistant Attorney General, Criminal Division; (4) the  Department of State’s Undersecretary for Economic and Agricultural  Affairs; (5) the Deputy United States Trade Representative; and (6) the  Department of Homeland Security’s Commissioner of U.S. Customs and  Border Protection. Representatives from the Department of Justice and  USPTO are co-chairs of NIPLECC.
Coordination efforts involving IP law enforcement through NIPLECC have  not been as successful as other efforts. In our September 2004 report, we  stated that NIPLECC had struggled to define its purpose and had little  discernible impact, according to interviews with industry officials and  officials from its member agencies, and as evidenced by NIPLECC’s own  annual reports. Indeed, officials from more than half of the member  agencies offered criticisms of NIPLECC, remarking that it was unfocused,  ineffective, and “unwieldy.” We also noted that if the Congress wishes to  maintain NIPLECC and take action to increase its effectiveness, it should  to consider reviewing the council’s authority, operating structure,  membership, and mission.
In the fiscal year 2005 Consolidated Appropriations Act, the Congress  provided $2 million for NIPLECC expenses, to remain available through  fiscal year 2006. The act also created the position of the Coordinator for  International Intellectual Property Enforcement, appointed by the  President, to head NIPLECC. 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.
section_title: STOP Was Created to Strengthen IP Enforcement
paragraphs: 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. 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.
section_title: STOP Has Energized U.S. Efforts, but Its Impact and Long- Term Viability Are Uncertain
paragraphs: STOP has energized U.S. efforts to protect and enforce IP and has initiated  some new efforts, however its long-term role is uncertain. One area where  STOP has increased efforts is outreach to foreign governments. In  addition, STOP has focused attention on helping small- and medium-sized  enterprises to better protect their IP rights. Industry representatives  generally had positive views on STOP, although some thought that STOP  was a compilation of new and on-going U.S. agency activities that would  have occurred anyway. STOP’s lack of permanent status as a presidential  initiative and lack of accountability mechanisms could limit its long-term  impact.
subsections: section_title: STOP Has Fostered Coordination and Undertaken Some New Initiatives
paragraphs: Agency officials participating in STOP cited several advantages to the  initiative. They said that STOP energized their efforts to protect and  enforce IP by giving them the opportunity to share ideas and support  common goals. Officials said that STOP had brought increased attention to  IP issues within their agencies and the private sector as well as abroad,  and attributed that to the fact that STOP came out of the White House,  thereby lending it more authority and influence. Another agency official  pointed out that IP was now on the President’s agenda at major summits  such as the G-8 and the recent EU-U.S. summits.
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. We recommended  that the Small Business Administration (SBA) and the USPTO work  together to make a range of foreign patent information available to SMEs.  Within the last year, an SBA official told us that SBA began working with  STOP agencies to distribute information through its networks and recently  linked SBA’s website to the STOP website, making information about U.S.,  foreign, and international laws and procedures accessible to its clients.
Many industry representatives with whom we spoke viewed STOP  positively, maintaining that STOP had increased the visibility of IP issues.  For example, one industry representative noted a coordinated outreach to  foreign governments that provided a more collaborative alternative to the  Section 301 process, whose punitive aspects countries sometimes  resented. Another indicated that his association now coordinates training  with CBP that is specific to his industry as a result of contacts made  through STOP. In addition, most private sector members with whom we  spoke agreed that STOP was an effective communication mechanism  between businesses and U.S. federal agencies on IP issues, particularly  through the Coalition Against Counterfeiting and Piracy (CACP), a cross- industry group created by a joint initiative between the Chamber of  Commerce and the National Association of Manufacturers. Private sector  officials have stated that CACP meetings are their primary mechanism of  interfacing with agency officials representing STOP.
There were some industry representatives who questioned whether STOP  had added value beyond highlighting U.S. IP enforcement activities. Some  considered STOP to be mainly a compilation of ongoing U.S. IP activities  that pre-dated STOP. For example, Operation Fast Link and a case  involving counterfeit Viagra tablets manufactured in China, both listed as  STOP accomplishments, began before STOP was created. In addition,  some industry representatives believed that new activities initiated under  STOP would have likely occurred without STOP.
section_title: STOP Has Features That May Limit Its Long-Term Impact
paragraphs: 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.
section_title: IP Enforcement Efforts at the Border Illustrate Challenges Facing STOP
paragraphs: One of STOP’s five goals is to increase federal efforts to seize counterfeit  goods at the border, but work we are conducting for this Subcommittee  illustrates the kind of challenges that STOP faces in achieving its goals.  CBP and ICE are responsible for border enforcement efforts, but their top  priority is national security. CBP has taken several steps since fiscal year  2003, when it made IP matters a priority trade issue, to update and  improve its border enforcement efforts. While CBP seizures of IP- infringing goods have grown steadily since fiscal year 2002, the total  estimated value of seizures during that time generally did not exhibit  similar growth. Additionally, some steps that CBP is taking to improve IP  enforcement are works in progress whose impact on this STOP objective  is uncertain. CBP’s ability to effectively enforce IP rights at the border is  also challenged by limited resources for such enforcement and by long- standing weaknesses in its ability to track the physical movement of goods  entering the United States using the in-bond system.
subsections: section_title: CBP IP Seizures Have Increased in Number but the Estimated Value Has Fluctuated
paragraphs: 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. However, there is no corresponding trend in  the estimated value of such seizures. The estimated value of goods seized  in fiscal years 2002 and 2003 was $99 million and $94 million, respectively.  This figure jumped to a peak of about $139 million in fiscal year 2004, but  dropped back to the former level, about $93 million, in fiscal year 2005.
According to CBP officials, the agency’s goal is to focus its resources in  part on high-value seizures, but a large percentage of annual seizure  activity does not result in a significant seizure value. For example, nearly  75 percent of fiscal year 2005 seizures were small-scale shipments made at  mail and express consignment facilities (facilities operated by companies  that offer express commercial services to move mail and cargo, such as  the United Parcel Service) or from individuals traveling by air, vehicle, or  on foot. These seizures represented about 14 percent of total estimated  seizure value in that year. Conversely, about 14 percent of fiscal year 2005  seizures involved large-scale shipments (i.e., containers) and accounted  for about 55 percent of that year’s estimated seizure value. The number of  seizures made on goods emanating from China has risen from about 49  percent of the estimated domestic value of all IP seizures in fiscal year  2002 to about 69 percent in fiscal year 2005.
While CBP seizes goods across a range of product sectors, in recent years,  seizures tend to be concentrated in particular goods, such as apparel,  handbags, cigarettes, and consumer electronics. CBP also seeks to  increase seizures of goods involving public health and safety risks, and its  data shows that the estimated domestic value of seized goods involving  certain health and safety risks, specifically pharmaceuticals, electrical  articles, and batteries, increased during fiscal years 2002-2005. However,  seizures in these and certain other health and safety categories  represented less than 10 percent of the total estimated domestic value of  seizures in fiscal year 2005, and seizures of other potentially dangerous  goods, such as counterfeit auto parts, remain relatively limited. For  example, CBP estimated in a letter to an automotive industry trade  association that it made 14 seizures in fiscal years 2003-2005 of certain  automotive parts. 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.
section_title: CBP Has Taken Steps to Improve IP Enforcement, but Several Are Still Works in Progress
paragraphs: 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. 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. 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. 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. 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. 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.  While these are important steps, we have not yet evaluated the impact of  the new recordation system. Several industry representatives have cited  other concerns about recordation generally, such as long recordation  processing times and the effective lack of border protection caused by the  inability to record copyrights with CBP before such rights are issued by  the Copyright Office. For example, one private sector representative said  that during the 6 to 9 months it takes to process a copyright, pirated  master CDs may be allowed to enter the United States because the rights  holder has not yet been able to record the title with CBP.
section_title: Initial Evidence Indicates That Resources for IP Enforcement Are Shrinking
paragraphs: 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 January 2006, 7 of 8 FBI positions were empty and  the 8th position was filled by rotating FBI staff. In July 2006, an FBI official  told us that no FBI staff were working at the IPR center because of limited  physical space and pressing FBI casework, but that some staff would  return in September 2006.
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.
section_title: In-Bond System Faces Persistent Control Weaknesses and Has Been Used to Circumvent IP Laws
paragraphs: The in-bond system has been identified by CBP and ICE officials as a  mechanism that has been used to circumvent import and IP laws and  regulations, presenting an enforcement challenge. A significant portion of  goods received at U.S. ports do not immediately enter U.S. commerce but  are instead shipped “in-bond” for official entry at other U.S. ports or are  transported through the United States for export. 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. For many years, GAO and others have noted weaknesses  in the in-bond system used to monitor shipments between ports.
CBP and ICE officials recognize that the in-bond system has been used by  certain importers to bring counterfeit and pirated goods into the United  States by avoiding official entry at the port of arrival and then diverting the  goods afterwards. Some CBP officials said the in-bond system may  contribute to imports of counterfeits by allowing some importers to “port  shop” for ports that are less likely to identify IP violations. Indeed, CBP  has made sizable IP-related seizures from the in-bond system, including  220 seizures valued at about $41 million in fiscal year 2004, representing  nearly 30 percent of the total estimated domestic value of IP seizures in  that year. In fiscal year 2005, there were 126 seizures valued at about $14  million, representing about 15 percent of estimated domestic value of IP  seizures that year.
We have found weaknesses in the past with the in-bond system and are  currently conducting follow-up work to determine whether these  weaknesses have been corrected. Our audit is still underway, but work to  date indicates that some previously identified weaknesses in tracking and  monitoring in-bonds remain. For example, in January 2004 GAO reported  that CBP collects significantly less information on in-bond shipment than  for regular entries and that this lack of information makes tracking in- bond shipments more difficult. In our recent work, CBP staff continue to  observe that the limited information required from importers on in-bond  shipments makes it difficult for CBP to ensure that the shipments have  reached their proper destinations.
section_title: Conclusions
paragraphs: Intellectual property protection is an issue that requires the involvement of  many U.S. agencies, and the U.S. government has employed a number of  mechanisms to combat different aspects of IP crimes, with varying levels  of success. The STOP initiative, the most recent coordinating mechanism,  has brought attention and energy to IP efforts within the U.S. government,  and participants and industry observers have generally supported the new  effort. At the same time, the challenges of IP piracy are enormous, and will  require the sustained and coordinated efforts of U.S. agencies, their  foreign counterparts, and industry representatives to be successful. Our  initial observations on the structure of STOP suggest that it is not well  suited to address the problem over the long term, as the presidential  initiative does not have permanence or the accountability mechanisms  that would facilitate oversight by the Congress. Our ongoing work on IP  protection efforts at the U.S. border, one of the five areas identified by  STOP, also illustrates the types of challenges that need sustained attention  to make progress on the issue. We believe that our more detailed reports  to be released in the near future will contribute to continuing  Congressional oversight of these issues.
Mr. Chairman, this concludes my prepared statement. I would be pleased  to respond to any questions that you or other members of the  subcommittee may have at this time.
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