The International AntiCounterfeiting Coalition ("IACC") strongly endorses H.R. 2511, the Anticounterfeiting Consumer Protection Act of 1995, and we urge the Subcommittee to act on this important legislation as quickly as possible. The IACC is a non- profit trade association comprised of more than 160 members that works to improve the protection of intellectual property rights and the safety of consumers from the threats posed by counterfeit products.
When most Americans think of counterfeit activity, they picture a one or two person operation that sells fake sunglasses and watches on city street corners. In reality, counterfeiting is an international, multi-billion dollar crime dominated by organized crime syndicates. Legitimate businesses lose almost $200 billion in revenue each year. Their reputations are damaged by counterfeiting, and their employees lose jobs due to the decline in sales of legitimate goods.
Counterfeit activity is growing at a rapid pace, because under current law, the penalties for counterfeiting are inadequate and rarely enforced. Because of the high profits and low risk involved, it has not taken long for organized crime to become significantly involved in counterfeiting operations. Organizations often use the easy money from counterfeiting to finance other high profile criminal activities.
Counterfeiting affects almost every American industry. The automobile industry in the United States has lost more than $12 billion from the sales of counterfeit parts such as brake pads and oil filters. Counterfeit sales of computer software represented 55% of that market in 1993. In 1992, 219 cases against makers of counterfeit airplane parts were referred to grand juries. Moreover, products such as counterfeit baby formula and pharmaceuticals have posed serious health and safety risks to millions of American consumers.
Federal anticounterfeiting law is incapable of dealing with the highly organized, international business of counterfeiting that has developed. H.R. 2511 provides federal law enforcement officers with a more sophisticated structure to match today's more sophisticated international illegal counterfeiting operations. This legislation will give law enforcement officials the means to put an end to this illegal trade, stem losses legitimate businesses suffer in profits and to their good name, and protect millions of Americans from harmful and ineffective counterfeit consumer products.
Good morning and thank you for this opportunity to testify. My name is John Bliss and I am the President of the International AntiCounterfeiting Coalition. The IACC is a non-profit trade association comprised of more than 160 members, including corporations, business trade associations, and professional firms. IACC members come from a wide range of important industries: auto, apparel, luxury goods, pharmaceuticals, computer software, food, and entertainment, among others. The Coalition's purpose is to work with governments around the world to improve the protection of intellectual property rights and the safety of consumers from the threats posed by counterfeiting.
The IACC strongly endorses H.R. 2511, the Anticounterfeiting Consumer Protection Act of 1995, and we urge the Subcommittee to act on this important legislation as quickly as possible.
Today, there is a persistent myth about counterfeiting. To most Americans, counterfeiting is best represented by a shady figure selling fake watches out of his overcoat on a city street corner. The consumer knows he isn't buying the real item. The entire process is considered a joke, and no harm is done. No one is hurt, and you basically get what you pay for.
In fact, there is a cost to counterfeiting - almost $200 billion in lost revenue each year. What most Americans do not realize is that counterfeiting is an international, multi-billion dollar crime. It is dominated by organized crime, which uses the easy money from counterfeiting to finance other criminal activity, from money laundering to murder. Counterfeiting ruins businesses, steals hundreds of thousands of jobs, and cheats millions of consumers. In fact, many consumers are not even aware they are buying counterfeit products. Counterfeiters have tried to sell almost every type of consumer product, from watches to airplane and auto parts, from videos to pharmaceuticals.
The rapid growth in counterfeiting is directly related to the unlikelihood of prosecution. Counterfeiters have little chance of being arrested and prosecuted under current law, and even if their activities are discovered, the penalties are insignificant. The lure of easy money has drawn organized crime syndicates into the act. For example, David Thai, the former head of the New York City Born to Kill gang, recently stated that he made an estimated $13 million a year selling counterfeit Rolex and Cartier watches. In August of 1994, authorities raided 17 video stores in the greater Detroit area and seized more than 20,000 illegal video cassettes. All the stores were supplied by an organized distribution network that relied on one large illegal duplicating facility for inventory.
Counterfeiters can ship a low-quality quartz watch that resembles a high-priced designer watch from Hong Kong to the United States for as little as $3. A counterfeit trade name and logo can be attached to the watch for fifty cents. The end product sells on the street for at least $30, ten times its original cost.
The pharmaceutical industry provides another example. It can take ten years and $125 to $160 million to bring a pharmaceutical product to market. A counterfeit drug can be easily copied by a chemist in days with a few thousand dollars of equipment, especially since safety and efficacy are of no concern.
Counterfeit activities also damage legitimate businesses through the injury to reputation that develops when lower quality counterfeit goods are associated with their trademark and company name. In addition, employees of companies whose products are counterfeited feel the negative effects of this crime. As sales of counterfeit products increase, sales of legitimate products decrease, which makes it more difficult for companies to recoup their investments. If companies are not selling as many products as they should, then they no longer need as many employees to continue to manufacture the products. According to the U.S. Customs Service, counterfeiting resulted in the loss of up to 750,000 jobs in 1993.
The profits made from counterfeiting often funds other high profile criminal activities. Chinese organized crime syndicates, commonly known as Triads, are increasingly turning to counterfeiting as a source of funds and to launder drug money. In three recent raids in Los Angeles, law enforcement officials seized counterfeit software and other material with a potential retail value in excess of more than $10.5 million. Software, manuals, and hologram labels were found, along with four pounds of plastic explosives, two pounds of TNT, shotguns, handguns, and silencers.
Many American industries have been hurt by counterfeiting. The automobile industry in the United States has lost more than $12 billion from the sales of counterfeited parts such as brake pads and oil filters. Industry statistics indicate that if these counterfeit parts were removed from the market, more than 200,000 additional workers could be hired.
In 1993, the computer software industry estimated its losses from counterfeit sales at over $12.8 billion. Counterfeit sales represented 55% of the software market that year. In April of 1995, the U.S. Customs Service discovered 29,000 counterfeit Microsoft holograms at San Francisco International airport, arriving from Hong Kong. 47,000 holograms had been seized the month before at a residential counterfeit factory operated in Rowland Heights, California.
Even more distressing than the economic cost of counterfeiting is the threat that this crime poses to the health and safety of every American. For example, a helicopter crash killed a traffic reporter during a live broadcast in 1987. Federal investigators later discovered, after a series of similar accidents, that more than 600 helicopters sold to both NATO and private entities contained counterfeit parts.
In 1992, 219 cases against makers of counterfeit airplane parts were referred to grand juries. The Department of Transportation has reported numerous cases across the country where individuals and companies have been charged with the manufacture and sale of mislabeled and counterfeit airplane parts. In 1994, two top managers of a California parts firm pled guilty to defrauding the FAA and private aircraft companies by selling "unapproved" parts such as counterfeit combustion liners. Combustion liners are critical components on jet engines that confine the heat of the combustion process to a particular region of the engine.
Examples of counterfeit activity abound in a variety of other industries. Counterfeiters recently sold a copy of a popular infant formula that was potentially harmful to any child allergic to particular ingredients used to make the fake product. A counterfeit version of a well-liked shampoo was found to contain bacteria that could cause infection in users with weakened immune systems. Counterfeit brake pads made from wood chips and other substandard materials have caused deadly automobile accidents. Counterfeit bolts and fasteners have caused bridge joints to fail and military equipment to break down.
In 1984, Congress passed the Trademark Counterfeiting Act, which began to address the problem of counterfeiting. That legislation is now inadequate to deal with the highly organized, international business of counterfeiting. In the past eleven years, counterfeiting has grown dramatically and now results in serious and widespread consequences. This country needs new legislation that reforms federal anticounterfeiting laws.
H.R. 2511 provides for the seizure and destruction of counterfeit goods. All federal officers would be able to assist in making ex parte seizure of counterfeit merchandise, which would enable officers to get proof of counterfeit transactions before it vanishes. Law enforcement officers would be also able to seize vehicles, tools, and equipment used to transport counterfeit merchandise. The U.S. Customs Service would be required to destroy all counterfeit merchandise seized, unless the trademark owner consented to some other disposition. Customs officials could no longer re-export counterfeit merchandise, a practice which currently perpetuates continuing violations of intellectual property rights.
The crime of trafficking in counterfeit goods or services would constitute a "predicate act" for purposes of the criminal Racketeer Influenced and Corrupt Organizations Act, known as RICO. Current RICO laws have no predicate offense that involves counterfeiting, which poses a significant obstacle to the efforts of federal officials against organized crime syndicates. In the recent seizure of over $10.5 million in counterfeit Microsoft products, the Los Angeles U.S. Attorney's Office declined to take part in the case, because the RICO laws traditionally used against criminal organizations do not apply to counterfeit activity.
This legislation specifically addresses an area in which counterfeiting has been prevalent in recent years - the computer software industry. H.R. 2511 makes it a crime to traffic in computer software programs, computer program labels and computer software packaging. Current law already protects record and video labels, and this same benefit should certainly be offered to the computer industry, where 55% of all products in the software market are counterfeit and holograms and other authentication devices are so frequently falsified.
H.R. 2511 heightens enforcement efforts and penalties, to deter counterfeit activity and to aid those who have been injured by counterfeit products. The U.S. Customs Service would be permitted to impose a civil fine on those involved in the importation of counterfeit goods, up to the market value of the merchandise if it were genuine, and doubled for repeat offenders. Statutory damages would also be made available in the court's discretion as an alternative to actual damages in cases involving counterfeit goods. Defendants in many counterfeiting cases keep falsified records of their sales, if they keep records at all. This lack of evidence makes proving actual damages extremely difficult.
H.R. 2511 requires the Attorney General to collect and publicize statistical information from all U.S. Attorneys, offices related to trafficking investigations and cases. The Attorney General would then be required to include this information in an annual report to Congress on the business of the Department of Justice. other recordkeeping requirements require customs entry documentation relating to goods shipped on a vessel or aircraft to include trademark information about goods or packages to determine whether the merchandise bears an infringing trademark. These informational requirements present a minimal additional burden for the Customs Service, if any, and allow the private corporations harmed by counterfeiting to aid in the enforcement of federal anticounterfeiting law.
Mr. Chairman, in just over the ten years since Congress passed the Trademark Counterfeiting Act, the loss to legitimate businesses due to counterfeiting has jumped from $5.5 billion a year to nearly $200 billion annually -- a more than 3,000 percent increase. Any other industry that experienced this kind of growth would make the covers of every business magazine in the country. obviously, however, the faces of the men who run the counterfeiting syndicates are more likely to be seen on an FBI Is Most Wanted list.
H.R. 2511 provides federal law enforcement officers with a more sophisticated structure to match today's more sophisticated, international illegal counterfeiting operations. This legislation will give law enforcement officials the means to put an end to this illegal trade, stem losses legitimate businesses suffer in profits and to their good name, and protect millions of Americans from harmful and ineffective counterfeit consumer products. Thank you for this opportunity to testify, and I will be happy to answer any questions.