Department of Justice

STATEMENT

OF

JOHN G. MALCOLM

DEPUTY ASSISTANT ATTORNEY GENERAL FOR THE CRIMINAL DIVISION

UNITED STATES DEPARTMENT OF JUSTICE

BEFORE THE

SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

COMMITTEE ON THE JUDICIARY

UNITED STATES HOUSE OF REPRESENTATIVES

CONCERNING

COPYRIGHT PIRACY AND LINKS TO CRIME AND TERRORISM

PRESENTED ON

MARCH 13, 2003

TESTIMONY OF JOHN G. MALCOLM

DEPUTY ASSISTANT ATTORNEY GENERAL FOR THE CRIMINAL DIVISION

UNITED STATES DEPARTMENT OF JUSTICE

BEFORE THE HOUSE COMMITTEE ON THE JUDICIARY,

SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

THURSDAY, MARCH 13, 2003

Mr. Chairman and Members of the Subcommittee:

Thank you for inviting me to testify before you today. This is an extremely important topic, and I commend you, Mr. Chairman, for holding this hearing. This hearing and the others recently held by the Subcommittee are providing the American public with an important look at the growing threat of intellectual property (IP) crime, which chiefly includes copyright piracy, trademark counterfeiting, and theft of trade secrets. Today I am pleased to offer the views of the Department of Justice on the links among organized crime, terrorism and intellectual property piracy.

The Department of Justices Anti-Piracy Program

The enforcement of this nation=s criminal laws protecting intellectual property is a priority at the Department of Justice. Since the beginning of his tenure, Attorney General Ashcroft has worked diligently to ensure that the prosecutorial resources needed to address intellectual property crime are in place. Shortly after becoming the Attorney General, he used additional resources provided by Congress to establish or expand Computer Hacking and Intellectual Property (or CHIP) Units in ten U.S. Attorney=s Offices across the nation. These specialized units consist of dedicated federal prosecutors whose primary focus is on prosecuting high tech crimes, including IP crimes. Subsequently, the Attorney General established three additional CHIP units, and used additional funding to bolster the cyber and IP prosecutive resources in a number of other jurisdictions. The CHIP units ensure that the Department of Justice has a ready supply of prosecutors to pursue IP cases. The expertise of the various CHIP Units helps the Justice Department to keep pace with the changing face of high-tech crime. Rapid advances in technology bring new challenges to the investigators and prosecutors who handle these cases, and the establishment of these specialized units ensures that the individuals who misuse technology to further their criminal activity will not find a safe haven in the United States.

The CHIP Units complement the already existing network of Computer and Telecommunications Coordinators (CTCs) that serve in every United States Attorney=s Office. The CTCs regularly receive specialized training in the investigation and prosecution of high-tech crimes, including intellectual property crimes. Many of the 94 U.S. Attorneys Offices have two or more CTCs to help meet the growing demand for trained high-tech prosecutors.

Working hand-in-glove with the CHIP Units and the CTC network is the Criminal Divisions Computer Crime and Intellectual Property Section, also known as CCIPS, which I supervise. Created as a Unit in 1991 by then-Assistant Attorney General Robert Mueller and elevated to a Section in the Criminal Division in 1996, CCIPS is a highly specialized team of over thirty-five lawyers who focus exclusively on computer and intellectual property crime. CCIPS attorneys prosecute cybercrime and intellectual property cases; advise and train local, state, and federal prosecutors and investigators in network attacks, computer search and seizure, and IP law; coordinate international enforcement and outreach efforts to combat intellectual property and computer crime worldwide; and comment upon and propose legislation. For example, CCIPS attorneys worked with Congress, including Members of this Committee, in 1997 to improve IP enforcement through the legislative amendments made by the ANo Electronic Theft@ (NET) Act. Those amendments extended federal criminal copyright law to unlawful large-scale reproduction and distribution of copyrighted works even when the thieves do not make a profit. In 1999, CCIPS prosecutors obtained the first convictions after trial under the Economic Espionage Act of 1996, a criminal statute that protects trade secrets. CCIPS also worked with the U.S. Sentencing Commission in 2001 to amend the sentencing guidelines to provide substantial sentences for copyright infringement.

With the deeply appreciated support of Congress, we have significantly increased the size of the Computer Crime and Intellectual Property Section in the past eighteen months, which is allowing us to devote additional resources to address piracy both here and abroad. Intellectual property protection is an important part of my portfolio, and a core responsibility of CCIPS. Moreover, for the first time, CCIPS has a Deputy Chief whose sole responsibility is to oversee and manage the attorneys in the Section dedicated to IP enforcement. At present, there are ten CCIPS attorneys working full-time on the IP program. The attorneys of CCIPS are developing a focused and aggressive long-term plan to combat the growing threat of piracy. They are developing and implementing the Departments overall anti-piracy strategy, assisting AUSAs in the prosecution of intellectual property crimes, and reaching out to international counterparts to ensure a more effective world-wide response to intellectual property theft. Working in concert, CCIPS, the CTC Network, and the CHIP Units create a formidable, multi-pronged approach to prosecuting intellectual property crimes. We are already beginning to see the positive results of their efforts.

Significant Prosecutorial Accomplishments:

In the past few years we have achieved many significant prosecutorial victories against IP pirates. I would like to take just a few minutes to highlight some of our most recent accomplishments.

Operation Buccaneer:

The Computer Crime and Intellectual Property Section, working with the CHIP Unit for the Eastern District of Virginia and the United States Customs Service, continues to investigate and prosecute a massive international copyright piracy conspiracy code-named "Operation Buccaneer." This undercover investigation culminated in the simultaneous execution of more than 70 searches worldwide in December 2001, including searches in Australia, Finland, Sweden, Norway, and the United Kingdom. It was the largest Internet software piracy investigation and prosecution ever undertaken, and the first to reach across international borders to achieve coordinated enforcement action against domestic and foreign targets. The investigation targeted multiple top-tier, highly organized and sophisticated international piracy or Awarez@ groups that specialized in Acracking@ the copyright protection on software, movie, game and music titles and distributing tens of thousands of those titles over the Internet. I will discuss their organized criminal operations in more detail shortly.

As a result of Operation Buccaneer, as of today, twenty U.S. defendants have been convicted of felony copyright offenses, sixteen of those in the Eastern District of Virginia. Nine defendants have received prison sentences of between 33 to 46 months, the longest sentences ever imposed for Internet copyright piracy. Six defendants are awaiting trial in the United Kingdom, and I can assure you with virtual certainty that more prosecutions will be brought in the U.S. as this investigation progresses. In both its scope and outcome, Operation Buccaneer is the most significant Internet piracy case ever brought, and it has sent a strong deterrent message which continues to resonate throughout the copyright piracy community.

United States v. Mynaf:

On February 13, 2003, a California man, Mohsin Mynaf was sentenced in the Eastern District of California to 24 months in federal prison for multiple violations relating to copyright, including Digital Millennium Copyright Act violations, criminal copyright infringement, and trafficking in counterfeit labels. Mynaf operated a videocassette reproduction center which produced counterfeit movie videocassettes, which he would then sell at various locations throughout California. In addition to 24 months in federal prison, Mynaf must also pay in excess of $200,000 in restitution. Three other individuals have also been convicted of aiding and abetting Mynaf in his illegal activity and are awaiting sentencing. This case was successfully prosecuted by a CTC in the U.S. Attorneys Office in Sacramento, California.

Operation Decrypt:

On February 11, 2003, in the Central District of California, as part of a year-long investigation known as Operation Decrypt, 17 individuals were indicted for their roles in developing sophisticated software and hardware used to steal satellite television signals. One of the individuals has already pled guilty and admitted to being responsible for nearly $15 million in losses to the victim companies. An additional nine defendants have also agreed to plead guilty to various crimes as a result of their involvement. The defendants in these cases used online chat rooms to exchange information and techniques on how to defeat the sophisticated security protections utilized by satellite entertainment companies. In October of 2002, search warrants were executed in seven states as part of this operation. Operation Decrypt is being prosecuted by an attorney with the CHIP Unit for the Central District of California, located in Los Angeles.

United States v. Ke Pei Ma, et. al:

On February 26, 2003, in a joint operation between federal and local law enforcement in New York City, four arrests were made and six people were charged (two remain fugitives) in conjunction with an investigation of the illegal distribution of Symantec and Microsoft software. At the time of the arrests, over $9 million worth of counterfeit software was seized from distribution centers in the New York area. The defendants are believed to have distributed thousands of copies of counterfeit software and received an estimated $15 million over two years in return for the pirated products. In a single two-month period, the defendants received nearly $2 million dollars as a result of their illegal activity. This case was prosecuted by attorneys in the CHIP Unit in the Eastern District of New York.

United States v. Rocci:

Beginning on February 25, 2003, the Computer Crime and Intellectual Property Section, working with the CHIP Unit for the Eastern District of Virginia, engaged in a ground-breaking and highly-successful public education effort as part of a conviction originally obtained in December of 2002. In December, David Rocci of Virginia, pled guilty to conspiring with others to traffic in illegal circumvention devices in violation of the Digital Millennium Copyright Act. Rocci was the owner and operator of the most prominent publicly-accessible web site on the Internet dedicated to providing information about the Awarez@ scene and copyright infringement, www.iSONEWS.com. Rocci used his web site as the exclusive medium to conduct the illegal sale of circumvention devices known as Amod chips,@ which defeat security protections in the Microsoft Xbox and allow unlimited play of pirated games on the gaming console. As a condition of his guilty plea, Rocci transferred his domain name and website to the United States. Upon taking control of the domain name late last month, the United States replaced iSONEWS.com with a new web page providing information about U.S. v. Rocci, as well as a general anti-piracy message outlining the potential criminal consequences for engaging in illegal piracy. (A copy of the website is attached to this testimony.) This case marks the first time that the United States has assumed control of an active domain name in an intellectual property case. In the first three days, the new law enforcement site received over 238,000 hits from Internet users worldwide. As of March 11, the two week mark, the site received over 550,000 hits. The Department feels a strong sense of responsibility to educate the public about the need to respect intellectual property rights and will look for additional opportunities like this to build upon successful prosecutions of those who willfully violate those rights.

Mr. Chairman, as you can see, the Department of Justice is actively pursuing intellectual property criminals engaged in a wide array of illegal activity, and we are doing so using all of the various statutes at our disposal. Our efforts are beginning to pay off, and we are having success in our battle with global piracy. But we are not resting on our laurels and are aware that there is much work to be done. We remain committed to this effort and will build on our success by continuing to prosecute piracy aggressively.

Organized Criminal Activity and Piracy:

As a result of cases such as those I have just mentioned, law enforcement today has a deeper and more sophisticated understanding of piracy than it has ever had before. Piracy is a continually evolving crime. Traditionally, piracy operations were small, often run by individuals or a loose collection of people trying to make a quick buck in what has been perceived to be a fairly Arisk-free@ criminal enterprise. However, in recent years, that has changed. Piracy is now big business: a world-wide, multi-billion dollar illicit economy which robs legitimate industries and creators of income, while driving up costs for consumers.

It is against this backdrop that criminal organizations are playing a more prominent - and dangerous - role in piracy around the globe. Organized criminal activity, in many forms, is clearly a factor in global piracy today. Today, I will talk about two different, yet equally troubling, types of organized criminal activity that are emerging globally: organized on-line piracy groups and traditional organized crime syndicates operating from Asia or Eastern Europe.

Organized On-line Piracy Groups:

One aspect of piracy - practically non-existent as recently as twenty years ago - is online or Internet piracy. The Internet has changed the landscape of intellectual property crimes in many ways. Piracy over the Internet poses significant challenges for law enforcement. It is harder to detect than traditional means of piracy, and it costs the pirates virtually nothing to operate, while generating countless perfect digital copies of music, movies, software and games in just a fraction of the time it would take to generate the copies manually. Even when we successfully remove the source of digital piracy, any copies previously distributed remain on the Internet and can spawn a whole new generation of pirated products with little more than a few strokes on a keyboard.

As mentioned, until recently, on-line piracy was believed to be high-return, low-risk endeavor by many in the piracy community. Now, however, through a number of high-profile enforcement actions, the Department is making it clear to members of the online piracy community that their activities may have dire consequences for them. In addition to Operation Buccaneer, attorneys from the Department, along with the Federal Bureau of Investigation, have effectively prosecuted online pirates in other cases, such as the APirates with Attitude@ and AFastlane@ prosecutions in Illinois, and two ongoing prosecutions, AOperation Bandwidth@ in Nevada and AOperation Digital Piratez@ in New Hampshire. We are committed to continuing to disrupt the online piracy community. The word is out: the Department of Justice will pursue online pirates and will put them in jail.

The Department has learned a great deal about the online piracy community. First and foremost, it is dominated by a handful of highly structured, security conscious groups which exist solely to engage in piracy online. These organized criminal groups are frequently referred to as Awarez@ groups. While warez groups are a relatively new phenomenon, they are responsible for placing a massive number of pirated movies, music, games and software into circulation each year, and represent a significant and growing threat to intellectual property rights around the globe.

The leading international warez groups compete against each other to attain a reputation as the fastest, highest quality, free providers of pirated computer software, including utility and application software, PC and console games, and movies. These groups specialize in being the first to release new pirated software to the warez community for unauthorized reproduction and distribution. The groups prosecuted as part of Operation Buccaneer were among the most notorious organized online piracy groups in the warez scene.

These criminal organizations are extremely security conscious, utilizing state-of-the-art technology to attempt to shield their illegal activity from victim companies and from law enforcement. They are also highly organized, structured to maximize their manpower and technological know-how to fully and efficiently support their illegal activity.

Like legitimate companies, Atop-tier@ warez groups have clear hierarchies and divisions of labor. Rank and position within warez groups are based on a variety of factors, including special skills, length and quality of service to the group, and reputation within the warez scene. A typical group - which can consist of people all over the world who may know each other only through their screen names - will consist of one or possibly two leaders, two or three high level individuals known as ACouncil,@ twelve to fifteen Staff members, and a general Membership comprising anywhere from twenty to eighty individuals. The Leader has ultimate authority over all aspects of the group and its activities. Council members are primarily responsible for the group=s day-to-day operations, including preparation of new releases, recruitment, and security issues. Staff members are typically the most active individuals in preparing a group=s new releases for distribution, or in maintaining the group=s AFile Transfer Protocol@ (FTP) sites from which the pirated software is distributed. Finally, the general Members contribute to the group in a variety of ways, including acting as occasional suppliers of new software, hosting the groups FTP servers, or providing hardware (e.g., laptops, hard drives, routers, other computer equipment) to other group members for use in their warez activities. The more work someone does for the group, the higher up the organization that person will move, and the greater the access that person will have to pirated products.

While there are countless similarities, two factors distinguish warez groups from traditional organized crime syndicates. First, warez groups conduct their illegal operations in the cyber world as opposed to the physical world. Second, and perhaps most startling, warez groups typically do not engage in piracy for monetary gain. In fact, in some quarters of the warez scene, pirates who engage in Afor profit@ operations are held in contempt and criticized.

Despite the fact that warez groups typically do not profit directly, it would be a grave mistake to dismiss their conduct as harmless or unimportant. On the contrary, warez groups pose a growing and significant threat to intellectual property rights holders around the world. It is generally agreed that most of the pirated movies, music, games and software available on the Internet come from these high-level warez groups. Further, they are the source for much of the pirated products which filter their way down to less sophisticated, but more widely used, distribution mechanisms such as peer-to-peer networks. For example, a warez group dedicated to music piracy will obtain unauthorized advance copies of songs and albums and distribute those advance copies to the warez scene. Within days, or frequently within just a few hours, the warez music release filters down to public AInternet Relay Chat@ (IRC) channels and peer-to-peer networks - often weeks before its commercial release date. The availability of MP3 files on the Internet in advance of legitimate CD=s being made publicly available results in a direct injury to the artists and to the recording industry.

While the pirates who steal and distribute copyrighted works do not profit monetarily, the consequences to the victim company are just as dire as if they did. For many victim companies, particularly smaller companies whose livelihood depends upon the success of only one or two products, irreversible damage occurs the moment the pirated digital copy hits the Internet.

Any consideration of organized crime and IP must include top-level warez release groups. While we recognize that our efforts must address all aspects of online and hard-good piracy, including the pursuit of those involved in the lower tiers of the Internet distribution chain, the Department will continue to devote significant resources to pursuing warez groups.

Traditional Organized Crime and Intellectual Property.

Another emerging concern is the fact that traditional organized crime syndicates appear to be playing a dominant role in the production and distribution of certain types of hard goods piracy, such as optical disks. This problem seems particularly prevalent in Asia and parts of the former Soviet Union. Unlike warez groups, the goal of these organized crime groups is to make as much money as they can.

The continued emergence of organized crime poses substantial challenges for law enforcement. Highly organized criminal syndicates frequently have significant resources to devote to their illegal operations, thus increasing the scope and sophistication of their criminal activity. Further, by nature, these syndicates control international distribution channels which allow them to move massive quantities of pirated goods, as well as other illicit goods, throughout the world.

As one might expect, these groups do not hesitate to threaten or injure those who attempt to interfere with their illegal operations. Industry representatives in Asia report that they have been threatened and their property has been vandalized by members of these syndicates when their anti-piracy efforts strike too near the illegal operation. Government officials have also been threatened. These criminal syndicates are a formidable foe, but one that must be dealt with to truly attack the problem of intellectual property theft.

Throughout Asia, organized crime groups operate assembly lines and factories that generate literally millions of pirated optical discs. These groups pirate a full range of products ranging from music to software to movies to video games. Anything that can be reproduced onto an optical disk and sold around the globe is available. There is also anecdotal evidence that syndicates are moving their production operations onto boats sitting in international waters to avoid law enforcement.

Recently, an attorney from the Computer Crime and Intellectual Property Section visited Kuala Lumpur, Malaysia to conduct law enforcement training for Malaysian prosecutors and agents. According to Malaysian officials with whom he spoke, many, if not most, of the optical disk production facilities in Malaysia are owned and operated by organized crime syndicates, specifically very wealthy and powerful criminal gangs or Atriads@ from Taiwan which control a significant number of facilities not just in Malaysia but across Asia generally.

The reach of organized crime appears to extend beyond the production of optical disks into the distribution chain. While in Malaysia, that same CCIPS attorney visited an open air market, similar to ones found in large cities around the world, which offered a myriad of pirated products. While touring the market, our attorney learned that many vendors offer their goods on tables covered in brightly colored cloths which indicate that vendors affiliation with a specific criminal syndicate. One vendor may use a red cloth to show his affiliation with one criminal gang, while his neighbor offers his wares on a blue cloth signifying his affiliation with another criminal gang.

Of course, this problem is not limited to Malaysia, but occurs in other parts of the world such as in parts of the former Soviet Union. Additionally, many organized piracy groups from Asia use South America, most notably Paraguay, as a transshipment point for pirated products. Industry groups have reported that organized crime from Taiwan and other parts of the world control much of the distribution of optical disks into Latin America through Ciudad del Este.

It is also true that the pirated goods produced by organized crime syndicates enter into and are distributed throughout the United States. There is ample evidence, for example, that Taiwanese triad members import into the United States massive amounts of counterfeit software and other counterfeit products, such as Aremarked@ computer chips. The reach of these organized crime operations is undeniably global in scope.

Of course, developing more and better intelligence about these organized crime groups and their operations is just the first step in what will be a long and potentially difficult process of targeting this type of activity. Because most of these syndicates operate outside the United States, we must rely on foreign governments for much of the enforcement efforts in this area. The importance of international cooperation cannot be overstated. If a government lacks the will or the expertise to enforce IP laws, organized crime will continue to proliferate with impunity. Even in countries that have the will and expertise to fight back, a lack of investigative resources, inadequate laws, a judicial system that will not impose serious sentences, or corruption can grind IP enforcement to a halt.

The Department of Justice is committed to being a constructive part of the United States government=s international IP outreach efforts. In particular, we are focusing our resources on those foreign nations which face surmountable difficulties in the investigation and prosecution of IP crimes. We are pleased to be working with other United States agencies, such as the Patent and Trademark Office, the State Department and the U.S. Trade Representative, to ensure that foreign nations are committed to building sound and lasting IP enforcement regimes.

The Justice Department will continue to work closely with investigative agencies, especially the Federal Bureau of Investigations and the United States Customs Service, to develop additional intelligence sources and information in order to enhance our ability to respond to the growing threat of organized crime from Asia and other parts of the world. This is a serious and emerging threat that victimizes American rights holders, costs companies hundreds of millions of dollars, and damages our nation=s economy. There is no easy solution. The task at hand requires a concerted effort on the part of industry, government and law enforcement. The Department stands ready to do its part.

Terrorism and Piracy

Finally, Mr. Chairman, I want to close by briefly discussing terrorism. Earlier I noted that organized crime syndicates are frequently engaged in many types of illicit enterprises, including supporting terrorist activities. On this point, I want to be crystal clear. Stopping terrorism is the single highest priority of the Department of Justice. We are constantly examining possible links between traditional crimes and terrorism, and we will continue to do so. All components of the Justice Department, including CCIPS, the Counterterrorism Section, and the Organized Crime and Racketeering Section, will do everything within their power to make sure that intellectual property piracy does not become a vehicle for financing or supporting acts of terror.

Conclusion

On behalf of the Department of Justice, I want to thank you again for inviting me to testify today. We thank you for your support over the years and reaffirm our commitment to continuing to work with Congress to address the significant problem of piracy. I will be happy to answer any questions that you might have.