<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:20018.wais]
RESPONDING TO ORGANIZED CRIMES AGAINST MANUFACTURERS AND RETAILERS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CRIME, TERRORISM,
AND HOMELAND SECURITY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MARCH 17, 2005
__________
Serial No. 109-36
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
______
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah MAXINE WATERS, California
SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida
MARK GREEN, Wisconsin ANTHONY D. WEINER, New York
RIC KELLER, Florida ADAM B. SCHIFF, California
DARRELL ISSA, California LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona ADAM SMITH, Washington
MIKE PENCE, Indiana CHRIS VAN HOLLEN, Maryland
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
------
Subcommittee on Crime, Terrorism, and Homeland Security
HOWARD COBLE, North Carolina, Chairman
DANIEL E. LUNGREN, California ROBERT C. SCOTT, Virginia
MARK GREEN, Wisconsin SHEILA JACKSON LEE, Texas
TOM FEENEY, Florida MAXINE WATERS, California
STEVE CHABOT, Ohio MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida WILLIAM D. DELAHUNT, Massachusetts
JEFF FLAKE, Arizona ANTHONY D. WEINER, New York
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
LOUIE GOHMERT, Texas
Jay Apperson, Chief Counsel
Michael Volkov, Deputy Chief Counsel
Elizabeth Sokul, Counsel
Katy Crooks, Counsel
Jason Cervenak, Full Committee Counsel
Bobby Vassar, Minority Counsel
C O N T E N T S
----------
MARCH 17, 2005
OPENING STATEMENT
Page
The Honorable Daniel E. Lungren, a Representative in Congress
from the State of California................................... 1
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan..................................... 9
The Honorable Robert C. Scott, a Representative in Congress from
the State of Virginia, and Ranking Member, Subcommittee on
Crime, Terrorism, and Homeland Security........................ 11
WITNESSES
Mr. Chris Swecker, Assistant Director, Criminal Investigative
Division, Federal Bureau of Investigation
Oral Testimony................................................. 12
Prepared Statement............................................. 14
Mr. Chris Nelson, Director of Asset Protection, Target
Corporation, on behalf of the Coalition Against Organized
Retail Theft
Oral Testimony................................................. 15
Prepared Statement............................................. 18
Mr. Paul D. Fox, Director, Global External Relations, The
Gillette Company, and Chair, Coalition Against Counterfeiting
and Piracy
Oral Testimony................................................. 20
Prepared Statement............................................. 22
Ms. Lauren V. Perez, Vice President, Regulatory Matters, Sandler,
Travis & Rosenberg, P.A., on behalf of the American Free Trade
Association
Oral Testimony................................................. 25
Prepared Statement............................................. 26
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable Joseph Knollenberg, a
Representative in Congress from the State of Michigan.......... 3
Letter from the Honorable Donald A. Manzullo, a Representative in
Congress from the State of Illinois, to the Honorable Howard
Coble.......................................................... 5
Letter from the American Apparel & Footwear Association,
Automotive Aftermarket Industry Association, Gas Appliance
Manufacturers Association, et al., to the Honorable Joseph
Knollenberg.................................................... 7
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Robert C. Scott, a
Representative in Congress from the State of Virginia, and
Ranking Member, Subcommittee on Crime, Terrorism, and Homeland
Security....................................................... 37
Prepared Statement of the Honorable Mark Green, a Representative
in Congress from the State of Wisconsin, and Member,
Subcommittee on Crime, Terrorism, and Homeland Security........ 37
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan.......... 38
Prepared Statement of the Honorable Bob Goodlatte, a
Representative in Congress from the State of Virginia.......... 38
Letter from Sandy Kennedy, President, Retail Industry Leaders
Association (RILA), to the Honorable Howard Coble.............. 40
Prepared Statement of the National Electrical Manufacturers
Association (NEMA)............................................. 44
Document entitled ``Organized Retail Crime: Describing a Major
Problem,'' by Read Hayes, Loss Prevention Research Council and
University of Florida.......................................... 48
Response to post-hearing questions from Chris Swecker, Assistant
Director, Criminal Investigative Division, Federal Bureau of
Investigation.................................................. 107
Response to post-hearing questions from Chris Nelson, Director of
Asset Protection, Target Corporation, on behalf of the
Coalition Against Organized Retail Theft....................... 110
RESPONDING TO ORGANIZED CRIMES AGAINST MANUFACTURERS AND RETAILERS
----------
THURSDAY, MARCH 17, 2005
House of Representatives,
Subcommittee on Crime, Terrorism,
and Homeland Security
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 1:17 p.m., in
Room 2141, Rayburn House Office Building, the Honorable Daniel
E. Lungren (acting Chair of the Subcommittee) presiding.
Mr. Lungren. All right. The Subcommittee on Crime,
Terrorism, and Homeland Security is having a legislative
hearing today on crimes against manufacturers and retailers.
We'll also have a markup of the bill H.R. 32, the ``Stop
Counterfeiting in Manufactured Goods Act,'' as soon as we have
a voting quorum, which will be nine.
My intention is to begin the hearing from our witnesses,
and at such time as we have a reporting quorum, to break the
hearing here, have the vote on the proposed bill, and then go
back into the hearing.
The purpose of today's hearing is to examine the harm
caused to consumers, manufacturers, and retailers by
counterfeit products and organized retail theft. Because of the
suspected involvement of organized crime and connections to
terrorism in these activities, Federal law enforcement has
undertaken a number of efforts to combat these crimes. Today,
we will examine additional options for combating trafficking in
counterfeited goods and organized retail theft. Both of these
crimes produce staggering losses to businesses and, therefore,
jobs across the United States and around the world. The level
of organization required for these criminal activities and the
established links to terrorism have made this a priority for
the Federal Government.
Task forces have been created by the Administration to
direct resources to investigate and prosecute these crimes at
the Federal level. The proliferation of counterfeit products in
recent years creates not only a threat to legitimate businesses
but also to the consumer. Many of the products that are falsely
labeled are labeled with brand names or trademarks that
consumers know and trust. Mislabeling of all often inferior
products creates a false sense of security for consumers.
Additionally, and as importantly, some of the counterfeited
products, such as prescription or over-the-counter medications,
could have serious health consequences if they are used by an
unsuspecting consumer. FBI and Customs and Border agents
estimate sales of counterfeit goods are lining the pockets of
organized crime organizations to the tune of about $500 billion
in sales per year. By mid-year of fiscal year 2003 the
Department of Homeland Security already reported 3,117 seizures
of counterfeit branded goods, including cigarettes, books,
apparel, handbags, toys, and electronic games, with an
estimated street value of about $38 million.
According to the FBI's Financial Institution Fraud Unit,
counterfeit products cheat the U.S. of tax revenues, adds to
the national trade deficit, subjects consumers to health and
safety risks, and leaves consumers without any legal recourse
when they're financially or physically injured by counterfeit
products. The FBI has identified counterfeit products not only
in pharmaceuticals and automobile parts, but also in such
products as airplane parts, baby formulas, and children's toys.
Organized retail theft is another growing problem
throughout the United States affecting a wide range of retail
establishments, including supermarkets, chain drug stores,
independent pharmacies, mass merchandisers, and convenience
stores. It has become one of the most pressing security
problems confronting retailers and suppliers and now accounts
for over $30 billion of losses at store level annually,
according to the FBI Interstate Theft Task Force.
Organized retail theft is a separate and distinct crime
from petty shoplifting. It involves professional theft rings
that move quickly from community to community and across State
lines to pilfer large amounts of merchandise that is then
repackaged and sold back into the marketplace. Because of the
prevalence of this criminal activity, the FBI created a task
force to specifically focus on this problem. In addition to
prosecutions under State laws, the Federal Government may use
RICO laws to prosecute these large theft rings.
In addition to the harm this crime causes for business,
consumers are put at risk when these rings steal consumable
products, especially over-the-counter medications and infant
formula. In many cases, after the merchandise has been stolen,
the products are stored under conditions that could threaten
the integrity of the product. For example, extreme heat or
extreme cold can affect the nutrient content or physical
appearance of infant formulas. There is no guarantee that these
products have not been stored or kept past the expiration
dates. Expiration dates, lot numbers, and labels may have
changed--may have been changed to falsely extend the shelf life
of the product and to disguise the fact that the merchandise
has been stolen.
I find both of these crimes very troubling, not only
because of their effect on businesses and our economy and our
jobs, but also because of the real threat to consumers who may
unknowingly receive these products. I am interested and the
Committee is interested in hearing from each of the witnesses
here today regarding appropriate efforts to prevent and
prosecute these crimes.
Also, I note that Congressman Knollenberg is unable to be
in attendance. He is the author of H.R. 32, the ``Stop
Counterfeiting in Manufactured Goods Act.'' I thank him for his
contribution to this effort and ask for unanimous consent to
submit a statement by Congressman Knollenberg in the record in
support of his legislation, as well as a statement from
Congressman Don Manzullo, and a letter from the Coalition
Against Counterfeiting and Piracy. And without objection, it is
so ordered.
[The prepared statement of Mr. Knollenberg follows:]
Prepared Statement of the Honorable Joseph Knollenberg, a
Representative in Congress from the State of Michigan
Mr. Chairman and members of the Subcommittee, thank you for the
opportunity to submit testimony for your hearing on ``Responding to
Organized Crimes Against Manufacturers and Retailers.''
The focus of my testimony today is the scourge of counterfeit
manufactured goods. As you know, I have introduced the Stop
Counterfeiting in Manufactured Goods Act, which you will markup
following this hearing. I want to thank the subcommittee and,
especially Chairman Coble, for taking up this important issue and
considering my bill.
The economy of my congressional district, as you would expect being
located just northwest of Detroit, is largely centered around the auto
industry, particularly auto suppliers. I represent quite a few large
suppliers, such as Delphi and Arvin-Meritor. In fact, my district
includes the headquarters of over one-fourth of the 100 largest auto
suppliers in North America, as well as a host of small suppliers. To
say that the manufacturing sector is important to my district and to
the State of Michigan is an understatement. In my district alone, there
are more than 1,500 manufacturing entities, and 93% of them have less
than 100 employees.
Early last year an association that represents auto parts suppliers
came to my office and told me about the serious and growing problem of
counterfeit auto parts. I was particularly struck by the impact that
counterfeiters were having on the auto supplier industry.
The numbers, in fact, are staggering. In addition to the obvious
safety issues, counterfeit automobile parts cost the automotive
supplier industry over $12 billion annually. It's estimated that if
these losses were eliminated, the auto industry could hire 200,000
additional workers.
It's important to remember those numbers, because counterfeiting is
not a victimless crime. In addition to selling bogus products, the
counterfeiters are stealing jobs and money away from legitimate
companies, destroying brand names, increasing warranty claims, and
requiring legal fees and costly investigations.
The fight against counterfeiters is not limited to the automotive
industry. The impact of counterfeiters is broad. When it comes to the
economy overall, the U.S. Customs Service has estimated that
counterfeiting has resulted in the loss of 750,000 jobs and costs the
United States around $200 billion annually. The International Chamber
of Commerce estimates that seven percent of the world's trade is in
counterfeit goods and that the counterfeit market is worth $350
billion.
That's why the Stop Counterfeiting in Manufactured Goods Act not
only has united support from the auto industry, but from many, many
other industries.
Counterfeiting is a problem that is growing larger every day. We
must take a more aggressive stand against it. And one of the ways we
are going to do that is to give the government more tools to fight
counterfeiters.
My bill has two key provisions that will help stop criminals who
use counterfeit trademarks.
The first provision is the most important and gets at the roots of
the problem--it requires the mandatory destruction and forfeiture of
the equipment and materials used to make the counterfeit goods.
Under current law, a convicted trademark counterfeiter is only
required to give up the actual counterfeit goods, not the machinery.
What's to stop them from going back to make more?
My bill would require the convicted criminals to give up not just
the counterfeit goods, but also the equipment they used to make those
goods.
In addition to this provision, my bill also prohibits trafficking
in counterfeit labels, patches, and medallions that are not necessarily
attached to a particular counterfeit good. This provision will close a
loophole that was created through the case of the United States vs.
Giles, also known as the ``Fabulous Fakes'' case.
I believe that these simple changes will have a profound impact in
combating counterfeit manufactured goods in many different ways.
This bill will send a signal to counterfeiters that the United
States is serious about fighting this growing problem. Passing this
bill will give prosecutors more tools to go after the criminals here in
the U.S. and punish them severely.
This bill is also necessary to address the problem globally. Most
of the counterfeit auto parts are coming from other countries,
particularly China. Some countries are better than others at fighting
counterfeiting, but we do have ways to prod the stragglers.
However, we can't demand that other countries take steps to combat
trademark counterfeiting that we have not taken ourselves. So, by
passing my bill and improving our own law, Congress will empower our
trade negotiators to press for stronger anti-counterfeiting provisions
in other countries.
As the United States is currently engaged in a variety of trade
negotiations, it is critical to pass this bill as soon as possible so
that it can have the greatest impact abroad.
This bill has broad support, including the U.S. Chamber of
Commerce, the National Association of Manufacturers, the Motor and
Equipment Manufacturers Association, the National Electrical
Manufacturers Association, the IACC, International Trademark
Association and a host of major corporations.
For these reasons, Mr. Chairman, I respectfully urge you and your
colleagues on the subcommittee to pass H.R. 32, the Stop Counterfeiting
in Manufactured Goods Act. As I have outlined, counterfeiting is a very
serious worldwide problem that threatens public safety, hurts the U.S.
economy and costs Americans thousands of manufacturing jobs. No one
supports counterfeiters, and we must do everything we can to eliminate
the problem. Passing my bill, the Stop Counterfeiting in Manufactured
Goods Act is one important step we need to take. I look forward to
working with all of you to advance this cause.
[The letter from Mr. Manzullo follows:]
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[The letter from the coalition follows:]
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Mr. Lungren. At this time I would say that normally
Congressman Coble would be presiding over this hearing, but
Congressman Coble was required to appear to give a eulogy for a
close friend of his in his district and otherwise would be in
attendance.
When Congressman Bobby Scott appears, I will recognize him
for his opening statement. He is still on the floor, having
just managed the Congressional Black Caucus amendment to the
Budget Act.
Mr. Conyers. Mr. Chairman?
Mr. Lungren. Yes?
Mr. Conyers. Might I make a brief opening statement in his
absence?
Mr. Lungren. In his absence, yes, sir. The gentleman is
recognized.
Mr. Conyers. I thank you very much. Always happy to see Dan
Lungren sitting in the chair again. He took a leave of absence
to be Attorney General in California, and now he is back on the
Committee, I think his seniority is restored. And, of course,
our good friend Bobby Scott of Virginia is the ranking
Subcommittee person here, and he will be here shortly, I am
sure.
But this is a timely hearing. There has been, without
question, more organized retail theft and trafficking in
counterfeit trademarks that cause us to be here today. And we
know that the numbers that Chairman Lungren brought to us, the
FBI estimates and retail losses, are about where he said they
are.
We are here to talk about solutions to these problems, and
I wanted to just throw out a couple of common-sense principles
that might guide us as we proceed in this discussion.
As we consider strengthening remedies against illicit
counterfeiters, we want to be careful not to unnecessarily
infringe on legitimate businesses and commercial activities.
Many law-abiding companies operate in the parallel importation
market which involves the selling and reselling of genuine
goods and services, and in turn, they are then provided to
customer--to consumers at competitive discount rates. Thus, any
limits placed on such companies have a detrimental effect on
consumers in search of bargains.
And, finally, we should agree just as a general principle--
and I think that this does guide us most times. We don't want
to add laws to the criminal code unless they are absolutely
necessary. That goes back to the principles of federalism that
dictate that we offer solutions only to those problems not left
within the domain of the State, and the prosecution of
shoplifters at the Federal level may not meet this requirement.
And I am hoping that we'll be discussing somewhere along the
line, Mr. Chairman, the verification of secondary sourcing.
And with that, I ask that my statement be included in the
record and return my time. Thank you very much.
Mr. Lungren. It shall be. Thank you.
Our first witness is Assistant Director of the FBI Criminal
Investigative Division, Chris Swecker. The Criminal
Investigative Division is responsible for coordinating,
managing, and directing all criminal investigative programs
nationwide. Mr. Swecker entered the FBI in 1982. Prior to being
appointed to his current position by Director Mueller on July
7, 2004, he served as the special agent in charge of the
Charlotte, North Carolina, field office. A native of Spain?
Mr. Swecker. Navy family.
Mr. Lungren. Navy family, okay. A native of Spain, he
received his early education in Virginia Beach, Virginia,
earned a bachelor of science degree in political science and
economics from Appalachian State University in North Carolina,
and juris doctorate degree from Wake Forest School of Law.
This is a little earlier than we thought we were going to
have a vote. We will find out what it is.
Upon graduating from law school, he became Assistant
District Attorney for the First District of North Carolina
September 1981.
Our next witness is here today on behalf of the Gillette
Corporation. Mr. Paul Fox is the Director of External Relations
for the Gillette Corporation. Over the last 3 years, he has
devoted specific focus to assisting Gillette identify the
issues associated with the counterfeiting and theft of its
products, developing wide-ranging programs designed to combat
the impact of these crimes on Gillette's businesses, and is
currently the Chair of the Coalition Against Counterfeiting and
Piracy. Mr. Fox was educated in England.
Our third witness, Mr. Chris Nelson, is the Director of
Asset Protection for the Target Corporation. Before being
appointed to this role, Mr. Nelson held the position of
Director of Investigations for the Target Corporation. In this
capacity, he led the corporation's investigative strategy and
teams, including field investigations, corporate
investigations, financial investigations, and intelligence.
Prior to joining Target, he served as an officer of the U.S.
Army Military Police. Assignments required him to serve all
over the world, from South Korea to Washington, D.C., and even
led him to command a military police company at Fort Riley,
Kansas, and in Mogadishu, Somalia, supporting U.S. and UN
operations during the Somalian conflict. He received his B.A.
from St. Cloud State University in criminal justice, is a
graduate of the military police skills officer basic and
advanced course in combined arms and services staff school at
Fort Leavenworth, Kansas.
Our final witness, Ms. Lauren Perez, is Vice President on
Regulatory Matters and an international trade adviser with
Sandler, Travis, and Rosenberg, specializing in global
regulatory issues.
Again, I turn to my colleague, the distinguished gentleman
from Michigan, to make a few remarks with respect to Ms. Perez.
Mr. Conyers. We want to welcome Attorney Perez, who has now
been promoted within her firm for her good work. And she is an
old friend of intellectual property issues and has been before
the Committee many times. And she conducts corporate seminars
and deals with international protection of international--
intellectual property rights and has been very good in working
with the Committee on the Judiciary. And I must say that we're
always happy to have her come up from Florida to be with us.
Thank you, Mr. Chairman.
Mr. Lungren. Thank you, Ranking Member.
It's the practice of the Subcommittee to swear in all
witnesses appearing before it, so if you would please stand and
raise your right hand.
[Witnesses sworn.]
Mr. Lungren. Thank you. Let the record show that each of
the witnesses answered in the affirmative, and please be
seated. I notice this was probably easier than the hearing they
were having just down the hall. Some of you may have realized
why you could have seats at this place. Canseco is down the
hall.
We have written statements from all the witnesses on this
panel, which I will ask unanimous consent to submit into the
record in their entirety, and without objection, so ordered.
We have been informed that we have a vote on a motion to
rise from the Committee considering the budget bill. The reason
why we're surprised is we did not know--this was not scheduled.
That is a 15-minute vote, I understand, and we will have to
break and go over and vote and come back, and I apologize to
our witnesses. We are a half-hour past when we wanted to, but
this is what happens when you have hearings while we're also
voting on something on the floor, the budget. And we shall
adjourn and be back as soon as possible.
[Recess.]
Mr. Lungren. All right. We'll reconvene the Subcommittee
hearing.
First of all, I want to ask unanimous consent that the
statement of Mr. Green be placed in the record. Without
objection, so ordered.
I recognize the Ranking Member of the Subcommittee,
Congressman Bobby Scott.
Mr. Scott. Thank you, Mr. Chairman. I apologize for being
delayed. The amendment that was voted on previous to this last
vote was an amendment that I had drafted, so I had to be there
to answer questions. So although there was plenty of time to
get back after people had an opportunity to vote, I felt
compelled to stay. So I apologize.
But I'm pleased to join you in convening this hearing on
counterfeiting of manufactured goods and organized retail
theft. We have Federal laws to address counterfeiting of
manufacturing goods. H.R 32, the ``Stop Counterfeiting in
Manufactured Goods Act,'' amends existing law in a manner
designed to intensify the effort to prevent counterfeiting of
goods. Counterfeited goods not only victimize the manufacturer
but shortchanges the purchasers with substandard products,
exposes us to--all of us to risks of unsafe products, and
deprives Americans of jobs and other benefits of commerce of
authentic goods.
Yet there is concern that H.R. 32 as drafted may go too far
and criminalizes legitimate, time-honored practices of law-
abiding merchants who legally purchase manufactured goods and
repackage them in various ways to enhance sales of such goods.
We have been able--we have able witnesses who may speak to
these points, so I look forward to their testimony.
For some now--for some time now, we've been hearing about
the problem of organized retail theft, or ORT, from business
representatives in my congressional district, so I am pleased
that we'll be able to report to them that we're giving this
issue attention in Congress. Theft of merchandise through
shoplifting from retail outlets and through other means is not
new and has traditionally been handled by State criminal laws.
In Virginia, for example, any theft in excess of $200 is grand
larceny, with a maximum penalty of 20 years. A third offense of
petty larceny is by law in Virginia treated the same way as
grand larceny. With the diligent enforcement activities, such
measures are ordinarily adequate to--ordinary law enforcement
activities are usually adequate to keep the problem of
merchandising theft sufficiently in check.
However, with organized theft rings deploying numerous
individuals operating across State lines, ordinary enforcement
approaches may not be adequate. These individuals can shoplift
with acceptable risks by maintain--by remaining under the grand
larceny threshold for each incident and steal thousands of
dollars worth of merchandise for the ring. I expect that our
witnesses will describe ORT as a problem of growing dimensions
with organized crime, interstate, and international elements.
As with counterfeiting of goods, we already have Federal
laws which can be utilized, and I'm pleased to have a
representative from the FBI to describe what the Federal
Government is doing about it and what is needed for further
effectiveness.
So, Mr. Chairman, I look forward to hearing testimony from
our witnesses and working with you and Chairman Coble to do
what makes sense at the Federal level to curb both problems,
including counterfeiting of manufactured goods and organized
retail theft.
Thank you.
Mr. Lungren. Thank you very much.
Now it becomes my duty to explain to you that even though
you have waited here for almost 50 minutes, we're going to ask
you to please confine your comments to 5 minutes apiece. The
green light goes on to show you there's 5 minutes; the yellow
light goes on with 1 minute; and I'll be as lenient as I
possibly can, and then we'll have questions and answers. And we
very much appreciate you being here. It is just a crazy
schedule. And the absence of some Members is no reflection on
the quality of your testimony. It is just the craziness of this
Congress.
Mr. Swecker, if we could begin with you, please.
TESTIMONY OF CHRIS SWECKER, ASSISTANT DIRECTOR, CRIMINAL
INVESTIGATIVE DIVISION, FEDERAL BUREAU OF INVESTIGATION
Mr. Swecker. Good afternoon, Mr. Chairman, Members of the
Committee. I appreciate the opportunity to be here to talk
about the problem posed by criminal enterprises involved in the
theft, diversion, repackaging, and ultimate resale of consumer
products to include such items as over-the-counter medications,
prescription drugs, health and beauty aids, and infant formula.
The problem is significant for the economic loss it brings
to retailers and manufacturers, which are then passed on to
consumers. Ultimately, the consumer ends up paying
significantly higher prices for these products because of this.
The problem is particularly acute in the area of organized
retail theft by criminal enterprises. It is estimated that the
retail industry loses between $15 to $30 billion annually to
such theft.
The unsuspecting consumer also faces potential health and
safety risks from legitimate products which may have been
mishandled by the criminal enterprises who stole them for
resale to consumers. In many cases, stolen infant formula,
pharmaceuticals, and other consumables are not stored under
proper conditions. When these items are reintroduced into the
retail market, they can pose a significant health hazard to the
consumer. The potential threat to the health and safety of
unsuspecting consumers is most evident in cases in which infant
formula is stolen, repackaged, and then resold to both knowing
and unknowing wholesalers, who then sell the infant formula to
Government food programs and discount stores.
The first phase of the initiative included the formation of
a National Retail Federation/FBI Intelligence Network, which is
a partnership between the FBI, State and local law enforcement,
and corporate security entities, to establish an effective
means of sharing intelligence information.
Stolen prescription and over-the-counter medications and
health and beauty aids are also sold to illegitimate
wholesalers who specialize in repackaging and reintroduction of
these products into the retail market, creating the same health
and safety concerns. These illegitimate wholesalers also work
with other criminal enterprises to facilitate the introduction
of counterfeit prescription and over-the-counter medications
and health and beauty aids to unsuspecting retailers and
consumers. In addition to these concerns, the potential for
intentional product tampering prior to the reintroduction of
the stolen merchandise into the market is significant.
These significant criminal enterprises can best be
dismantled through a coordinated and cooperative effort between
local law enforcement, Federal law enforcement, and the
manufacturing and retail industry. In December of '03, we
established the Organized Retail Theft Initiative to identify
and ultimately to disrupt and dismantle the most sophisticated,
multi-jurisdictional criminal enterprises, using the Federal
statutes, including RICO and money laundering. Increased
information sharing and cooperation between law enforcement and
the private sector will enable both to gain a better
understanding of the full nature and extent of this problem, as
well as to identify the best methods for law enforcement and
the industry to attack this serious problem.
The FBI's initiative and the formation of the Intelligence
Network has received strong support from the retail/food
industry. Information obtained through this initiative has been
furnished to FBI field offices to initiate investigations and
facilitate a more effective, intelligence-driven investigative
response to the significant problem.
As part of the Intelligence Network, a Retail Loss
Prevention--or, excuse me. As part of the Intelligence Network,
the NRF has created a Retail Loss Prevention Intelligence
Network Database. This database will provide retail entities
and law enforcement with intelligence/information capability.
The FBI is serving on the RLP--or on this committee in an
advisory capacity.
In addition to this initiative, the FBI is identifying and
targeting multi-jurisdictional criminal enterprises utilizing
major theft task forces. These task forces combine the
resources of State, Federal, and local law enforcement as well
as the industry to apply investigative techniques and
strategies which the FBI successfully utilize to target
traditional organized crime, including the development of a
solid intelligence base and the use of undercover operations
and various electronic surveillance techniques. These task
forces increase the effectiveness of the effort.
Currently there are nine FBI-led major theft task forces
located in Houston, Memphis, Miami--where there are two--
Newark, New York, Philadelphia, San Juan, and the Washington
field office. They're responsible for conducting investigations
of all major theft violations including retail, cargo, vehicle,
jewelry and gem theft. As of this date, the nine FBI-led task
forces are staffed by FBI agents and other State, Federal, and
local law enforcement.
In FBI field offices that do not have a task force,
significant investigations are being conducted by criminal
enterprise squads. Many of these investigations are worked in
coordination with State and local law enforcement and include
assistance from the industry.
In summary, major theft task forces are an extremely
effective manner by which to combat organized retail theft
enterprises. They ``force multiply'' the resources available,
eliminate redundant investigative efforts, reduce concurrent
jurisdictional issues, and encourage that information sharing
that is so critical.
The use of the task forces, coupled with a partnership with
the industry, is seen as one of the most effective and
efficient tools by which to identify, disrupt, and dismantle
organized retail theft enterprises impacting the health,
safety, and pocketbook of the American consumers.
Thank you.
[The prepared statement of Mr. Swecker follows:]
Prepared Statement of Chris Swecker
Good morning Mr. Chairman and members of the Judiciary Committee.
On behalf of the Federal Bureau of Investigation, I would like to
express my gratitude to the committee for affording me the opportunity
to speak with you concerning the FBI's efforts in addressing the
nationwide problem posed by criminal enterprises involved in the theft,
diversion, repackaging, and ultimate resale of consumer products, to
include such items as over-the-counter medications, prescription drugs,
health and beauty aids, and infant formula.
This problem is significant for the economic losses it brings to
manufacturers and retailers, which are then passed on to consumers.
Ultimately, the American consumer ends up paying significantly higher
prices for these products. This problem is particularly acute in the
area of Organized Retail Theft (ORT) by criminal enterprises. It is
estimated that the retail industry loses between $15 to $30 billion
annually to such theft.
The unsuspecting consumer also faces potential health and safety
risks from legitimate products which may have been mishandled by the
criminal enterprises who stole them for resale to consumers. In many
cases, stolen infant formula, pharmaceuticals, and other consumables
are not stored under proper conditions. When these items are
reintroduced into the retail market, they can pose a significant health
hazard to the consumer. The potential threat to the health and safety
of unsuspecting consumers is most evident in cases in which infant
formula is stolen, repackaged and then resold to both knowing and
unknowing wholesalers, who then sell the infant formula to government
food programs and discount stores.
The first phase of the ORT Initiative included the formation of a
National Retail Federation (NRF)/FBI Intelligence Network. This network
is a partnership between the FBI, state and local law enforcement, and
corporate security entities; to establish an effective means of sharing
ORT information/intelligence; to discuss ORT trends as they relate to
specific areas of the retail market; and, to identify and target the
most significant ORT criminal enterprises, particularly those that may
be involved in the funding and/or supporting of terrorist organizations
or activities.
Stolen prescription and over-the-counter medications and health and
beauty aids are also sold to illegitimate wholesalers who specialize in
the repackaging and reintroduction of these products into the retail
market, creating the same health and safety concerns. These
illegitimate wholesalers also work with other criminal enterprises to
facilitate the introduction of counterfeit prescription and over-the-
counter medications and health and beauty aids to unsuspecting
retailers and consumers. In addition to these concerns, the potential
for intentional product tampering prior to the reintroduction of the
stolen merchandise into the retail market is significant.
These sophisticated ORT criminal enterprises can best be dismantled
through a coordinated and cooperative effort between law enforcement
and the manufacturing and retail industry. In December 2003, the FBI
established an ORT Initiative to identify and ultimately to disrupt and
dismantle the most sophisticated, multi-jurisdictional ORT criminal
enterprises, using the Interstate Transportation of Stolen Property,
Money Laundering, and RICO statutes. Increased information sharing and
cooperation between law enforcement and the private sector will enable
both to gain a better understanding of the full nature and extent of
this crime problem, as well as to identify the best methods for law
enforcement and the manufacturing and retail industry to attack this
serious crime problem.
The FBI's ORT Initiative and the formation of the Intelligence
Network has received strong support from the retail/food industry.
Information obtained through this initiative has been furnished to
appropriate FBI field offices to initiate investigations and to
facilitate a more effective, intelligence-driven investigative response
to the significant problem of ORT criminal enterprises.
As part of the Intelligence Network, the NRF is creating a Retail
Loss Prevention Intelligence Network Database (RLPIN). This database
will provide retail entities and law enforcement with an ORT
information/intelligence sharing capability. The FBI is serving on the
RLPIN committee in an advisory capacity.
In addition to the ORT Initiative, the FBI is identifying and
targeting multi-jurisdictional ORT criminal enterprises utilizing joint
Major Theft Task Forces. These task forces, which combine the resources
of local, state and federal law enforcement, as well as manufacturing
or retail security personnel, are applying investigative techniques and
strategies which the FBI has successfully utilized to target
traditional organized crime, including the development of a solid
intelligence base and the use of undercover operations and various
electronic surveillance techniques. These task forces increase the
effectiveness and productivity of limited personnel and logistical
resources, avoid the duplication of investigation resources, and expand
the cooperation and communication among federal and state law
enforcement agencies.
Currently there are 9 FBI-led Major Theft Task Forces located in
the Houston, Memphis, Miami (2 Task Forces), Newark, New York,
Philadelphia, San Juan, and Washington DC Field Offices. These task
forces are responsible for conducting investigations of all major theft
violations to include retail, cargo, vehicle, and jewelry and gem
theft. As of this date, the 9 FBI-led Major Theft Task Forces are
staffed by FBI Agents and other federal, state and local law
enforcement officers.
In FBI Field Offices that do not currently have formal Major Theft
Task Forces, significant ORT investigations are being conducted by
criminal enterprise squads. Many of these investigations are worked in
coordination with state and local law enforcement agencies, and include
assistance from manufacturing and retail security entities.
In summary, Major Theft Task Forces are an extremely effective
manner by which to combat ORT criminal enterprises. They ``force
multiply'' federal resources, benefit local law enforcement efforts,
eliminate redundant investigative efforts, reduce concurrent
jurisdictional issues, encourage information sharing and intelligence
development, and reduce substantial organized retail theft.
The use of Major Theft Task Forces, coupled with a partnership with
the retail industry, is seen by the FBI as one of the most effective
and efficient tools by which to identify, disrupt and dismantle
organized retail theft criminal enterprises impacting the health,
safety and pocketbook of American consumers.
Thank you.
Mr. Lungren. Thank you very much.
Mr. Nelson?
TESTIMONY OF CHRIS NELSON, DIRECTOR OF ASSET PROTECTION, TARGET
CORPORATION, ON BEHALF OF THE COALITION AGAINST ORGANIZED
RETAIL THEFT
Mr. Nelson. Thank you. Mr. Chairman, Members of the
Subcommittee, Congressman Goodlatte, my name is Chris Nelson.
I'm the Director of Asset Protection for Target Corporation,
which is headquartered in Minneapolis, Minnesota. Thank you for
conducting today's hearing on counterfeiting and organized
retail theft. My statement today is presented on behalf of the
Coalition Against Organized Retail Theft, This group, which has
been together for close to 5 years, consists of national
manufacturing and retail organizations as well as individual
companies from both of these sectors. A listing of all the
coalition members can be found at the end of my statement.
Mr. Chairman, organized retail theft, or ORT, is a growing
problem throughout the United States affecting many sectors of
the retail community from supermarkets and chain drug stores to
mass merchandisers and specialty stores. It is clearly the most
pressing security problem facing our industry. Organized retail
theft now accounts for up to $30 billion in losses at the store
level annually, according to the FBI interstate task force.
More importantly and most disturbing is the fact that the
type of criminal activity can put consumers' health and safety
at risk. For example, consumers are potentially at risk when
professional shoplifting rings steal consumable products, such
as over-the-counter medications and infant formula. Pilfered
products may not be kept under ideal or required storage
conditions, and they can threaten the product's integrity.
Oftentimes these organized thieves will repackage and change
labels of stolen merchandise or products to falsely extend that
product's expiration date or to disguise the fact that that
merchandise has been stolen.
Additionally, we at Target and several retailers have been
victimized by ORT groups involved in other illicit activities,
including the distribution of narcotics and money laundering
supporting overseas operations.
After working last year in the Fort Worth-Dallas area to
close down a very large organized retail theft group stealing
and reselling baby formula, we were advised by law enforcement
that the group has sent $6 million to the Middle East.
Organized retail theft rings are highly mobile and
sophisticated, moving from community to community, and across
State lines stealing large amounts of merchandise from
retailers. Typical retail security practices are not enough to
deter these groups. At Target, we studied the tactics of these
groups and responded by fielding a highly trained investigative
team throughout the country specifically equipped to deal with
these groups. Unfortunately, not all retailers are in a fiscal
position to resource such an endeavor. This creates an
environment where ORT groups have the advantage and
significantly lessens their risk.
ORT groups typically target everyday household products
that can easily be sold through fencing operations, flea
markets, over the Internet, swap meets, and shady storefront
operations. In addition to infant formula and OTC medications,
other items that are in high demand by these professional
shoplifting rings include razor blades, camera film, batteries,
DVDs, CDs, and smoking cessation public sector. These items are
attractive because they are commodities which are easy to
conceal and easy to sell on the secondhand market. High-end
items including designer clothes and electronics are also
popular items for theft by these gangs. ORT groups target the
same trend or hot items that honest consumers want.
The coalition wishes to express its gratitude to both the
Justice Department and the FBI for their hard work and
dedication to the organized retail crime front as well as
outstanding efforts of State and local law enforcement. In
particular, retailers and manufacturers are very pleased about
the recent collaborative efforts between Federal and State law
enforcement officials who have broken up a retail theft ring
operating in North Carolina and Virginia that was responsible
for moving more than $2 million worth of stolen infant formula
and OTC products.
The coalition views the apprehension of this theft ring as
a very positive development, but more needs to be done because
the problem is prevalent throughout the country and these theft
rings are becoming increasingly more aggressive and violent in
their behavior. Unfortunately, this goal may be elusive, and
that's because there is no Federal statute currently on the
books that specifically addresses organized retail theft
crimes. The Federal statute most frequently utilized in dealing
with professional theft rings is the Interstate Transportation
of Stolen Property Act, but this law is limited to situations
involving transportation of stolen goods. Thus, when
professional thieves are apprehended for stealing large
quantities of merchandise from a retail store, no Federal
statute is readily available. This means the case is likely to
be handled under State shoplifting law and usually treats such
crimes as petty theft and a misdemeanor. As a result, organized
retail theft cases are rarely prosecuted, and when they are,
individuals who are convicted usually see limited jail time and
are placed on probation if they have no prior arrests. That
means they are back out on the street quickly, only to continue
their illegal efforts and further injure both businesses and
consumers.
Retailers and manufacturers firmly believe that there is an
overriding need to make organized retail theft a Federal felony
as we believe it would serve as a strong deterrent against the
commission of crimes of this nature in the future. The 108th
Congress--or in the 108th Congress, our coalition endorsed such
a bill, S. 1553, that was introduced by Senator Larry Craig.
In addition to our support for an initiative that would
make organized retail theft a Federal felony, the coalition
offers the following legislative recommendations for
consideration by the Congress:
The establishment of a national database or clearinghouse
to collect and track organized retail theft crimes. Such a
national database would allow State and local law enforcement
officials as well as retail stores to transmit electronically
appropriate information into the database. The transmitted
information would allow the FBI to quickly identify hot spots
throughout the United States where ORT crimes are being
committed and to deploy its agents and the resources more
effectively in the field.
Second is the authorization of funding for the
establishment and maintenance of the national database, and for
the purposes of educating and training Federal law enforcement
agents for investigating, apprehending, and prosecuting
individuals engaged in ORT activities.
Third, the prohibition of the sale of certain products that
are regulated by the Food and Drug Administration, such as
infant formula and OTC medications, by flea markets and
transient vendors unless such vendors have written
authorization from the manufacturer to sell their products.
And, finally, to amend Federal law to specifically
reference organized retail theft as a Federal offense and to
include a working definition of what constitutes organized
retail theft so that Federal and State law enforcement agencies
can identify these crimes and respond accordingly. In addition,
better sentencing guidelines so that ORT crimes are not
considered petty theft whereby individuals receive little jail
time or probation.
Mr. Chairman, this concludes my statement. Thank you for
allowing me on behalf of Target Corporation and the Coalition
Against Organized Retail Theft to participate in this important
hearing.
[The prepared statement of Mr. Nelson follows:]
Prepared Statement of Chris Nelson
introduction
Mr. Chairman, Members of the Subcommittee, Congressman Goodlatte.
My name is Chris Nelson, and I am Director of Asset Protection for
Target Corporation, headquartered in Minneapolis, Minnesota. Thank you
for conducting today's hearing on counterfeiting and organized retail
theft. My statement today is presented on behalf of the Coalition
Against Organized Retail Theft. This group, which has been together for
close to five years, consists of national manufacturing and retail
organizations as well as individual companies from both of these
sectors. A listing of all Coalition Members can be found at the end of
my statement.
organized retail theft--a growing problem
Mr. Chairman. Organized Retail Theft is a growing problem
throughout the United States affecting many sectors of the retail
community from supermarkets, and chain drug stores to mass
merchandisers and specialty stores. It is clearly the most pressing
security problem facing our industry. Organized Retail Theft now
accounts for up to $30 billion in losses at store level annually
according to the Federal Bureau of Investigation's (FBI) interstate
task force.
More importantly and most disturbing is the fact that this type of
criminal activity can put consumer's health and safety at risk. For
example, consumers are potentially at risk when professional
shoplifting rings steal consumable products, such as over-the-counter
medications and infant formula. Pilfered products may not be kept under
ideal or required storage conditions which can threaten the product's
integrity. And often times these organized thieves will repackage and
change the labels of stolen products to falsely extend the product's
expiration date or to disguise the fact that the merchandise has been
stolen.
Organized retail theft rings are highly mobile, moving from
community to community, and across state lines stealing large amounts
of merchandise from retail stores. They typically target everyday
household products that can be easily sold through fencing operations,
flea markets, over the Internet, swap meets and shady storefront
operations. In addition to infant formula and OTC medications, other
items that are in high demand by these professional shoplifting rings
include razor blades, camera film, batteries, DVDs, CDs, and smoking
cessation products. High end items including designer clothes and
electronics are also popular items for theft by these brazen gangs.
The Coalition wishes to express its gratitude to both the Justice
Department (DOJ) and the FBI for their hard work and dedication on the
organized retail crime front as well as the outstanding efforts of
state and local law enforcement. In particular, retailers and
manufacturers are very pleased about the recent collaborative effort
between federal and state law enforcement officials who have broken up
a retail theft ring operating in North Carolina and Virginia that was
responsible for moving more than $2 million dollars worth of stolen
infant formula and OTC products.
The Coalition views the apprehension of this theft ring as a very
positive development, but more needs to be done because the problem is
prevalent throughout the country and these theft rings are becoming
more aggressive and violent in their behavior. Unfortunately, this goal
may be elusive, and that's because there is no federal statute
currently on the books that specifically addresses organized retail
theft crimes. The federal statute most frequently utilized in dealing
with professional theft rings is the Interstate Transportation of
Stolen Property Act, but this law is limited to situations involving
the transporting of stolen goods. Thus, when professional thieves are
apprehended for stealing large quantities of merchandise from a retail
store, no federal statute is readily available. This means the case is
likely to be handled under a state shoplifting law that usually treats
such crimes as petty theft and a misdemeanor. As a result, rarely are
organized retail theft cases prosecuted, and when they are, individuals
who are convicted usually see limited jail time or are placed on
probation if they have no prior arrests.
coalition recommendations
Therefore, retailers and manufacturers firmly believe that there is
an overriding need to make Organized Retail Theft a federal felony as
we believe it would serve as a strong deterrent against the commission
of crimes of this nature in the future. In the 108th Congress, our
Coalition endorsed such a bill (S. 1553) that was introduced by Senator
Larry Craig (R-ID).
In addition to our support for an initiative that would make
Organized Retail Theft a federal felony, the Coalition offers the
following legislative recommendations for consideration by the
Congress:
1. The establishment of a national data base or clearinghouse
to collect and track organized retail theft crimes. Such a
national data base would allow state and local law enforcement
officials as well as retail stores to transmit electronically
appropriate information into the data base. The transmitted
information would allow the FBI to quickly identify ``hot
spots'' throughout the United States where ORT crimes are being
committed and to deploy its agents and resources more
efficiently in the field.
2. The authorization of funding for the establishment and
maintenance of the national data base, and for the purposes of
education and training of federal law enforcement agents for
investigating, apprehending and prosecuting individuals engaged
in ORT crimes.
3. The prohibition of the sale of certain products that are
regulated by the Food and Drug Administration, such as infant
formula and OTC medications, by flea markets and transient
vendors unless such vendors have written authorization from the
manufacturer to sell their products.
4. Amend federal law to specifically reference organized
retail theft as a federal offense and to include a working
definition of what constitutes organized retail theft so that
federal and state law enforcement agencies can identify these
crimes and respond accordingly. In addition, better sentencing
guidelines so that ORT crimes are not considered petty theft
whereby individuals receive little jail time or probation.
Mr. Chairman, this concludes my statement and thank you for
allowing the Coalition Against Organized Retail Theft to participate in
this important hearing.
__________
COALITION AGAINST ORGANIZED RETAIL THEFT
Abbott Laboratories
Consumer Healthcare Products Association
Cosmetic, Toiletry and Fragrance Association
CVS/Pharmacy
Duane Reade
Eastman Kodak Company
Eckerd Corporation
Food Marketing Institute
The Gillette Company
GlaxoSmithKline
Grocery Manufacturers of America
International Formula Council
The Kellen Company
National Association of Chain Drug Stores
National Association of Convenience Stores
National Community Pharmacists Association
National Retail Federation
Retail Alliance of Virginia
Retail Industry Leaders Association
Security Industry Association
Wal-Mart Stores, Inc.
Walgreen Co.
Mr. Lungren. Thank you, Mr. Nelson.
Mr. Fox?
TESTIMONY OF PAUL D. FOX, DIRECTOR, GLOBAL EXTERNAL RELATIONS,
THE GILLETTE COMPANY, AND CHAIR, COALITION AGAINST
COUNTERFEITING AND PIRACY
Mr. Fox. Mr. Chairman, Members of the Subcommittee, my name
is Paul Fox. I am Director of Global External Relations for The
Gillette Company.
Gillette is a large, publicly held consumer product company
based in Boston with world-renowned branches such as MACH3,
Venus, Right Guard, Oral-B, Duracell, and Braun.
I am also Chair of the Coalition Against Counterfeiting and
Piracy, a cross-industry group created by a joint initiative
between the U.S. Chamber of Commerce and the National
Association of Manufacturers to act as the interface between
U.S. business and the U.S. Government's Strategy Targeting
Organized Piracy Program. A list of member organizations to the
coalition is attached to my written testimony. That written
testimony also includes a copy of the report Gillette
commissioned last year on the scale and impact of the illicit
market in stolen and counterfeit goods on the fast-moving
consumer goods sector.
I am also Chair of the National Association of
Manufacturers' Working Group on Counterfeiting.
I am here today on behalf of both Gillette and the
coalition to discuss counterfeiting and theft, two issues of
intense concern to Gillette and U.S. businesses nationwide.
First and foremost, I want to emphasize that counterfeiting
and theft pose a significant threat to the economy of the
United States and undermine the welfare, the security, and the
safety of its citizens.
Let me begin by focusing on the issue of counterfeiting.
I have two packages of Duracell batteries here, one of
which is counterfeit. You should know that I can tell you a lot
about the real batteries in my right hand--where they were
made, what's in them, how they perform, how much we and the
retailer can expect to make on them; and last, but not least,
the amount of tax that Federal and State governments make from
their sale.
On the other hand, all I can tell you about these fakes is
that they will probably last one-tenth as long as the real
ones, probably would sell for half as much, and that Gillette,
the retailer, and the Government would get nothing from their
sale. These counterfeit batteries are part of more than 34
million that we seized during 2004. During that same period, we
also seized more than 31 million fake Gillette shaving products
and tens of thousands of Oral-B toothbrushes.
When you apply these issues to the entire U.S. business
community, the cost is staggering: an estimated $200 billion to
the U.S. economy and a loss of 750,000 American jobs.
Counterfeiting is clearly not a small problem, nor is it a
victimless crime. We know that counterfeiting is used by
organized crime and terrorist groups, including al Qaeda, to
help fund their activities. But in addition to the risks from
these organizations, our citizens also face direct health and
safety dangers. These dangers range from fake, substandard auto
and aircraft parts to fake pharmaceuticals that have no
therapeutic value and may even cause direct harm.
So what do we do and where do we start? First, we must make
sure our law enforcement people have the resources they need to
make a real impact, including the ability to seize and destroy
the machinery used in making counterfeit products. A recent
Gallup survey on consumer attitudes to counterfeiting revealed
that more than 70 percent of American consumers wanted to see
tougher laws against these criminals. And we urge the
Department of Commerce to complete the counterfeiting study for
which it earmarked funds 3 years ago, but for which work has
not yet begun.
And, second, we use an improved domestic posture to
influence international action on counterfeiting, to enact
mandatory confiscation and destruction laws, to strengthen
criminal penalties, and to enhance global cooperation on this
issue.
In the end, this is not a problem we can solve overnight or
alone. But as leaders in global commerce, we must take real
steps to protect the integrity of U.S. brands and products. Our
citizens and our businesses deserve nothing less.
Now let me turn to the question of organized retail theft.
Theft within the U.S. retail industry is a $30 billion problem
often linked to the same organized crime syndicates that
perpetrate the outrages connected with counterfeiting. It is
the same shady middlemen who peddle counterfeit goods that also
help fence stolen merchandise and put it back into the licit
retail chain.
The majority of goods are stolen not for personal use but
by organized criminals intent on the resale of the goods or to
use them as collateral for other consumables such as drugs.
Increasingly, criminals use violence to enforce their
activities and to conduct their crimes. Retail staff face
serious physical threats from thieves intent on removing
products from store shelves.
Because petty shoplifting is generally a misdemeanor
prosecuted only under State statutes, organized crime rings
have been using shoplifting to feed large-scale, high-revenue
theft. ORT kingpins recruit gangs of shoplifters, giving them
lists of low-volume, high-value items to be stolen from retail
outlets--items such as razor blades, batteries, over-the-
counter drugs, infant formula, and designer clothing.
The individual shoplifter may not seem worth prosecuting by
local authorities since the value of the goods stolen from the
single store is usually, and purposely, below the dollar value
that would make the single act of shoplifting a felony under
State law.
However, while each individual instance of theft may itself
be relatively small, the combined impact of these gangs can be
devastating. During one recent FBI investigation, theft
amounting to more than $10 million over a 5-year period was
conducted by one criminal enterprise.
So what can Congress do? First, Congress should establish
and provide ongoing funding for a national organized retail
crime database that would allow the FBI to quickly deploy
resources against these crimes. We have a national database for
stolen cars. We need a national database on ORT as well.
Second, we need a focused Federal criminal statute to give
Federal prosecutors better tools and more incentive to go after
these criminals. Right now, Federal prosecutors spend little
time on individual shoplifting crimes even though this may be
the most effective way to crack a much larger ORT ring.
In short, the organized criminals are using the low level
of attention paid to the crime of shoplifting as a cover for a
massive theft effort that costs billions of dollars each year.
For our part, American industry stands ready to assist you in
any way possible.
This concludes my submission, and I would like to thank you
for your time.
[The prepared statement of Mr. Fox follows:]
Prepared Statement of Paul D. Fox
Mr. Chairman, Members of the Sub-Committee. My name is Paul Fox,
and I am the Director of Global External Relations for The Gillette
Company.
Gillette is a large, publicly held consumer product company based
in Boston with world-renowned brands such as MACH3, Venus, Right Guard,
Oral-B, Duracell, and Braun.
I am also Chair of the Coalition Against Counterfeiting and Piracy
. . . a cross industry group created by a joint initiative between the
US Chamber of Commerce and the National Association of Manufacturers to
act as the interface between US business and the US Government's
Strategy Targeting Organized Piracy Program. A list of member
organizations to the Coalition is attached to my written testimony.
That written testimony also includes a copy of the report Gillette
commissioned last year on the scale and impact of the illicit market in
stolen and counterfeit goods on the fast moving consumer goods sector.
I also Chair the National Association of Manufacturers' Working
Group on Counterfeiting.
I am here today on behalf of both Gillette and the Coalition to
discuss counterfeiting and theft--two issues of intense concern to
Gillette and US businesses nationwide.
First and foremost, I want to emphasize that counterfeiting and
theft pose a significant threat to the economy of the United States and
undermine the welfare, security and safety of its citizens.
Let me begin by focusing on the issue of counterfeiting.
I have two packages of Duracell batteries here . . . one of which
is counterfeit.
You should know that I can tell you a lot about the real batteries
in my right hand--
-- where they were made,
-- what's in them,
-- how they perform,
-- how much we and the retailer can expect to make on them,
-- and last, but not least, the amount of tax that federal and
state governments make from their sale.
On the other hand, all I can tell you about these fakes is that
they will probably last one-tenth as long as the real ones,
-- probably would sell for half as much,
-- and that Gillette, the retailer and the government would get
nothing from their sale.
These counterfeit batteries are part of more than 34 million that
we seized during 2004.
During the same period, we also seized more than 31 million fake
Gillette shaving products and tens of thousands of fake Oral-B
toothbrushes--
When you apply these issues to the entire US business community,
the cost is staggering . . . an estimated $200 Billion to the US
economy and a loss of 750,000 American jobs.
counterfeiting is clearly not a small problem nor is it a victimless
crime--
We know that counterfeiting is used by organized crime and
terrorist groups, including Al Queda, to help fund their activities
But in addition to the risks from these organizations, our citizens
also face direct health and safety dangers.
These dangers range from fake, substandard auto and aircraft
parts----
-- to fake pharmaceuticals that have no therapeutic value and
may even cause direct harm.
So what do we do and where do we start?
First, we make sure our law enforcement people have the resources
they need to have a real impact, including the ability to seize and
destroy the machinery used in making counterfeit products,
A recent Gallup survey on consumer attitudes to counterfeiting
revealed that more than 70 percent of American consumers wanted to see
tougher laws against these criminals.
-- and we urge the Department of Commerce to complete the
counterfeiting study for which it earmarked funds three years
ago, but for which work has not yet begun.
And second, we use an improved domestic posture to influence
international action on counterfeiting,
-- to enact mandatory confiscation and destruction laws
-- to strengthen criminal penalties
-- and to enhance global cooperation on the issue.
In the end, this is not a problem we can solve overnight or alone.
But as leaders in global commerce, we must take real steps to
protect the integrity of US brands and products.
Our citizens and our businesses deserve nothing less.
Now let me turn to organized retail theft.
Theft within the US retail industry is a $30 billion dollar problem
often linked to the same organized crime syndicates that perpetrate the
outrages connected with counterfeiting. It is the same shady middlemen
who peddle counterfeit goods that also help fence stolen merchandize
and put it back into the licit retail chain.
The majority of goods are stolen not for personal use but by
organized criminals intent on the resale of the goods or to use them as
collateral for other consumables such as drugs.
Increasingly, criminals use violence to enforce their activities
and to conduct their crimes. Retail staff face serious physical threats
from thieves intent on removing products from store shelves.
Because petty shoplifting is generally a misdemeanor prosecuted
only under state statutes, organized crime rings have been using
shoplifting to feed large-scale, high-revenue theft.
ORT kingpins recruit gangs of shoplifters, giving them lists of
low-volume, high-value items to be stolen from retail outlets--items
such as razor blades, batteries, over-the-counter drugs, infant
formula, and designer clothing.
The individual shoplifter may not seem worth prosecuting by local
authorities, since the value of the goods stolen from the single store
is usually, and purposefully, below the dollar value that would make
the single act of shoplifting a felony under state law.
However, while each individual instance of theft may itself be
relatively small, the combined impact of these gangs can be
devastating. During one recent FBI investigation, theft amounting to
more than $10 million over a five year period was conducted by one
criminal enterprise.
So, what can Congress do?
First, Congress should establish and provide ongoing funding for a
national organized retail crime database that would allow the FBI to
quickly deploy resources against these crimes.
We have a national database for stolen cars. We need a national
database on ORT as well.
Second, we need a focused federal criminal statute to give federal
prosecutors better tools and more incentive to go after these
criminals. Right now, federal prosecutors spend little time on
individual shoplifting crimes even though this may be the most
effective way to crack a much larger ORT ring.
In short, the organized criminals are using the low-level of
attention paid to the crime of shoplifting as a cover for a massive
theft effort that costs billions of dollars each year.
For our part, American industry stands ready to assist you in any
way possible.
This concludes my submission and I would like to thank you for your
time.
I would be happy to answer any questions.
__________
Coalition Against Counterfeiting and Piracy_Membership
Associations
1. AeA, Advancing the Business of Technology (AeA)
2. Advanced Medical Technology Association (ADVAMED)
3. American Apparel & Footwear Association (AAFA)
4. American Association of Exporters and Importers (AAEI)
5. American Intellectual Property Lawyers Association (AIPLA)
6. American Society of Association Executives (ASAE)
7. The Cosmetic, Toiletry and Fragrance Association (CTFA)
8. Consumer Electronics Association (CEA)
9. Entertainment Software Association (ESA)
10. Food Marketing Institute (FMI)
11. Gas Appliance Manufacturers Association (GAMA)
12. Global Business Leaders Alliance Against Counterfeiting (GBLAAC)
13. Grocery Manufacturers of America (GMA)
14. International Anti-counterfeiting Coalition (IACC)
15. Intellectual Property Owners Association (IPO)
16. International Communications Industries Association (ICIA)
17. International Trademark Association (INTA)
18. Motor & Equipment Manufacturers Association (MEMA)
19. Motion Picture Association of American (MPAA)
20. National Association of Manufacturers (NAM)
21. Recording Industry Association of America (RIAA)
22. Toy Industry Association (TIA)
23. U.S. Chamber of Commerce (USCC)
24. U.S. Council for International Business (USCIB)
25. U.S.-India Business Council
26. Vision Council of America (VCA)
27. U.S.--India Business Council
28. Vision Council of America (VCA)
Corporations
1. Altria Corporate Services, Inc.
2. Amgen Inc.
3. American Standard Inc.
4. Aspen Systems Corporation
5. BellSouth Corporation
6. C&M International, LTD
7. Dayco Products, LLC
8. DuPont Security & Solution
9. Eastman Kodak Company
10. Gillette
11. News Corporation
12. Oakley
13. Pernod Ricard USA
14. Robert Branand International
15. SICPA Securink Corporation
16. Stanwich Group LLC.
17. The Fairfax Group
18. Transpro, INC
19. Underwriters Laboratories, Incorporated
20. Xerox Corporation
Mr. Lungren. Thank you very much, Mr. Fox.
Ms. Perez?
TESTIMONY OF LAUREN V. PEREZ, VICE PRESIDENT, REGULATORY
MATTERS, SANDLER, TRAVIS & ROSENBERG, P.A., ON BEHALF OF THE
AMERICAN FREE TRADE ASSOCIATION
Ms. Perez. It's a privilege and honor to appear before the
Subcommittee to offer these comments on behalf of the American
Free Trade Association. AFTA is a nonprofit trade association
of independent American retailers, distributors, importers, and
wholesalers, committed to preserving the parallel market in
order to assure American consumers cost competition and
distribution of genuine and legitimate brand-name merchandise.
To be honest, AFTA is never going to come before you and
oppose legislation committed to eliminating organized crime or
combating retail theft. AFTA supports any measures that's going
to make American businesses and consumers safer and more
profitable. AFTA, in fact, supports legislation that
criminalizes counterfeiting activity, so long as that
legislation does not also prove to the detriment of consumers,
relying upon the benefit of a freely competitive marketplace.
AFTA supports the intentions of H.R. 32 but has grave concerns
about the unintended consequences of its language.
I'm going to spend a couple of minutes talking about and
briefly illustrating some of those concerns.
The amendment to the definition of a counterfeit trademark
in H.R. 32 is a dramatic amendment, and it's put in the context
of a criminal statute. The bill's proposed amended definition
of a counterfeit trademark ignores entirely the fact that,
under certain necessary, lawful, and desired commercial
transactions, parties other than the registered trademark owner
need to and should be able to reproduce and refer to registered
trademarks on product packaging, labeling, tags, stickers, or
labels.
Product retailers and wholesalers in the United States
often consolidate and combine legitimate brand-name merchandise
into gift sets. We love this, especially around holiday time.
You get lipsticks with mirrors or perfumes with hairbrushes.
And then what these traders do is they make packaging or
labeling to combine these products, and on that packaging and
labeling they reproduce or refer to the registered trademarks
to accurately identify the genuine brand-name merchandise
contained in those gift sets. There's nothing wrong with this.
But H.R. 32 would potentially make that packaging counterfeit.
It would turn the people who traffick in that packaging into
criminals. That's not what legislation intended to stop
counterfeiting should also do.
We all love coupons, discount coupons. American consumers
and retailers, everyone depends upon the availability of
coupons. There are third-party service providers that, quote-
unquote, traffic in these promotional vehicles that necessarily
contain registered trademarks that accurately refer to the
genuine brand-name merchandise being sold at a discount. H.R.
32 would potentially make these coupons counterfeit if they
weren't manufactured under the authority of the registered
trademark owner. That's not what this legislation should do.
For many, many, many years, trademark owners and product
manufacturers have rushed into court charging that parallel
marketers and suppliers to the secondary marketplace are
counterfeiters, and oftentimes they're just not right. That's
just not true.
There's one case I just want to briefly talk about, and it
does deal with infant formula. I want to separate the issue of
the health and safety of infant formula from the portion of
this case that I think is germane to what I'm talking about.
In that case, there was a third-party distributor that had
in its possession unadulterated, untampered-with infant formula
that was well still within its sell-by date. This infant
formula was consolidated and combined, all of one single
manufacturer, into a shipping container, a cardboard shipping
container. The shipping container, the packaging, was made so
that consumers could see that the products had not been
tampered with. They could see that the products could still be
consumed within the sell-by date and had on it the registered
trademark accurately identifying the brand of the infant
formula contained on those trays.
The Government argued that the trays were counterfeit. They
wanted this third-party distributor held criminally liable for
counterfeiting under section 2320 of the Criminal Code. The
court fortunately didn't buy it and said that the shipping
trays that just actually reproduced the trademarks of the
actual products, genuine products contained on the shipping
trays were not counterfeit. H.R. 32 would reverse that
decision.
AFTA is absolutely convinced and remains convinced and
confident that H.R. 32 is intended to stop illicit criminal
counterfeit activity and supports that intention. Again, it's
the failure of the legislation to distinguish between lawful
and unlawful application of registered trademark that needs to
be fixed. We need to work together to find an amendment that
fixes it.
While there's absolutely no question that all American
trade groups and associations need to bind together to make
sure that criminal counterfeiting activity stops, it's an
inappropriate legislative remedy to stop also normal,
desirable, and necessary commercial transactions.
AFTA has submitted in its written testimony proposed
amendment language that we ask the Subcommittee and the
Committee to consider. This language attempts to preserve
criminal penalties for counterfeit packaging, labels, tags,
while it also exempts from criminal prosecution the lawful sale
and resale of genuine products that merely contain packaging
that reproduce the trademarks accurately reflecting those
genuine brand-name products and merchandise. AFTA looks forward
to working with the proponents and supporters of this
legislation to stop retail theft, to stop organized crime, and
to ensure that any amendment to H.R. 32 equally protects the
rights of intellectual property rights owners with the rights
of American consumers to continue to be able to enjoy the
benefit of a competitive marketplace which is supported by the
members of the American Free Trade Association.
Thank you again for the opportunity to speak before you
today.
[The prepared statement of Ms. Perez follows:]
Prepared Statement of Lauren V. Perez
It is a privilege and honor to appear before this Subcommittee to
offer these comments on behalf of the American Free Trade Association
(AFTA). The American Free Trade Association is a not-for-profit trade
association of independent American importers, distributors, retailers
and wholesalers, dedicated to preservation of the parallel market to
assure competitive pricing and distribution of genuine and legitimate
brand-name goods for American consumers.
To be honest, there is no testimony or comments AFTA would ever
offer opposing any legislation committed to eliminating organized
crime. Summarily, AFTA supports any measures furthered by this
subcommittee that makes our borders and our domestic businesses safer
and more able to prosper and succeed. Specifically, AFTA supports any
legislation that criminalizes counterfeiting activity so long as
consumers remain the beneficiaries of a freely competitive marketplace.
In that regard, AFTA fully supports the intentions of H.R. 32--although
it seeks modification of the bill to ensure that lawful commercial
activity will not unintentionally be obstructed by its provisions.
Following is a brief discussion illustrating certain of AFTA's
concerns:
1. The amendment to subsection (e)(1) of 18 U.S.C. Section
2320 as proposed in H.R. 32 would dramatically alter the
definition of a counterfeit trademark in the context of a
criminal statute. The Bill's proposed amended definition of a
counterfeit trademark ignores the fact that, under certain
necessary and desirable business conditions, applications of
registered trademarks to product packages, labels, containers,
stickers or wrappers by parties other than the U.S. trademark
owner must be protected as lawful business activities.
2. Product retailers in the U.S. often combine different
branded products into ``gift sets''--particularly around
holiday times. Perfumes are often combined with mirrors, or
lipsticks may be placed together with hairbrushes. The retailer
or wholesaler then affixes trademarks to the repackaged gift
sets to identify the ownership of intellectual property rights
and to inform consumers, at the point of sale, about the
branded products contained in those gift packs. As harmless as
this conduct is, and despite the fact that such activities are
intended only to facilitate sales of legitimate branded
merchandise, H.R. 32 would, nevertheless, create the
possibility that such combining or consolidation of genuine
brand name merchandise would become a criminal act if the third
party consolidator includes packaging or labeling bearing a
registered trademark that was not authorized for manufacture by
the original trademark owner.
3. Many retailers, wholesalers and other lawful product
distributors in this country offer discount coupons to
customers. This is not only a normal commercial transaction,
but is a practice depended upon by consumers who seek the best
bargains on branded goods. H.R. 32 would make this activity
illegal, though, because such coupons may be considered
counterfeit goods. That is, because the coupons contain a
reproduction of a registered trademark to identify the genuine
branded merchandise being offered at a discount and because
coupons are manufactured by third parties ``trafficking'' in
such promotional vehicles to assist sales of genuine
merchandise, a literal interpretation of H.R. 32 criminalizes
use of coupons by anyone other than the original trademark
owner.
4. It is true that, for many, many years, U.S. trademark
owners have attacked lawful parallel traders of genuine
merchandise with charges of counterfeiting activity. And,
perhaps, one such recent case, United States Of America versus
Ibrahim Elsayed Hanafy, et. al, 302 F.3d 485 (5th Cir. 2002),
in fact gave rise to the type of increased criminal
culpabilities sought to be established by passage of H.R. 32.
In this case, cans of genuine, unadulterated infant formula
were consolidated onto shipping trays or cardboard containers
by a third party distributor, in a manner where expiration
dates and the manufacturer's registered trademarks were
visible. The government argued that the plain language of
Section 2320 required a finding that even these truthfully
marked shipping trays were counterfeit goods and urged that the
distributors be found criminally culpable for such unauthorized
activities. Fortunately, the Appellate Court agreed that such
third party distributors could not be held criminally liable
for consolidating genuine products and selling them on a
shipping tray that referenced the registered trademarks used on
those same products! However, AFTA members are very concerned
that H.R. 32 will broaden the criminal liability statutes to
specifically include--even in a narrowly construed
interpretation--unauthorized application of a registered
trademark on a shipping tray, if that shipping tray that bears
the registered trademark was not manufactured under authority
of the U.S. trademark owner.
recommendation and conclusion
AFTA is confident that H.R. 32 is not intended to do anything other
than strengthen remedies against illicit counterfeiters. To repeat,
AFTA's concerns with this legislation is not with its intentions, but
with its unintended consequences on legitimate businesses and
commercial activities. By not distinguishing between lawful and
unlawful applications of trademarks by parties other than the
registered trademark owner or those authorized by such rights holder,
H.R. 32 would criminalize many legitimate, necessary and normal
commercial activities. While there is no doubt whatsoever that all
commercial traders should unite to defeat unlawful, criminal
counterfeiting activities that deceive American purchasers and deprive
rights holders from their just rewards, assessing criminal liability
against legitimate traders for normal commercial practices that provide
such benefits to the American consumer and the competitive marketplace
is, respectfully, an inappropriate legislative remedy.
AFTA recommends that the following be substituted as subsection (f)
in H.R. 32:
(f) Nothing in this section shall entitle the United States to
bring a criminal cause of action alleging criminal trafficking
in counterfeit goods against lawful resale or otherwise legal
third party sale of genuine, unadulterated goods or services,
so long as such sales or resales do not utilize, rely upon or
refer to a trademark other than that trademark registered, used
or authorized for use by the original manufacturer or offerer
of such goods or services, even if reproduced by a party other
than the original trademark owner and whether or not in
combination with other, third party marks or designations.
This language attempts to preserve criminal penalties for counterfeit
packaging, labels, containers, tags and similar accoutrements at the
same time it specifically exempts from criminal prosecution at least
certain of the lawful activities referred to in this testimony. AFTA
continues to look forward to working with the proponents of this
legislation to ensure that any amendment to H.R. 32 equally protect the
interests of intellectual property rights holders and American
consumers who deserve the continuing benefit of the competitive trade
made possible through the lawful domestic secondary marketplace.
Thank you again for the opportunity to offer our testimony before
you today.
Mr. Lungren. Thank you very much for your statement and the
statements of all of you.
Let me first ask Mr. Swecker whether or not--with all the
focus of the FBI on terrorism, is it reasonable for us to
expect that you can give sufficient attention to this problem?
Mr. Swecker. It is more difficult in the current
environment, sir, because we have had to divert resources from
major theft operations around the country to terrorism
investigations. We have less than half the number of agents
working these major theft issues that we did prior to 9/11.
We're still at it. We still have the task forces. We had 18
task forces. We are actually down to nine. So it has had its
impact.
Mr. Lungren. What about the suggestion that current Federal
statutes are insufficient for the Federal Government to move
when they need to in these cases, that is, that you need
something other than RICO and the money-laundering statutes,
you would need a specific criminal statute dealing with
organized retail theft?
Mr. Swecker. We're happy to have any tool we can use to
take cases into Federal court. RICO has been very easy to use.
Predicate acts that are included in RICO have been easy to work
with and pretty inclusive. I'm not sure--actually, I couldn't
tell you if they included counterfeiting. I don't think it
does. Money-laundering statutes do apply because they're--any
hiding or changing the nature of criminal proceeds is--
constitutes money laundering.
Mr. Lungren. No, I wasn't referring to the counterfeiting
question. It was concerning the organized retail theft crime
that we have heard others discuss.
Mr. Swecker. The statute, Interstate Transportation of
Stolen Property statutes have been adequate to work with, but
we do welcome additional tools, as I said.
Mr. Lungren. Has RICO been actually utilized in any cases
involving organized retail theft?
Mr. Swecker. I believe it has, but it has been in the
larger context of a criminal organization where it was one of
the predicate acts included in the RICO, particularly with
organized crime.
Mr. Lungren. Mr. Nelson, I know that you believe that we
need a new statute. My question is this: Given the fact that we
have this overwhelming threat on terrorism that we've diverted,
and I think properly so, resources of the FBI toward that,
we've taken the FBI and made them in more of a counterterrorism
operation where they're analyzing intelligence--gathering
intelligence, analyzing it, that there probably will be an
inadequate dedication of resources to this particular problem.
Is it still your feeling that a new law would be what would
be most effective, or would greater attention to multi-level
task forces or multi-jurisdictional task forces be perhaps a
better answer to the problem?
Mr. Nelson. Mr. Chairman, I think the answer lies in a
combination of efforts, including laws, including a law that
would be more readily available to be used, including task
forces, including the database that we talked about.
If you look back through history, in my days in the
military we were fighting the war on drugs, and what happened
with the war on drugs is there was a lot of task forces. There
was very supportive laws. There was an effort across the board
with multiple venues and multiple tools available. And the
result was fairly successful. We put many people in jail who
were trafficking in narcotics for 5 to 15 years. If you look at
the time now, that 5 to 15 years has gone by, and what we're
starting to see is people who maybe perpetrated those sort of
offenses in the past are now coming over into organized retail
theft.
I fully understand the terrorism implications. We've
actually had several times where money that was involved in our
cases was going overseas, likely to support those type of
activities. So I think if I dare say both, there's a piece here
that we need to cover both.
Mr. Lungren. I just want to be realistic. I want to be--I
don't want to be Major League Baseball that promises something
and doesn't show it, to use a timely topic these days.
Mr. Fox, the Federal Criminal Code already provides for
penalties for counterfeit products. Do you believe that H.R. 32
would further that? Would you support H.R. 32 as something that
is essential to the fight against counterfeit products?
Mr. Fox. We would, Mr. Chairman, with absolute certainty.
The whole question about intellectual property law, as it
stands right now, there are plenty of laws that exist not only
in the United States but around the world to protect IP. One of
the issues that we do face, of course, is the penalties against
those that breach those laws. And one of the areas that we
really are--want to focus on is the question of the severity of
the penalties for those people caught counterfeiting.
My colleague Mr. Nelson made a reference to the drug-
trafficking issue, which is a very good example on perhaps two
levels. One is this whole question about legislation
enforcement and, if you like, an education program on the
dangers of drug trafficking have proved to be an exceptionally
useful and powerful argument in that fight against drugs.
But, of course, what we're seeing now is that the rewards
from counterfeiting far outweigh the rewards from drug
trafficking. To give you an example, a kilo of drugs has a
certain level of return for the criminals that undertake that
activity. The returns from counterfeiting CDs or DVDs is far
higher than that. So--and the risks are much lower. So it's not
really surprising that those organized crimes are moving away
from drug trafficking and moving toward counterfeiting because
the rewards are so much higher for their enterprise, but the
risks are so much lower in terms of penalties.
So, no, we would absolutely support H.R. 32.
Mr. Lungren. Thank you, Mr. Fox.
Mr. Scott, you're recognized for 5 minutes.
Mr. Scott. Thank you.
Mr. Swecker, Mr. Nelson said that with organized retail
theft there's no Federal law involved. Aren't there some
Federal laws that you can look at?
Mr. Swecker. The laws that address interstate
transportation of stolen property, thefts from interstate
shipment, the interstate theft-type laws--I couldn't name each
individual statute--are there on the books. We use them. We
also use, as I said, RICO. Most of the time we're working these
cases, we're working in enterprise, a criminal enterprise.
Mr. Scott. And what kind of penalty can be assessed against
those who are found guilty?
Mr. Swecker. I think those statutes range from 5 to 15
years. RICO may go higher. I will say that anything--our
ability to penetrate these enterprises is directly proportional
to the sentences that these folks are facing when we try to get
them to cooperate. So anything that addresses increased
penalties increases our chances of getting cooperators and
people who will help us penetrate the enterprise. And as I
said, we're usually dealing with a criminal enterprise,
organized crime of some type, so it would be--as I said, any
tool--anything that puts another tool in the toolbox is a good
thing for us.
Mr. Scott. Well, I think you indicated if you had more
funding you could do more investigations.
Mr. Swecker. I have been told to stay away from budgetary
issues, but---- [Laughter.]
Anything that puts agents on the--boots on the ground is a
good thing.
Mr. Scott. Ms. Perez, you offered new language for the
legislation before us. Can you tell us exactly what your
language would do that the language on the bill on trademarks
does not do?
Ms. Perez. Yes. Let me read the language that we've put
forward. ``Nothing in this section shall entitle the United
States to bring''--``Nothing in this section shall entitle the
United States to bring a criminal cause of action alleging
criminal trafficking in counterfeit goods against lawful resale
or otherwise legal third party sale of genuine, unadulterated
goods or services, so long as such sales or resales do not
utilize, rely upon or refer to a trademark other than that
trademark registered, used or authorized for use by the
original manufacturer of offerer of such goods or services,
even if reproduced by a party other than the original trademark
owner and whether or not in combination with other, third party
marks or designations.''
What that will do is that will still preserve the ability
to go after parties who use counterfeit labels, who use
counterfeit packaging, who are peddling counterfeit goods. It
will protect from criminal prosecution parallel marketers,
suppliers on the secondary marketplace who are supplying
genuine merchandise and using packaging or labeling with
registered trademarks to identify for the consumer what that
brand-name merchandise is.
Mr. Scott. Well, what activity is--do they get away with
with the language that's in the bill that--well, I guess what
language in the bill would be--would capture what you don't
want captured?
Ms. Perez. Okay. The bill--what the bill does is it amends
the definition of a counterfeit trademark, as I said. And it
includes language in here that--I'm going to try to find the
exact phrase that's of concern. It's a spurious mark used in
connection with the trafficking in any goods, services, label,
patch that's identical or substantially indistinguishable from
a registered trademark, that is applied to or used in
connection with the goods or services for which the market is
registered so that that label, package, or container is used in
connection with genuine goods or is applied to or consists of a
label, patch, sticker, wrapper, badge, emblem, medallion,
charm, box, container, can, case, hangtag, documentation, or
packaging of any type or nature that is capable of being
applied to or used in connection with the goods or services.
That language absolutely says that even if your packaging is
used with genuine goods, it's a problem. And that label and
that packaging may not be counterfeit. It may merely be
accurately representing to the consumer the branded goods and
the genuine goods contained inside.
Mr. Scott. Mr. Fox, do you have a problem with that
language?
Mr. Fox. Elements of that. I think, you know, one of the
issues with my colleague's proposition is that it does allow--
certainly not her member organizations, but certainly some of
the illicit organizations to take things like stolen goods,
repackage those and then put them back into the licit chain.
That clearly would be of a major issue to us and law
enforcement agencies.
The whole question about the use of trademarks--trademarks
and copyright is clearly, you know, the property of the brand
owners themselves. Considerable millions of dollars have gone
into the development of those brand names, and simply to allow
a third party without authority to use those brand names in
another way that a company cannot control, it's something that
we wouldn't necessarily support.
Mr. Scott. I take that to mean that you don't like her
language; you like the language in the bill.
Mr. Fox. We do indeed.
Mr. Scott. How does the bill language prevent what you just
said? Does the bill language prevent someone from doing what
you just said, using the label--stolen goods and stuff like
that?
Mr. Fox. That's certainly the way that we interpret it.
Mr. Scott. Okay. Mr. Swecker, the bill takes away the
ability of the judge to exercise judgment in asset confiscation
of counterfeit goods. By changing ``may'' to ``shall,'' it
essentially requires the destruction rather than allow the
destruction. Why is that a good idea?
Mr. Swecker. Often we find with these forfeiture statutes
that they neglect to provide a way to dispose of the property.
There is no legitimate reason to keep the property around other
than for evidentiary purposes. So it does give us the ability
to dispose of the property when the case is over after there's
no use for it as evidence.
Mr. Scott. If you get rid of it, are there any proceeds? I
mean, can you possibly sell the goods? Or you have to destroy
the goods?
Mr. Swecker. If it's counterfeit goods, I would suspect
that the industry would argue that it shouldn't be sold
anywhere out on the market anywhere. If it's stolen, that's
another story. I think we're talking about two different
things.
Mr. Scott. I don't have any further questions.
Mr. Lungren. Before I recognize the gentleman from Florida,
Mr. Keller, Ms. Perez, I just would note that the bill as
drafted has the language that you talked about, but it also has
``and the use of which is likely to cause confusion, to cause
mistake, or deceive.'' And then there is--the very last part of
the bill says, ``Nothing in this section shall entitle the
United States to bring a criminal cause of action for the
repackaging, without deception, of genuine goods or services.''
I believe the drafters of the legislation believe that meets
your concern, and I take it you don't think it does and want it
to be more specific.
We will look at what you are talking about, but there was
an effort to try and address your concerns with that last part,
basically saying that if there's no deception, which would be
required to be part of the proof of the prosecution, there
could not be a successful prosecution.
Mr. Keller is recognized for 5 minutes.
Mr. Keller. I thank the Chairman for yielding.
Mr. Swecker, let me ask you a question in the context of
counterfeit pharmaceuticals and drugs. It's an issue that we
wrestle with, those of us from Florida, Congressman Feeney and
myself. We have a lot of seniors. We want them to have drugs as
cheap as possible, and we wrestle with whether to allow the
reimportation of drugs from Canada and other countries. And in
a nutshell, it comes down to this. We would like them to have
safe drugs so they could be cheaper, but every time it comes
up, we get letters from law enforcement agencies, DEA and FDA,
telling us of the mass problems with counterfeit drugs. And
when we raise that as an issue, others will say, no, you know,
you're just saying that because the pharmaceutical companies
made a contribution here or there and it's really not a
problem, and they allow fruit in from other countries, why
don't you allow these drugs in.
So with that as the background--and I'm open-minded on this
issue--in your experience is this problem with altered or
counterfeit pharmaceutical drugs from other countries a real or
an imaginary problem?
Mr. Swecker. It actually is a fairly real problem. The
problem is that you have a whole network of wholesalers and
repackagers of pharmaceuticals. They rarely go directly from
the manufacturer to the market. They fall into the hands of
wholesalers, packagers, 6,500 or so of them out there that are
unregulated. And so we don't know what's being--you know, when
you introduce counterfeit or stolen--and stolen can involve
drugs that are outdated, expired. There isn't much control over
how these drugs are repackaged.
So it is--the short answer is yes, it's a problem.
Mr. Keller. Do you find a distinction in terms of the
problem with drugs coming from Canada versus other countries?
Are other countries a big concern and is Canada safer? Or are
they all a concern? What do you find there?
Mr. Swecker. You're actually getting into an area that's
out of my area of expertise. I would be guessing.
Mr. Keller. Okay. I just heard it suggested that there's a
problem everywhere but Canada is less of a problem, but I'll
explore that with someone else.
Mr. Swecker. I know drugs are coming up from Mexico. No
question about that.
Mr. Keller. Okay. Beyond stiffening penalties, if we were
concerned about this problem with the counterfeit
pharmaceuticals coming into our country, let's say, from
Canada, do you have some ideas that we should be looking at
that would make us more likely to be able to reimport these
drugs and make sure that they're safer?
Mr. Swecker. Actually, I don't. I mean, I do think that the
wholesalers--I'm sorry, the repackagers need to be addressed
because that's a completely unregulated area, and that's where
we find most of our problems. We're working some operations
right now that have really highlighted that problem, and there
are thousands of them, many in Florida, and we just don't know
what's going back in. Once they repackage the drugs, you have
no idea what's going into the final packaging.
Mr. Keller. Do you believe this legislation before us today
will help you at all with respect to giving you a tool to go
after the repackagers?
Mr. Swecker. It could be used to address that, yes.
Mr. Keller. Okay. Thank you.
Mr. Chairman, I'll yield back the rest of my time.
Mr. Lungren. Mr. Conyers, do you have questions? Five
minutes.
Mr. Conyers. Thank you, Mr. Chairman.
What I am curious about is how did the American Free Trade
Association come into existence in the first place.
Ms. Perez. You're way before my time. The American Free
Trade Association has been around for well over 20 years, and
it's served as amicus curiae on the two leading Supreme Court
cases upholding the legality of the parallel market trade. It's
served to support numerous lower court decisions. As you noted
before, it's worked a lot with the Judiciary Committee and the
Intellectual Property Committee on legislation and trying to
work to preserve a competitive marketplace. It's a respected
and well-known trade association, and as I said, started way
before my professional career did.
Mr. Conyers. Now, Ms. Perez, what about the unintended
consequences of criminal laws and adding laws in this
atmosphere that we find ourselves? Because, after all, there
is, I think, more activity in these parallel markets than ever
before. I suspect that it may be growing.
Ms. Perez. I suspect you may be right, and I think a large
part of that is frankly out of economic need. As I said before,
the members of AFTA in particular--and it is a reputable trade
association, and we're not going to favor or be in support of
any criminal activity, anything that's going to make possible
retail theft or organized crime. Any legislation that will work
to cure those problems, we want to work with you on that. Our
concern is, as I said before, that legislation not be couched
in rhetoric that is going to stop organized crime or impede
retail theft or be anti-counterfeiting, when, in fact, what it
looks to do is to stop the parallel market trade so that
intellectual property owners get much broader rights and
remedies that they're legitimately entitled to under U.S.
intellectual property laws.
Mr. Conyers. Now, under the kind of business that many of
your folks are in, repackaging with trademarks is standard
operating procedure.
Ms. Perez. It is. Also, I might add that the members who do
the repackaging consult with the law firm I work with often to
make sure that they're doing it right.
Mr. Conyers. Who do they consult with?
Ms. Perez. They consult with our law firm.
Mr. Conyers. Sure.
Ms. Perez. With their lawyers, with their counsel, to make
sure that the intellectual property they are noting on their
packaging is correctly attributed to the rightful owner. They
add disclaimers where appropriate to make sure that there's no
perceived deception or confusion as to the source of the
repackaged product. So we talked about the repackaging
deception in here, and our concern with that language is that
it just doesn't, frankly, consider all possible commercial
activities that need to be protected. I mean, as I said before,
is affixing a shrink wrap over a gift set, is that repackaging?
Is coming up with a shipping container or a cardboard
container, is that repackaging? Is inserting a coupon, two-for-
one special, is that repackaging? And while, you know, we love
the fact, frankly, that this Committee and the Subcommittee and
the drafters of this bill obviously were concerned about
legitimate commercial activities, we started to work on this
bill a little bit, and we look forward to doing that.
Mr. Conyers. Well, you seem like a firm that's been
recommending and working in this area for quite a while, and I
just wanted to ask Mr. Nelson about his understanding that
there are activities engaged in by the companies that Attorney
Perez represents that are perfectly lawful and support all the
crime-fighting activity against trademarks and thefts that has
been discussed here today and that it's good for consumers who
are looking sometimes for bargains. I know that I am one of
those that--I can cite that one place I went to told me that an
educated consumer were their best customers, and I perked up
immediately when I found out that I was in this very special
group.
What do you think about, you know, what they're doing and
what they're----
Mr. Nelson. Our primary concern would obviously be for the
safety of the consumer so that what goes back into the market
is, in fact, safe. Unfortunately, my area of expertise in this
case is organized retail theft as opposed to the counterfeiting
piece.
Mr. Conyers. Sure. Well, you would--I know my time is up. I
see the tendency that the Chairman has developed across the
years to reach for his gavel and put a firmer grip around the
handle is a tipoff of what might be happening soon. But you
don't have any problem with an organization of this kind, a
trade organization that tries to help you keep everybody in
line? They're paying a pretty big firm in Florida to keep this
thing, this show on the road, in good shape.
Mr. Fox. Yes, and on its face, I wouldn't think they'd have
a problem, but it would be unfair for me to comment on that
because it's not my area of expertise.
Mr. Conyers. Okay.
Mr. Lungren. The gentleman's time has expired.
Mr. Conyers. Thanks, Mr. Chairman.
Mr. Lungren. Although the gentleman has not expired, so we
appreciate that.
[Whereupon, at 2:43 p.m., the Subcommittee proceeded to
other business.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Robert C. Scott, a Representative
in Congress from the State of Virginia, and Ranking Member,
Subcommittee on Crime, Terrorism, and Homeland Security
Thank you, Mr. Chairman. I am pleased to join you in convening this
hearing on counterfeiting of manufactured goods and organized retail
theft. We have federal laws to address counterfeiting of manufactured
goods. H.R. 32, the ``Stop Counterfeiting in Manufactured Goods Act,''
amends existing law in a manner designed to intensify the effort to
prevent counterfeiting of goods. Counterfeited goods not only
victimizes the manufacturer, but short changes purchasers with
substandard products, exposes us all to risks from unsafe products and
deprives Americans of jobs and other benefits from the commerce of
authentic goods.
Yet, there is concern that H.R. 32, as drafted, goes too far and
criminalizes currently legitimate, time-honored practices by law-
abiding merchants who legally purchase manufactured goods and repackage
them in various ways to enhance sales of such goods. We have able
witnesses who will speak to these points, so I look forward to their
testimony for clarification of issues and concerns with the bill.
For some time now, I have been hearing about the problem of
organized retail theft, or ORT, from business representatives in my
Congressional District, so I am pleased to be able to report to them
that we are giving attention to this issue in the Congress. Theft of
merchandise through shoplifting from retail outlets and through other
means is not new and has traditionally been handled through state
criminal laws. In Virginia, for example, any theft in excess of $200 is
grand larceny with a maximum penalty of 20 years. And a third offense
of petty larceny is, by law, treated the same as grand larceny. With
diligent enforcement activities, such measures are ordinarily adequate
to keep the problem of merchandise theft sufficiently in check.
However, with organized theft rings deploying numerous individuals
operating across state lines, ordinary enforcement approaches are
inadequate. These individuals can shoplift with acceptable risks by
remaining under the grand larceny threshold for each incident, and
steal thousands of dollars worth of merchandise for the ring.
I expect that our witnesses will describe ORT as a problem of
growing dimension, with organized crime, interstate and international
elements. As with counterfeiting of goods, there are already federal
laws which can be utilized to address ORT. I am pleased that we have a
representative from the FBI here to describe what the federal
government is doing about it and what is needed for greater
effectiveness.
So, Mr. Chairman, I look forward to hearing the testimony of our
witnesses and to working with you and Chairman Coble to do what makes
sense at the federal level to curb both the problem of counterfeiting
manufactured goods and organized retail theft. Thank you.
__________
Prepared Statement of the Honorable Mark Green, a Representative in
Congress from the State of Wisconsin, and Member, Subcommittee on
Crime, Terrorism, and Homeland Security
First, I want to thank Chairman Coble for bringing this bill up
today. I also want to thank our colleague, Mr. Knollenberg, for his
hard work and dedication to this legislation.
From skyrocketing health care costs to excessive taxes, the hurdles
U.S. manufacturers face today are larger than ever and that is why we
must continue to do everything we can to help American manufacturers
stay competitive. One way to do that is by getting tougher laws on the
books to punish those who counterfeit our manufactured goods. By
strengthening our laws we are strengthening the hands of our trade
representatives to demand tougher penalties on foreign businesses that
counterfeit U.S. goods.
It is time we sent a strong message to foreign counterfeiters and
the countries that ignore their criminal behavior: if you keep stealing
our products, you're going to face harsh consequences. This legislation
is an important part of that message and I encourage my colleagues to
support it.
__________
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan
Let me begin by thanking Chairman Coble and Ranking Member Scott
for convening this important and timely hearing. The recent rise in
organized retail theft and the continued growth in trafficking in
counterfeit trademarks are issues of great concern.
Some security professionals estimate that the retail industry
experiences as much as $15 billion a year in operating losses as a
result of such thefts. And, I'm told those numbers continue to grow.
With regard to counterfeit trademarks, the FBI estimates sales of
counterfeit goods line the pockets of criminal organizations to the
tune of about $500 billion per year.
Today, we're here to talk about possible solutions to these growing
problems. At the outset, I'd like to suggest that any such discussion
be guided by two commonsense principles.
First, as we consider strengthening remedies against illicit
counterfeiters, we must be careful not to unnecessarily infringe upon
legitimate businesses and commercial activities.
Many law abiding companies operate in the parallel importation
market which involves the selling and reselling of genuine goods and
services. These goods and services, in turn, are then provided to
consumers at competitive discount prices. Thus, any limits placed on
such companies has an equally detrimental effect on consumers in search
of bargains.
Second, we should agree to refrain from adding any new laws to the
current federal criminal code unless such new laws prove to be
absolutely necessary. Principles of federalism dictate that we should
only offer solutions to those problems not left within the sole domain
of the state. And, the prosecution of organized shoplifters at the
federal level simply does not satisfy this requirement.
I would like to thank each of the witnesses for agreeing to appear
before us today. I look forward to your testimony.
__________
Prepared Statement of the Honorable Bob Goodlatte, a Representative in
Congress from the State of Virginia
Mr. Chairman, thank you for holding a hearing on the important
issues of organized retail theft and counterfeit products.
There is a growing problem relating to organized retail theft (ORT)
rings in America. It is estimated that professional organized retail
theft rings are responsible for pilfering up to $30 billion in
merchandise from retail stores annually.
Organized retail theft groups typically target everyday household
commodities and consumer items that can be easily sold through fencing
operations, flea markets, swap meets and shady store-front operations.
Items that are routinely stolen include over-the-counter drug products,
such as analgesics and cold medications, razor blades, camera film,
batteries, videos, DVDs, CDs, smoking cessation products, infant
formula and computer software items. Thieves often travel from retail
store to retail store, stealing relatively small amounts of goods from
each store, but cumulatively stealing significant amounts of goods.
Once stolen, these products can be sold back to fencing operations,
which can dilute, alter and repackage the goods and then resell them,
sometimes back to the same stores from which the products were
originally stolen.
When a product does not travel through the authorized channels of
distribution, there is an increased potential that the product has been
altered, diluted, reproduced and/or repackaged. These so-called
``diverted products'' pose significant health risks to the public,
especially the diverted medications and food products. Diverted
products also cause considerable financial losses for legitimate
manufacturers and retailers. Ultimately, the consumers bear the brunt
of these losses as retail establishments are forced to raise prices to
cover the additional costs of security and theft prevention measures.
At the state level, organized retail theft crimes are normally
prosecuted under state shoplifting statutes as mere misdemeanors. As a
result, the thieves that participate in organized retail theft rings
typically receive the same punishment as common shoplifters. The
thieves who are convicted usually see very limited jail time or are
placed on probation. I believe that the punishment does not fit the
crime in these situations. Mere slaps on the wrists of these criminals
has practically no deterrent effect. In addition, criminals who are
involved in organized retail theft rings pose greater risks to the
public because their intent is for the goods to be resold. Because the
routes of these diverted products are extremely difficult to trace,
there is a greater risk that these goods will be faulty, outdated and
dangerous for consumer use. The punishment for these criminals should
be greater than that for common shoplifters.
In December of 2003, the FBI established an Organized Retail Theft
initiative to combat this growing problem. While this is a good start,
I look forward to hearing the FBI's plans to bolster its efforts to
combat these crimes, which are increasing in frequency, posing greater
threats to consumers, and resulting in greater losses to businesses.
Recent busts have shown how widespread this problem truly is. Federal
and state law enforcement broke up an organized retail theft ring in
North Carolina and Virginia that was responsible for moving more than
$2 million dollars worth of stolen infant formula and over-the-counter
products. This arrest shows that these crimes come with huge potential
costs and that they affect the most vulnerable among us. We need more
arrests like this to effectively combat organized retail theft.
I am pleased that we have witnesses today from the FBI and the
private sector to describe this growing problem and what can be done to
solve it. Thank you again, Mr. Chairman, for holding this important
hearing.
Letter from Sandy Kennedy, President, Retail Industry Leaders
Association (RILA), to the Honorable Howard Coble
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Prepared Statement of the National Electrical
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Document entitled ``Organized Retail Crime: Describing a Major
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University of Florida
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Response to post-hearing questions from Chris Swecker, Assistant
Director, Criminal Investigative Division, Federal Bureau of
Investigation
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Response to post-hearing questions from Chris Nelson, Director of Asset
Protection, Target Corporation, on behalf of the Coalition Against
Organized Retail Theft
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