Customs agents are seizing record amounts of pirated IT hardware

But counterfeit technology is finding its way into government agencies.

Strategy Targeting Organized Piracy (STOP!)

U.S. Customs and Border Protection agents are seizing counterfeit computers, technology components and network hardware in record numbers, but the pirated goods are still finding their way into the marketplace and government agencies are using them.

The technology industry has been concerned for years about intellectual property violations. But Therese Randazzo, director of CBP’s Office of Strategic Trade, said the volume and range of counterfeit technology products confiscated in the past year have been particularly acute.

From fiscal 2004 to fiscal 2005, Randazzo said CBP seizures increased 185 percent. In 2005, CBP seized 220 shipments of counterfeit computers and related hardware with a value of $4.8 million.

Traditionally, Randazzo said, they’ve confiscated items such as laptop computers, notebook computers, chips, keyboards, monitors and other standard items. But now they’re beginning to see counterfeit interface cards, switchers, routers and other components needed for local and wide-area networks, memory sticks, memory modules and flash drives.

These products vary in quality, usually don’t meet manufacturing safety standards and could be a fire or electrocution hazard, she said. They are sold via the Internet at vastly lower prices than authentic items. They are also sold to consumers and public-sector agencies through unsuspecting retail stores and other legitimate sellers.

“There have been reports of government agencies purchasing counterfeit computer parts,” Randazzo said, declining to identify the agencies being investigated.

Randazzo said government agencies should be aware of the problem. They should ask their suppliers and vendors whether they have authorization to import the products and whether they are licensed by the brand owners, to confirm that imported products are genuine.

If the vendor can’t provide proof of authorization and licensing, agency officials should explore further, she said, even if they must scrutinize the vendor’s supplier.

Seventy percent to 80 percent of counterfeit technology products come from China, experts say. Joe Simone, an intellectual property attorney in Baker and McKenzie’s Hong Kong office, said the problem has been serious for several years. His firm sees more cases now that involve medium-size suppliers of specialized electronic components exported worldwide.

According to a mid-2005 survey by the Quality Brands Protection Committee, a China-based industry association formed to protect intellectual property, 60 percent of members believe that many of the products in the Chinese market labeled with the member company’s brands are fake. However, their estimates of the proportion of fake goods range widely — from five percent to 99 percent.

In China, Simone said, prosecution of trademark counterfeiting increased last year and will likely more than double in the coming year as police investigations rise.

“But the total number of cases being handled by criminal, as opposed to administrative, authorities is still pitifully low compared to the need,” he wrote in an e-mail message to Federal Computer Week. “There are a lot of great enforcers that we work with in China, particularly police, but they don’t have enough manpower, money and training, overall, to make a real dent in the problem. The enforcers know this and are somewhat embarrassed by it.”

The same can be said about the United States, but the scope of the problem is “nowhere near as bad as it is in China,” he wrote.

Travis Johnson, associate counsel at the International AntiCounterfeiting Coalition (IACC), said that although it’s good to hear that CBP is seizing more counterfeit technology products, counterfeit items are still entering the country. He said many items can be counterfeited, but electronic devices have safety risks that knockoffs might not protect against.

Overall, U.S. businesses lose $200 billion to $250 billion in revenue and 750,000 jobs annually because of counterfeiting, according to government estimates from IACC. Fortune 500 companies spend an average of $2 million to $4 million annually – and some as much as $10 million – to combat the problem, IACC states.

Sources declined to comment on which technology companies have been most affected. Although Simone’s firm works for a number of those companies, he said he was not authorized to talk about them. CBP officials said only that counterfeits of a half-dozen major brands have been seized, but he did not identify them.

In 2001, several technology companies formed a nonprofit membership association to protect the intellectual property of authorized goods. The Alliance for Gray Market and Counterfeit Abatement has 14 members, including Cisco Systems, Hewlett-Packard, Nortel Networks, 3Com, Lexmark and Qualcomm.

Johnson said government agencies are doing an excellent job of working with one another, with foreign governments and with intellectual property owners to combat the problem. In addition, a new federal law, called the Stop Counterfeiting in Manufactured Goods Act, is designed to close several loopholes and strengthen the ability of government authorities to seize and destroy counterfeiters’ raw materials, finished goods, equipment and other assets.

“It’s not something that I would expect to see immediate results coming out of, but it’s probably the most significant improvement in the law related to counterfeiting at least in 10 to 15 years,” Johnson said.

But the government doesn’t have the technology and manpower to search every single shipment coming into the country, he said. Intellectual property rights owners would like to see the number of CBP employees increased considering the rate of growth in global trade, he added.

Randazzo said the government is aggressively targeting shipments and working with the technology industry to identify counterfeit goods. She said CBP agents review information filed with them about prospective imports and then identify shipments most likely to contain pirated goods, which are then physically inspected. Government officials work with experts to determine whether the shipments are counterfeit. They also use other types of automated targeting systems and computer programs.

CBP officials are also cross-trained in their duties. For instance, agents inspecting cargo are trained to deal with weapons of mass destruction, narcotics and counterfeit goods.

“The approach that CBP uses is we basically have one face at the border where all of our officers are trained not only in our priority mission, which is security and securing weapons of mass destruction and weapons of mass effect, but they’re also trained on issues like intellectual property rights, on agricultural threats, any other security issue that may be out there,” Randazzo said. “We don’t per se put a cadre of people that are only working on [intellectual property rights]. It gives us flexibility.”

The agency, she said, is also in the process of implementing a risk model nationally that uses statistical analysis and techniques to identify characteristics of counterfeit imports in cooperation with the Bush administration, whose officials began an initiative in 2004 called the Strategy for Targeting Organized Piracy, or STOP.

Through the initiative, White House officials have established an interagency effort among the U.S. Patent and Trademark Office; the Commerce, State, Justice and Homeland Security departments; and several others to take the offensive against global piracy and counterfeiting.

New anti-counterfeiting law takes aim at IT pirates abroad

Experts say the Stop Counterfeiting in Manufactured Goods Act (H.R. 32), which President Bush signed into law March 16, is one of the most significant pieces of anti-counterfeiting legislation enacted in years.

Travis Johnson, associate counsel at the International AntiCounterfeiting Coalition, said law enforcement officials are more interested in stopping the manufacturers of counterfeit items than the sidewalk vendors who hawk them. The new law closes several loopholes and strengthens the criminal case against counterfeiters, he said. Among its provisions, it:

  • Mandates forfeiture not only of finished counterfeit products, but also the raw materials or component parts used to make them. Previously, law enforcement officials could not confiscate the raw materials and equipment, and many times counterfeiters could get materials returned to them.

  • Calls for the destruction of counterfeit items even in the absence of a criminal conviction. Previously destroying the items was left to a judge’s discretion.

  • Requires forfeiture of direct or indirect assets and equipment used in counterfeiting. Essentially it brings the trademark counterfeit law in line with the copyright law, Johnson said.

  • The forfeiture provisions allow the federal government to recoup some expenses and possibly increase the number of anti-counterfeiting personnel, he said. Strengthening the law here will help the federal government negotiate the same kinds of protections abroad when negotiating international treaties, he added.

    — Dibya Sarkar