Intellectual Property: CBP Can Enhance Information Sharing with the Private Sector to Address Changes in the Counterfeits Market

This testimony summarizes the information contained in GAO's January 2018 report, entitled Intellectual Property: Agencies Can Improve Efforts to Address Risks Posed by Changing Counterfeits Market , ( GAO-18-216 ).

Changes in the market for counterfeit goods entering the United States pose new challenges for consumers, the private sector, and U.S. agencies that enforce intellectual property rights (IPR). Specifically, growth in e-commerce has contributed to a shift in the sale of counterfeit goods in the United States, with consumers increasingly purchasing goods online and counterfeiters producing a wider variety of goods that may be sold on websites alongside authentic products. For example, 20 of 47 items GAO purchased from third-party sellers on popular consumer websites were counterfeit, according to testing by the products' rights holders (see table), highlighting potential risks to consumers. The changes in the market for counterfeit goods can also pose challenges to the private sector—for example, the challenge of distinguishing counterfeit from authentic goods listed for sale online—and complicate the enforcement efforts of U.S. Customs and Border Protection (CBP) and U.S. Immigration and Customs Enforcement (ICE).

CBP and ICE engage in a number of activities to enhance IPR enforcement; however, while ICE has assessed some of its efforts, CBP has taken limited steps to do so. CBP's and ICE's IPR enforcement activities broadly include detecting imports of potentially IPR-infringing goods, conducting special operations at U.S. ports, engaging with international partners, and undertaking localized pilot programs or port-led initiatives. CBP and ICE have collected some performance data for each of the eight activities GAO reviewed, and ICE has taken some steps to understand the impact of its efforts. However, CBP has conducted limited evaluation of its efforts to enhance IPR enforcement. Consequently, CBP may lack information needed to ensure it is investing its resources in the most efficient and effective activities.

CBP and ICE generally collaborate on IPR enforcement, but according to private sector representatives, restrictions on CBP's information sharing limit private sector enforcement efforts. GAO found that CBP and ICE have undertaken efforts that align with selected key practices for interagency collaboration, such as participating in developing a national IPR enforcement strategy and agreeing on roles and responsibilities. However, sharing additional information about seized items with rights-holding companies and e-commerce websites could improve enforcement, according to private sector representatives. CBP officials said they share information to the extent allowed under current regulations, but CBP has not completed an assessment of what, if any, additional information would be beneficial to share with private sector entities. Without such an assessment, CBP will not know if sharing additional information requires regulatory or legal changes.

I am pleased to be here to discuss the results of our review of U.S.  agencies’ efforts to address changes in the market for counterfeit goods  and their work with the private sector. Intellectual property is an important  component of the U.S. economy, and the United States is an  acknowledged global leader in its creation. Infringement of intellectual  property rights (IPR) through the illegal importation and distribution of  counterfeit goods harms the U.S. economy by stifling innovation, slowing  economic growth, weakening the competitiveness of U.S. employers, and  threatening American jobs. IPR infringement can also threaten the health  and safety of American consumers. The Department of Homeland  Security’s U.S. Customs and Border Protection (CBP) and U.S.  Immigration and Customs Enforcement (ICE)—two of the many agencies  involved in IPR enforcement—are responsible for IPR enforcement at  U.S. borders. CBP leads enforcement activity at the border by detecting  and seizing counterfeit goods that enter the United States through its  more than 300 ports of entry and by assessing penalties against IPR  infringers. CBP coordinates its efforts with ICE, which investigates IPR  violations for federal prosecution.

My testimony today summarizes the findings from our January 2018  report, which was released on February 27, 2018, on CBP’s and ICE’s  IPR enforcement at U.S. borders. This testimony addresses (1) what is  known about counterfeit goods entering the United States and the  challenges they present, (2) efforts CBP and ICE have undertaken to  enhance IPR enforcement and the extent to which they have assessed  the results of these efforts, and (3) the extent to which CBP and ICE  collaborate on IPR enforcement as well as ways in which they coordinate  with the private sector in enforcing IPR.

For our report, we analyzed CBP seizure data for fiscal years 2012  through 2016 and reviewed documents and reports from CBP, ICE, other  U.S government entities, and international organizations. We interviewed  CBP and ICE officials in Washington, D.C., and at selected port locations  in Chicago, Illinois; Los Angeles, California; Miami, Florida; and New  York, New York. We also interviewed representatives of IPR-holding  companies (rights holders) and popular consumer websites that offer  platforms for third-party sellers. We used undercover identities to  purchase selected products from third-party sellers on popular consumer  websites and subsequently asked the rights holders for the selected  products to test their authenticity. More detailed information on our  objectives, scope, and methodology for this work can be found in the  issued report. We conducted the work on which this statement is based in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. We conducted our related  investigative work in accordance with investigation standards prescribed  by the Council of the Inspectors General on Integrity and Efficiency.

Accelerated by E- Commerce, Changes in the Counterfeits Market Present Challenges to U.S. Agencies, Consumers, and the Private Sector

E-Commerce Has Contributed to a Shift in the Market for Counterfeit Goods

The rise of e-commerce has contributed to a fundamental change in the  market for counterfeit goods, according to our analysis of documents from  CBP, ICE, and international organizations and our interviews with CBP  and ICE officials. U.S. agencies and international organizations have  observed a shift in the sale of counterfeit goods from “underground” or  secondary markets, such as flea markets or sidewalk vendors, to primary  markets, including e-commerce websites, corporate and government  supply chains, and traditional retail stores. Whereas secondary markets  are often characterized by consumers who are knowingly purchasing  counterfeits, primary markets involve counterfeiters who try to deceive  consumers into purchasing goods they believe are authentic.

This shift has been accompanied by changes in the ways in which  counterfeit goods are sold. In the past, consumers could often rely on  indicators such as the location of sale or the goods’ appearance or price  to identify counterfeit goods in the marketplace. However, counterfeiters  have now adopted new ways to deceive consumers. For example, as  consumers increasingly purchase goods online, counterfeiters may  exploit third-party online marketplaces to gain an appearance of  legitimacy and access to consumers. When selling online, counterfeiters  may post pictures of authentic goods on the websites where they are  selling counterfeits and may post pseudonymous reviews of their  products or businesses in order to appear legitimate. Additionally, by  setting the price of a counterfeit at, or close to, the retail price of a  genuine good, counterfeiters may deceive consumers, who will pay the  higher price because they believe the goods are real or who believe that  they are getting a slight bargain on genuine goods.

CBP Data Indicate Changes in Several Key Characteristics of Counterfeit Goods Seized

According to CBP seizure data and CBP officials, the volume, variety, and  methods of shipment of counterfeit goods seized by CBP and ICE have  changed in recent years. CBP reports indicate that the number of IPR  seizures increased by 38 percent in fiscal years 2012 through 2016.  According to CBP data, approximately 88 percent of IPR seizures made  during this period were shipped from China and Hong Kong. The variety  of products being counterfeited has also increased, according to CBP  officials. CBP and ICE officials noted that, while many consumers may  think of luxury handbags or watches as the most commonly counterfeited  goods, counterfeiting occurs in nearly every industry and across a broad  range of products. In addition, according to CBP data we reviewed and  officials we spoke to, the methods of importing counterfeit goods into the  United States have changed in recent years. Specifically, express carriers  and international mail have become the predominant form of  transportation for IPR-infringing goods entering the United States,  constituting approximately 90 percent of all IPR seizures in fiscal years  2015 and 2016, according to CBP data.

Twenty of 47 Items Purchased from Third- Party Sellers on Popular E-Commerce Websites Were Counterfeits, Highlighting Potential Risks to Consumers

In an attempt to illustrate the risk that consumers may unknowingly  encounter counterfeit products online, we purchased a nongeneralizable  sample of four types of consumer products—shoes, travel mugs,  cosmetics, and phone chargers—from third-party sellers on five popular  e-commerce websites. According to CBP data we reviewed and officials  we spoke to, CBP often seizes IPR-infringing counterfeits of these types  of products. As table 1 shows, the rights holders for the four selected  products we purchased determined that 20 of the 47 items were  counterfeit.

We did not identify any clear reasons for the variation among the  counterfeit and authentic items that we purchased based on the products  that they represented, the e-commerce websites where we bought the  items, or the third-party sellers from whom we bought them. For three of  the four product types, at least one item we purchased was determined to  be counterfeit, with results varying considerably by product.  Representatives of the rights holders also could not provide a specific  explanation for the variation among authentic and counterfeit goods that  we received. They noted that the results of covert test purchases can  fluctuate depending on enforcement activities and the variety of goods and sellers on a particular website on a given day. Rights-holder testing  also showed that we purchased at least one counterfeit item and one  authentic item from each of the five e-commerce websites. In addition,  our analysis of the customer ratings of third-party sellers from whom we  bought the items did not provide any clear indications that could warn  consumers that a product marketed online may be counterfeit. For  example, we received both counterfeit and authentic items from third- party sellers with ratings that were less than 70 percent positive as well  as sellers with ratings that were up to 100 percent positive.

Rights holders were able to determine that items we purchased were not  authentic on the basis of inferior quality, incorrect markings or  construction, and incorrect labeling. Some counterfeit items we  purchased were easily identifiable as likely counterfeit once we received  them. For example, one item contained misspellings of “Austin, TX” and  “Made in China.” Other items could be more difficult for a typical  consumer to identify as counterfeit. For example, the rights holder for a  cosmetic product we purchased identified one counterfeit item on the  basis of discrepancies in the color, composition, and design of the  authentic and counterfeit items’ packaging. Counterfeit goods may also  lack key elements of certification markings and other identifiers. For  example, on a counterfeit phone charger we purchased, the UL  certification mark did not include all components of the authentic mark.  Figure 1 shows examples of these counterfeit items.

The risks associated with the types of counterfeit goods we purchased  can extend beyond the infringement of a company’s IPR. For example, a  UL investigation of counterfeit iPhone adapters found a 99 percent failure  rate in 400 counterfeit adapters tested for safety, fire, and shock hazards  and found that 12 of the adapters tested posed a risk of lethal  electrocution to the user. Similarly, according to a rights holder  representative, counterfeits of common consumer goods, such as Yeti  travel mugs, may contain higher-than-approved concentrations of  dangerous chemicals such as lead, posing health risks to consumers.  According to ICE, seized counterfeit cosmetics have been found to  contain hazardous substances, including cyanide, arsenic, mercury, lead,  urine, and rat droppings.

Representatives of rights holders and e-commerce websites whom we  interviewed reported taking independent action to try to protect IPR within  their areas of responsibility. For example, both rights holders and e- commerce websites maintain IPR protection teams that work with one  another and with law enforcement to address infringement issues. E- commerce websites may also take a variety of steps to block and remove  counterfeit items listed by third-party sellers. These efforts rely on data  collected through a variety of means, including consumer reporting of  counterfeits, rights-holder notifications of IPR infringement, and corporate  efforts to vet potential third-party sellers, according to private sector  representatives.

Our January 2018 report includes information on steps that consumer  protection organizations and government agencies recommend  consumers take to limit the risk of purchasing counterfeits online. These  steps include, for example, buying only from authorized retailers online,  avoiding prices that look “too good to be true,” and reporting counterfeit  purchases.

Changes in the Marketplace Can Pose Challenges to U.S. Agencies and the Private Sector

We identified a number of key challenges that the changes in the market  for counterfeit goods can pose to CBP and ICE as well as to the private  sector. First, the increasing sophistication of counterfeits can make it  difficult for law enforcement officers to distinguish between legitimate and  counterfeit goods. Second, as the range of counterfeit goods expands,  CBP has a wider variety of goods to screen, which requires CBP officials  to have in-depth knowledge of a broad range of products and of how to  identify counterfeits. Third, counterfeiters may break up large shipments  into multiple smaller express carrier or mail packages to decrease the risk  of losing significant quantities of merchandise to a single seizure. This  shift toward smaller express shipments of counterfeit goods to the United  States poses challenges to CBP and ICE because, according to CBP  officials, seizure processing requires roughly the same amount of time  and resources regardless of shipment size or value.

The changing marketplace also presents challenges to the private sector,  according to representatives from rights holders and e-commerce  websites. For example, it is more difficult for rights holders and e- commerce websites to identify and investigate individual counterfeit  cases, because e-commerce websites face a growing inventory from a  larger registry of sellers. Tracking goods from known counterfeiters  through various website fulfillment and delivery mechanisms is also a  significant challenge for the private sector. Furthermore, the growth of e- commerce has accelerated the pace at which counterfeiters can gain  access to consumers or reinvent themselves if shut down.

CBP and ICE Engage in Activities to Enhance IPR Enforcement, but CBP Has Not Fully Evaluated the Results of Its Activities

CBP and ICE engage in a number of activities to enhance IPR  enforcement; however, while ICE has assessed some of its efforts, CBP  has taken limited steps to do so. CBP’s and ICE’s IPR enforcement  activities broadly include detecting imports of potentially IPR-infringing  goods, conducting special operations at U.S. ports, engaging with  international partners, and undertaking localized pilot programs or port- led initiatives. CBP and ICE have collected some performance data on  activities we reviewed, and ICE has taken some steps to better  understand the impact of its efforts, such as creating a process to track  cases it deems significant. However, we found that CBP has conducted  limited evaluation of its efforts to enhance IPR enforcement.  Consequently, we concluded that CBP may lack information needed to  ensure it is investing its resources in the most efficient and effective  activities. We recommended in our report that CBP take steps to evaluate  the effectiveness of its IPR enforcement efforts; CBP concurred with this  recommendation.

CBP and ICE Generally Collaborate on IPR Enforcement, but CBP Is Restricted in Sharing Information with the Private Sector

Our analysis showed that CBP and ICE interagency collaboration on IPR  enforcement is generally consistent with the following selected key  practices for effective interagency collaboration: (1) define and articulate  a common outcome; (2) establish mutually reinforcing or joint strategies;  (3) identify and address needs by leveraging resources; (4) agree on  roles and responsibilities; and (5) establish compatible policies,  procedures, and other means to operate across agency boundaries. For  example, the agencies may leverage resources by collocating staff or  sharing their expertise. CBP and ICE have also issued guidance and  developed standard operating procedures to clarify roles and  responsibilities. CBP and ICE also coordinate with the private sector in a  variety of ways, such as obtaining private sector assistance to determine  whether detained goods are authentic and to conduct training.

Representatives of rights holders and e-commerce websites noted that  information shared by law enforcement entities is critical to private sector  IPR enforcement, such as pursuing civil action against a counterfeiter or  removing counterfeit items from websites. In the Trade Facilitation and  Trade Enforcement Act of 2015, Congress provided CBP with explicit  authority to share certain information with trademark and copyright  owners before completing a seizure. CBP officials stated that they share  information about identified counterfeits with e-commerce websites and  rights holders to the extent possible under current regulations. However,  according to private sector representatives we spoke to, restrictions on  the amount and type of information about seized items shared by CBP  limit the ability of rights holders and e-commerce websites to protect IPR.  CBP officials noted that there are legal limitations to the amount and type  of information they can share, particularly if the e-commerce website is  not listed as the importer on forms submitted to CBP.

Several private sector representatives stated that receiving additional  information from CBP would enhance their ability to protect IPR.  Representatives of one website noted that information on the exterior of  seized packages, such as business identifiers on packages destined for  distribution centers, would be helpful for identifying groups of counterfeit  merchandise from the same seller. However, according to CBP officials,  CBP cannot provide such information to e-commerce websites.  Representatives of one e-commerce website noted that ICE sometimes  shares information related to an investigation, but that ICE’s involvement  in the enforcement process begins only after CBP has identified and  seized counterfeit items. Representatives of two e-commerce websites  stated that, because of the limited information shared by CBP, they may  not be aware of IPR-infringing goods offered for sale on their websites,  even if CBP has seized related items from the same seller.

According to CBP officials, CBP is reviewing options for sharing additional  information with rights holders and e-commerce websites and is  assessing what, if any, additional information would be beneficial to share  with private sector entities. CBP officials stated that they have not yet  determined whether changes to the amount and types of information  provided to e-commerce websites would require regulatory changes or  additional legal authorities. These officials also said that they have  discussed differences in CBP’s and ICE’s information sharing with ICE  officials. In our report, we recommended that CBP, in consultation with  ICE, assess what, if any, additional information would be beneficial to  share with the private sector and, as appropriate, take action to enhance  information sharing where possible. CBP concurred with this  recommendation.

Chairman Hatch, Ranking Member Wyden, and Members of the  Committee, this concludes my prepared statement. I would be pleased to  answer any questions that you may have at this time.

If you or your staff have any questions about this testimony, please  contact Kimberly Gianopoulos, Director, International Affairs and Trade,  at (202) 512-8612 or gianopoulosk@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this statement. GAO staff who made key contributions to  this testimony are Joyee Dasgupta, Kara Marshall, Katie Bassion, Kristen  Timko, Reid Lowe, Sarah Collins, Neil Doherty, Ramon Rodriguez, Helina  Wong, Julie Spetz, Kevin Loh, Wayne McElrath, Grace Lui, James  Murphy, Mary Moutsos, Justin Fisher, Rachel Stoiko, and Sarah Veale.

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Counterfeit goods harm the U.S. economy and can pose a threat to consumers. But these products can be hard to spot and may be offered online next to authentic goods. For example, we testified that manufacturers determined that 20 of 47 items we purchased from third-party sellers on popular sites were counterfeit.

Customs and Border Protection leads efforts to stop imported counterfeit goods at the border, and Immigration and Customs Enforcement conducts investigations. In the report on which this testimony is based, we made recommendations to improve oversight of CBP's efforts and enhance information sharing with the private sector.