[House Hearing, 112 Congress]
[From the U.S. Government Printing Office]
HOMELAND SECURITY INVESTIGATIONS: EXAMINING DHS'S EFFORTS TO PROTECT
AMERICAN JOBS AND SECURE THE HOMELAND
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT,
INVESTIGATIONS, AND MANAGEMENT
of the
COMMITTEE ON HOMELAND SECURITY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
JULY 7, 2011
__________
Serial No. 112-34
__________
Printed for the use of the Committee on Homeland Security
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20402-0001
COMMITTEE ON HOMELAND SECURITY
Peter T. King, New York, Chairman
Lamar Smith, Texas Bennie G. Thompson, Mississippi
Daniel E. Lungren, California Loretta Sanchez, California
Mike Rogers, Alabama Sheila Jackson Lee, Texas
Michael T. McCaul, Texas Henry Cuellar, Texas
Gus M. Bilirakis, Florida Yvette D. Clarke, New York
Paul C. Broun, Georgia Laura Richardson, California
Candice S. Miller, Michigan Danny K. Davis, Illinois
Tim Walberg, Michigan Brian Higgins, New York
Chip Cravaack, Minnesota Jackie Speier, California
Joe Walsh, Illinois Cedric L. Richmond, Louisiana
Patrick Meehan, Pennsylvania Hansen Clarke, Michigan
Ben Quayle, Arizona William R. Keating, Massachusetts
Scott Rigell, Virginia Kathleen C. Hochul, New York
Billy Long, Missouri Vacancy
Jeff Duncan, South Carolina
Tom Marino, Pennsylvania
Blake Farenthold, Texas
Mo Brooks, Alabama
Michael J. Russell, Staff Director/General Counsel
Kerry Ann Watkins, Senior Policy Director
Michael S. Twinchek, Chief Clerk
I. Lanier Avant, Minority Staff Director
------
SUBCOMMITTEE ON OVERSIGHT, INVESTIGATIONS, AND MANAGEMENT
Michael T. McCaul, Texas, Chairman
Gus M. Bilirakis, Florida William R. Keating, Massachusetts
Billy Long, Missouri, Vice Chair Yvette D. Clarke, New York
Jeff Duncan, South Carolina Danny K. Davis, Illinois
Tom Marino, Pennsylvania Bennie G. Thompson, Mississippi
Peter T. King, New York (Ex (Ex Officio)
Officio)
Dr. R. Nick Palarino, Staff Director
Diana Bergwin, Subcommittee Clerk
Tamla Scott, Minority Subcommittee Director
C O N T E N T S
----------
Page
Statements
The Honorable Michael T. McCaul, a Representative in Congress
From the State of Texas, and Chairman, Subcommittee on
Oversight, Investigations, and Management:
Oral Statement................................................. 1
Prepared Statement............................................. 3
The Honorable Gus M. Bilirakis, a Representative in Congress From
the State of Florida:
Prepared Statement............................................. 6
The Honorable Bennie G. Thompson, a Representative in Congress
From the State of Mississippi, and Ranking Member, Committee on
Homeland Security.............................................. 5
Witnesses
Mr. Brian Toohey, President, Semiconductor Industry Association:
Oral Statement................................................. 9
Prepared Statement............................................. 11
Mr. Michael Russo, Director, Global Security and Product
Protection, Eli Lilly and Company:
Oral Statement................................................. 17
Prepared Statement............................................. 20
Mr. Mario Mancuso, Partner, Fried, Frank, Harris, Shriver &
Jacobson LLP:
Oral Statement................................................. 23
Prepared Statement............................................. 25
Ms. Jena Baker McNeill, Private Citizen:
Oral Statement................................................. 27
Prepared Statement............................................. 29
For the Record
The Honorable Michael T. McCaul, a Representative in Congress
From the State of Texas, and Chairman, Subcommittee on
Oversight, Investigations, and Management:
Statement of the Motion Picture Association of America, Inc.... 7
Statement of the Recording Industry Association of America,
Inc.......................................................... 8
HOMELAND SECURITY INVESTIGATIONS: EXAMINING DHS'S EFFORTS TO PROTECT
AMERICAN JOBS AND SECURE THE HOMELAND
----------
Thursday, July 7, 2011
U.S. House of Representatives,
Subcommittee on Oversight, Investigations, and
Management,
Committee on Homeland Security,
Washington, DC.
The subcommittee met, pursuant to call, at 10:10 a.m., in
Room 311, Cannon House Office Building, Hon. Michael T. McCaul
[Chairman of the subcommittee] presiding.
Present: Representatives McCaul, Long, Duncan, and
Thompson.
Also present: Representative Rogers.
Mr. McCaul. The committee will come to order. First order
of business, I would like to ask for unanimous consent that the
gentleman from Alabama Mr. Rogers, the Chair of the committee's
Subcommittee on Transportation Security, be permitted to sit on
the dais and participate in today's hearing. Without objection,
so ordered.
This committee is meeting today to hear testimony from our
private-sector working citizens in order to examine the
effectiveness of DHS' enforcement policies and their impact on
private industry, and I recognize myself now for an opening
statement.
American innovation is the envy of the world. It is a
constant target for competitors, including rogue nations that
prefer to steal and copy rather than create. In addition to
overcoming a depressed business climate, our Nation's job
creators must protect their intellectual property from
sophisticated counterfeiters all over the world, make sure
their exports do not end up in the wrong hands, and comply with
immigration laws. The consequences of failure are serious.
When counterfeit prescription drugs enter the marketplace
or cheap imitation parts breach a semiconductor manufacturing
plant, it costs American businesses revenues and jobs. When
sensitive equipment manufactured for the Department of Defense
falls into the wrong hands of rogue nations, it poses a threat
to our National security. And when businesses seek assistance
from the Government, it is the responsibility of the Department
of Homeland Security to protect intellectual property,
safeguard against counterfeit goods, maintain the integrity of
export supply chains, and to ensure that businesses are in
compliance with immigration laws in order to maintain a high-
level playing field.
So today we ask these questions: Is the help they receive
from DHS, in collaboration with other Government agencies,
adequate? What improvements can be made? What more needs to be
done? Indeed, several cases in recent years indicate that there
is room for improvement in these measures that directly impact
the bottom line of businesses and their ability to create jobs.
A 2008 investigation by Business Week magazine uncovered a
polluted supply chain in some of our Nation's military
equipment. According to Business Week, counterfeit products
have been linked to the crash of mission-control networks, and
they contain hidden back doors enabling network security to be
bypassed and sensitive data accessed by hackers, thieves, and
spies.
The same investigation found that as many as 15 percent of
the spare parts and microchips the Pentagon buys are actually
counterfeit. Recently, Wired magazine reported that the
military purchased 59,000 counterfeit microchips from China in
2010. These chips were to be installed into an array of
equipment, including U.S. missile-defense systems. This problem
has been highlighted in many Federal prosecutions, including
one in Houston where the defendant was sentenced to prison for
selling counterfeit network cards to the U.S. Marine Corps for
use in combat in Iraq and Afghanistan.
Pharmaceutical companies are seeing more of their products
counterfeited. These counterfeits are often ineffective and, in
some cases, dangerous. A recent report by CBS News found that
the counterfeit drug network is worth an estimated $75 billion
per year. This market has produced pharmaceutical drugs that
contain little, none, or too much of the drug's active
ingredient, and in some cases they contain harmful substances.
One recent case involved Mr. Ken Wang, the owner of a
Houston-based company, who was convicted of conspiring with
individuals in China to traffic in counterfeit and misbranded
prescription drugs. ICE began its investigation after CBP
seized 6,500 Viagra tablets from a mail facility in San
Francisco addressed to Mr. Wang. Pfizer Pharmaceuticals, the
manufacturer of Viagra, confirmed that these tablets were
counterfeit and contained a substance used to manufacture
sheetrock. I am sure some buyers were severely disappointed
upon the receipt of these counterfeit Viagra. After being
convicted, Mr. Wang fled to China, where he is still in hiding.
Such cases often involve a bizarre, multijurisdictional
chain supply, making it difficult to prosecute and harder to
track. In one instance the supply chain began with the
medication being manufactured in mainland China, shipped to
Hong Kong, then to the United Arab Emirates, and then, lastly,
to the Bahamas. Once in the Bahamas, the individual
prescriptions were filled, put into packets, addressed, and
sent to the United Kingdom. From the United Kingdom, the drugs
were then shipped to the consumers in the United States, who at
the time believed--when they placed an order on-line believed
they were purchasing them from a Canadian pharmacy.
ICE is the only Federal law enforcement entity with full
statutory authority to pursue violations of U.S. export laws
related to military items and controlled dual-use commodities,
which will be another focus of this hearing. These are products
that may have a seemingly innocuous civilian use, but also can
have a potent military use as well.
A glaring example is the triggered spark gap. This device
is used legally by doctors to break up kidney stones in
patients; however, it can also be used to detonate a nuclear
device. In one case, a Pakistani businessman with close ties to
Pakistan military and linked to the militant Islamic groups
attempted to use a third party in South Africa to purchase 200
triggered spark gaps. Under U.S. law, as a dual-use item, it is
legal to export the devices to South Africa, but illegal to
export them to Pakistan. The third-party buyer was arrested,
but the Pakistani businessman has not yet been apprehended.
Finally, this subcommittee will examine the issue of
worksite enforcement. In 2009, ICE, citing finite resources,
instituted a shift in strategy from targeting undocumented
employees to the employers that hire them. The results have
been striking.
According to the Congressional Research Service, since
2008, administrative arrests have declined 77 percent, criminal
arrests have declined 59 percent, and criminal convictions have
declined 66 percent. These figures strongly suggest that the
shift in strategy has led to a scaling back of worksite
enforcement efforts that allow bad actors to get away with
breaking the law with little or no penalty.
As is evident from my opening statement, ICE and CBP have a
broad array of laws and issues they are responsible for
enforcing, and we have a lot to talk about. I will, therefore,
conclude my remarks by thanking our witnesses for being here
today, and I do look forward to your testimonies.
[The information follows:]
Prepared Statement of Chairman Michael T. McCaul
The Committee on Homeland Security Subcommittee on Oversight,
Investigations, and Management will come to order. The subcommittee is
meeting today to hear testimony from our private sector witnesses in
order to examine the effectiveness of DHS enforcement policies and
their impact on private industry. I now recognize myself for an opening
statement.
American innovation is the envy of the world. It is a constant
target for competitors, including rogue nations that prefer to steal
and copy rather than create.
In addition to overcoming a depressed business climate, our
Nation's job creators must protect their intellectual property from
sophisticated counterfeiters all over the world, make sure their
exports do not end up in the wrong hands, and comply with immigration
laws.
The consequences of failure are serious. When counterfeit
prescription drugs enter the marketplace or cheap imitation parts
breach a semiconductor manufacturing plant it costs American businesses
revenue and jobs. When sensitive equipment manufactured for the
Department of Defense falls into the hands of rogue nations, it poses a
threat to our National security.
When businesses seek assistance from the Government, it is the
responsibility of the Department of Homeland Security to protect
intellectual property, safeguard against counterfeit goods, maintain
the integrity of export supply chains and to ensure that businesses are
in compliance with immigration laws in order to maintain a level
playing field.
Today we ask: Is the help they receive from DHS, in collaboration
with other Government agencies, adequate? What improvements can be
made? And what more can be done? Indeed, several cases in recent years
indicate that there is room to improve these measures that directly
impact the bottom line of businesses and their ability to create jobs.
A 2008 investigation by Businessweek magazine uncovered a polluted
supply chain in some of our Nation's military equipment. According to
Businessweek: ``Counterfeit products have been linked to the crash of
mission-critical networks, and may contain hidden `back doors' enabling
network security to be bypassed and sensitive data accessed by hackers,
thieves, and spies.'' The same investigation found that as many as 15%
of the spare parts and microchips the Pentagon buys are counterfeit.
Recently Wired Magazine reported that the military purchased 59,000
counterfeit microchips from China in 2010. These chips were to be
installed into an array of equipment, including U.S. missile defense
systems.
This problem has been highlighted in many Federal prosecutions,
including one in Houston where the defendant was sentenced to Federal
prison for selling counterfeit network cards to the U.S. Marine Corps
for use in combat in Iraq and Afghanistan.
Pharmaceutical companies are seeing more of their products
counterfeited. These counterfeits are often ineffective and, in some
cases dangerous. A recent report by CBS News found that the counterfeit
drug network is worth an estimated $75 billion dollars per year. This
market has produced pharmaceutical drugs that contain little, none, or
too much of the drug's active ingredients. In some cases, the drugs
contained harmful substances.
One recent case involved Mr. Ken Wang, the owner of a Houston-based
company, who was convicted of conspiring with individuals in China to
traffic in counterfeit and misbranded prescription drugs. ICE began its
investigation after CBP seized 6,500 loose Viagra tablets from a mail
facility in San Francisco addressed to Mr. Wang. Pfizer
Pharmaceuticals, the manufacturer of Viagra, confirmed that the tablets
were counterfeit and contained a substance used to manufacture
sheetrock. After being convicted, Mr. Wang fled to China, where he is
still in hiding.
Such cases often involve a bizarre, multijurisdictional supply
chain, making it difficult to prosecute and harder to track. In one
instance, the supply chain began with the medication being manufactured
in mainland China, shipped to Hong Kong, then the United Arab Emirates
and lastly to the Bahamas. Once in the Bahamas, the individual
prescriptions were filled, put into packets, addressed, and sent to the
United Kingdom. From the United Kingdom the drugs were shipped to the
consumer in the United States who, at the time of placing their on-line
order, believed they were purchasing them from a Canadian pharmacy.
ICE is the only Federal law enforcement entity with full statutory
authority to pursue violations of U.S. export laws related to military
items and controlled dual-use commodities. These are products that may
have a seemingly innocuous civilian use, but also can have a potent
military use as well. A glaring example is the triggered spark gap.
This device is used legally by doctors to break up kidney stones in
patients. However, it can also be used to detonate a nuclear device.
In one case, a Pakistani businessman with close ties to the
Pakistani military, and linked to militant Islamic groups, attempted to
use a third-party in South Africa to purchase 200 triggered spark gaps.
Under U.S. law, as a duel-use item, it is legal to export the devices
to South Africa, but illegal to export them to Pakistan. The third-
party buyer was arrested, but the Pakistani businessman has not yet
been apprehended.
Finally, the subcommittee will examine the issue of worksite
enforcement.
In 2009, ICE, citing ``finite resources'', instituted a shift in
strategy from targeting undocumented employees to the employers that
hire them.
The results have been striking. According to the Congressional
Research Service, since 2008, administrative arrests have declined 77
percent, criminal arrests have declined 59 percent, and criminal
convictions have declined 66 percent.
These figures strongly suggest that this shift in strategy has lead
to a scaling back of worksite enforcement efforts that allow bad actors
to get away with breaking the law with little or no penalty.
As is evident from my opening statement, ICE and CBP have a broad
array of laws and issues they are responsible for enforcing and we
clearly have much to talk about today. I will therefore conclude my
remarks by thanking our witnesses for being here. I look forward to
each of your testimonies.
Mr. McCaul. I see that my Ranking Member of the
subcommittee Mr. Keating is not available today. I believe he
is attending a funeral back in his district, and with that, I
will recognize the Ranking Member of the full committee, the
gentleman from Mississippi, Mr. Thompson.
Mr. Thompson. Thank you very much, Mr. Chairman, for
convening this hearing.
We are here today to discuss the work of the Homeland
Security Investigations Division of ICE, responsible for a wide
range of duties from investigations involving the illegal
production, smuggling, and distribution of counterfeit and
priority products to money laundering violations and workplace
immigration enforcement efforts. ICE Homeland Security
Investigation is called upon to handle these matters on very
stretched resources.
ICE Homeland Security Investigation's International Affairs
Unit also represents the largest investigative law enforcement
presence abroad from the Department of Homeland Security, yet,
according to ICE and the Intellectual Property Enforcement
Coordinator, they are required to do much with very little.
In this Congress, the majority passed H.R. 1, which cut
$350 million from the Department of Homeland Security budget
for border security and technology. Despite these financial and
staffing changes, the Obama administration has made numerous
advances in confronting both worksite enforcement and
intellectual property issues.
For example, Operation Network Raider, a collaborative
interagency initiative aimed at ending illegal distribution of
counterfeit network hardware manufacturing in China, resulted
in 30 felony convictions and over 700 seizures of counterfeit
hardware valued at more than $143 million. In fiscal 2010, ICE
intellectual property investigations are up more than 41
percent, arrests are up more than 37 percent, and the
Department of Homeland Security intellectual property seizures
are up more than 34 percent.
Regarding worksite enforcement, in April 2009, the
administration shifted the country's focus from large-scale
raids, which cost millions and yielded minimal criminal
convictions, to focusing on unscrupulous employers that hire
and sometimes exploit undocumented immigrants. Prior to this
shift in strategy, ICE conducted numerous high-profile worksite
raids that were high on costs, but low on substance.
In August 2008, one of the largest raids occurred in
Laurel, Mississippi, where over 600 workers were detained.
Approximately 475 of the 600 workers were detained; yet,
according to reports, only 8 appeared in Federal court to face
criminal charges. This form of military-style raids destroyed
families, disrupted local economies, and had a negative impact
on small towns and rural communities.
The new approach represents an aggressive enforcement
strategy that targets the worst employers. A major focus of
this strategy is the audit of Form I-9, Employment Eligibility
Verification Form. ICE use of Form I-9 audits to test an
employer's compliance with existing documentation laws has
skyrocketed from 254 in fiscal year 2007 to 2,196 in fiscal
year 2010. Furthermore, forced removals are at a record high,
393,000 in fiscal year 2009, up from 30,000 in fiscal year
1990; as well as detentions, which are at a record high of over
360,000 in fiscal year 2010, up from 95,000 in fiscal year
2001.
But let me be clear, enforcement alone will not fix our
immigration system. Congress can no longer delay enacting
comprehensive immigration reform and should immediately do what
the American people demand: Fix the broken immigration system,
not enact more piecemeal policies that don't solve the problem.
I am looking forward to receiving the testimony of our
private-sector witnesses; however, I know that it is ultimately
the responsibility of multiple Federal partners to enforce our
immigration laws and prevent counterfeit goods from entering
into our supply chain. ICE, CBP, FDA, and the newly created
Intellectual Property Enforcement Coordinator could have
provided helpful testimony on existing challenges and
recommendations for staying ahead of changes in technology that
make intellectual property theft a constantly moving target.
Furthermore, testimony from ICE would have revealed the strides
that have been made under the country's new worksite
enforcement approach. Unfortunately, they were not invited to
testify, and as a result, the record will not reflect the facts
that they could have provided.
However, I do look forward to the testimony, Mr. Chairman,
as I indicated, and I yield back the balance of my time.
Mr. McCaul. I thank the Ranking Member, and other Members
may submit opening statements for the record.
[The statement of Hon. Bilirakis follows:]
Prepared Statement of Honorable Gus M. Bilirakis
July 7, 2011
Thank you, Mr. Chairman, and thank you for holding this important
hearing.
The American economy has been working for the last several years to
climb out of its economic rut. In my Congressional district in the
Tampa Bay area, and throughout the State of Florida, the unemployment
rate is still in double digits, which is far too high. I regularly
visit with businesses throughout my Congressional district. Too often,
I hear from them that the Federal Government appears, at best,
indifferent to the concerns of America's job creators.
In the global marketplace that we live and work in, we must ensure
that sensitive products and services do not end up in the hands of
those who wish to harm us, while at the same time allowing American
employers and employees to compete with the rest of the world and
create much-needed jobs. Entities within the Department of Homeland
Security are tasked with enforcing our laws pertaining to intellectual
property rights, commercial fraud, export control, and worksite
immigration enforcement. We must ensure that Immigrations and Customs
Enforcement (ICE) and Customs and Border Protection (CBP) are working
seamlessly with the private sector in the most effective and efficient
ways possible to prohibit pirated goods from entering our marketplace,
counterfeit medicines from harming our sick, jobs from going to illegal
immigrants, and sensitive security technology from falling in the hands
of our enemies.
These goals can best be achieved through a cooperative and
collaborative approach, rather than an adversarial relationship with
American businesses. I look forward to learning how the Congress and
the Department can work together with the private sector to help ensure
that our economic strength and freedoms and National security are not
compromised.
I yield back.
Mr. McCaul. Before I introduce the witnesses, I ask
unanimous consent to insert into the record statements from the
Motion Picture Association of America and the Recording
Industry Association of America. Without objection, so ordered.
[The information follows:]
Statement of the Motion Picture Association of America, Inc.
July 7, 2011
a. background and introduction
We want to thank the subcommittee for holding this oversight
hearing to review the efforts of the Department of Homeland Security to
combat counterfeiting, trademark, and intellectual property theft, a
crime that damages our economy and threatens American jobs. We
appreciate the opportunity to submit this statement on behalf of the
Motion Picture Association of America, Inc.\1\ and its member companies
regarding the serious and growing threat of this crime. As the primary
voice and advocate for the American motion picture, home video, and
television industries in the United States and around the world, we
have witnessed the proliferation of web-based enterprises dedicated
solely to stealing the product of our industry's workforce and are
gravely concerned about the detrimental impact that digital theft has
on the millions of American men and women who work in our industry.
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\1\ The Motion Picture Association of America and its international
counterpart, the Motion Picture Association (MPA) serve as the voice
and advocate of the American motion picture, home video, and television
industries, domestically through the MPAA and internationally through
the MPA. MPAA members are Paramount Pictures Corporation, Sony Pictures
Entertainment Inc., Twentieth Century Fox Film Corporation, Universal
City Studios LLC, Walt Disney Studios Motion Pictures, and Warner Bros.
Entertainment Inc.
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The U.S. intellectual property (IP) industries--of which ours is
one--are critical to the health of our economy. Our industry alone
produces billions in tax revenue each year, consistently generates a
positive balance of trade with every country in the world, and has
shown it can contribute to the economic recovery of areas hard-hit by
the recession. We are woven into the fabric of the U.S. economy.
More than 2.4 million working Americans residing in all 50 U.S.
States rely on the motion picture and television industry for their
livelihoods. While it is true that our industry employs some well-known
artists, that is not the real story of our business. Whether they are
set builders, costume designers, electricians, assistant directors, or
cast members, the overwhelming majority of those who work behind the
scenes in our industry are middle-class workers who are proud to be
part of a business that has created a quintessential American product
for almost 100 years: filmed entertainment. The major motion picture
companies represent only a fraction of the businesses that make up our
industry, as there are a host of U.S. companies who play a critical
role in the creation of filmed entertainment providing technologies and
services utilized in every step of the post-production process. More
than 95,000 small businesses--93 percent of whom employ fewer than 10
people--are involved in the production and distribution of movies and
television. Those individuals, small business owners and their families
are extremely vulnerable to changes in the production economy.
We appreciate the efforts of the Immigration and Customs
Enforcement (ICE) agency to combat digital theft and counterfeiting for
a range of U.S. industries. In the case of the entertainment industry,
the theft of motion picture and television productions threatens the
economic vitality of our business, and the millions of American working
men, women, and local small businesses that depend on it. The websites
targeted by ICE--via a transparent process that requires a judicial
finding of probable cause--are not ``innocent'' internet users; they
are illegal for-profit businesses knowingly trafficking in stolen and
counterfeit goods. They pose a threat to us, to movie theaters large
and small, to the American public who unknowingly gives over personal
financial income to unscrupulous traders, and to the health of the U.S.
economy. In the past decade, we have seen increasing evidence that
organized crime and terrorist organizations are engaging in
counterfeiting and intellectual property theft to support a variety of
criminal activities.\2\ ICE, by initiating Operation In Our Sites in
June 2010, has stepped forward to protect U.S. industries and citizens
from this form of cybercrime.
---------------------------------------------------------------------------
\2\ ``Film Piracy, Organized Crime, and Terrorism'' Published 2009
by the RAND Corporation.
---------------------------------------------------------------------------
Digital theft threatens the jobs of all who work in our business.
Such theft destroys the ability of those who finance and produce filmed
entertainment to recoup their investment, and in turn, the ability of
film artists to continue to create. The majority of films produced must
secure financing and distribution partners prior to production. Digital
theft damages the confidence of those partners in their ability to do
so, the end result being a diminished number of films being made and
American jobs disappearing.
We are not talking about a distant future. Over the last 3 months,
no fewer than three reports have demonstrated that infringing content
represents a significant percentage of global internet traffic. Most
recently, a report released by Envisional, an independent internet
consulting company, estimated that almost a quarter of global internet
traffic and over 17 percent of U.S. internet traffic is copyright
infringing. This is a level of theft that cannot be sustained without
significant damage to the motion picture industry, the workforce it
supports, and the American economy.
The Intellectual Property Enforcement Coordinator's (IPEC) Joint
Strategic Plan on Intellectual Property Enforcement released in June
2010 committed to using these resources and existing resources to
increase law enforcement activity. ICE, the Department of Justice, and
the IPR Center have stepped forward to carry out that mandate.
Operation In Our Sites has not only put illegal sites out of business,
but has raised public awareness about this specific form of crime on
the internet. Most importantly, these enforcement efforts have resulted
in most of these entities ceasing their illegal activity. Movies and TV
programs, some of the biggest draws on the internet, are in many ways
the ``canary in the coal mine.'' Stealing and illegally selling this
content may appear to be victimless crimes or a harmless form of theft,
but they are neither. If it is not made clear that this kind of
activity is illegal, it has the potential to become the harbinger of
even more forms of illegal activity on the internet.
Again, we appreciate the opportunity to submit this statement and
applaud the subcommittee for holding this important oversight hearing.
We look forward to working with Congress to support strong IP
enforcement and to secure the additional resources that will protect
our industry--and American jobs--from those who engage in the illegal
activity of digital theft with disregard.
______
Letter From the Recording Industry Association of America
July 7, 2011.
The Honorable Michael T. McCaul,
Chairman, Subcommittee on Oversight, Investigations, and Management,
Committee on Homeland Security, House of Representatives, 131
Cannon House Office Building, Washington, DC 20515.
Dear Chairman McCaul: On behalf of the RIAA\1\ and its member
companies, I want to thank you for holding today's hearing examining
the work of the Department of Homeland Security to protect American
jobs. I believe it is important to recognize the significant anti-
piracy work of the U.S. Immigration and Customs Enforcement Bureau.
ICE's considerable enforcement efforts have been invaluable in
protecting our industry's--and our country's--valuable creative works.
---------------------------------------------------------------------------
\1\ The Recording Industry Association of America, Inc. (``RIAA'')
is a trade association whose member companies create, manufacture, and/
or distribute approximately 85% of all legitimate sound recordings
produced and sold in the United States.
---------------------------------------------------------------------------
In particular, I would like to bring attention to ICE's on-going
program, Operation In Our Sites. This initiative has brought much-
needed attention to the rogue on-line sites dedicated to infringement
of copyrighted and trademarked works, and takes appropriate and
necessary action to stop their illegal activity. These illicit
businesses have, until recently, operated with near-impunity, making
millions of dollars through the theft and unauthorized distribution of
others' products and content. The result has been the loss of thousands
of jobs, of billions in economic development, and of countless creators
who can't afford to make new contributions to our culture and economy.
We understand how easy it is, particularly in the digital era, to
wave off the value of recorded music. Yet, our industry contributes
billions to our economy and remains one of our country's most important
exports. And few can deny the importance of music in our everyday
lives. Keeping the U.S. music industry the envy of the world requires
increased vigilance and action. We greatly appreciate ICE for
recognizing the growing threats to these works on-line, and for taking
the necessary steps to ensure they are properly protected. We look
forward to working with the Committee on Homeland Security, the
Department and other interested parties in the future.
Sincerely,
Mitch Bainwol,
Chairman and CEO.
Mr. McCaul. Mr. Brian Toohey is the president of
Semiconductor Industry Association and has served in this
capacity since 2010. His responsibilities include crafting and
leading SIA's policy agenda and serving as an advocate for U.S.
semiconductor design and manufacturing across the globe. Prior
to joining SIA, Mr. Toohey served in leadership positions at
the Pharmaceutical Research and Manufacturers of America, DKA
Research and Development, and the Europe office of the U.S.
Department of Commerce. He holds an undergrad and graduate
degree from Georgetown University School of Foreign Service,
and he currently serves as an adjunct professor. Welcome here
today.
Mr. Michael Russo is the global security director for Eli
Lilly and Company. Mr. Russo is responsible for the management
of Lilly's global product protection security team, which
includes eight experienced investigators based in Asia, Europe,
and the United States. His team handles cases involving
counterfeit, stolen, and diverted pharmaceuticals. Mr. Russo
joined Eli Lilly in 1997 as a global security associate and has
supported various security roles prior to his current
assignment. He is a native of Indianapolis and received a
bachelor of science in public administration and criminal
justice from Indiana University; also a graduate of the FBI
National Academy at Quantico, Virginia; and the United States
Secretary Service Dignitary Protection School. Welcome, Mr.
Russo.
Next we have Mr. Mario Mancuso, who is a corporate partner
at the Fried Frank in Washington, DC. He is a leading authority
on U.S. regulation and international trade and export control
enforcement. From 2007 to 2009, he served as Under Secretary
for Industry and Security at the U.S. Department of Commerce.
In this role Mr. Mancuso was responsible for, among many other
things, identifying and opening key export markets around the
world for U.S. technology products consistent with the United
States' security interests. He graduated magna cum laude from
Harvard University and received his law degree from the New
York University School of Law; former Army infantry officer. He
is a combat veteran of Operation Iraqi Freedom, and we thank
you for that.
Ms. Jana Baker McNeill is a senior policy analyst for
homeland security at The Heritage Foundation. Today Ms. McNeill
is testifying as a private citizen. She is an expert on
homeland security and science and technology issues, including
the issue of worksite enforcement of immigration laws. She has
provided commentary in her research and writings on multiple
media outlets and renowned publications. Before joining
Heritage, she worked as a research assistant for the Hutchinson
Group; also worked as an environmental management consultant
for Booz, Allen, Hamilton. Prior to that, she worked on the
staff of Maryland Governor Robert Ehrlich. Ms. McNeill
graduated from the University of Arkansas Little Rock School of
Law and has a bachelor's degree in environmental science from
the University of Maryland.
With that, I want to thank the witnesses for being here
today. I think this will be very interesting testimony, and now
the Chair recognizes Mr. Brian Toohey for his remarks.
STATEMENT OF BRIAN TOOHEY, PRESIDENT, SEMICONDUCTOR INDUSTRY
ASSOCIATION
Mr. Toohey. Thank you, Chairman McCaul, Ranking Member
Thompson, and the other Members of the subcommittee. Greatly
appreciate the opportunity to be here today before this
oversight subcommittee to testify about the dangers that
counterfeit semiconductors pose to U.S. National security and
public safety, as well as the proven, common-sense steps that
DHS can take to prevent counterfeit chips from entering
military and civilian supply chains.
This issue is of more and more importance as semiconductors
are being used in an increasing number of mission-critical
applications such as life-saving medical devices, automotive
safety systems, airplanes, and military equipment.
By way of brief background, the semiconductor industry is
America's largest export industry. Semiconductor innovations
form the foundation of America's trillion-dollar technology
industry that supports a workforce of nearly 6 million in the
United States. The semiconductor industry is a great American
innovation story invented here, and our companies still lead
the world in the pace of innovation and global market share,
and we consider our industry a model for the innovation economy
of the future. Our companies still do the vast majority of
advanced design and manufacturing here in the United States and
sell nearly 85 percent of our products internationally.
But the importation of counterfeit semiconductor chips is a
growing National security and health and safety threat. For
years manufacturers abroad, primarily in China, have used crude
techniques, including surface sanding, acid washes, and other
procedures, to turn e-waste into counterfeit semiconductors.
These chips, already weakened from their original state and at
great risk of failure, are then relabeled using digital
printing and laser-etching techniques, and packaged for sale to
international brokers.
Recently counterfeiters have begun acquiring even more
sophisticated equipment and advanced techniques, making it
increasingly difficult to identify fake semiconductors. As a
result, more and more counterfeit chips make it through our
borders into a wide range of products, including automobile
technology, such as brake systems; health care technology, such
as defibrillators; and, most troubling, into military
equipment, such as missiles, navigation systems, and jets.
Given their high risk of failure, this places our citizens and
our military personnel at unreasonable risk.
I would like to draw the subcommittee's attention to
Exhibit No. 1 up on the screen. This is a picture of an
authentic and counterfeit voltage regulator for an automotive
air bag and braking system. Very, very difficult to tell the
difference between the two, and I will explain more about the
markings in my testimony.
Experts have estimated that 15 percent of all spare and
replacement semiconductors purchased by the Pentagon are
counterfeit, and DHS is equally vulnerable. Overall, more than
$7 billion of counterfeit chips are sold in the United States
every year. Our industry takes this threat very seriously and
is committed to doing everything within our power from
establishing publicly available databases of authorized
distributors to training Customs officials around the world to
working cooperatively with U.S. law enforcement.
We appreciate the Obama administration's commitment to
intellectual property rights and its resolve to prevent
counterfeit goods from entering our borders. U.S. Immigration
and Customs Enforcement, the Federal Bureau of Investigation,
the Department of Justice, and Department of Defense all play
crucial roles in combating the infiltration of counterfeit
goods, including semiconductors, and we have been working
cooperatively with these agencies for many years.
Historically, Customs and Border Protection also
facilitated anticounterfeiting efforts. Prior to 2000, when
port officers suspected a shipment contained counterfeit chips,
they would contact the manufacturer and share one of the
products. After 2000, but before 2008, port officers
photographed the outside of suspected chips and sent the
publicly viewable information to the chip manufacturer whose
trademark appeared on the surface to determine whether the chip
was counterfeit. Using highly confidential databases,
manufacturers then determined very quickly, in about 85 percent
of the cases, whether or not the chips were counterfeit by
analyzing the codes on the surface of the chip. It was a system
that worked very well and prevented enormous quantities of
counterfeit chips from entering the United States.
In mid-2008, however, CBP officers were instructed to
redact or cross out the identifying marks in the photographs
except the trademarks before sending them to manufacturers,
thereby scuttling the cooperative system that worked so well
for so many years. The current redaction practice makes it
virtually impossible for the industry, much less the importer
or CBP, to authenticate suspected counterfeit semiconductors.
U.S. Treasury officials argue that this policy shift is
intended to shield port officers from criminal liability for
disclosure of confidential information; however, to the extent
the codes on the surface of semiconductors which are publicly
viewable to anyone who picks up the chip or looks at the label
are confidential, they belong to the manufacturers to whom the
photographs would be sent.
We respectfully ask this subcommittee to exercise its
oversight authority to insist that CBP revert to its historical
practice of sharing the unredacted photographs and, where
necessary, the physical products of suspected counterfeit
semiconductors with manufacturers. Such a policy is clearly in
the National interest and public safety. It is a practical,
discrete action that could be implemented today. It would stop
untold number of counterfeits at our borders, improve our
National security, and save American lives.
Thank you for this opportunity. I would welcome any
questions.
[The statement of Mr. Toohey follows:]
Prepared Statement of Brian Toohey
executive summary
The importation of counterfeit semiconductor ``chips'' is a growing
National security threat. For years, manufacturers abroad (primarily in
China) have used crude techniques, including open fires, surface
sanding, and acid washes, to turn ``e-waste'' into counterfeit
semiconductors. These chips--already weakened from their original state
and at great risk of failure--are then re-labeled using digital
printing and laser etching and packaged for sale to international
brokers. However, counterfeiters have begun acquiring more
sophisticated equipment and advanced counterfeiting techniques, making
it increasingly difficult to identify counterfeit semiconductors. As a
result, more and more counterfeit chips make it through our borders and
into a wide range of products, including automobile technology such as
brake systems, health care technology such as defibrillators, and, most
troublingly, into military equipment such as missiles, navigation
systems, and jets. Given their high-failure risk, counterfeit
infiltration places our citizens and military personnel in unreasonable
peril.
SIA appreciates the Obama administration's commitment to
intellectual property rights and its resolve to prevent counterfeit
goods from entering the United States supply chain. Immigrations and
Customs Enforcement (``ICE''), the Federal Bureau of Investigation
(``FBI''), the Department of Justice (``DOJ''), and the Department of
Defense (``DOD'') have all played crucial roles in combating the
infiltration of counterfeit goods.
Historically, Customs and Border Protection (CBP) has also
facilitated anti-counterfeiting efforts. Prior to 2000 when Port
Officers suspected a shipment contained counterfeit chips, they would
contact the trademark owner and share one of the products. After 2000
but before 2008, Port Officers photographed the outside of a suspect
chip and sent the publicly viewable information to the chip
manufacturer whose trademark appeared on the surface of the chip to
determine whether the chip was counterfeit. Using a highly confidential
database, the trademark owner could then determine very quickly, in
almost 85% of the requests, whether or not the chips were counterfeits
by analyzing the codes on the surface of the chip.
In mid-2008, however, CBP Officers were instructed to redact any
identifying marks in the photographs, except the trademark, before
sending them to manufacturers, thereby scuttling the cooperative system
that worked so well for 8 years. The current redaction practice makes
it impossible for the industry, much less the importer or CBP, to
authenticate suspected counterfeit semiconductors. U.S. Treasury
officials argue that its policy shift is intended to shield Port
Officers from criminal liability for the disclosure of confidential
information. However, to the extent the codes on the surface of
semiconductors, which are publicly viewable to anybody who picks up a
chip or looks at a chip's packaging label, are confidential, they
belong to the manufacturers to whom photographs would be sent.
SIA simply asks CBP to revert to its historical pre-2008 practice
and share unredacted photographs, and where necessary physical
products, of suspected counterfeit semiconductors with semiconductor
manufacturers. Such a policy is clearly in the Nation's National
security interest. Preventing counterfeit semiconductors from entering
the United States will protect public safety and safeguard the military
supply chain.
Chairman McCaul, Ranking Member Keating, and other Members of the
subcommittee, my name is Brian Toohey. I am the President of SIA, the
Semiconductor Industry Association (``SIA''). I thank the committee for
inviting me to testify about the dangers that counterfeit
semiconductors pose to the U.S. military and the civilian population at
large, as well as the common-sense steps the Obama administration can
take to prevent counterfeit semiconductors from entering highly
sensitive military and civilian supply chains. This issue is more and
more important as semiconductors are being used in an increasing number
of mission-critical applications such as medical lifesaving equipment,
car brakes and air bag systems, nuclear reactors, airplanes and
military weapon systems.
SIA is the voice of the U.S. semiconductor industry, America's
largest export industry since 2005 and a bellwether of the U.S.
economy. Semiconductor innovations form the foundation for America's
$1.1 trillion dollar technology industry affecting a U.S. workforce of
nearly 6 million. Founded in 1977 by five microelectronics pioneers,
SIA unites more than 60 companies from across the United States that
account for 80 percent of the Nation's semiconductor production. Our
industry has an especially robust presence in Texas and Massachusetts,
with SIA members AMD, Freescale, Intel, STMicroelectronics and Texas
Instruments in Texas, and Analog Devices, Intel, Maxim and Rochester
Electronics in Massachusetts. SIA seeks to strengthen U.S. leadership
in semiconductor design and manufacture by working with Congress, the
administration, and other industry groups to enable the right ecosystem
for technology development and commercialization. Specifically, SIA
encourages policies and regulations that fuel innovation, propel
business and drive international competition in order to maintain a
thriving semiconductor industry in the United States.
background on semiconductors
Semiconductor ``chips'' are used in everything that is computerized
or uses radio waves. Indeed, semiconductors are components in a
staggering variety of products, from computers and smart phones to
medical devices, LEDs and smart meters, automobiles and military
equipment, including missiles, navigation systems and jets. They are
making the world around us smarter, greener, safer, and more efficient.
They are also economically vital to the Nation. In 2010, U.S.
semiconductor companies generated over $140 billion in sales--
representing nearly half the worldwide market, and making
semiconductors the Nation's largest export industry. Our industry
directly employs nearly 200,000 workers in the United States, and
another 6 million American jobs are made possible by the use of
semiconductors. Studies show that semiconductors, and the information
technologies they enable, represent 3 percent of the economy, but drive
25 percent of economic growth.
increasing prevalence of counterfeits
Due to the increasing availability and decreasing price of
equipment needed to counterfeit semiconductors, unscrupulous brokers
looking to garner illicit profits are importing ever greater numbers of
counterfeit chips into the United States. In fact, the Department of
Commerce has reported that counterfeit incidents discovered by the
military and military suppliers more than doubled between 2005 and
2008, from 3,868 to more than 9,356 cases.\1\ Alarmingly, these
counterfeit chips can be found in automobile airbag systems,
defibrillators, and even highly sensitive military equipment. As
BusinessWeek explains:
---------------------------------------------------------------------------
\1\ U.S. Department of Commerce, Defense Industrial Base
Assessment: Counterfeit Electronics available at http://
www.bis.doc.gov/defenseindustrialbaseprograms/osies/defmarketresearch-
rpts/final_counterfeit_electronics_report.pdf; see also Michele Moss,
Systems Assurance, The Global Supply Chain, and Efforts to Increase
Communication Between Acquisition and Development, available at http://
www.dtic.mil/ndia/2010CMMI/WednesdayTrack4_11328Moss.pdf; Surge in
counterfeit items in Pentagon's supplies, Homeland Security Newswire,
Aug. 10, 2010, available at http://www.homelandsecuritynewswire.com/
surge-counterfeit-items-pentagons-supplies.
``The American military faces a growing threat of potentially fatal
equipment failure--and even foreign espionage--because of counterfeit
computer components used in warplanes, ships, and communications
networks. Fake microchips flow from unruly bazaars in rural China to
dubious kitchen-table brokers in the U.S. and into complex weapons.
Senior Pentagon officials publicly play down the danger, but government
documents, as well as interviews with insiders, suggest possible
connections between phony parts and breakdowns. In November 2005, a
confidential Pentagon-industry program that tracks counterfeits issued
an alert that `BAE Systems experienced field failures,' meaning
military equipment malfunctions, which the large defense contractor
traced to fake microchips . . . In a separate incident last January, a
chip falsely identified as having made by Xicor . . . was discovered in
the flight computer of an F-15 fighter jet at Robins Air Force Base . .
. Special Agent Terry Mosher of the Air Force Office of Special
Investigations confirms that the 409th Supply Chain Management Squadron
eventually found four counterfeit Xicor chips.''\2\
---------------------------------------------------------------------------
\2\ Brian Grow et al., Dangerous Fakes: How counterfeit, defective
computer components from China are getting into U.S. warplanes and
ships, BusinessWeek, Oct. 2, 2008, available at http://
www.businessweek.com/magazine/content/08_41/b4103034193886.htm.
Some experts have estimated that as many as 15 percent of all spare
and replacement semiconductors purchased by the Pentagon are
counterfeit.\3\
---------------------------------------------------------------------------
\3\ Id.
---------------------------------------------------------------------------
Many counterfeit chips are traced back to China. BusinessWeek
writers visited China and described the counterfeiting economy as
follows:
``The traders typically obtain supplies from recycled-chip emporiums
such as the Guiyu Electronics Market outside the city of Shantou in
southeastern China. The garbage-strewn streets of Guiyu reek of burning
plastic as workers in back rooms and open yards strip chips from old PC
circuit boards. The components, typically less than an inch long, are
cleaned in the nearby Lianjiang River and then sold from the cramped
premises of businesses such as Jinlong Electronics Trade Center. A sign
for Jinlong Electronics advertises in Chinese that it sells `military'
circuitry, meaning chips that are more durable than commercial
components and able to function at extreme temperatures. But proprietor
Lu Weilong admits that his wares are counterfeit. His employees sand
off the markings on used commercial chips and relabel them as military.
Everyone in Guiyu does this, he says: `The dates [on the chips] are
100% fake, because the products pulled off the computer boards are from
the '80s and '90s, [while] consumers demand products from after
2000.'\4\
---------------------------------------------------------------------------
\4\ Id.
While the Chinese have admitted the prevalence of semiconductor
counterfeiting in China, Chinese officials claim they can do little
about the counterfeiting. As Wayne Chao, secretary general of the China
Electronics Publishing Association and anticounterfeiting advocate
said, ``[e]veryone wants to blame China. But it's difficult to
differentiate between a legitimate product and a fake.''\5\
---------------------------------------------------------------------------
\5\ Id.
---------------------------------------------------------------------------
administration resolve to combat counterfeits
Mr. Chao is correct--it is difficult to differentiate between a
legitimate semiconductor and a fake. And it is precisely because of the
difficulties inherent in differentiating between a legitimate and
counterfeit semiconductor that the Government must place a single-
minded emphasis on preventing the importation of counterfeit chips.\6\
Thankfully, the Obama administration--like the previous Bush and
Clinton administrations--has shown an admirable resolve to combat
counterfeiting and other forms of intellectual property theft. Indeed,
President Obama himself has promised:
---------------------------------------------------------------------------
\6\ See Exhibit 1, a photograph comparing a genuine and counterfeit
semiconductor.
``We're going to aggressively protect our intellectual property. Our
single greatest asset is the innovation and the ingenuity and
creativity of the American people. It is essential to our prosperity
and it will only become more so in this century.''\7\
---------------------------------------------------------------------------
\7\ Victoria Espinel, 2010 Joint Strategic Plan on Intellectual
Property Enforcement 3, available at http://www.whitehouse.gov/sites/
default/files/omb/assets/intellectualproperty/intellectual-
property_strategic_plan.pdf (``IPEC Report'').
Last year, DOJ, ICE, the Office of Homeland Security
Investigations, Naval Criminal Investigative Service (``NCIS''), Postal
Inspection Service, Internal Revenue Service, Department of
Transportation, and General Services Administration worked together
with the semiconductor industry on an investigation that led to the
indictments of the principals of a Florida-based company that generated
nearly $16 million in gross receipts between 2007 and 2009 by importing
nearly 60,000 counterfeit semiconductors from China and selling them to
the military as ``military grade.''\8\ As the U.S. Attorney in charge
of the investigation explained:
---------------------------------------------------------------------------
\8\ Press Release, U.S. Department of Justice, Owner and Employee
of Florida-based Company Indicted in Connection with Sales of
Counterfeit High Tech Devices Destined to the U.S. Military and Other
Industries (Sept. 14, 2010), available at http://www.justice.gov/
criminal/cybercrime/wrenIndict.pdf; Spencer H. Hsu, U.S. charges
Florida pair with selling counterfeit computer chips from China to the
U.S. Navy and military, Washington Post, Sept. 14, 2010, available at
http://www.washingtonpost.com/wp-dyn/content/article/2010/09/14/
AR2010091406468.html.
``Product counterfeiting, particularly of the sophisticated kind of
equipment used by our armed forces, puts lives and property at risk.
This case shows our determination to work in coordination with our law
enforcement partners and the private sector to aggressively prosecute
---------------------------------------------------------------------------
those who traffic in counterfeit parts.''
The Obama administration's Intellectual Property Enforcement
Coordinator, Victoria Espinel, also understands the importance of
enforcing intellectual property laws and preventing the importation of
counterfeit semiconductors. In the administration's 2010 Joint
Strategic Plan on Intellectual Property Enforcement, Ms. Espinel
explained the vital role of intellectual property enforcement in
protecting the consumer safety and National security:
``Violations of intellectual property rights, ambiguities in law and
lack of enforcement create uncertainty in the marketplace, in the legal
system and undermine consumer trust. Supply chains become polluted with
counterfeit goods. Consumers are uncertain about what types of behavior
are appropriate and whether the goods they are buying are legal and
safe. Counterfeit products can pose a significant risk to public
health, such as . . . military systems with untested and ineffective
components to protect U.S. and allied soldiers, auto parts of unknown
quality that play critical roles in securing passengers and suspect
semiconductors used in life-saving defibrillators . . . Intellectual
property infringement [also] can undermine our national and economic
security. This includes counterfeit products entering the supply chain
of the U.S. military, and economic espionage and theft of trade secrets
by foreign citizens and companies.''\9\
---------------------------------------------------------------------------
\9\ IPEC Report at 4.
Unfortunately, despite the Obama administration's understanding of
the dangers posed by counterfeit semiconductors, a 2008 Customs and
Border Protection (``CBP'') action required by the Department of the
Treasury is frustrating the efforts of other Government agencies to
combat the importation of counterfeit chips.
cbp action halts industry assistance in combatting counterfeiting
Historically, when a CBP Port Officer suspected that an imported
semiconductor was counterfeit, CBP would send the manufacturer of the
semiconductor (as identified by the trademarks featured on the
semiconductor) either a sample of a suspect semiconductor or a
photograph of the surface of the suspect chip. The surface of
semiconductors contain identifying manufacturing marks--these usually
represent part number, lot number, date of manufacture and place of
manufacture--all in clear sight to anyone looking at the chip. The
meaning of these identifying marks, however, is known only to the
manufacturer--and only the manufacturer of the semiconductor can
identify the authenticity of the chip using highly confidential and
proprietary company-specific databases. After receiving a photograph of
a suspected counterfeit chip, a semiconductor manufacturer would
quickly locate the specific product in its internal computer systems,
determine the product's authenticity, and inform CBP of its
determination. CBP could then seize the counterfeit chips. While this
policy did not prevent all counterfeits from entering the country, it
did lead to numerous successful raids of counterfeit manufacturers in
China and brokers in the United States.\10\
---------------------------------------------------------------------------
\10\ See note 8; Press Release, U.S. Department of Justice, Three
California Family Members Indicted in Connection with Sales of
Counterfeit High Tech Parts to the U.S. Military (Oct. 9, 2009),
available at http://www.justice.gov/criminal/cybercrime/
aljaffIndict.pdf.
---------------------------------------------------------------------------
Unfortunately, in August 2008 manufacturers discovered that Customs
Officers had been ordered to stop sending photographs (or samples) of
suspect chips showing the information required by a manufacturer to
authenticate a chip, even though CBP had been sending such photographs
for nearly 8 years. Instead, CBP began sending redacted photos that
obscured identifying information and left only the manufacturer's
trademark visible. Given the advanced labeling technology now available
to counterfeiters, manufacturers cannot determine whether chips are
counterfeit based on these logo-only pictures. Unsurprisingly, before
August 2008, seizures of counterfeit semiconductors were increasing
year after year. Since CBP changed its policy, SIA members have
reported receiving an increased number of complaints about
counterfeits. Semiconductor manufacturers were not notified or provided
an opportunity to comment before CBP began implementing the new policy:
One day in August 2008, the identifying markings on photographs sent to
manufacturers were simply redacted.
The CBP's new post-2008 redaction practice is based on an April
2000 Customs Directive \11\ which instructed Customs Officers to
``remove or obliterate any information indicating the name and/or
address of the manufacturer, exporter, and/or importer, including all
bar codes or other identifying marks'' before providing samples of
chips suspected to bear ``confusingly similar'' trademarks to
semiconductor manufacturers. Of course, Customs Officers understood
that this policy could not effectively prevent the importation of
counterfeit semiconductors, and did not interpret the restrictive
Directive to apply to photographs until August 2008 when, we have been
told, CBP Port Officers were ``reminded'' by Treasury officials that
the April 2000 Directive applies to photographs.
---------------------------------------------------------------------------
\11\ Customs Directive No. 2310-008A (April 7, 2000), available at
http://www.cbp.gov/linkhandler/cgov/trade/legal/directives/2310-
008a.ctt/2310-008a.pdf.
---------------------------------------------------------------------------
customs needs industry support to prevent the importation of
counterfeit semiconductors
CBP cannot effectively prevent the importation of counterfeit
semiconductors without the industry's assistance. A semiconductor is
very different from apparel, for example, where a photograph of a fake
Gucci handbag redacted per the Customs Directive's instructions likely
still provides sufficient information for an intellectual property
rights holder to determine the authenticity of merchandise. In
contrast, semiconductor manufacturers use common exterior packages
(which fit in common board sockets) for their semiconductors. Moreover,
counterfeiters have obtained professional laser etching equipment to
place fake codes on counterfeit chips. Thus, it is nearly impossible to
determine whether a given chip is legitimate or counterfeit based on
the redacted photographs.\12\
---------------------------------------------------------------------------
\12\ See Exhibit 1.
---------------------------------------------------------------------------
Semiconductor manufacturers can only assist CBP in preventing
importation of counterfeit merchandise if CBP provides manufacturers
with sufficient information to determine whether suspect chips are
authentic. An unredacted photograph of a suspect chip would ordinarily
be sufficient to provide the manufacturing codes (that usually
represent lot numbers, dates, and locations of manufacture) that a
manufacturer needs to authenticate a chip. Alternatively, CBP could
provide manufacturers with these numbers or a sample chip. However, a
photograph that has been redacted to remove these numbers does not
provide sufficient information to determine the authenticity of a chip.
Unless CBP provides manufacturers unredacted photographs of suspect
chips (or provides the manufacturing codes and dates and locations of
manufacture reflected on the face of the suspect chips that only
manufacturers can decipher), CBP cannot discharge its statutory
obligation to ensure that imports comply with U.S. intellectual
property laws. In such circumstances, the risk that counterfeit chips
will enter U.S. commerce and ultimately end up as components in
commercial, industrial, and military devices increases as we have
witnessed since Treasury's policy shift.
customs has the authority to get industry help
The most frustrating aspect of the current policy is the fact that
CBP has all the legal authority necessary to provide semiconductor
manufacturers with the information necessary to stem the tide of
counterfeit chips. Treasury officials have claimed that the 2000
Directive is meant to protect Customs Officers from liability under the
Disclosure of Confidential Information (``DCI'') provision of the Trade
Secrets Act.\13\ However, such protection is unnecessary, as Customs
Officers are only exposed to DCI liability to the extent that CBP
decides that information is confidential.\14\ Therefore, CBP can
effectively protect Customs Officers by simply declaring that the
information included on the surface of semiconductors is not
confidential information, as it had implied prior to its policy shift.
Indeed, it is unclear how a code that is readily visible to anyone
looking at the product label on a container containing semiconductors
or the surface of a semiconductor can be confidential information.
Tellingly, when Customs promulgated the rule that the 2000 Directive
was intended to ``fix,''\15\ it identified two potential trade secrets
that might be divulged when disclosing information: The identity of the
manufacturer and the identity of the importer.\16\ But sharing the
codes on the surface of semiconductors and product labels on the
packaging with semiconductor manufacturers would not reveal either, as
the manufacturer knows its own identity and the surface codes reveal no
information about a chip's importer.
---------------------------------------------------------------------------
\13\ 18 U.S.C. 1905.
\14\ In United States v. Wallington, 889 F.2d 573 (5th Cir. 1989),
the Fifth Circuit logically found that the DCI only prohibits the
disclosure of confidential information. In addition, the Fifth Circuit
clarified that Customs agents cannot be held liable for DCI violations
without ``at least . . . knowledge that the information is confidential
in the sense that its disclosure is forbidden by agency official policy
(or by regulation or law).'' Thus, since the Trade Secret Act does not
address the information at issue, CBP Officers could be shielded from
any potential DCI liability (to the extent such liability may exist)
with a stroke of a pen if CBP were to clarify the Directive to permit
Customs agents to share with semiconductor manufacturers unredacted
photographs.
\15\ 19 C.F.R. 133.25 (``Customs may disclose to the owner of the
trademark or trade name . . . in order to obtain assistance in
determining whether an imported article bears an infringing trademark
or trade name . . . [a] description of the merchandise'').
\16\ Copyright/Trademark/Trade Name Protection; Disclosure of
Information, 63 Fed. Reg. 11996, 11997 (Mar. 12, 1998); see also Gray
Market Imports and Other Trademarked Goods, 64 Fed. Reg. 9058 (Feb. 24,
1999).
---------------------------------------------------------------------------
CBP has failed to understand that even if the publicly viewable
codes were confidential, Congress clearly contemplated CBP disclosing
such information to rights holders in order to permit CBP to fulfill
the many laws and treaties requiring it to stop counterfeits from
entering the United States. The DCI simply prohibits Government
officials from disclosing confidential information that ``concerns or
relates to . . . the identity . . . of any person'' to ``any extent not
authorized by law.'' Accordingly, Congress has authorized CBP to
provide unredacted photos to semiconductor manufacturers through the
Tariff Act of 1930, the Lanham Act, the North American Free Trade
Agreement and the GATT Agreement on Trade-Related Aspects of
Intellectual Property Rights. In addition, CBP's own Disclosure of
Information Regulation authorizes such disclosure.\17\ It is truly
difficult to understand why CBP believes disclosing information to
semiconductor manufacturers is unlawful when ICE, DOD, DOJ, NCIS, and
even the FBI--the agency tasked with enforcing the Trade Secrets Act--
do not, and in fact routinely disclose such information to
semiconductor manufacturers.
---------------------------------------------------------------------------
\17\ See note 15.
---------------------------------------------------------------------------
conclusion
As a trade association that represents one of America's most vital
industries, SIA hopes that all executive agencies will support the
Obama administration's intellectual property enforcement efforts by
resolving this counterfeit issue expeditiously. Counterfeit
semiconductors are a clear and present National security threat and
danger to human health because they are used in many mission-critical
applications. SIA is pleased with the efforts by the U.S. Attorney for
the District of Columbia, ICE, NCIS, and other Federal law enforcement
agencies to bring to justice unscrupulous brokers selling dangerous
counterfeits into the civilian and military supply chain. However, the
2000 CBP policy, further refined in 2008, prevents the U.S. Government
from most effectively working with industry to prevent counterfeit
chips from being imported into the United States. This is alarming,
especially given the danger such chips so obviously present.
We respectfully request this subcommittee and Congress to work with
CBP and Treasury to ensure that the pre-2008 practice of sharing
unredacted pictures of suspected counterfeit semiconductors and product
labels with manufacturers is reinstated in the interest of safeguarding
the health and safety of the American public and our military.
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Mr. McCaul. Thank you.
Mr. Toohey, I will ask in my questions why DHS changed that
practice. I don't know how you can identify with the markings
taken off. So it seems a bit absurd to me, but we will follow
up with that in questions.
Mr. Russo, you are now recognized.
STATEMENT OF MICHAEL RUSSO, DIRECTOR, GLOBAL SECURITY AND
PRODUCT PROTECTION, ELI LILLY AND COMPANY
Mr. Russo. Good morning, Mr. Chairman and Members of the
committee.
First, let me thank the committee for inviting Eli Lilly to
testify about the dangers of counterfeit pharmaceuticals and
the efforts of ICE and CBP to stop these products which have
serious consequences for Americans, global public health, our
economy, National security, and certainly our industry. In
order to meet time constraints, I will request that my full
testimony be submitted for the record, and I will provide a
summary of my comments today.
I am Michael Russo, director of global security and asset
protection for Eli Lilly and Company, a global pharmaceutical
company. Lilly invests heavily to research, develop, and
manufacture safe and effective pharmaceutical therapies which
treat many diseases and save lives. Criminal counterfeiters
steal those innovations by copying our branding attributes,
packaging characteristics, and deliberately misleading
consumers to believe they are buying our legitimate, safe,
quality-controlled medicines. Our analysis of counterfeits have
determined that in many cases they are poorly made, lack
efficacy, and may contain dangerous and other unknown
substances. There are several known cases in which counterfeit
products have been responsible for patient deaths.
We are also seeing that the problem is on the rise
globally. We have learned from our work that many
counterfeiters are highly sophisticated and are associated with
international organized crime networks. For this reason, the
United States and other governments must continue to work and
dismantle these organizations before the counterfeit drug trade
extends so broadly that it undermines the legitimate global
pharmaceutical supply. Lilly is committed to assisting
Government agencies like ICE in tackling this threat.
In short, ICE and CBP have been highly supportive and
responsive to our concerns, though we all need to increase
efforts and do more. Their efforts have resulted in numerous
criminal convictions and a significant number of seizures of
counterfeit pharmaceuticals at our borders. Through their
efforts we have seen an increased cooperation of foreign law
enforcement agencies that target counterfeit operations outside
the United States.
The effectiveness of ICE has been the result not only of
work of numerous individual ICE agents globally, but also the
critical coordination and support provided by the IPR Center.
The internet has posed a significant challenge by facilitating
criminal counterfeiting. ICE has responded to complaints by
brand owners with Operation in Our Sites II, a new approach to
the internet trade in counterfeits. These actions sent a
message that the internet was no longer a safe haven for the
distribution of counterfeit product. We would like to see more
attention by this committee and other relevant U.S. Government
agencies to the dangerous counterfeit pharmaceuticals that are
being sold on the internet.
Customs and Border Protection officers have also increased
their efforts to combat counterfeit pharmaceuticals. There are
thousands of illegal small parcels and express mail packages
entering the United States every day facilitated by
illegitimate on-line drug sellers posing as legitimate
pharmacies. We support continuing and increasing high-profile
interdiction operations, as well as using the collection of
data to inform and educate Americans about the dangers of
purchasing medicines on-line.
International cooperation aimed at coordinated law
enforcement operation and training is another vital element of
how ICE is contributing to this problem. We support continued
and expanded posting of ICE and CBP attaches outside the United
States, and encourage effective resourcing to enable an
increase in focus on counterfeit pharmaceuticals given their
unique threat.
The efforts by ICE to combat counterfeit pharmaceuticals
are noteworthy, but going forward, more needs to be done to
protect Americans. We view the following as key areas of
concern and additional focus going forward.
More operations and public education is needed to disrupt
thousands of illegal shipments entering the United States
daily. CBP needs more resources and technology to interdict
these shipments, and all appropriate agencies need authority to
destroy the known counterfeits and illegal drugs instead of
shipping them back to the criminals who are sending them to our
country.
More attention needs to be focused on a broad internet
strategy to address thousands of illegal websites that are
selling fake and dangerous pharmaceutical products to U.S.
patients.
We believe a major public awareness campaign is needed to
educate citizens about the dangers of fake products and the
importance of purchasing medicines safely on the internet. The
FDA and IPEC are working to develop a coordinated education
effort.
DHS has the unique ability to contribute to this campaign
by providing real data about what is coming across our borders.
Additionally, more should be done to encourage the
voluntary efforts initiated by Google and Go Daddy in their
Center for Safe Internet Pharmacies to stop providing services
to illegal on-line drug sellers and distributors of counterfeit
drugs. Their efforts have the potential to drastically reduce
the threat posed to patients and reduce the burden on law
enforcement agencies. Therefore, we encourage this committee to
support more voluntary efforts.
As a final part of internet strategy, more effort is needed
through investigation to track websites back to the source of
supply and to major distributors of counterfeit medicines. This
requires increased international law enforcement cooperation in
response to leads developed and aggressive law enforcement
action when justified.
In this spirit we support and encourage the on-going work
of the IPR Center to bring together the various Government
authorities and brand holders to fight this criminal activity
that is endangering our homeland and National security. It is
critical that all of the relevant agencies, ICE, CBP, the FDA,
the FBI, and local authorities, are working together with the
utmost coordination to fight the counterfeit drug trade.
Counterfeit pharmaceuticals pose a very unique and frightening
threat and must not be viewed as an economic or IP crime alone.
In conclusion, I want to underscore that combating
counterfeited pharmaceuticals is a very complex issue requiring
the cooperation of many agencies and governments, as well as
the private sector, health care professionals, and
nongovernment organizations. None of us can do this alone.
I might also add, Mr. Chairman, that DHS and ICE get this
situation. Just 2 weeks ago we were summoned to New York to
meet with Secretary Napolitano, who was focusing on this
matter, and additional resources from her team are being added
to this as we see it.
We stand with you in the effort to protect U.S. consumers
and the homeland from counterfeit medicines. There is a lot of
work needed, and we believe that it is vital to the mission of
preventing crime and protecting patients.
Again, I thank the committee for inviting Lilly to testify
today and look forward to any of your questions.
Mr. McCaul. Thank you, Mr. Russo.
[The statement of Mr. Russo follows:]
Prepared Statement of Michael Russo
July 7, 2011
Good morning, Mr. Chairman and Members of the subcommittee. First,
let me thank the committee for inviting Lilly to testify about the
dangers of counterfeit pharmaceuticals and the efforts of ICE and CBP
to stop these dangerous products which have serious consequences for
Americans, global public health, our economy, National security, and
certainly our industry. In order to meet time constraints, I will
request that my full testimony be submitted for the record, so that I
can provide a summary of my comments today.
I am Michael Russo, Director of Global Security Product and Asset
Protection for Eli Lilly and Company, a global researched-based
pharmaceutical company based in Indianapolis. Lilly invests heavily to
research, develop, and manufacture safe and effective pharmaceutical
therapies which treat many diseases and save lives. Criminal
counterfeiters steal those innovations, by copying our branding
attributes and packaging characteristics and deliberately misleading
consumers to believe they are buying and using the legitimate, safe,
quality-controlled products that we manufacture. In our experience with
counterfeit products, we have observed that in many cases they are
poorly made in filthy facilities, lack efficacy, and may contain
dangerous and other unknown substances. There are several known cases
in which counterfeit products have been responsible for patient deaths.
And it is likely that counterfeit medicines have inadvertently caused a
patient harm by denying the effective treatment of a genuine medicine.
We are also seeing that the problem is on the rise globally.
Criminals cannot resist the allure of extremely high profits and
surprisingly low risks associated with counterfeit pharmaceuticals.
They are producing counterfeit versions of expensive and innovative
anti-cancer drugs, as well as less expensive generic medicines such as
antibiotics and vaccines. They target developed markets in the United
States and Europe, but also sell fake medicines to some of the poorest
populations, in some cases contributing to drug-resistant strains of
disease. I mention this because it is important to understand that this
is a crime against global public health, not just our company, and not
just our country. It threatens all of us, whether you buy medicine from
a fake on-line pharmacy, or you are administered a counterfeit vaccine.
If the fake products continue to proliferate; theoretically, they could
overtake genuine product in some countries, and that is frightening.
For these obvious implications on public health, our company has
prioritized the issue, acting as an industry leader to raise the matter
with U.S. agencies and other governments. We have established a
coordinated team of Lilly professionals who analyze the problem and
directly assist U.S. and foreign governments in the fight against
counterfeit pharmaceuticals. We also chair our industry association's
Anti-Counterfeiting Working Group, working through PhRMA and in
partnership with other sectors to combat this threat.
We have learned from our work that the counterfeiters are highly
sophisticated and are associated with international organized crime
networks. While our companies work to comply with numerous laws and
regulations to ensure our medicines are safe for patients, criminal
networks circumvent all of them with no concern for the patient's
health or our company's brand. They are pretending to be us, but they
do not regulate or control the quality of their products, and our
patients suffer the consequences.
For this reason, the United States and other governments must
continue work to disrupt and dismantle these organizations before the
counterfeit drug trade extends so broadly that it undermines the
legitimate global pharmaceutical supply.
Lilly is committed to assisting Government agencies like ICE in
tackling this threat. Lilly investigators work globally to develop
information regarding the various manufacturing and distribution
networks involved in the counterfeit pharmaceutical trade and the
individuals responsible for them. In order to succeed, we turn this
information over to a law enforcement agency capable of developing the
information we provide and ultimately bringing those responsible to
justice. ICE and CBP have been highly supportive and responsive to our
referrals. Their efforts have resulted in numerous criminal convictions
and a significant number of seizures of counterfeit pharmaceuticals at
our borders. Through their efforts, we have seen an increase in
cooperation with foreign law enforcement agencies that target
counterfeit operations outside the United States.
The effectiveness of ICE has been the result of not only the work
of numerous individual Homeland Security Investigative (HSI) agents
globally, but also the critical coordination and support provided by
the National Intellectual Property Rights Coordination Center (IPR
Center) which has served as a model of interagency and public-private
coordination for Government agencies and brand holders here in the
United States. The IPR Center maintains continuous communication with
brand owners and uses the expertise of its member agencies to share
information, test new initiatives, coordinate enforcement actions, and
conduct joint investigations. It also provides an effective forum for
brand owners to share information directly with investigative
professionals familiar with counterfeit/intellectual property (IP)
crime and for us to provide training regarding the characteristics of
our products.
The efforts by ICE to combat counterfeit pharmaceuticals have
resulted in several criminal convictions. In 2009, Kevin Xu was
convicted and sentenced in U.S. District Court in Houston for
distributing counterfeit and misbranded pharmaceuticals. Xu's criminal
activities resulted in him profiting in the amount of $1.5 million in 1
year from the sale of counterfeit pharmaceuticals. He was also
responsible for distributing counterfeits in Europe which resulted in
the recall of three pharmaceutical products. In Houston, Lawrence Chow
was sentenced to 12 months and one day for conspiring to distribute
counterfeit pharmaceuticals and trafficking in pharmaceuticals bearing
false labeling and counterfeit trademarks. In St. Louis this February,
Mark Hughes was sentenced to 48 months in Federal prison on multiple
charges including the sale of counterfeit and misbranded
pharmaceuticals. These convictions send an important deterrent message
to criminals who engage in this activity. We are thankful for and
support additional criminal investigations and resulting prosecutions
to send a clear message to drug counterfeiters who target the United
States and elsewhere. That said, the convictions are paltry compared to
the severity of the offense and do not send a strong enough message to
future criminals.
As this committee may know, the internet has posed a significant
challenge by facilitating criminal counterfeiting. It is used as a
conveniently anonymous platform by manufacturers, distributors, and
buyers of counterfeit pharmaceuticals. Criminal organizations dupe
customers into buying counterfeits through fake on-line ``pharmacies''
which use trademarked images of branded pharmaceutical products. In
response to this, ICE has responded to complaints by brand owners with
Operation in Our Sites II--a new approach to the internet trade in
counterfeits. In late 2010, the Justice Department Criminal Division,
ICE and nine U.S. Attorneys' offices across the country executed
seizure orders against 82 internet domain names of websites engaged in
the sale and distribution of counterfeit goods and illegal copyrighted
works. These actions sent a message that the internet was no longer a
safe haven for the distribution of counterfeit product. We would like
to see more attention by this committee and relevant U.S. Government
agencies to the number of dangerous counterfeit pharmaceuticals that
are being sold on the internet. Law enforcement operations such as
Operation in Our Sites are crucial deterrents, but more must be done to
take down fake on-line pharmacy sites and interdict incoming shipments
from these sites. This will undoubtedly require more active support
from the private sector companies that are indirectly facilitating the
registration and advertisement of new sites every day as well as
processing and shipping the purchased fake and illegal medicines
through their services. They can do a lot to support law enforcement
and prevent this criminal activity. We endorse the excellent work of
the Intellectual Property Enforcement Coordinator (IPEC), Victoria
Espinel, in fostering this collaboration and seeking ways to work more
robustly with the private sector as part of her Joint Strategy. We also
endorse the work of the Alliance for Safe Online Pharmacies (ASOP)
(www.safeonlinerx.com) of which Lilly is a member.
International cooperation aimed at coordinated law enforcement
operation and training is another vital element of how ICE is working
to address this problem. In addition to operations and trainings
conducted through such multi-lateral institutions as the Asia Pacific
Economic Cooperation (APEC), there is regular bilateral engagement
through the ICE and CBP Attache's posted in U.S. Embassies. These
attaches are critical to the success of international counterfeit
pharmaceutical investigations. They develop the critical links and
relationships with foreign law enforcement authorities that are
necessary to effectively dismantle counterfeit networks. In addition,
they provide brand owners with a professional investigative resource
in-country with whom to discuss and refer cases. ICE attaches
coordinate important training between local authorities and brand
owners that increase the importance and awareness of IP crimes and
familiarize local authorities with the dangers of counterfeit
pharmaceuticals and how these products can harm local populations. We
support the continued and expanded posting of ICE and CBP attaches
outside the United States and we encourage effective resourcing to
enable an increase in focus on counterfeit pharmaceuticals, given the
unique threat they pose to global public health and our own National
security.
Customs and Border Protection (CBP) officers who inspect the
millions of shipments entering the United States have also increased
their efforts to combat counterfeit pharmaceuticals. There are
thousands of illegal small parcels and express mail packages entering
the United States every day facilitated by illegitimate on-line drug
sellers posing as legitimate pharmacies. CBP officers have effectively
responded to our concerns about these shipments by implementing
coordinated efforts to inspect large volumes of packages for
counterfeits and referring those in violation to ICE HIS agents for
follow-up. Lilly, along with other industry partners, provided product
identification training as well as on-site analysis of seized products.
These efforts are critical to protecting U.S. consumers. They send an
important deterrent and educational message to U.S. consumers. We
support continuing and increasing high-profile interdiction operations,
as well as using the collection of data to inform and educate Americans
about the dangers of purchasing medicines on-line.
The efforts by ICE to combat counterfeit pharmaceuticals are
noteworthy but going forward more needs to be done to protect
Americans. We view the following as key areas for concern and where we
recommend additional focus going forward:
More operations and public education is needed to disrupt
the thousands of illegal shipments entering the United States
daily in small parcels and express mail. CBP needs more
resources and technology to interdict these shipments and all
appropriate agencies need the authority to destroy the known
counterfeit and illegal drugs seized instead of shipping them
back to the criminals who are sending them to our country. We
refer to the March 2011 administration's White Paper on
Intellectual Property Enforcement Legislative Recommendations
and Counterfeit Pharmaceutical Interagency Working Group Report
to the Vice President and Congress, which provided important
insight and suggestions related to this challenge.
We recommend legislation to increase penalties for
counterfeit and diverted products, which pose a direct threat
to public health and safety. Increased penalties will help to
send an important message to criminals engaged in
counterfeiting pharmaceuticals.
More attention needs to be focused on a broad international
internet strategy to address the thousands of illegal websites
that are selling fake and dangerous pharmaceutical products to
U.S. patients. We are currently providing ICE with lists of
offending internet websites which are infringing on our
trademarks and placing patients at risk. While their
investigative/deterrent work continues, more must be done with
education and voluntary action to compliment that effort.
As part of this strategy, we believe a major public
awareness campaign is needed to educate citizens about the
dangers of fake products and the importance of purchasing
medicine safely on the internet. The FDA and IPEC are working
to develop a coordinated education effort, and we believe that
funding and resources for this kind of a campaign are critical
to preventing this crime and protecting the homeland. Though
Government funding is needed to kick-start the effort, its
success requires the participation of several stakeholders,
from non-governmental organizations such as patient advocates,
to health-care professionals such as doctors, nurses, and the
local pharmacist. It must be a comprehensive education effort
to inform people about the dangers of fake drugs and why they
should go through legitimate channels when purchasing
medicines.
DHS has the unique ability to contribute to this campaign by
providing real data about what is coming across our borders as
well as information about the true nature of the criminal
organizations involved in the fake drug trade. DHS is needed to
help tell the story of the criminals involved in making fake
medicines in order to educate the public and health care
professionals.
Additionally, more should be done to encourage and realize
outcomes from the voluntary initiative of companies like Google
and Go Daddy to stop providing services to illegal on-line drug
sellers and distributors of counterfeit drugs. Google and Go
Daddy have initiated a new nonprofit called the Center for Safe
Internet Pharmacies (CSIP) with membership that includes search
engines, domain name registrars, credit card companies, and
shippers. CSIP is a vital development in efforts to reduce this
crime on the internet over the long term, and it is an
important compliment to the day-to-day work that ICE is doing.
CSIP has the potential to drastically reduce the threats posed
to patients and reduce the burden on law enforcement agencies;
therefore, we encourage this committee to support the work that
CSIP is doing.
Specifically, we ask for your support of the section in the
Protect IP Act of 2011 (S. 968) which provides legal immunity
to CSIP and other internet-related companies who stop providing
services to websites that endanger the public health. No House
version has been introduced yet, but that section would be very
helpful in any final House legislation. It helps to remove any
final disincentive to voluntary action that will protect
American citizens.
As a final part of the internet strategy, more effort is
needed through investigations to track websites back to the
source of supply and the major distributors of counterfeit
medicines. This requires increased international law
enforcement cooperation in response to leads developed and
aggressive enforcement action to follow up when justified. The
counterfeit drug trade is providing enormous profit that fuels
other dangerous criminal activity by organized criminal
networks. Dismantling these counterfeit pharmaceutical networks
must become a higher priority for law enforcement agencies
globally.
In this spirit, we support and encourage the on-going work
of the IPR Center to bring together the various Government
authorities and brand holders to fight this criminal activity
that is endangering our homeland and National security. It is
critical that all of the relevant agencies, ICE and CBP, the
FDA, the FBI, and local authorities, are working together with
the utmost coordination to fight the counterfeit drug trade.
This growing threat of counterfeit pharmaceuticals poses a very
unique and frightening threat, and it must not be viewed as an
economic or IP crime alone.
In conclusion, I want to underscore that combating counterfeit
pharmaceuticals is a very complex issue requiring the cooperation of
many agencies and governments, as well as the private sector, health
care professionals, and non-government organizations. None of us can do
it alone. We stand with you in the effort to protect U.S. consumers and
the homeland from counterfeit medicines and dismantle the international
crime networks that profit from the counterfeit drug trade. There is a
lot of work needed, and we do believe it is vital to the mission of
preventing crime and protecting patients everywhere. Again, I thank the
committee for inviting Lilly to testify today and for your commitment
to this important issue and look forward to any questions.
Mr. McCaul. The Chairman now recognizes Mr. Mancuso for 5
minutes.
STATEMENT OF MARIO MANCUSO, PARTNER, FRIED, FRANK, HARRIS,
SHRIVER & JACOBSON LLP
Mr. Mancuso. Thank you, Chairman McCaul, Ranking Member
Thompson, and distinguished Members of the subcommittee. Thank
you for the opportunity to testify today.
Today's hearing is a timely and important one and
implicates a number of vital U.S. National interests, our
technological competitiveness, U.S. jobs, and our Nation's
security.
As an initial matter, I believe we are fortunate to have
talented and committed career civil servants in our Government,
including at DHS. Unfortunately, this alone is not enough to
either keep U.S. industry globally competitive or dangerous
technologies out of the hands of U.S. adversaries. Ironically,
we need to do both more and less, and we might start by raising
our expectations for what constitutes success in the export
control context.
In my view, we should seek to enhance U.S. National
security and remain the most competitive, the most innovative
economy in the world. That objective is not merely desirable;
it is vital, and it is possible.
Before giving my general observation about DHS' role in
export control enforcement, I would like to simply describe the
context in which export control policy and enforcement take
place.
The world has changed since the end of the Cold War, and it
is changing still. Globalization is reordering our world, and
certain facets of globalization, economic, technological, and
political, are impacting our Nation's security profile and
shaping the exercise of our National power.
Today's National security threats are more numerous and
varied than ever before, and they require more and more
differentiated approaches to mitigate risk to U.S. security
interests. At the same time, the global, economic, and
competitive landscape has changed profoundly, fundamentally
realtering the efficacy and opportunity costs of export
controls.
Indeed, the very success of our economic diplomacy, the end
of the Cold War, and globalization generally, has increased the
pool of world-class competitors and altered the dynamics of
global economic competition. Unlike when U.S. export controls
were originally instituted, technology, talent, and capital are
now ubiquitous. Today U.S. companies compete with the rest of
the world, including companies in China and in India, but also
in Brazil, Korea, Indonesia. The list goes on.
Consider two startling facts. In 2009, King Abdullah
University opened its doors in Saudi Arabia. On the day it
opened, it had an endowment roughly equivalent to that of MIT,
except it took MIT 142 years to get there. Today it is
estimated that 90 percent of all scientists and engineers live
in Asia.
But there is more. The alchemy of our military
technological superiority has also changed. In the past,
approximately two-thirds of our Nation's military technologies
were developed in defense-unique R&D settings with the
remaining third generated from adaptations of commercial, off-
the-shelf technologies. Today those proportions are almost
exactly reversed. Thus, in a very real way, the vitality of our
civilian technology industry is now linked to U.S. National
security.
In the aggregate these developments are not altogether a
bad thing. In fact, the United States welcomes the integration
of developing countries into a rules-based global economy, but
these changes have challenged the core assumption of export
controls, that we have something that other people do not have,
that complicated the calculus of export controls generally and
further elevated the salience of U.S. economic competitiveness
and technology leadership in National security policymaking.
To some degree, U.S. export control regulations impact the
competitiveness of U.S. industry and, therefore, jobs in
America. To the extent that such export controls actually
advance U.S. security interests, those export controls are
necessary. However, to the extent that such controls create
protected foreign markets for U.S. competitors without
advancing U.S. security interests, they should be reconsidered,
unless doing so would be inconsistent with other important U.S.
National interests.
While this broader policy calculus is really beyond the
scope of this hearing, it should nonetheless inform DHS'
enforcement work. On a surface level, DHS has impressive
institutional tools at its disposal: A large pool of special
agents, fulsome legal authorities to conduct export control
investigations here and abroad, and a network of law
enforcement personnel deployed around the world. Yet, thus far,
DHS' enforcement results appear to be modest in comparison to
its resources. In this connection I offer the following
practical observations.
First, it is not only about DHS. DHS is an important actor
in export control enforcement, but it is not the only one.
While there is generally effective coordination at the senior
policy and special agent level, there could be improved
coordination at the middle-management level of the various
departments and agencies with export control responsibilities.
Indeed, our Nation's success in export control enforcement
matters at all is largely attributable to the make-it-happen
attitude of special agents in the field, and while President
Obama's creation of an export control coordination center is a
good idea, it will not, by itself, guarantee a positive result.
Second, DHS should improve its export control enforcement
acuity and operational concept. Large parts of DHS'
investigative culture developed around the investigation of
very different kinds of cases. As a result, export control
acumen is not a prominent part of the DHS investigative self-
identity. This is not an insuperable obstacle, but it will
require organizational leadership to ensure that export control
expertise remains a visible and highly regarded DHS capability.
Third, DHS should strengthen its enforcement architecture.
Fourth, DHS should refocus its enforcement activities. No
entity, including the Department of Homeland Security, can do
everything everywhere all the time. This is particularly true
in a resource-constrained environment. DHS should refine its
classified intelligence gathering and analysis capability and
prioritize its efforts accordingly. This should be done
periodically to ensure that DHS is focusing in the geographic
and other areas of maximum National consequence.
Finally, DHS should accelerate its engagement with allied
and partner governments to help address our shared security
interests. DHS should accelerate and elevates its engagement
with other governments through its attache presence around the
world. While it should seek to work with all governments of
goodwill, it should prioritize its efforts based on their
contribution to U.S. and international security. This important
work should be closely coordinated with the U.S. State
Department and, in every case, with our Chiefs of Mission
abroad.
Thank you for your kind attention. I understand I went over
my limit, but I would be pleased to answer any questions you
may have. Thank you.
[The statement of Mr. Mancuso follows:]
Prepared Statement of Mario Mancuso
July 7, 2011
Chairman McCaul, Ranking Member Thompson, and distinguished Members
of the subcommittee: Thank you for the opportunity to testify today.
Today's hearing, ``Homeland Security Investigations: Examining DHS's
Efforts to Protect American Jobs and Secure the Homeland,'' is a timely
and important one, and implicates a number of vital U.S. National
interests--our technological competitiveness, jobs, and our Nation's
security.
I have been fortunate to have had the opportunity to consider these
issues from a variety of perspectives in the public and private
sector--as Deputy Assistant Secretary of Defense for Special
Operations, as Under Secretary of Commerce for Industry and Security in
the administration of President George W. Bush, and as an international
lawyer counseling clients in export control and related matters. I hope
my testimony today will be of some value to the Members of this
subcommittee as you continue your important work in assessing the
efficacy and multiple impacts of DHS investigations.
As an initial matter, I believe we are fortunate to have talented
and committed career civil servants in our Government, including at
DHS. Unfortunately, this alone is not enough to either keep U.S.
industry globally competitive or dangerous technologies out of the
hands of U.S. adversaries.
Ironically, we need to do both more and less. And, we might start
by raising our expectations for what constitutes ``success'' in the
export control context. In my view, we should seek to enhance U.S.
National security and remain the most competitive, the most innovative
economy in the world. That objective is not merely desirable, it is
absolutely vital--and possible to achieve.
Before giving my general observations about DHS's role in export
control enforcement, I would like to simply describe the context in
which export control policy and enforcement take place.
the policy context
The world has changed since the end of the Cold War, and it is
changing still. Globalization is reordering our world and certain
facets of globalization--economic, technological, and political--are
impacting our Nation's security profile, and shaping the exercise of
our National power.
Today's National security threats are more numerous and varied than
ever before, requiring more and more differentiated approaches to
mitigate risk to U.S. security interests. At the same time, the global
economic and competitive landscape has changed profoundly,
fundamentally re-altering the efficacy and opportunity costs of export
controls.
Indeed, the very success of our post-war economic diplomacy, the
end of the Cold War, and globalization generally, has increased the
pool of world-class competitors and altered the dynamics of global
economic competition. Unlike when U.S. export controls were instituted,
technology, talent, and capital are now ubiquitous. Today, U.S.
companies compete with the rest of the world, including companies in
China and India, but also in Brazil, Korea, Indonesia--and the list
goes on.
Consider two startling facts:
In 2009, King Abdullah University opened its doors in Saudi
Arabia. On the day it opened it had an endowment roughly
equivalent to that of MIT--except it took MIT 142 years to get
there.
Today, it is estimated that more than 90% of all scientists
and engineers live in Asia.
But there's more. The very alchemy of our military technological
superiority has also changed. In the past, approximately two-thirds of
our Nation's military technologies were developed in defense-unique R&D
settings, with the remaining one-third generated from adaptations of
commercial, off-the-shelf technologies. Today, those proportions have
been almost exactly reversed. Thus, in a very real way, the vitality of
our civilian technology industry is now linked to U.S. National
security.
In the aggregate, these developments are not altogether a bad
thing. In fact, the United States welcomes the integration of
developing countries into a rules-based global economy. But these
changes have: (i) Challenged the core assumption of our export
controls--i.e., that we have something that others do not, (ii)
complicated the net-benefit calculus of export controls generally, and
(iii) further elevated the salience of U.S. economic competitiveness
and technology leadership in National security policymaking.
In this environment, we can no longer assume that export controls
always and automatically work to enhance U.S. security interests.
Instead, we must be discerning in the application of export controls,
rigorous in our enforcement of a right-sized export-control regime, and
mindful of the long-term relationship between U.S. security interests
and U.S. technology competitiveness.
To some degree, U.S. export control regulations impact the
competitiveness of U.S. industry--and therefore, jobs--in America. To
the extent that such export controls actually advance U.S. security
interests, those export controls are necessary. However, to the extent
that such controls create protected foreign markets for U.S.
competitors without advancing U.S. security interests, they should be
reconsidered.\1\
---------------------------------------------------------------------------
\1\ Unless doing so would be inconsistent with other U.S. National
interests.
---------------------------------------------------------------------------
While this broader policy calculus is beyond the scope of this
hearing (and the mandate of DHS enforcement officials), it should
nonetheless inform the tenor of DHS's enforcement work.
dhs and export control enforcement
On a surface level, DHS has impressive institutional tools at its
disposal: A large pool of highly-trained special agents, fulsome legal
authorities to conduct export control investigations here and abroad,
and a network of law enforcement personnel deployed around the world.
Yet, thus far, DHS's enforcement results appear to be modest by
comparison to its resources.
In this connection, I offer the following observations:
First, it's not only about DHS.
DHS is an important actor in export control enforcement, but it is
not the only one. While there is generally effective coordination at
the senior policy and special agent level, there could be improved
coordination among the middle-management levels of the various
departments and agencies with export control responsibilities. Indeed,
our Nation's success in export control enforcement matters is largely
attributable to the ``make it happen'' attitude of our special agents
in the field. And, while President Obama's creation of an Export
Control Coordination Center (ECCC) is helpful, it will not guarantee a
positive result in this regard.
Second, DHS should improve its export control enforcement acuity
and ``operational concept.''
Large parts of DHS's investigative culture developed around the
investigation of very different kinds of cases (e.g., border security,
human trafficking, bulk cash smuggling). As a result, export control
acumen is not a prominent part of the DHS investigative self-identity.
This is not an insuperable obstacle, but it will require organizational
leadership to ensure that export control expertise remains a visible,
and highly-regarded, DHS capability.
In addition, DHS has historically focused its export control
enforcement efforts on detecting illegal exports, investigating
potential violations, and obtaining international cooperation to
investigate leads abroad. This approach is reasonable but may lead to
sub-optimal enforcement results by not fully leveraging the
informational resources of the private sector. DHS should, therefore,
refine and build upon Project Shield America to better inform private
industry of export control issues and to more effectively engage the
private sector as a full partner.
Third, DHS should strengthen its enforcement architecture.
Though it did not resolve thorny jurisdictional and other issues,
President Obama's creation of the ECCC is a promising initiative to
enhance interagency coordination and limit duplicative or conflicting
enforcement activities. But, even a Presidential Executive Order is of
limited utility without consistent day-to-day leadership attention and
without appropriate DHS prioritization. Indeed, in the absence of
leadership involvement, the ECCC could make matters worse if it only
adds organizational complexity without operational value.
Fourth, DHS should refocus its enforcement activities.
No entity, including DHS, can do everything, everywhere, all the
time. This is particularly true in a resource-constrained environment.
DHS should refine its classified intelligence gathering and analysis
capability, and prioritize its enforcement efforts accordingly. This
should be done periodically, to ensure that DHS is focusing in the
geographic and other areas of maximum National consequence.
Finally, DHS should accelerate its engagement with allied and
partner governments to help address our shared security interests.
DHS should accelerate and elevate its engagement with other
governments through its attache presence around the world. While it
should seek to work with all governments of good will, it should
prioritize and rationalize its efforts based on their contribution to
U.S. and international security interests (e.g., WMD proliferation).
This important work should be closely coordinated with the U.S. State
Department and, in every case, with our Chiefs of Mission abroad.
Thank you for your kind attention. I would be pleased to answer any
questions that you may have at this time.
Mr. McCaul. Thank you, Mr. Mancuso.
The Chairman now recognizes Ms. McNeill for 5 minutes.
STATEMENT OF JENA BAKER MC NEILL, PRIVATE CITIZEN
Ms. Baker McNeill. Chairman McCaul, Ranking Member
Thompson, and subcommittee Members, thank you for this
opportunity to testify today. I should state beforehand, as
Chairman McCaul expressed, that these views are my own and not
an official position of The Heritage Foundation.
I hope to make three points today. First, worksite
enforcement is vital to our Nation's security, economic well-
being, and rule of law. The Obama administration, however, has
used its tenure to roll back or deemphasize several key
worksite enforcement measures.
Second, the Department of Homeland Security's employer-
focused strategy for worksite enforcement is inadequate in
terms of creating a legal workforce in the United States, and
it really sends the message that the Government does not take
enforcement of our immigration laws seriously.
Third, the right worksite enforcement strategy will address
both employers of illegal labor and illegal workers alike,
deploying a menu of enforcement tools aimed at stopping all
forms of illegal employment, which largely include identity
theft, fake documentation, and off-the-books employment.
While the employment of illegal workers has been unlawful
in the United States since 1986, these laws were not seriously
enforced. From 2004 to 2008, the Bush administration set up a
strategy to ramp up worksite enforcement of immigration laws,
including initiatives aimed at both employers of illegal labor
and illegal workers.
One of the more well-known of these actions was commonly
referred as to worksite raids. Law enforcement and immigration
authorities, pursuant to a criminal investigation, would arrive
unannounced at workplaces suspected of employing illegal
immigrants. Illegal immigrants would then be turned over to law
enforcement, while employers would then be prosecuted. These
checks were a huge deterrent mechanism to those seeking to
avoid the law.
Other efforts used by the administration at the time
included expanded use and promotion of E-Verify, as well as an
effort to use Social Security no-match letters as an
enforcement tools. These efforts, I think, were good first
steps towards effectively identifying individuals working
illegally and employers that were abusing immigration laws.
The Obama administration has since announced a change in
strategy, taking emphasis off of identifying illegal workers
and on punishing employers of illegal labor. The administration
has, for instance, avoided worksite raids and has focused its
efforts on
I-9 audits where employers have lead time by which to clear out
a staff of illegal labor. Even upon auditing, employers are
largely oftentimes free of further investigation as long as
they are doing the rote technicality of filling out the I-9
forms appropriately, even if they are aware that rampant
identity theft could be going on in their workplace.
Essentially, with plenty of notice, it is fairly easy for
most employers to clean up their payroll to pass the Obama's
administration's muster. With less threat of criminal
punishment, they can pass off any civil fines they receive as
just another cost of doing business. While these audits look
great on paper, they do very little in terms of actually
enforcing immigration laws.
These actions are also missing out on an opportunity to
identify and hold accountable illegal workers. Instead, now
they can go down the street and find another job illegally.
This pattern sends a message that we don't take enforcement
seriously, but it also hinders enforcement efforts because
apprehended illegal workers were often helpful to investigators
in a prosecution of employers who were abusing the law.
The administration has also expressly abandoned the effort
to use no-match as an enforcement tool and has been active in
trying to roll back implementation of REAL ID. Given that
identity theft is one of the biggest challenges facing worksite
enforcement, setting minimum standards for driver's licenses
just makes sense. However, the administration has spent more
time trying to get the act repealed or replaced than on meeting
its own implementation deadlines.
Meanwhile, the administration has made E-Verify the
centerpiece of its worksite enforcement efforts. Let me
emphasize: E-Verify is an outstanding tool for catching the use
of fake identification by illegal workers, but it is not a
silver bullet solution for enforcement. For instance, it can't
catch off-the-books employment or situations of identity theft.
If DHS is serious about holding employers accountable, it
has to be serious about holding illegal workers accountable.
The two aren't separate issues, and they require a strategy
with the right tools to deter the use of illegal labor in the
workplace.
I urge Congress to push the administration to better
delineate how its current worksite enforcement strategy will
better maintain the integrity of the U.S. workforce.
Thank you for this opportunity to testify, and I will be
happy to answer any questions you might have.
[The statement of Ms. Baker McNeill follows:]
Prepared Statement of Jena Baker McNeill
July 7, 2011
Chairman McCaul, Ranking Member Keating, and subcommittee Members,
thank you for this opportunity to share my thoughts on this very
important topic.
I am currently the Senior Policy Analyst for Homeland Security at
The Heritage Foundation, a position I have held for over 3 years. In
this capacity, I research, write, and speak on homeland security
issues, including the issue of worksite enforcement of immigration
laws. I should state beforehand that the views expressed in this
testimony are my own and should not be construed as any official
position of The Heritage Foundation.
Today's hearing will examine the Department of Homeland Security's
efforts to protect American jobs and secure the homeland. Specifically,
I hope to make three points during my testimony:
Worksite enforcement of immigration laws is vitally
important to our Nation's security, economic well-being, and
rule of law. The Obama administration, however, has used its
tenure to rollback several key worksite enforcement measures
put in place during and prior to the Bush administration.
The Department of Homeland Security's ``employer-focused''
strategy for worksite enforcement is inadequate in terms of
creating a legal workforce in the United States. It fails to
effectively address the problem of off-the-books and identity
fraud employment and sends the message that the Government does
not take enforcement of our immigration laws seriously.
An effective worksite enforcement strategy must combat both
employers of illegal labor and illegal workers alike, deploying
an extensive menu of enforcement tools, meant to combat
identity theft/fraud, fake documentation, off-the-books
employment, and other abuses of immigration laws in the
workplace.
I feel it is important to the discussion of worksite enforcement to
first delineate the primary means by which an individual might try to
work illegally in the United States. Understanding these illegal
methods is essential in terms of assessing the strategies that have
been employed by both the Obama and Bush administrations to enforce
immigration laws in the workplace. There are three main methods by
which most individuals attempt to gain illegal employment:\1\
---------------------------------------------------------------------------
\1\ Robert Rector, ``Reducing Illegal Immigration Through
Employment Verification, Enforcement, and Protection,'' Heritage
Backgrounder No. 2192, October 7. 2008, at http://www.heritage.org/
Research/Reports/2008/10/Reducing-Illegal-Immigration-Through-
Employment-Verification-Enforcement-and-Protection (July 4, 2011).
---------------------------------------------------------------------------
1. Working ``on the books'' with a fictitious Social Security
number.--In this situation, the illegal worker is employed
formally by a business, just as any other employee. The
employer withholds Social Security (FICA) taxes and files a
W-2 tax form for the employee. The illegal employee presents
identity documents to the employer showing that he is either a
U.S. citizen or lawful immigrant entitled to work.
These documents will contain a name, date of birth, Social Security
number, and possibly a green card number, which are either
partially or completely fictitious. The employer dutifully
records this fictitious information on an official form called
an I-9 and stores the form in a file cabinet. If the
information on the I-9 were checked, it would immediately be
found to be fraudulent.
2. Working ``on the books'' through identity fraud.--In this
situation, the illegal worker is also employed by a business
just like any other employee. The employer withholds Social
Security (FICA) taxes and files a W-2 tax form for the
employee. The illegal employee presents identity documents to
the employer showing that he is either a U.S. citizen or lawful
immigrant entitled to work.
However, in this case, the name, date of birth, Social Security
number, and (in some instances) green card number on the
documents corresponds to the identity of a real U.S. citizen or
lawful immigrant. To obtain employment, the illegal
fraudulently assumes the identity of another real person. The
employer records the fraudulent information on the I-9 and
keeps the I-9 on file, but neither the employer nor the
Government checks to determine whether the employee is the
person he purports to be.
3. Working ``off the books.''--In this situation, the employer
deliberately conceals the employment of the illegal worker from
the Government. There is no public record of the employee, FICA
taxes are not paid, and no W-2 is sent to the Government. It is
very unlikely that an I-9 form is completed or kept.
An effective worksite enforcement strategy will deploy enforcement
tools aimed at combating all three types of illegal employment.
weak enforcement history
The employment of illegal workers has been unlawful in the United
States since 1986 when Congress enacted the Immigration Reform and
Control Act (IRCA). IRCA set penalties for knowingly hiring illegal
workers and sought, through the requirements of the paper I-9 process,
to require employers to verify whether newly hired workers could
legally work in the United States.
This policy was ineffective at stemming the tide of illegal labor,
largely because it was never seriously enforced. While most employers
dutifully checked the information given to them from newly hired
employees, there was little accountability by the Federal authorities
to ensure that employers were following through on their obligations.
Furthermore, the Government failed to actually identify and deport
those found illegally employed in the United States. Employers had few
tools by which to know whether documents and other information provided
by employees were fake, authentic, or stolen from another authorized-
to-work American or lawful immigrant.
Partially because of this lackadaisical worksite enforcement
policy, in the years from 1986 to today, the illegal immigrant
population in the United States grew from approximately 2.8 million to
12 million in 2008 and down to around 10.8 million in 2010.\2\ Some of
this decrease can arguably be attributed to the enforcement measures
carried out from 2004-2008 which I will describe below, admittedly
however, most of the decrease in the past few years can be attributed
to our fledging economy and high unemployment rate which has and
continues to discourage many would-be illegal immigrants from choosing
to come to the United States. Without a strong enforcement strategy in
place, any economic rebound will likely increase these numbers to 2008
levels or possibly higher.
---------------------------------------------------------------------------
\2\ Michael Hoefer, Nancy Rytina, and Bryan C. Baker, Estimates of
the Unauthorized Immigrant Population Residing in the United States:
January 2009, http://www.dhs.gov/xlibrary/assets/statistics/
publications/ois_ill_pe_2009.pdf (July 4, 2011).
---------------------------------------------------------------------------
enforcement push
From 2004-2008, the Bush administration began an aggressive
strategy to ramp-up enforcement of immigration laws in the workplace,
including initiatives aimed at both employers of illegal labor and
illegal workers alike.
Despite the fact that IRCA provides both civil and criminal
penalties to employers that knowingly hire an individual without
complying with the employment verification system (the paper I-9
process), prior to the Bush administration, it was commonplace that
employers found hiring illegal labor might only be subject to
administrative hearings and at most civil penalties. The Bush
administration, however, began to perform large-scale criminal and
civil investigations of employers and used stiff criminal and civil
penalties to prosecute those that were abusing the law, while
identifying illegal workers.
Popularly referred to as ``worksite raids,'' the Bush
administration used unannounced immigration enforcement checks as a
means to identify employers of illegal labor and illegal workers. Law
enforcement and immigration authorities, pursuant to a criminal
investigation would arrive unannounced at workplaces suspected of
employing illegal immigrants and require proof of legal status. The
employees found to be illegal would be turned over to law enforcement,
while employers would be subjected to fines and other penalties for
employing illegal labor. These checks were essential in terms of
discovering all three types of illegal employment and served as a huge
deterrent mechanism to those seeking to avoid the law.
Other efforts used by the Bush administration included the expanded
use and promotion of E-Verify--an on-line tool by which to check the
employment status of newly hired employees. While deployed on a limited
basis as a pilot program since 1996, it was extended to all 50 States
in 2003. E-Verify today remains a voluntary program, and yet has more
than 225,000 participating employers.\3\ As part of the Bush
administration's push to increase participation in E-Verify, the
administration propagated a rule, in place today, which requires all
Federal contractors to use E-Verify for their employees.
---------------------------------------------------------------------------
\3\ United States Citizenship and Immigration Services, What is E-
Verify? http://www.uscis.gov/portal/site/uscis/
menuitem.eb1d4c2a3e5b9ac89243c6a7543f6d1a/?vgnextoid=-
e94888e60a405110VgnVCM1000004718190aRCRD&vgnextchannel=e94888e60a405110V
gn- VCM1000004718190aRCRD (July 4, 2011).
---------------------------------------------------------------------------
The Bush administration also began an effort in 2007 to use Social
Security No-Match letters as a worksite enforcement tool. The Social
Security Administration (SSA) has long issued letters to workers to let
them know that there was discrepancies in the use of their Social
Security numbers. In 1994, the SSA began sending such letters to
employers with 10 or more no-match W-2 forms. The Bush administration,
however, issued a new rule clarifying that receipt of such a no-match
letter ``may,'' depending on the circumstances, constitute constructive
knowledge that a worker is unauthorized. The rule then granted
employers a safe harbor from immigration enforcement actions based on
no-match letters when they took certain simple actions, such as double-
checking their records.\4\ After a court challenge, DHS proposed a
supplemental rule which would have resolved court concerns over the
rule's implementation and yet still preserve No-Match as an enforcement
tool. However, the administration was unable to follow through with
full implementation before the end of its tenure, and the Obama
administration would later completely abandon the effort.
---------------------------------------------------------------------------
\4\ Charles Stimson and Andrew Grossman, No Match Immigration
Enforcement: Time for Action, Heritage Legal Memorandum No. 25, at
http://www.heritage.org/Research/Reports/2008/05/No-Match-Immigration-
Enforcement-Time-for-Action (July 7, 2011).
---------------------------------------------------------------------------
When the Bush administration began actually enforcing immigration
laws in the workplace, the frequency of worksite arrests jumped from
845 in fiscal year 2004 to 6,287 in fiscal year 2008. These efforts
were essential first steps towards effectively identifying individuals
working illegally in the United States and employers that were abusing
immigration laws. While certainly not the end of the road for worksite
enforcement, augmented and effectively deployed, these efforts did and
would have continued to have a gigantic impact on worksite enforcement.
``change'' in strategy
The Obama administration, upon taking office, announced a change of
course in terms of its own worksite enforcement strategy. It has
emphasized that it has switched to one that is ``employer,'' rather
than ``employee'' focused, taking the emphasis off of identifying
illegal workers, and more on punishing those who hire illegal labor.
What this has meant in practice, however, seems to be significantly
less worksite enforcement than the Bush administration.
For instance, the administration has emphasized that it no longer
prefers to use ``worksite raids'' or unannounced worksite enforcement
checks, largely abandoning criminal investigations in favor of civil
actions. Instead, it has focused its efforts on paper I-9 audits where
employers would be told in advance that they will be audited and are
given significant lead time by which to clear out a staff of illegal
labor. Even upon auditing, employers are largely left free of
additional investigation as long as they are filling out the I-9
paperwork appropriately. Essentially, with plenty of notice, it is
fairly easy for most employers to clean-up their payroll to pass the
Obama administration's muster. While these audits look nice on paper,
they do very little in terms of actually enforcing immigration laws.
In at least one instance where the Department of Homeland Security
has performed investigations into employers, the enforcement check
reportedly resulted in no identification, detention, or deportations of
apprehended illegal workers. In February of 2009, an investigation into
Yamato Engine Specialists Company in Bellingham, Washington yielded 28
illegal workers. The Secretary of Homeland Security, however,
apparently uninformed of the enforcement check, according to press
reports, gave the apprehended workers temporary work permits.
This pattern sends a message that the administration is not serious
about enforcement. But it is also disappointing because the actual
apprehension of illegal workers was often helpful to investigators
during the Bush administration as witnesses to provide testimony in a
prosecution of employers for abuse of the law.
Rescission of Social Security No-Match.--Instead of pushing forward
with the supplementary rule propagated by the Bush administration that
would have likely met court muster and allowed for full deployment of
no-match as an enforcement tool, the Obama administration halted no-
match letter issuance completely and expressly emphasized its intention
to prevent the use of such letters as evidence for constructive
knowledge of unauthorized workers. While the administration has in
recent months quietly begun issuing letters again, it has shown no
appetite to push forward with the Bush administration's plan to use no-
match as an enforcement tool. Given that the administration has
emphasized its preference for an ``employer-focused'' strategy for
immigration enforcement--such a policy should fit squarely into the
administration's agenda.
Abandonment of REAL ID.--REAL ID was enacted in 2005 in direct
response to the 9/11 Commission Recommendation that the Federal
Government set secure standards for identification as a means of
preventing terrorist travel, but also to combat identity theft and
fraud. Given that identity theft and fraud is one of the biggest
challenges facing worksite enforcement and driver's licenses are
routinely used as part of the worker verification process, requiring
States to meet a minimum standard for driver's licenses only makes
sense. However, while many States have moved forward to meet the Act's
requirements, the administration has spent more time trying to get the
Act repealed or replaced than meeting implementation deadlines. The
administration's efforts to get rid of the mandate make little sense if
it is serious about combating the rampant identity theft used to obtain
employment illegally.
At the same time as rolling back these measures, the Obama
administration has made E-Verify the centerpiece of its worksite
enforcement strategy and has pushed aggressively to increase
participation in the E-Verify program. At a conference on E-Verify in
2009, Secretary Napolitano stated that ``E-Verify is at the centerpiece
of our efforts to maintain a legal workforce both for large and small
businesses.''
Let me emphasize, E-Verify is an outstanding tool for catching the
use of fake information by would-be illegal workers. It can accurately
and inexpensively do so and it absolutely should be promoted. However,
it is not a silver bullet solution for enforcement and should not be
sold as such by the administration. For instance, E-Verify cannot catch
off the books employment. It also does not catch situations where an
illegal worker steals a legitimate Social Security number and other
documentation and gives that information to an employer. In essence,
without other tools aimed at squeezing out other forms of illegal
employment, an E-Verify focused enforcement strategy will simply
further the market for identity theft and off-the-books employment, and
only detect a small percentage of the illegal workforce.
an effective strategy
The Department of Homeland Security's so-called employer-focused
strategy has resulted in less enforcement, not more. While it has in
some instances exceeded the Bush administration's levels in terms of
sheer number of investigations and penalties, these efforts have
largely lacked in substance, and have done very little to actual stop
the employment of illegal labor. Some of the right questions to be
asked should be the number of worksite arrests, what actions ICE has
taken to investigate identity theft discovered in the course of an
investigation, and what steps is it taking to follow up with employers
that have been investigated through a soft I-9 audit.
If DHS is serious about holding employers accountable, it must also
be serious about holding illegal workers accountable. The two are not
separate issues, and require a comprehensive strategy aimed at
disincentivizing the use of illegal labor in the workplace.
Effective enforcement requires a menu of enforcement tools aimed at
squeezing all forms of illegal labor out of the market, including off-
the-books, identity theft, and fake documentation. Such a menu of
enforcement tools should include:
Reinstatement of worksite enforcement checks.--These checks,
pursuant to a criminal investigation are a valuable tool in
terms of identifying those employers that are consistently
hiring illegal labor. Diluting their effectiveness by alerting
employers or not actually identifying, detaining, and deporting
identified illegal workers makes such raids useless.
Continued use of civil audits in conjunction with criminal
enforcement.--I-9 audits can be used effectively to alert
employers of potential violations of immigration law. These
audits should continued to be used, in conjunction with a
robust criminal investigation process. Together, these actions
can provide the deterrent effect necessary to combat violations
of worksite immigration laws.
Provide resources to limit the impact of worksite raids on
families and local communities.--While worksite enforcement
checks are a perfectly legitimate and effective means by which
to identify illegal workers, the impact of these raids on
families and local communities should not be ignored. Often the
children of detainees, most of them U.S.-born citizens, suffer
when their parents are detained and deported. ICE has tried to
put in place several initiatives to allow families to stay
together during the deportation process as well as the release
of sole caregivers from detention facilities. The Obama
administration could go further to coordinate with local
communities before and after raids, including working with
schools, social services, and religious institutions to ensure
that no children are being left behind, as well as working to
ensure quick release of sole caregivers to minimize the time
that children of single parents are left in the care of others.
Continued efforts to promote and improve upon E-Verify.--E-
Verify is highly accurate at detecting false information
provided by an illegal worker. It should continue to be
promoted as a means for employers to check the work eligibility
of their employees. Congress and the administration should
remain committed to its reauthorization and to continually
refine the accuracy of its databases. Another step may be to
investigate whether employers are actually discharging the
employees who receive final non-confirmations.
Promote IMAGE.--IMAGE is the ICE Mutual Agreement between
Government and Employees. It was meant to improve internal
enforcement by giving companies training on ICE on hiring
procedures, detecting fraudulent documents and using E-Verify.
In addition, participating companies have to undergo an I-9
audit and check the legitimacy of existing employees' Social
Security numbers. IMAGE should be supported in order to give
willing companies more resources by which to ensure the
legality of their workplace.
Move forward with Social Security No-Match as an enforcement
tool.--No-Match has the ability to help tackle identity theft
situations and help employers identify illegal workers in their
labor force. A next step would be to allow information sharing
between DHS and SSA on no-match data to assist in immigration
investigations.
Examine supplemental procedures to prevent identity fraud/
theft.--One method may be for the SSA to scan its wage database
to identify individuals who held two or more jobs at the same
time, over an extended period, were receiving Social Security
benefits, or were employed under the age of 16. These red flags
could then be used by SSA to send a letter to the individual
notifying them that a potential identity theft may have
occurred.
Ramp-up support for investigations of off-the-books
employment.--While off-the-books employment situations are the
most difficult for investigators to tackle, additional
resources for investigations of these incidents could decrease
the incentive for employers to hire workers in this manner.
Increase penalties for unlawful hiring.--The financial
penalties for hiring legal workers is too low, so low, in fact
that it does not always deter illegal hiring. As a result, many
employers can factor in fines as a cost of doing business.
Congress should look to set fines in a way that will have an
actual deterrent effect.
Move Forward with REAL ID.--Postponing or modifying
implementation confuses the work already in process and
detracts from the underlying purpose of REAL ID--to maintain
security and combat identity theft.
A legal workforce is absolutely essential in terms of an effective
immigration strategy that preserves National security, promotes the
economy, and maintains rule of law. I urge Congress to push the
administration to better delineate how its worksite enforcement
strategy will meet these goals.
Thank you for this opportunity to testify. I would be happy to
answer any questions you have at this time.
Mr. McCaul. I want to thank the witnesses for their
testimony. The Chairman now recognizes himself for 5 minutes.
Mr. Toohey, I want to start with you. We have some
photographs I hope we can put up on the screen that deal with
the issue you were talking about. As I understand it, this is a
semiconductor chip that has included information about date and
manufacturing location codes; is that correct?
[The information follows:]
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Mr. Toohey. That is correct, Mr. Chairman.
Mr. McCaul. Why is that important?
Mr. Toohey. It is important because in this context it
enables us to determine whether or not the chip is authentic or
counterfeit. Companies have databases which can tell you
exactly where the chip was manufactured, on what day, what type
of chip it is, and by verifying the type of chip versus that
coding system, we can almost instantaneously verify whether
that is an authentic chip or not.
Mr. McCaul. Okay. So DHS would come to you and say, hey, we
have got this chip, is this authentic, is it yours, and if it
is not, if it is counterfeit, they need to confiscate it,
correct?
Mr. Toohey. Yes, sir.
Mr. McCaul. That was going on between--that was the
practice----
Mr. Toohey. Practice for many years.
Mr. McCaul. Two-thousand to 2008 or----
Mr. Toohey. Even before, Mr. Chairman--sorry. Even before
2000, it was the practice for many years. Starting in 2000,
they stopped sending out the actual product and just sent us
pictures, which is fine. As long as we have the code, we can
determine. Actually it was a system that worked very well, but
in 2008 it all stopped, and they redacted the information from
the pictures that they were sending.
Mr. McCaul. So early on they would actually send you the
actual product, which is the best evidence, then they sent the
picture which had information on it so you could identify, and
then in 2008 something else--something happened--and let us
show the other picture if we can. This is what you get. Is this
an example of what you would currently receive from DHS?
[The information follows:]
[GRAPHIC(S)] [NOT AVAILABLE IN TIFF FORMAT]
Mr. Toohey. Yes, Mr. Chairman, and as you can see, it is
virtually impossible--you can't see the number, and it is
virtually impossible based on that for anyone to authenticate
that chip.
Mr. McCaul. You don't have the trace codes or any of the
information contained in the previous photograph to identify
this intellectual property, this semiconductor chip?
Mr. Toohey. Yes, Mr. Chairman, that is exactly right.
Mr. McCaul. It is astounding. Why? Has DHS explained to you
why they have stopped providing this kind of information?
Mr. Toohey. Yes. First of all, let me clarify. This isn't a
policy that was directed only at our industry. It affects all
products, and it was based on a reinterpretation that Treasury
Department, which has policy responsibilities in this area,
established in 2000. It was a reinterpretation of the Trade
Secrets Act, in which it determined that--or at least its
opinion was that by sending that information to the
manufacturer, that would violate the disclosure of confidential
information provisions of the Trade Secrets Act.
As I mentioned in my statement, that just doesn't make any
sense, even common sense, because to the extent anyone owns
that publicly viewable information, it is the manufacturing. It
is the company that it would be sent to. We provided detailed
legal analysis to the Department of Treasury and DHS in terms
of why that just isn't the case. They haven't really given us
any reason why our legal analysis is wrong.
Part of the motivation that I understand is a desire to
protect parallel importers, so as to not have any, you know,
information disclosed to manufacturers that could affect
importers, but there is nothing in that code that can tell us
who the importer is. At the most it could tell us who we
originally sold it to, but that information simply is not
possible to obtain from that code. So, from our perspective,
that doesn't make much sense.
You know, if one can even understand that justification for
handbags or some other products, you know, one could maybe
understand it, but for products where there is critical, you
know, life-saving technologies, health and safety, our
soldiers' technologies on the line--we know for a fact, as you
said in your opening statement, Mr. Chairman, this is a clear
and present danger. We know that there is 15 percent of current
inventories of the Pentagon where these chips are counterfeit.
So we know this is a problem. We know that this is an on-going
issue, and it is affecting the lives of our soldiers and the
health and safety of our citizens. So, in this particular area,
it just doesn't make any sense to us why we would tie our hands
and not allow our industry to help the Government determine
instantly where these products are coming from.
Mr. McCaul. You want to help the Government identify
counterfeit chips, and it is my understanding the lawyers at
the Department have now determined that they cannot give you
this information unless they have basically, you know, taken
all the identifying information off of it. How can you possibly
identify something as counterfeit when they have taken off all
the code numbers?
Mr. Toohey. You are exactly right; you can't, Mr. Chairman.
Mr. McCaul. You can't?
Mr. Toohey. You cannot.
Mr. McCaul. So, as a result of this legal policy or
analysis that was done, we probably have God knows how many
counterfeit chips coming into this country, and we are
excluding the private sector from being able to assist DHS in
identifying, you know, counterfeit chips coming into the
country; is that correct?
Mr. Toohey. That is exactly correct, Mr. Chairman. We are
desperate to help. We have been begging Treasury and DHS to let
us help stop dangerous chips that are coming in.
Mr. McCaul. Well, we are going to try to help you. I hope
Mr. Thompson--I don't see this as a Republican or Democrat
issue. I see it as just a common-sense issue that I hope
perhaps we can work together to change this policy. Otherwise
we are going to have counterfeit goods coming in that can't be
identified.
I want to try to hit a quick question with each of you. I
know my time is limited, but going to Mr. Russo, you know, I
talked about the example of just one drug going to so many
different countries around the world and finally ending up in
the United States being counterfeit. When we talk about this
chain of supply, what do you consider to be the greatest threat
to pharmaceutical companies, the supply chain?
Mr. Russo. Mr. Chairman, the greatest threat that we see to
the supply chain is what is available over the internet. The
ease in which a consumer, wherever it is in the world, can
order counterfeit pharmaceuticals over rogue websites presents
a significant threat to patients in the United States and, for
that matter, other countries.
Mr. McCaul. You know, there has been some talk about making
it legal for people to import from Mexico and Canada. Does that
pose any threat in terms of the quality of the product?
Mr. Russo. The problem is that when you look at internet
sites that sell pharmaceutical products, what you look at is
what is a very slickly designed website with a person in a
white coat with a stethoscope around their neck, and the
patient throws a credit card in there and orders product, and
you really don't know what you are going to get. You could get
diverted product, you could get stolen product, you could get
counterfeit product. As you said in your remarks, sir, those
products are less than efficacious and don't treat disease. So
that is the issue is you have a slick front, and you don't know
what is behind that, and as we have purchased from those sites,
we found many of those products to be substandard coming into
the United States.
Mr. McCaul. Do you know what percentage of these consumers
are seniors that buy their medications on-line?
Mr. Russo. No, Mr. Chairman, I don't have that data. We see
a lot of different consumers buying over the internet, you
know, for various reasons.
Mr. McCaul. If I can move on to Mr. Mancuso, you know, in
my prior life I worked at the Department of Justice. We worked
quite a bit on Export Control Act cases, dual-use technologies,
so I am very familiar with that. Most of these cases involved
China, you know, and we know that the most probably hacked-into
office from a cyberattack is this export control office within
the Department of Commerce, for obvious reasons.
What more needs to be done to protect--you know, we don't
want to slow commerce down, but we certainly don't want to be
giving nations, you know, that don't have our best interests at
heart, you know, technology like the example I gave; one is it
is a medical device, but that it can be used, you know, for a
nuclear device. What more needs to be done?
Mr. Mancuso. Mr. Chairman, I would suggest, just to begin
with, to distinguish two things. First is refining our export
controls and reaching out to industry to ensure that the
private sector is really a partner in enforcement. You know,
many U.S. companies want to help and have more information at
their disposal with respect to industry competitors who may not
be complying with the law.
On the other hand is industrial espionage, which is, of
course, different because industrial espionage is the
intentional theft of technology. I think we have to,
specifically with respect to State-based competitors, near-peer
competitors, looming adversaries perhaps, we need to buttress
our counterintelligence capabilities to figure out what
technologies they are interested in and what vectors they use
to acquire our technologies.
So I would submit to you, Mr. Chairman, that there are two
things: Export controls and outreach to industries to ensure
that on the U.S. side of the equation, industry knows what is
controlled, how it is controlled, how it can be exported. But
on the sort of foreign side, we need to build a better firewall
in terms of our counterintelligence capability to uncover,
prosecute industrial espionage.
Mr. McCaul. Thank you.
Last question to Ms. McNeill on the worksite enforcement
issue.
According to the Congressional Research Service, since this
administration has come into power, administrative arrests have
declined 77 percent, criminal arrests have declined 59 percent,
and convictions declined 66 percent. I know there was a shift
in policy in terms of going after, I guess, employers and not
the employees, but these numbers are, to me, very disturbing in
the sense that we are not enforcing the law. What is your
opinion?
Ms. Baker McNeill. Well, you know, it is sometimes very
difficult, Mr. Chairman, to disaggregate the employers of
illegal labor from the illegal workers. You know, if you look
at the situations where they--if they are in the Bush
administration, during worksite arrests they may find
individuals who either the employers had knowledge of the
identity theft ring that was going on, that the employers maybe
were violating other workplace standards, other immigration
laws in the workplace, and these illegal workers were so
essential to providing that kind of case to be able to
prosecute employers. So you can't take one and not have the
other to have an effective enforcement strategy. You really
have to do both because they work--you know, they work off of
one another. It is an economic problem because workers want
jobs, employers need labor. So we have to attack it from both
sides.
Mr. McCaul. This hearing is really about protecting
intellectual property and innovation in this country and
protecting American jobs, jobs that Americans would have but
they're losing. So, you know, the E-Verify I always thought has
great promise if it is fully implemented. The verification on
Social Security numbers, if we could fully implement that. But
we just have never--and I'll say in fairness to both the prior
administration and this administration, we have yet to fully
implement that program.
Ms. Baker McNeill. Well, I will give significant credit,
Mr. Chairman, to the Obama administration for taking the time
to look at ways to improve E-Verify as a system. They have done
E-Verify self-check, which essentially allows individuals to go
and look at their own information. That only helps improve the
accuracy of E-Verify. So I think that is an area. But we can't
make E-Verify the only centerpiece enforcement tool, because it
doesn't take into account identity theft and off-the-books
employment, which are huge issues in the workplace.
Mr. McCaul. Thank you.
My time has expired. The Chairman now recognizes the
Ranking Member of the full committee, Mr. Thompson.
Mr. Thompson. Thank you very much, Mr. Chairman.
Since we are talking about American jobs and how this
process yields some increased numbers, Mr. Toohey, I looked at
your semiconductor picture, and it struck me that most of the
problems we are dealing with is these chips are made somewhere
else. If we really wanted to generate some jobs, I would think
we would try to bring that business back here. Has your
industry ever looked at what it would take to bring that
industry back, thus creating new jobs and eliminating a large
portion of this counterfeiting that's going on right now?
Mr. Toohey. Well, thank you, Mr. Ranking Member.
Our industry is committed to building jobs in this country.
As I mentioned in my opening statement, we manufacture the
majority, about 75 percent, of the chips that we sell all
around the world here in the United States. So we are very much
committed to manufacturing and design here in the United
States, and it is something that we continue to build and we
continue to invest in manufacturing here in the United States.
This counterfeit problem is a little bit different. Most of
the chips that come back as counterfeits were originally
manufactured as some other type of chip, probably here in the
United States, and they're sent around the world as e-waste,
you know, old computers, old things.
The counterfeiters, they don't have the capability to
manufacture chips themselves. They can't build $5 billion
fabrication facilities. They take these old chips out of old
computers or old cell phones and then they remark them as
something, you know, milspec chips or some very specific
application, and then sell them as international brokers.
So the problem is it is not that they are manufactured
overseas originally or that there is great investment in jobs.
That is mostly still here, Mr. Ranking Member. The problem is
that these counterfeiters then take the waste and then mark
them up and then send them back here as something else, and
that's what we need to stop.
Mr. Thompson. So have you looked at or has your trade group
looked at any additional methods that it would recommend to
prevent those chips from coming back in?
Mr. Toohey. Thank you, Mr. Ranking Member.
Certainly closing the front door, taking the very discrete
action that we recommend would be an enormous help, something
we could do today that would significantly advance our efforts
and prevent these counterfeit, dangerous chips from coming in.
So that's one aspect.
Another aspect is increasing the prosecution of these
unscrupulous dealers. Much of the prosecution--and ICE and
other agencies are great at doing this, but providing--stopping
the counterfeiters first will actually facilitate additional
prosecutions.
From the Business Week articles and others, you will see
that many of the dealers selling chips into the DOD system are
these small, unscrupulous dealers. They know what their problem
is.
A third area where I think we could do more is in
tightening up our Federal acquisition regulations so that DOD,
DHS, other agencies only purchase from authorized dealers.
That's not the case today. That's something we ought to look
at.
A final area, Mr. Ranking Member, is working with our
international partners more closely. We know where these chips
are being counterfeited. We know they're being sold openly in
Shinsen in a big market there. One of my colleagues just came
back from there and brought some samples he was freely given.
We know exactly where this is, and so we need to work more
closely with China to stop this and increase enforcement on the
ground.
Those are some other practical measures we could take.
Mr. Thompson. Thank you very much.
Mr. Russo, with respect to counterfeit pharmaceuticals, I
think part of your testimony talked about these rogue websites
and the fact that a number of them have been shut down, but a
number of them still exist. Taking off from the Chairman's
comments, sometimes people are lured to those sites because of
the cost factor of the drugs. A lot of seniors get caught up in
the trap. Knowing that a disproportionate number of those
individuals might be seniors, has your industry looked at any
programs that could drive seniors back to the marketplace
versus the websites?
Mr. Russo. Thank you, Mr. Ranking Member.
I want to say that no pharmaceutical company wants to see a
patient that needs medication without product. To help seniors
and others who don't have funds to buy product, there are a
number of programs that our company has and other competitors
to us have for seniors who can't afford medication. Many of
those are available publicly on our website. Through some of
the enhancements in Medicaid and Medicare, there are other
programs for seniors. So there are, we believe, a number of
ways for seniors who don't have funds to obtain product; and we
encourage them to use those programs to seek safe and
efficacious pharmaceutical products.
Mr. Thompson. I appreciate your indulgence, Mr. Chairman.
You know, we created the position of Intellectual Property
Enforcement Coordinator; and to the extent that that's been
there for a while, Mr. Toohey, can you comment as to what the
industry's experience has been with that operation?
Mr. Toohey. Sure, I would be happy to. Thank you, Mr.
Ranking Member.
We have had a great experience with Victoria Espinel and
her office that has been tremendously helpful to us in a wide
range of areas in intellectual property enforcement globally.
So that office, as a matter of fact, used--they spent a lot of
time trying to help us solve this problem, but they weren't
able to change the Treasury Department's and DHS' policy views.
They weren't able to overrule them. But we have had a fantastic
experience and great support from that office.
Mr. Thompson. What about you, Mr. Russo? Do you have any
contact with that office?
Mr. Russo. Thank you, Mr. Ranking Member.
I would echo Mr. Toohey's comments and say that I
personally have been very impressed with Ms. Espinel and her
staff who have really got to the low-level understanding of the
issues that face our industry and, as you can see, their
industry; and they have been very helpful and very effective in
helping us fight counterfeit pharmaceuticals.
Mr. Thompson. Thank you.
I yield back, Mr. Chairman.
Mr. McCaul. I thank the Ranking Member.
The Chairman now recognizes the gentleman from Missouri,
Mr. Long.
Mr. Long. Thank you, Mr. Chairman.
Mr. Toohey, you testified that we need to take proven,
commonsense steps, which the trouble with common sense is it
isn't common, as you know.
Then you said that 15 percent of--was it--spare chips
purchased by Department of Defense are counterfeit.
Now I have got a visual in my head of a guy in a trench
coat standing over at the Pentagon saying, hey, buddy, you want
to buy a chip? How in the world are we buying 15 percent of
counterfeit chips? What's the supply chain? Where do those come
from?
Mr. Toohey. Well, Mr. Long, thank you very much for the
question.
It is a big problem that we would recommend be fixed, and
the Department of Defense and the Federal acquisition
regulations need to be tightened to only purchase through
authorized dealers. Right now, they purchase essentially at the
lowest price. The regulations are the lowest price. Anybody who
is willing to sell them these chips or other military products
is, at least my understanding, they have to purchase at the
lowest price. So they purchase, many times, from these very
kind of fly-by-night, unscrupulous dealers who get their chips
from China; and they mark them up as milspec and----
Mr. Long. Educate me. What is milspec?
Mr. Toohey. Sorry. Military specifications, so increased
heat and endurance, you know, very sophisticated equipment.
So, you know, it is--that system is broken. So part of the
solution would be to tighten our Federal acquisition
regulations, especially for the critical areas like DOD and
DHS, to make sure they are only buying from authorized dealers.
That just makes sense. That's just in our National interest.
So we would strongly recommend--we have been recommending
for many years--that the Department of Defense do that.
Mr. Long. These are coming in large enough quantity--
obviously, they are--where they can buy 15 percent of them.
Mr. Toohey. Yeah. That's their number. Officials publicly
have said that from DOD and said that's what they estimate.
Mr. Long. On your first exhibit, which was the authentic
and the counterfeit voltage regulator and automotive airbag
brake systems, the numbers on there, they don't look to be
quite identical. But walk me through the redacted part where
they are sending you these redacted pictures. What are those
pictures of? Are these shipments that they suspect are
counterfeit or they know are counterfeit and then they send the
industry these pictures with the redacted information?
Mr. Toohey. Yes, Mr. Long. They are suspected counterfeit.
So for whatever reason, maybe it is the location they came
from, the way they are packaged, the port officers suspects
that they don't look quite right. So, in that instance, they
traditionally send us the full picture of the chip where we can
tell them right away whether it was authentic or not.
Mr. Long. How can you do that? It looks like they could
copy identical the coding and everything if they're going to--I
mean, that's what I am having trouble with is understanding how
that helps you. Because it looks to me like they could--if they
are going to counterfeit the chip, it looks like they could
counterfeit the identifying numbers.
Mr. Toohey. Well, they don't always have the exact type of
chip that they are trying--many times, they are selling very
sophisticated, advanced chips, and what they are dealing with
are those old e-waste, and so they take numbers that----
Mr. Long. Is that 100 percent of the time this all starts
with e-waste?
Mr. Toohey. Mainly, yes. I mean, almost always. They don't
manufacture their own chips, so they get them from some other
place.
Mr. Long. I am flabbergasted that there is that much volume
out there where they could, all through e-waste, and come up
with a big enough shipment to ship to our military and we are
buying 15 percent of counterfeit product. It is just mind-
boggling.
Mr. Toohey. Yes, sir, it is. It is a system that we can
dramatically improve today by making the right type of policy
change.
Mr. Long. Okay. I hope we can help you with that.
Mr. Toohey. Thank you, Mr. Long.
Mr. Long. Mr. Russo, are you aware of any instances where a
country has prohibited FDA to inspect a facility within that
country?
Mr. Russo. Thank you, Mr. Long.
That's an area of expertise I don't have. My remit is
strictly counterfeit. FDA inspects a lot of facilities for
compliance and regulatory matters, and it would not be
information that I have. But I would be happy to go back to my
company, to the experts in that area, and get you a written
response.
Mr. Long. If you would, I'd appreciate it. Also to follow
up with the written response.
If there are countries that are doing that, my next
question would be if you all have any facilities within those
countries.
Mr. Russo. Yes, sir. We will follow up, and I thank you for
the question.
Mr. Long. Thank you, Mr. Chairman. I yield back.
Mr. McCaul. Thank you, Mr. Long, for your questions.
We are going to follow up on this issue. It is unacceptable
that 15 percent of the military's semiconductor chips are
coming--well, not only foreign countries but counterfeit. So I
think that's going to be one of the tangible takeaways we will
get from this hearing, and I appreciate your help on that.
The Chairman now recognizes the gentleman from South
Carolina, Mr. Duncan.
Mr. Duncan. Thank you, Mr. Chairman.
You know, sitting here, thinking about it, just listening
to the testimony, I think it is ironic that we are debating a
defense authorization or appropriations bill this week when so
much money has been spent with independent contractors out
there that are supplying these chips.
I want to reference a Business Week article. The cover says
``Dangerous Fakes'', and the article talks about a contractor
out in Bakersfield, California, who wasn't involved in any sort
of microchip business before, but she heard there may be a
business opportunity to begin selling microchips to the
military. So she created a business in her home, and since 2004
she has won Pentagon contracts worth a total of $2.7 million.
The military has acquired microchips and other parts from her
for use in radar on the aircraft carrier Ronald Reagan and
antisubmarine combat systems of destroyers. She said she knows
very little about the parts that she buys.
So I am sitting here thinking about all the money that we
spend with these independent contractors that, if you look at
what she went through to get that military contract, it was
very little. Then, to find the products that she sells, she
plugged parts into Google--part codes into Google and found
websites offering low prices. She bought those microchips from
the website and sold them to the military.
So I'm sitting here thinking how many men and women in our
armed services are in harm's way because of faulty microchips
that might be in an airplane system, now that we are doing fly
by wire in the F-18 and other future aircraft. How many faulty
weapon systems or faulty chips are in weapons systems there in
the drones that are used and in commercial aircraft? I'm going
to take this even further, commercial energy production,
nuclear power, the power grid?
We know what happened in Iran with the centrifuges with the
virus that shut them down. Do any of these microchips--is there
a possibility of espionage from a country or a rogue entity
that puts a virus in place or puts a back-door access code that
they can access these power systems on the commercial side, not
on the military side?
So these are things that I'm thinking about. So my question
to you is: Where are most of these microchips being produced?
What countries would you say they are coming from mostly?
Mr. Toohey. By far, China. By far some specific places
within China, that they take the old, used electronics and take
out the chips and then, you know, sand off the number and put a
new number on and then repackage them, sell them to people like
the person you mentioned, very unscrupulous dealers.
Unfortunately, that's not an isolated incident. But we know
exactly where they are coming from.
These are counterfeit chips. Just a couple of days ago one
of my colleagues was there in Shinsen and walked openly in the
market. He was given samples of counterfeit chips. So we know
exactly where it is. You know, part of the solution is
certainly targeting those places.
But I think the first thing we ought to do is use the very
practical, known, proven solutions to close our front door.
There is, obviously, a multi-tiered effort. We have to go on
tightening up our Federal acquisition regulations, prosecuting
these people, these unscrupulous dealers, and working with
other countries, especially China.
Mr. Duncan. What other countries are better to work with
than others? Do we have some that are proven difficult to work
with?
Mr. Toohey. Well, I think China has been difficult to work
with. I think our Government officials would tell you, on
overall enforcement of intellectual property, there are efforts
certainly going on in China to step that up, which we
appreciate, but we need more, and we need a stronger focus on
the part of our trade negotiators. But this problem almost
entirely emanates from China.
Mr. Duncan. Mr. Chairman, I am concerned that DHS is
writing security directives that change policy without
Congressional authority and Congressional consent and holding
up the ability to verify the validity of these chips that are
coming in. Through digital photography and email, it can be
almost instantaneous; and I appreciate the companies that are
willing to work with the DHS in trying to solve this issue.
We had an issue of a carburetor on a small engine that--EPA
requires an anti-tamper or adjustment mechanism on the
carburetor so that you can't adjust the carburetor and emit
more pollutants into the air. So these came into a port.
Homeland Security and CBP held that shipment up. A member of
the Customs and Border Patrol was able to defeat the mechanism
that blocked that device and that blocked your ability to
adjust that carburetor over a period of an hour with a hammer
and a screwdriver. They held up that whole shipment, even
thought that blocking device was approved by the EPA prior to
this.
But yet the Department of Homeland Security will not simply
take a digital photo and send it to a company who is willing to
say that is our chip or not our chip. We have got our
priorities mixed up in this country, especially when it comes
to espionage or for our power grid and protecting our armed
services, the men and women defending our liberties in this
country, and we are failing to do that, and these chips are
going into weapons systems and into our commercial power grid.
This is a very timely meeting, Mr. Chairman. I appreciate
that. Thanks, guys, for coming.
Mr. McCaul. Thank you, the gentleman from South Carolina,
for your remarks.
I think the Chinese have a saying, why invent it when you
can steal it? So that's what they do. There is no incentive.
They steal our intellectual property. They engage in espionage.
They hack our systems, every Federal agency, and now we have
our own department tying our hands with the private sector to
be able to identify what's counterfeit.
We will take action, and that's what this committee is all
about.
With that, I recognize the gentleman from Alabama, Mr.
Rogers.
Mr. Rogers. Thank you, Mr. Chairman.
I listened to your opening statements, yours and the
Ranking Member's, and they're pretty different. You paint a
pretty grim picture of ICE's effectiveness in the last 2 years
and the statistics, and then the Ranking Member comes back with
statistics that makes it appear that the Obama administration,
through its ICE director, has just been doing a stellar job. I
am really confused about which of those is correct. I have
asked my staff to get both of your statements and look at the
supporting evidence so we can find out which is right.
But I can tell you my personal experience is John Morton
and ICE have decided not to pursue worksite enforcement and not
enforce the law. I think the best evidence of that, aside from
the statistics, is his own employees gave him a vote of no
confidence for refusing to allow them to enforce the law.
I have got a chart up on the board right now that states--
and this is from CRS. This is not my numbers, CRS showing the
number of criminal convictions in the last 2 years. You can see
the last year of the Bush administration we had a very high
rate. My guess is, as a recovering attorney, that most of the
2009, 2010 cases were in the pipeline when this administration
took office. I would be very interested and will be interested
in seeing what 2011 and 2012 look like.
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Mr. Rogers. But I want to talk--this is less for Mr. Toomey
and Russo than it is for Mancuso and McNeill. I have got a
problem in the south in that we have a lot of illegals working
for companies just to be more competitive. We have turned in--I
know of companies that have turned it in to ICE, and I have
turned them in, just to find ICE not to do anything about it.
This has basically been the stated position since this
administration came in, that they were going to cease worksite
raids or dramatically reduce them. First, it was because of the
census. We didn't want to chill the enthusiasm of illegals
being counted. You know, then it was, after that, well, it's
because we don't want them to be afraid of the police or
reporting robbery or whatever. But it's always an excuse as to
why we don't want to alienate the illegal Hispanics that are
here in the country and punish their employers.
I notice in Ms. McNeill's statement that you talk about the
administrative change, getting away from, even using the phrase
``worksite raids''. Tell me more about that.
Ms. Baker McNeill. Mr. Rogers, as far as--are you asking
specifically about my use of the phrase?
Mr. Rogers. No. You talk about the fact that this
administration made a conscious decision to move away from
worksite raids. Why? What's their stated reason?
Ms. Baker McNeill. Well, there has been a number of stated
reasons. Partially, it has been because they have said that it
is better to go after employers because employers were the ones
hiring the illegal laborer and that the illegal workers were
simply just taking jobs.
Mr. Rogers. Have they followed that up with actual raids of
work sites and criminal actions against employers?
Ms. Baker McNeill. My impression is it is kind of twofold.
The first is that there have been a few investigations that
have occurred. I won't say that that didn't happen ever. There
have been some worksite raids. But in those cases you have had
the fact that the illegal workers were oftentimes not even
identified, much less detained or deported. They weren't even
identified. These could be significant rings of identity theft
that we just kind of let them go or give them temporary work
permits.
On the other side, you have the fact that, while criminal
arrests under the Obama administration of employers are up,
that that statistic is there, the reality is that, for most
employers, they have been sent the message that they are only
going to be subject to a civil I-9 audit.
Mr. Rogers. So that arrest is going to arise in a civil
penalty rather than a criminal penalty.
Ms. Baker McNeill. Well, somewhat. For most of the
employers who were doing the kind of on-the-books employment,
they have been sent the message, because they are only being
subject to
I-9 audits and not really criminal investigations, that what
they will get is their notice that they are going to be audited
and, you know, they get a decent amount of time by which to
basically clear their rolls of people that they think are
suspicious.
Mr. Rogers. So what happens with the arrest? I am trying to
figure out where the arrest comes in.
Ms. Baker McNeill. Well, from what I know, the Obama
administration has done some smaller investigations of
employers where they have done arrests. But as far as from what
I have seen, as far as big employers who have lots of labor and
potentially lots of illegal labor, they are not even touching
them with criminal investigations.
Mr. Rogers. Mr. Mancuso, do you agree with that?
Mr. Mancuso. I generally do agree with that.
I would also add that in our setting, in the export control
sort of enforcement setting, it is actually even a more
fundamental problem. If someone is inside the country
illegally, it stands to reason they are in the country
illegally. That's a problem.
But even with respect to legal immigrants inside this
country, one of the known vectors--and, clearly, most legal
immigrants who are here on special purpose visas to work for
technology companies are here for legitimate purposes. But we
know as a fact, we know in this Government as a fact that some
of those individuals who come here legally on special purpose
visas are collecting, are engaging in essentially espionage,
and we know that.
At the latter--towards the latter part of the Bush
administration, in fairness, in response to a number of reports
from the GAO, CRS, I believe, and some inspectors general at
various agencies, the Bush administration put in the pipeline a
policy change that would require employers who employ foreign
nationals legally in the country to make certain certifications
about those persons' access to controlled technology in the
United States. That is a positive change. But this is an area
that's important, and I would just underscore that I largely
agree with this Ms. McNeill.
Mr. Rogers. Great. Thank you. My time is expired.
Mr. Chairman, I do agree with the Ranking Member, and I
hope that you will consider calling John Morton from ICE in
here to help reconcile some of the differences that have been
stated here about his performance.
I yield back. I hope you have a second round.
Mr. McCaul. We do intend to call him as a witness at a
later hearing, because some of these numbers are disturbing to
me. When I do see even the employer prosecutions convictions,
they are not really of any significance. I don't think it is
having a deterrent effect as we talk about protecting American
jobs, you know, here in the United States.
So the other interesting point was, Mr. Mancuso, you
mentioned 90 percent of the scientists and engineers are now in
Asia. That's a pretty sad commentary on the state of education
in the United States and the workforce.
I talked about the H1-B visas. You know, I have got the
University of Texas with their Pickle Center. They train,
educate these students at taxpayer expense, and then, when they
graduate, they can't stay. They go back to our competitor. I
just find that to be--we need a high-skilled workforce in this
country, and I think that that would be a way to maybe change
some of those numbers that you talked about.
So the Ranking Member and have I agreed that we are
probably going to go ahead and conclude, unless the other two
have questions.
But I want to thank the witnesses for their testimony. It
has been very enlightening. I have a couple of action items to
follow up on, particularly on the semiconductor chips. I just
want to thank y'all for calling this to our attention.
Members have 10 days to submit written questions. If they
do so, I would ask that you respond to those. Again, thank you
for your valuable insight to this committee.
The committee stands adjourned.
[Whereupon, at 11:32 a.m., the subcommittee was adjourned.]
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