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STATEMENT
OF
JOHN G. MALCOLM
DEPUTY ASSISTANT ATTORNEY GENERAL FOR THE CRIMINAL DIVISION
UNITED STATES DEPARTMENT OF JUSTICE
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY
COMMITTEE ON THE JUDICIARY
UNITED STATES HOUSE OF REPRESENTATIVES
CONCERNING
COPYRIGHT PIRACY AND LINKS TO CRIME AND TERRORISM
PRESENTED ON
MARCH 13, 2003
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting me to testify before you today. This is an extremely
important topic, and I commend you, Mr. Chairman, for holding this hearing.
This hearing and the others recently held by the Subcommittee are providing
the American public with an important look at the growing threat of intellectual
property (IP) crime, which chiefly includes copyright piracy, trademark counterfeiting,
and theft of trade secrets. Today I am pleased to offer the views of the Department
of Justice on the links among organized crime, terrorism and intellectual property
piracy.
The Department of Justices Anti-Piracy Program
The enforcement of this nations criminal laws protecting intellectual
property is a priority at the Department of Justice. Since the beginning of
his tenure, Attorney General Ashcroft has worked diligently to ensure that the
prosecutorial resources needed to address intellectual property crime are in
place. Shortly after becoming the Attorney General, he used additional resources
provided by Congress to establish or expand Computer Hacking and Intellectual
Property (or CHIP) Units in ten U.S. Attorneys Offices across the nation.
These specialized units consist of dedicated federal prosecutors whose primary
focus is on prosecuting high tech crimes, including IP crimes. Subsequently,
the Attorney General established three additional CHIP units, and used additional
funding to bolster the cyber and IP prosecutive resources in a number of other
jurisdictions. The CHIP units ensure that the Department of Justice has a ready
supply of prosecutors to pursue IP cases. The expertise of the various CHIP
Units helps the Justice Department to keep pace with the changing face of high-tech
crime. Rapid advances in technology bring new challenges to the investigators
and prosecutors who handle these cases, and the establishment of these specialized
units ensures that the individuals who misuse technology to further their criminal
activity will not find a safe haven in the United States.
The CHIP Units complement the already existing network of Computer and Telecommunications
Coordinators (CTCs) that serve in every United States Attorneys Office.
The CTCs regularly receive specialized training in the investigation and prosecution
of high-tech crimes, including intellectual property crimes. Many of the 94
U.S. Attorneys Offices have two or more CTCs to help meet the growing demand
for trained high-tech prosecutors.
Working hand-in-glove with the CHIP Units and the CTC network is the Criminal
Divisions Computer Crime and Intellectual Property Section, also known as CCIPS,
which I supervise. Created as a Unit in 1991 by then-Assistant Attorney General
Robert Mueller and elevated to a Section in the Criminal Division in 1996, CCIPS
is a highly specialized team of over thirty-five lawyers who focus exclusively
on computer and intellectual property crime. CCIPS attorneys prosecute cybercrime
and intellectual property cases; advise and train local, state, and federal
prosecutors and investigators in network attacks, computer search and seizure,
and IP law; coordinate international enforcement and outreach efforts to combat
intellectual property and computer crime worldwide; and comment upon and propose
legislation. For example, CCIPS attorneys worked with Congress, including Members
of this Committee, in 1997 to improve IP enforcement through the legislative
amendments made by the No Electronic Theft (NET) Act. Those amendments
extended federal criminal copyright law to unlawful large-scale reproduction
and distribution of copyrighted works even when the thieves do not make a profit.
In 1999, CCIPS prosecutors obtained the first convictions after trial under
the Economic Espionage Act of 1996, a criminal statute that protects trade secrets.
CCIPS also worked with the U.S. Sentencing Commission in 2001 to amend the sentencing
guidelines to provide substantial sentences for copyright infringement.
With the deeply appreciated support of Congress, we have significantly increased
the size of the Computer Crime and Intellectual Property Section in the past
eighteen months, which is allowing us to devote additional resources to address
piracy both here and abroad. Intellectual property protection is an important
part of my portfolio, and a core responsibility of CCIPS. Moreover, for the
first time, CCIPS has a Deputy Chief whose sole responsibility is to oversee
and manage the attorneys in the Section dedicated to IP enforcement. At present,
there are ten CCIPS attorneys working full-time on the IP program. The attorneys
of CCIPS are developing a focused and aggressive long-term plan to combat the
growing threat of piracy. They are developing and implementing the Departments
overall anti-piracy strategy, assisting AUSAs in the prosecution of intellectual
property crimes, and reaching out to international counterparts to ensure a
more effective world-wide response to intellectual property theft. Working in
concert, CCIPS, the CTC Network, and the CHIP Units create a formidable, multi-pronged
approach to prosecuting intellectual property crimes. We are already beginning
to see the positive results of their efforts.
Significant Prosecutorial Accomplishments:
In the past few years we have achieved many significant prosecutorial victories
against IP pirates. I would like to take just a few minutes to highlight some
of our most recent accomplishments.
Operation Buccaneer:
The Computer Crime and Intellectual Property Section, working with the CHIP
Unit for the Eastern District of Virginia and the United States Customs Service,
continues to investigate and prosecute a massive international copyright piracy
conspiracy code-named "Operation Buccaneer." This undercover investigation
culminated in the simultaneous execution of more than 70 searches worldwide
in December 2001, including searches in Australia, Finland, Sweden, Norway,
and the United Kingdom. It was the largest Internet software piracy investigation
and prosecution ever undertaken, and the first to reach across international
borders to achieve coordinated enforcement action against domestic and foreign
targets. The investigation targeted multiple top-tier, highly organized and
sophisticated international piracy or warez groups that specialized
in cracking the copyright protection on software, movie, game and
music titles and distributing tens of thousands of those titles over the Internet.
I will discuss their organized criminal operations in more detail shortly.
As a result of Operation Buccaneer, as of today, twenty U.S. defendants have
been convicted of felony copyright offenses, sixteen of those in the Eastern
District of Virginia. Nine defendants have received prison sentences of between
33 to 46 months, the longest sentences ever imposed for Internet copyright piracy.
Six defendants are awaiting trial in the United Kingdom, and I can assure you
with virtual certainty that more prosecutions will be brought in the U.S. as
this investigation progresses. In both its scope and outcome, Operation Buccaneer
is the most significant Internet piracy case ever brought, and it has sent a
strong deterrent message which continues to resonate throughout the copyright
piracy community.
United States v. Mynaf:
On February 13, 2003, a California man, Mohsin Mynaf was sentenced in the Eastern
District of California to 24 months in federal prison for multiple violations
relating to copyright, including Digital Millennium Copyright Act violations,
criminal copyright infringement, and trafficking in counterfeit labels. Mynaf
operated a videocassette reproduction center which produced counterfeit movie
videocassettes, which he would then sell at various locations throughout California.
In addition to 24 months in federal prison, Mynaf must also pay in excess of
$200,000 in restitution. Three other individuals have also been convicted of
aiding and abetting Mynaf in his illegal activity and are awaiting sentencing.
This case was successfully prosecuted by a CTC in the U.S. Attorneys Office
in Sacramento, California.
Operation Decrypt:
On February 11, 2003, in the Central District of California, as part of a year-long
investigation known as Operation Decrypt, 17 individuals were indicted for their
roles in developing sophisticated software and hardware used to steal satellite
television signals. One of the individuals has already pled guilty and admitted
to being responsible for nearly $15 million in losses to the victim companies.
An additional nine defendants have also agreed to plead guilty to various crimes
as a result of their involvement. The defendants in these cases used online
chat rooms to exchange information and techniques on how to defeat the sophisticated
security protections utilized by satellite entertainment companies. In October
of 2002, search warrants were executed in seven states as part of this operation.
Operation Decrypt is being prosecuted by an attorney with the CHIP Unit for
the Central District of California, located in Los Angeles.
United States v. Ke Pei Ma, et. al:
On February 26, 2003, in a joint operation between federal and local law enforcement
in New York City, four arrests were made and six people were charged (two remain
fugitives) in conjunction with an investigation of the illegal distribution
of Symantec and Microsoft software. At the time of the arrests, over $9 million
worth of counterfeit software was seized from distribution centers in the New
York area. The defendants are believed to have distributed thousands of copies
of counterfeit software and received an estimated $15 million over two years
in return for the pirated products. In a single two-month period, the defendants
received nearly $2 million dollars as a result of their illegal activity. This
case was prosecuted by attorneys in the CHIP Unit in the Eastern District of
New York.
United States v. Rocci:
Beginning on February 25, 2003, the Computer Crime and Intellectual Property
Section, working with the CHIP Unit for the Eastern District of Virginia, engaged
in a ground-breaking and highly-successful public education effort as part of
a conviction originally obtained in December of 2002. In December, David Rocci
of Virginia, pled guilty to conspiring with others to traffic in illegal circumvention
devices in violation of the Digital Millennium Copyright Act. Rocci was the
owner and operator of the most prominent publicly-accessible web site on the
Internet dedicated to providing information about the warez scene
and copyright infringement, www.iSONEWS.com.
Rocci used his web site as the exclusive medium to conduct the illegal sale
of circumvention devices known as mod chips, which defeat security
protections in the Microsoft Xbox and allow unlimited play of pirated games
on the gaming console. As a condition of his guilty plea, Rocci transferred
his domain name and website to the United States. Upon taking control of the
domain name late last month, the United States replaced iSONEWS.com
with a new web page providing information about U.S. v. Rocci, as well
as a general anti-piracy message outlining the potential criminal consequences
for engaging in illegal piracy. (A copy of the website is attached to this testimony.)
This case marks the first time that the United States has assumed control of
an active domain name in an intellectual property case. In the first three days,
the new law enforcement site received over 238,000 hits from Internet users
worldwide. As of March 11, the two week mark, the site received over 550,000
hits. The Department feels a strong sense of responsibility to educate the public
about the need to respect intellectual property rights and will look for additional
opportunities like this to build upon successful prosecutions of those who willfully
violate those rights.
Mr. Chairman, as you can see, the Department of Justice is actively pursuing
intellectual property criminals engaged in a wide array of illegal activity,
and we are doing so using all of the various statutes at our disposal. Our efforts
are beginning to pay off, and we are having success in our battle with global
piracy. But we are not resting on our laurels and are aware that there is much
work to be done. We remain committed to this effort and will build on our success
by continuing to prosecute piracy aggressively.
Organized Criminal Activity and Piracy:
As a result of cases such as those I have just mentioned, law enforcement today
has a deeper and more sophisticated understanding of piracy than it has ever
had before. Piracy is a continually evolving crime. Traditionally, piracy operations
were small, often run by individuals or a loose collection of people trying
to make a quick buck in what has been perceived to be a fairly risk-free
criminal enterprise. However, in recent years, that has changed. Piracy is now
big business: a world-wide, multi-billion dollar illicit economy which robs
legitimate industries and creators of income, while driving up costs for consumers.
It is against this backdrop that criminal organizations are playing a more prominent
- and dangerous - role in piracy around the globe. Organized criminal activity,
in many forms, is clearly a factor in global piracy today. Today, I will talk
about two different, yet equally troubling, types of organized criminal activity
that are emerging globally: organized on-line piracy groups and traditional
organized crime syndicates operating from Asia or Eastern Europe.
Organized On-line Piracy Groups:
One aspect of piracy - practically non-existent as recently as twenty years
ago - is online or Internet piracy. The Internet has changed the landscape of
intellectual property crimes in many ways. Piracy over the Internet poses significant
challenges for law enforcement. It is harder to detect than traditional means
of piracy, and it costs the pirates virtually nothing to operate, while generating
countless perfect digital copies of music, movies, software and games in just
a fraction of the time it would take to generate the copies manually. Even when
we successfully remove the source of digital piracy, any copies previously distributed
remain on the Internet and can spawn a whole new generation of pirated products
with little more than a few strokes on a keyboard.
As mentioned, until recently, on-line piracy was believed to be high-return,
low-risk endeavor by many in the piracy community. Now, however, through a number
of high-profile enforcement actions, the Department is making it clear to members
of the online piracy community that their activities may have dire consequences
for them. In addition to Operation Buccaneer, attorneys from the Department,
along with the Federal Bureau of Investigation, have effectively prosecuted
online pirates in other cases, such as the Pirates with Attitude
and Fastlane prosecutions in Illinois, and two ongoing prosecutions,
Operation Bandwidth in Nevada and Operation Digital Piratez
in New Hampshire. We are committed to continuing to disrupt the online piracy
community. The word is out: the Department of Justice will pursue online pirates
and will put them in jail.
The Department has learned a great deal about the online piracy community. First
and foremost, it is dominated by a handful of highly structured, security conscious
groups which exist solely to engage in piracy online. These organized criminal
groups are frequently referred to as warez groups. While warez groups
are a relatively new phenomenon, they are responsible for placing a massive
number of pirated movies, music, games and software into circulation each year,
and represent a significant and growing threat to intellectual property rights
around the globe.
The leading international warez groups compete against each other to attain
a reputation as the fastest, highest quality, free providers of pirated computer
software, including utility and application software, PC and console games,
and movies. These groups specialize in being the first to release new pirated
software to the warez community for unauthorized reproduction and distribution.
The groups prosecuted as part of Operation Buccaneer were among the most notorious
organized online piracy groups in the warez scene.
These criminal organizations are extremely security conscious, utilizing state-of-the-art
technology to attempt to shield their illegal activity from victim companies
and from law enforcement. They are also highly organized, structured to maximize
their manpower and technological know-how to fully and efficiently support their
illegal activity.
Like legitimate companies, top-tier warez groups have clear hierarchies
and divisions of labor. Rank and position within warez groups are based on a
variety of factors, including special skills, length and quality of service
to the group, and reputation within the warez scene. A typical group - which
can consist of people all over the world who may know each other only through
their screen names - will consist of one or possibly two leaders, two or three
high level individuals known as Council, twelve to fifteen Staff
members, and a general Membership comprising anywhere from twenty to eighty
individuals. The Leader has ultimate authority over all aspects of the group
and its activities. Council members are primarily responsible for the groups
day-to-day operations, including preparation of new releases, recruitment, and
security issues. Staff members are typically the most active individuals in
preparing a groups new releases for distribution, or in maintaining the
groups File Transfer Protocol (FTP) sites from which the pirated
software is distributed. Finally, the general Members contribute to the group
in a variety of ways, including acting as occasional suppliers of new software,
hosting the groups FTP servers, or providing hardware (e.g., laptops, hard drives,
routers, other computer equipment) to other group members for use in their warez
activities. The more work someone does for the group, the higher up the organization
that person will move, and the greater the access that person will have to pirated
products.
While there are countless similarities, two factors distinguish warez groups
from traditional organized crime syndicates. First, warez groups conduct their
illegal operations in the cyber world as opposed to the physical world. Second,
and perhaps most startling, warez groups typically do not engage in piracy for
monetary gain. In fact, in some quarters of the warez scene, pirates who engage
in for profit operations are held in contempt and criticized.
Despite the fact that warez groups typically do not profit directly, it would
be a grave mistake to dismiss their conduct as harmless or unimportant. On the
contrary, warez groups pose a growing and significant threat to intellectual
property rights holders around the world. It is generally agreed that most of
the pirated movies, music, games and software available on the Internet come
from these high-level warez groups. Further, they are the source for much of
the pirated products which filter their way down to less sophisticated, but
more widely used, distribution mechanisms such as peer-to-peer networks. For
example, a warez group dedicated to music piracy will obtain unauthorized advance
copies of songs and albums and distribute those advance copies to the warez
scene. Within days, or frequently within just a few hours, the warez music release
filters down to public Internet Relay Chat (IRC) channels and peer-to-peer
networks - often weeks before its commercial release date. The availability
of MP3 files on the Internet in advance of legitimate CDs being made publicly
available results in a direct injury to the artists and to the recording industry.
While the pirates who steal and distribute copyrighted works do not profit monetarily,
the consequences to the victim company are just as dire as if they did. For
many victim companies, particularly smaller companies whose livelihood depends
upon the success of only one or two products, irreversible damage occurs the
moment the pirated digital copy hits the Internet.
Any consideration of organized crime and IP must include top-level warez release
groups. While we recognize that our efforts must address all aspects of online
and hard-good piracy, including the pursuit of those involved in the lower tiers
of the Internet distribution chain, the Department will continue to devote significant
resources to pursuing warez groups.
Traditional Organized Crime and Intellectual Property.
Another emerging concern is the fact that traditional organized crime syndicates
appear to be playing a dominant role in the production and distribution of certain
types of hard goods piracy, such as optical disks. This problem seems particularly
prevalent in Asia and parts of the former Soviet Union. Unlike warez groups,
the goal of these organized crime groups is to make as much money as they can.
The continued emergence of organized crime poses substantial challenges for
law enforcement. Highly organized criminal syndicates frequently have significant
resources to devote to their illegal operations, thus increasing the scope and
sophistication of their criminal activity. Further, by nature, these syndicates
control international distribution channels which allow them to move massive
quantities of pirated goods, as well as other illicit goods, throughout the
world.
As one might expect, these groups do not hesitate to threaten or injure those
who attempt to interfere with their illegal operations. Industry representatives
in Asia report that they have been threatened and their property has been vandalized
by members of these syndicates when their anti-piracy efforts strike too near
the illegal operation. Government officials have also been threatened. These
criminal syndicates are a formidable foe, but one that must be dealt with to
truly attack the problem of intellectual property theft.
Throughout Asia, organized crime groups operate assembly lines and factories
that generate literally millions of pirated optical discs. These groups pirate
a full range of products ranging from music to software to movies to video games.
Anything that can be reproduced onto an optical disk and sold around the globe
is available. There is also anecdotal evidence that syndicates are moving their
production operations onto boats sitting in international waters to avoid law
enforcement.
Recently, an attorney from the Computer Crime and Intellectual Property Section
visited Kuala Lumpur, Malaysia to conduct law enforcement training for Malaysian
prosecutors and agents. According to Malaysian officials with whom he spoke,
many, if not most, of the optical disk production facilities in Malaysia are
owned and operated by organized crime syndicates, specifically very wealthy
and powerful criminal gangs or triads from Taiwan which control
a significant number of facilities not just in Malaysia but across Asia generally.
The reach of organized crime appears to extend beyond the production of optical
disks into the distribution chain. While in Malaysia, that same CCIPS attorney
visited an open air market, similar to ones found in large cities around the
world, which offered a myriad of pirated products. While touring the market,
our attorney learned that many vendors offer their goods on tables covered in
brightly colored cloths which indicate that vendors affiliation with a specific
criminal syndicate. One vendor may use a red cloth to show his affiliation with
one criminal gang, while his neighbor offers his wares on a blue cloth signifying
his affiliation with another criminal gang.
Of course, this problem is not limited to Malaysia, but occurs in other parts
of the world such as in parts of the former Soviet Union. Additionally, many
organized piracy groups from Asia use South America, most notably Paraguay,
as a transshipment point for pirated products. Industry groups have reported
that organized crime from Taiwan and other parts of the world control much of
the distribution of optical disks into Latin America through Ciudad del Este.
It is also true that the pirated goods produced by organized crime syndicates
enter into and are distributed throughout the United States. There is ample
evidence, for example, that Taiwanese triad members import into the United States
massive amounts of counterfeit software and other counterfeit products, such
as remarked computer chips. The reach of these organized crime operations
is undeniably global in scope.
Of course, developing more and better intelligence about these organized crime
groups and their operations is just the first step in what will be a long and
potentially difficult process of targeting this type of activity. Because most
of these syndicates operate outside the United States, we must rely on foreign
governments for much of the enforcement efforts in this area. The importance
of international cooperation cannot be overstated. If a government lacks the
will or the expertise to enforce IP laws, organized crime will continue to proliferate
with impunity. Even in countries that have the will and expertise to fight back,
a lack of investigative resources, inadequate laws, a judicial system that will
not impose serious sentences, or corruption can grind IP enforcement to a halt.
The Department of Justice is committed to being a constructive part of the United
States governments international IP outreach efforts. In particular, we
are focusing our resources on those foreign nations which face surmountable
difficulties in the investigation and prosecution of IP crimes. We are pleased
to be working with other United States agencies, such as the Patent and Trademark
Office, the State Department and the U.S. Trade Representative, to ensure that
foreign nations are committed to building sound and lasting IP enforcement regimes.
The Justice Department will continue to work closely with investigative agencies,
especially the Federal Bureau of Investigations and the United States Customs
Service, to develop additional intelligence sources and information in order
to enhance our ability to respond to the growing threat of organized crime from
Asia and other parts of the world. This is a serious and emerging threat that
victimizes American rights holders, costs companies hundreds of millions of
dollars, and damages our nations economy. There is no easy solution. The
task at hand requires a concerted effort on the part of industry, government
and law enforcement. The Department stands ready to do its part.
Terrorism and Piracy
Finally, Mr. Chairman, I want to close by briefly discussing terrorism. Earlier
I noted that organized crime syndicates are frequently engaged in many types
of illicit enterprises, including supporting terrorist activities. On this point,
I want to be crystal clear. Stopping terrorism is the single highest priority
of the Department of Justice. We are constantly examining possible links between
traditional crimes and terrorism, and we will continue to do so. All components
of the Justice Department, including CCIPS, the Counterterrorism Section, and
the Organized Crime and Racketeering Section, will do everything within their
power to make sure that intellectual property piracy does not become a vehicle
for financing or supporting acts of terror.
Conclusion
On behalf of the Department of Justice, I want to thank you again for inviting
me to testify today. We thank you for your support over the years and reaffirm
our commitment to continuing to work with Congress to address the significant
problem of piracy. I will be happy to answer any questions that you might have.
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