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Extended Excerpts from the U.S. Interagency Report Titled "International Crime Threat Assessment".

Modern telecommunications and information systems that underpin legitimate commercial activity in today's fast-paced global market are as easily used by criminal networks. Commercially available state-of-the-art communications equipment greatly facilitates international criminal transactions -- including making deals and coordinating the large volume of illicit trade. In addition to the reliability and swiftness of the communications, this also affords criminals considerable security from law enforcement operations. According to US law enforcement agencies, many international crime groups and drug traffickers use a combination of pirated and encrypted cellular phones and bootleg or stolen phone cards that they replace after short periods of use.

Through the use of computers, international criminals have an unprecedented capability to obtain, process, and protect information and sidestep law enforcement investigations. They can use the interactive capabilities of advanced computers and telecommunications systems to plot marketing strategies for drugs and other illicit commodities, to find the most efficient routes and methods for smuggling and moving money in the financial system, and to create false trails for law enforcement or banking security. International criminals also take advantage of the speed and magnitude of financial transactions and the fact that there are few safeguards to prevent abuse of the system to move large amounts of money without scrutiny. More threateningly, some criminal organizations appear to be adept at using technology for counterintelligence purposes and for tracking law enforcement

Intellectual Property Rights (IPR) Violations

Most intellectual property rights (IPR) crimes affecting US businesses involve the theft of trade secrets and copyright, trademark, and patent violations. Criminal violations of intellectual property rights--particularly the sale of counterfeit or illegally manufactured products--distort international trade, undermine the legitimate marketplace, and cause extensive revenue losses to legitimate industries. The explosion of digitization and the Internet have further enabled IPR violators to easily copy and illegally distribute trade secrets, trademarks, and logos.

US businesses are particularly vulnerable and especially hard hit by counterfeiting and other forms of copyright, trademark, and patent infringement because the United States leads the world in the creation and export of intellectual property--primarily in motion pictures, computer software, sound recording, and book publishing. These industries contributed more than $270 billion to the US economy in 1996, or approximately 3.65 percent of GDP, according to International Intellectual Property Association estimates. Copyright industry products have surpassed agricultural products as the single-largest export sector in the US economy, and America's three largest software companies are now worth more than the steel, automotive, aerospace, chemical, and plastics industries combined.

Counterfeit or illegally manufactured products compete with, and often displace, legitimate sales. US businesses increasingly are losing legitimate sales due to the manufacture and distribution of illegal products that violate intellectual property rights. Many of these illegal products are exported to the United States, but most are circulated in markets abroad in direct competition with the legitimate products of US firms. In some countries, illicit products saturate the domestic market so completely that it is impossible for owners of intellectual property copyrights and trademarks to establish legitimate manufacturing or distribution interests.

US businesses experience significant profit and market loss due to the theft of trade secrets. Foreign companies seek to steal US trade secrets--particularly theft of sensitive information pertaining to research and development, production processes, and corporate strategies--to erode US companies' overseas market competitiveness and technological leadership. By so doing, they also try to outmaneuver or underbid US companies, hoping to tilt the playing field in their favor. The American Society for Industrial Security, which conducts a comprehensive survey of Fortune 500 companies, estimated in 2000 that potential known losses to all American industry resulting from the theft of proprietary information amounted to $45 billion.

US Customs Intellectual Property Rights (IPR) Seizures, 1995-99

Copyright violations primarily involve the illicit production and sale of computer software, recorded music, and videos. The International Intellectual Property Alliance estimated that, in 1998, trade losses suffered by US-based industries due to copyright violations totaled nearly $12.4 billion, with losses to the motion picture industry of $1.7 billion, the sound recording and music publishing industry at $1.7 billion, the business software industry at nearly $4.6 billion, the entertainment software industry at $3.4 billion, and the book publishing industry at $685 million. In 1996, law enforcement raids around the world resulted in the seizure of nearly 5.1 million unauthorized copies of motion picture videocassettes, according to the Motion Picture Association; also seized were more than 25,000 VCRs with an estimated production capacity of almost 33 million pirate videos per year.

  • Globally, one in every three compact discs (CDs) sold is a counterfeit copy, according to an estimate published in 1998. Data provided by the International Federation of the Phonographic Industry indicate that, in 1999, worldwide sales of pirated sound recordings totaled more than $4 billion.
  • The situation is as bad for computer software. According to current estimates by the Business Software Alliance, stolen software costs the industry $12 billion globally and topped $59 billion during the last five years. The average global piracy rate for software is 38 percent of total sales, with a US rate of about 25 percent. In 1997, Global Software Piracy Report estimated that 225 of the 523 new business software applications sold worldwide in 1996 were pirated copies.

Trademark violations include the counterfeiting of certain products and trademark goods. According to current estimates by the International Chamber of Commerce (ICC), counterfeit trademarked products account for approximately 8 percent of world trade-- roughly $200 billion annually. A recent survey of 10 leading apparel and footwear companies by the International Trademark Association indicated annual losses of nearly $2 billion. Online counterfeit sales may exceed $25 billion annually worldwide, according to ICC estimates.

In 1999, US Customs seized a record $98.5 million in counterfeit imported merchandise, an increase of $22 million during the previous year. Record media-- including audiocassettes, videocassettes, and CDs-- computer parts, sunglasses, and clothing were the commodities most commonly seized.

Patent violations involve the illegal manufacture of products using production processes, designs, or materials that are protected by patents giving the holder the right to exclude others from making, using, or selling an invention for a specified period of time. The 1995 Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) requires that members of the World Trade Organization protect most inventions for a period of 20 years and that their domestic laws permit effective action against patent infringement.

  • The Pharmaceutical Research and Manufacturers Association estimates that the pharmaceutical industry loses more than $2 billion annually due to counterfeit medications sold on the open market. US nongeneric pharmaceutical sales totaled $110.8 billion worldwide in 1997; estimated sales for 1998 were $124.6 billion.

Besides significant business losses, IPR crime costs the US Government tax revenue and reduces potential jobs available to US citizens. The International Anti-Counterfeiting Coalition (IACC) estimated in 1998 that product and software counterfeiting costs the United States more than $200 billion per year in lost sales, jobs, and tax revenues. The US Customs Service has estimated that foreign counterfeiting of US products has caused the loss of 750,000 jobs in the United States.

IPR crimes threaten consumer interests in the United States and elsewhere when counterfeit products are reproduced using bogus or inferior materials and poor quality controls that can affect public safety and health. Since 1990, US authorities have identified or seized nonconforming parts in US-produced automobiles and commercial airplanes and substandard materials used in household products and consumables such as infant formula and pharmaceuticals.

  • The World Health Organization estimated in 1997 that at least 7 percent of the medicines sold worldwide are counterfeit products. US authorities have confiscated misbranded and counterfeit pharmaceuticals, including birth control pills and AIDS, heart, diabetes, cancer, and diet medications.

Global Dimensions
IPR violations are a global phenomenon. Most countries have brought laws protecting intellectual property rights up to international standards, but few are devoting the political or budgetary support necessary to enforce the laws. Intellectual property violations are flourishing because of ineffective laws, weak enforcement, inadequate resources devoted to investigations and prosecutions, corrupt government officials, and uninformed or inadequately trained law enforcement officers. In many of the countries that are major IPR violators, the government turns a blind eye to the activity in the interest of boosting its industries' competitiveness in the international marketplace.

  • East and Southeast Asia are primary regions of IPR violations that cause significant losses to US businesses. China and Hong Kong harbor major duplicators of Western toys and clothing, while firms in Malaysia, Singapore, and Taiwan copy US audio, video, and software products. According to the US Customs Service, 56 percent of US IPR seizures (mostly music CDs, computer software packages, and movies) in the first half of 1999 were from China and Taiwan.
  • In Eastern Europe, Ukraine has emerged as the leading producer of illegal optical disc pirated products, exporting pirated CDs for distribution throughout the world. Most of the NIS in the former Soviet Union are improving IPR laws for their admission to the World Trade Organization, but implementation and enforcement are uncertain.
  • Israel's substantive laws remain deficient under the 1995 TRIPS Agreement, and it remains a key distribution hub in a regional network for pirated optical media products that extends into Russia and Eastern Europe.
  • Latin America is the third-largest market for illegal duplication of CDs, videos, and cassettes, according to the International Intellectual Property Alliance. Illegal production of these products is centered in Brazil and Argentina, whose governments have toughened their IPR laws but nonetheless are resisting further IPR improvements. Paraguay continues to be a regional center for pirated goods, especially optical media, and serves as a transshipment point for large volumes of IPR-infringing products from Asia to the larger markets bordering Paraguay, particularly Brazil.

Although many IPR crimes are committed by ostensibly legitimate foreign manufacturing, business, and import/export enterprises to enhance their competitiveness, criminal organizations are becoming common players in all stages of IPR crime, from manufacture to distribution. Product piracy and counterfeiting are attractive to criminal organizations because of the absence of strong criminal counterfeiting laws and the potential for large profits in the counterfeit goods market. Moreover, some criminal and terrorist organizations use the proceeds from producing and selling counterfeit brand name consumer goods to fund other types of criminal activity, both in the United States and elsewhere.

  • In New York City, ethnic Chinese crime syndicates are increasingly counterfeiting consumer products as a source of tax-free income. The Vietnamese gang "Born to Kill" reportedly relies on the sale of counterfeit Rolex and Cartier watches to fund gang activities. The group's founder has claimed earnings exceeding $35 million from counterfeit product sales.
  • In 1995, law enforcement officials in Los Angeles discovered several Chinese criminal groups-- including the Wah Ching, the Big Circle Boys, and the Four Seas triad--engaged in counterfeiting floppy discs and CD-ROMs. Asset seizures totaled more than $17 million in illicit products and manufacturing equipment, plastic explosives, TNT, and firearms.
  • Past press reporting indicated that the Provisional Irish Republican Army funded some of its terrorist activities through the sale of counterfeit perfumes, veterinary products, home videos, computer software, and pharmaceuticals.

High-Tech Crime

High-tech crimes targeting computer networks are becoming an increasing law enforcement and national security problem because of the growing reliance in the United States of government entities, public utilities, industries, businesses, and financial institutions on electronic data and information storage, retrieval, and transmission. Increasingly, other countries around the world face the same vulnerability. The creation of complex computer networks on which many government, public, private, and financial services depend has created opportunities for illicit access, disruption, and destruction of information by a wide range of hackers. Although most computer attacks are conducted by disgruntled employees and independent hackers, according to US law enforcement information, the threat from foreign intelligence services and foreign corporate competitors is significant for US national security interests. Moreover, international terrorist and criminal organizations have increasing capability to penetrate and exploit computer-based information and data systems.

  • Illegal penetration of computer systems provides criminals the ability to access and manipulate personal, financial, commercial, and government data. The introduction of computer viruses can compromise data system integrity. Hostile hackers-- whether individuals, industrial spies, foreign governments, terrorist or criminal organizations--could potentially disrupt critical public-sector assets.

The greater dependence on computer systems for daily business and administrative functions--and the increasing interconnections between computer networks--has increased both the vulnerability and potential costs of systems penetration. US communications and information industries have developed the most technologically advanced systems and networks in the world. Many critical public infrastructure industries--including power and energy, telecommunications, and transportation systems--are operated or managed by computer networks. According to the US Customs Service, all major international industries, businesses, and financial institutions rely on interconnected computer systems for commercial and financial transactions to remain competitive.

  • Attacks on computer and information systems of US corporations, financial institutions, universities, and government agencies through unauthorized access by employees and external system penetration ranged from denial of service and sabotage to financial fraud and theft of proprietary information, according to surveys jointly conducted by the FBI and Computer Security Institute.

Illegal intrusion and exploitation of computer networks in the United States have sizably increased over the last several years, causing millions of dollars in losses to US businesses and potentially threatening the reliability of public services.

  • According to the joint 2000 FBI-Computer Security Institute survey of security practitioners in US corporations, financial institutions, universities, and government agencies, 273 of the respondents cited financial losses of $265.5 million from computer crime--almost double the reported losses of $136.8 million in 1998.
  • The number of US businesses reporting computer intrusions through Internet connections rose from 37 percent in 1996 to 70 percent in 1998, according to the joint survey.
  • A significant percentage of the information needed to carry out essential government functions is processed at some point by information systems in the nonfederal sector of the national information infrastructure.

Criminals Exploiting High Technology
As worldwide dependence on technology increases, high-tech crime is becoming an increasingly attractive source of revenue for organized crime groups, as well as an attractive option for them to make commercial and financial transactions that support their criminal activities. With little of the risks and penalties associated with more traditional criminal activity, high-tech crime allows criminals to operate in the relative security of computer networks, often beyond the reach of law enforcement where the crime was committed.

International criminals, including members of traditional organized crime groups, are increasingly computer-literate, enabling them to use cutting-edge technologies for illicit gain. International criminals rely on publicly available sources to obtain information on system vulnerabilities. E-mail mailing lists routinely distribute vulnerability information and software that can be used to exploit computer systems. In addition, vulnerabilities are publicly exposed in books, magazine and newspaper articles, electronic bulletin board messages, and a growing list of Web sites that are targeted at informing a wide-ranging global network of potential hackers about the latest methodology for staging computer attacks.

  • Criminal groups may also exploit businesses and government agencies using programmers, many of whom are lesser paid foreigners, to make software fixes or write new programs to gain access to computer systems and the information they contain. Press reports indicate that a Russian-speaking crime group in the United States recruited unemployed programmers in Russia to hack into other syndicates' computer systems, embezzle funds, and create programs to protect its funds in US banks.

International criminals are using computers to support a wide range of criminal activity, including as an innovative alternative means to commit many traditional crimes. The use of computer networks allows criminals to more securely and efficiently orchestrate and implement crimes without regard to national borders. Drug traffickers, for example, are using encrypted e-mail and the Internet to avoid detection and monitoring of their communications over normal telephone and communications channels.

The Internet has also become the primary means used by international child pornography rings to disseminate their material worldwide. International child pornography rings are operating in dozens of countries, peddling their illicit wares through the Internet and other global distribution networks. Modern technology allows these child pornographers to store vast quantities of digital images on small portable computers easily smuggled into the United States and elsewhere.

Moreover, criminal commercial and financial transactions through computers occur amidst countless legitimate public, business, and personal uses of computer networks, making them especially difficult to identify. Transactions involving technology or components for weapons of mass destruction or embargoed items under US or international sanctions are being done through computers. Virtually any commodity, including weapons of mass destruction and their component parts and delivery systems, is being offered for international sale on Internet sites.

  • US Customs investigations show that many Internet sellers of contraband materials openly advertise that they have been in operation for many years without being caught by law enforcement. In December 1999, there were about 100 ongoing US Customs investigations involving the sale of counterfeit goods over the Internet.

Computers are also exploited by international criminals to facilitate a wide range of economic crime-- particularly targeting US commercial interests. High-tech financial fraud through illicit access to credit card numbers and commercial accounts has the potential to cause serious losses for US businesses conducting electronic commerce over the Internet.

  • According to a joint FBI-Computer Security Institute survey in 1998, 241 US business respondents reported $11.2 million in losses caused by computer financial frauds. Telecommunications fraud from computer attacks cost these companies an additional $17.2 million in losses.
  • In March 1999, hackers pleaded guilty to breaking into US phone companies for calling card numbers that eventually made their way to organized crime syndicates in Italy. US law enforcement information indicates that this high-tech theft cost the US phone companies an estimated $2 million.

Intellectual property rights violations through the penetration of computer networks are also an increasing threat to US businesses. US businesses responding in the 1998 survey reported losses of $33.5 million in theft of proprietary information from computer attacks.

International criminals may be using computer hacking and related methods for financial gain. Industry and law enforcement reporting indicates that high-tech criminals are using advances in technology to target banks and other financial institutions. The anonymity and speed of electronic transactions may encourage criminal exploitation of these technologies. While US and many Western and Asian banks and financial institutions maintain adequate security safeguards to prevent outside penetration of computer-based data financial transaction systems, some have outdated or lax security practices that high-tech criminals are able to exploit.

  • In October 2000, according to press reports, Italian authorities dismantled a Sicilian Mafia-led crime group that was planning to steal as much as $900 million in European Union aid earmarked for Sicily. Employing corrupt officials from the targeted bank and a telecommunications firm, the crime syndicate broke into the bank's computer network, created a virtual banking site linked to the interbank payments network, and was able to divert $115 million of the EU aid to Mafia-controlled bank accounts in Italy and abroad before they were discovered.
  • In China, a computer hacker was convicted in November 1999 of breaking into the Shanghai Securities Exchange, where he changed transaction records that cost two Chinese companies more than $300,000, according to Chinese press reports.
  • In South Africa in November 1999, an unidentified crime syndicate stole hundreds of thousands of dollars from local banks by using the Internet and bank-by-telephone services to hack into financial institutions, according to press reports.
  • In 1994, individuals in St. Petersburg, Russia-- aided by insider access--attempted to steal more than $10 million from a US bank by making approximately 40 wire transfers to accounts around the world. Members of the gang have since been arrested in several countries, and most of the stolen funds have been recovered.

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