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Counterfeit Electronic Parts Regulation Bogged Down

In 2011, Senator Kelly Ayotte (R-N.H.) stated that counterfeit electronic parts in military systems presented a “clear and present danger” to American troops. Often rendering systems inoperable, counterfeit electronic parts in the Department of Defense (DoD) supply chain negatively affect the quality of military equipment that troops use. Additionally, replacing such faulty components forces the DoD to pay twice for the originally ordered electronic parts. A Senate Armed Services Committee (SASC) investigation and hearing found over 1,800 cases of counterfeit parts in military equipment, such as the Air Force’s C-130J “Super Hercules” cargo plane. Coming mainly from China, this influx of counterfeit electronic parts revealed a severe need for increased oversight of defense contractors.

Congress swiftly responded to the crucial issue of counterfeit electronic parts, enacting Section 818 of the National Defense Authorization Act for Fiscal Year 2012 (FY 2012 NDAA) just two months after the SASC hearing. Signed into law on December 31, 2011, this legislation shifts most of the responsibility for detecting and resolving instances of counterfeit electronic parts to the private sector. Contractors must obtain electronic parts from trusted suppliers only, and perform any “rework or corrective action that may be required to remedy the use or inclusion” of counterfeit parts. High accountability is also encouraged, as contractors who report the suspected or known use of counterfeit parts are not subject to civil liability. Additionally, contractors need to establish policies and procedures to eliminate their use of counterfeit electronic parts, which include personnel training, inspection, and the use of trusted suppliers.

The DoD has worked to implement FY 2012 NDAA by creating a hotline and a Contractor Disclosure Program, both of which provide a way for employees and contractors to report instances of counterfeit parts. DoD also proposed a rule called “The Detection and Avoidance of Counterfeit Electronic Parts” (DFARS Case 2012-D055) in June 2013, but the rule seems to be bogged down as conflicts initiated by private contractors drag on.

Private companies, such as MICRORAM, SAE International, and the AIA, have found several faults with the proposed regulations. Both in comments submitted for the record and at a public meeting last June, companies took issue with what they say is a lack of definitions for terms such as “counterfeit part,” “suspect counterfeit part,” and “trusted supplier.” Many also expressed qualms relating to the extra cost they would incur as a result of reworking company policies and the difficult task of scrutinizing electronic parts down to the lowest level of subcontractor. Section 818 was changed through Section 833 of FY 2013 NDAA, to allow reimbursement for additional contractor cost if the contractor has a DoD-approved operational system to detect and avoid counterfeit parts, the fake parts were provided to the contractor as Government property, and the contractor provides “timely notice” to the government. The definition of a “counterfeit part” has also been modified to be more specific in a new version of the proposed rule set to be released this April (DFARS Case 2014-D005).

On March 27, 2014, the DoD hosted another public meeting on its proposed rule, which I attended. The majority of the commenters and presenters voiced concerns about what they felt was a vague definition of “trusted suppliers.” Dan Deisz from Rochester Electronics explained that “authenticity does not equal reliability” and that factors such as e-waste can still result in authentic parts that are less reliable. Deisz, along with many others such as Tom Sharpe from the SMT Corporation and Fred Schipp from the Crane Division of the Naval Surface Warfare Center, pressed the DoD to better define a trusted supplier and to require purchasing from them first. “The escalation of Cloned-Counterfeits requires ‘Trusted Source’ be re-defined by the DoD for our WARFIGHTERS” was spelled out in large yellow letters across the first slide of Sharpe’s presentation. Many expressed that changing the wording to “authorized” and applying that categorization to companies that pay the Original Component Manufacturer (OCM) directly for each part sold would work best to create a black-and-white definition.

At the end of the public meeting, a DoD representative explained that “There is not a single answer to tackling this problem” and that it would not be changing the definition. The DoD felt that the term “trusted suppliers” had been written to invoke the meaning authorized. The representative expressed that the Department does not feel comfortable explicitly excluding businesses by deeming some authorized or non-authorized, as this would hinder competition and discourage fair business practices.

Once the DoD releases its new proposed rule in April, a comment period and public meeting will again take place. Three years have passed since Section 818 became law, and the February 2014 finalization deadline for the proposed rule has passed, yet there appears to be no conclusion in sight. The process continues to drag on, with private industry continuously finding fault in definitions. All the while, the real issue of counterfeit electronic parts reducing the quality of military equipment remains unresolved. As SASC Chairman Carl Levin (D-MI) stated in 2011, “This has been going on for too long.”

By: Gabriela Urias
Intern, POGO

gabriela-urias Gabriela Urias is currently an intern with the Project On Government Oversight.

Topics: Contract Oversight

Related Content: Contractor Accountability, Spare Parts, Defense

Authors: Gabriela Urias

Submitted by Scott Amey at: May 5, 2014
The FINAL Rule will be published in tomorrow's Fed. Register -- here's a look: http://www.ofr.gov/OFRUpload/OFRData/2014-10326_PI.pdf
Submitted by ddeisz at: April 24, 2014
mcsharkey - "special interests"? While most of your posts are found on the stock boards for Applied DNA pumping their stock, you come here and talk about special interests? From an oversight of government spending perspective, the mandate implemented by DLA has resulted in them doubling their costs across 6 quarters (on FSC 5962 product) while executing 90% of their transactions through the broker market when it used to be 90% transactions through the Authorized market pre-mandate. Applied DNA and SMT both recommended purchasing from the Authorized channel with priority over the Independent/Broker channel and yet DLA doesn't. DLA has somehow interpreted the NDAA uniquely. Likely in the name of "small business", but that is for them to answer. Authenticity does not equal Reliability. Tagging tells you nothing about reliability. The government doesn't buy semiconductors through the manufacturers but through distribution for the vast majority of purchases so this reimbursement is mostly to brokers today. Tagging isn't going to happen by the semiconductor manufacturers for this less than 1% market that is already removed one step from direct manufacturers. For DLA, this mandate has simply moved them one more step away from manufacturers (now 2 levels) and doubled their cost while adding counterfeit risk. But hey, the parts have DNA on them!
Submitted by mcsharkey, at: April 16, 2014
The lack of progress is due to special interests within the semiconductor industry and SAE behaves more like a lobbying group than a standards organization. It goes way beyond electronics. Mechanized and hydraulic system are rife with SUBSTANDARD parts. Really, now one would care if counterfeits met the design requirements. They don't. Counterfeit products are subject to failure without warning due to substandard design. Section 818 of the Defense Authorization Act only holds accountable those who sell counterfeit products and are caught. They are only caught if a part fails. What's the issue? Don't want to spend the time to check the inventory. The DLA even reimburses the manufacturers and suppliers for the equipment cost. This is like the tobacco industry crying foul.

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