Counterfeit products are a major issue of great concern. The U.S. Automobile Manufacturer's Association reports it is a $3B industry annually in the U.S. and costing over 200,000 jobs, and a $12B impact worldwide. Motor Magazine, a publication of the automotive industry, reports that bogus brake pads made of compressed wood chips, grass or even seaweed have caused accidents and fatalities worldwide. Proctor & Gamble reports that up to 80 percent of Proctor & Gamble products sold in China are counterfeit, at a cost of over $5M annually. In China, nearly 90 unauthorized manufacturers of fake Yamaha motorcycles have been identified. In 2003, the World Health Organization cited estimates that the annual trade in counterfeit drugs was estimated at over $32 billion. Counterfeit cigarettes, fake designer purses, and of course counterfeit money are scams increasingly common each year. Obviously, in DOD we are primarily concerned about hardware and software as part of our weapons systems. In the U.S. defense industry, a number of jet fighters were found to have ersatz and substandard titanium engine mounts, an obvious safety risk. The USAF also discovered fake oscillators, components used in the Global Positioning System. The Army at one point was in possession of counterfeit seatbelt parts, made from a grade of aluminum inferior to DOD specifications, the fake parts discovered only when they broke easily in normal use or when accidently dropped. The counterfeits list includes microprocessors for the F-15 flight-control computer, improper self-locking nuts used in aircraft brakes, and counterfeit network components, including routers, with potential for high failure rates and even network shutdowns. While the true extent of the problem can only be estimated, there is growing consensus that it is accelerating and increasingly difficult to contain. However, the efforts to control the problem are also accelerating and the thrust is a joint industry-government function.
So what does this mean to me? First off, counterfeit parts pose a risk to the DoD supply chain. There has been no known loss of life or catastrophic mission failure due to counterfeit parts; however, it requires continued vigilance on the part of both government and industry to ensure that this remains the case. In addition:
- Counterfeit parts have implications for every stage of the DoD supply chain, from plan, source, and make, to deliver and return
- Intrusion can happen at any level (system, sub-system, component, sub-component) -- and intervention requires more than just contract action
- A single micro-circuit can impact multiple weapon systems and FMS partners. For example, according to the OSD staff, one NSN is used on 125 weapon systems and has been sold to 18 countries
- DoD takes a holistic risk-based approach to counterfeit prevention across the entire acquisition process and product life-cycle, such as:
- strengthening procurement processes through rulemaking
- partnering with industry to develop/adopt counterfeit prevention standards
- increasing workforce awareness through counterfeit prevention training
- detecting counterfeit parts through materiel inspection and testing
- reporting counterfeit occurrences in the Government-Industry Data Exchange Program (GIDEP) and monitoring trends
- aggressively managing obsolescence through total life-cycle system management
DoD published DoD Instruction 4140.67, "DoD Counterfeit Prevention Policy" in April 2013, which:
- establishes risk-based approach to counterfeit prevention
- provides procurement guidance for critical materiel
- directs application of authentication technologies
- requires reporting of suspect counterfeit materiel within 60 days
DoD issued DFARS rule 2012-D055 "Detection and Avoidance of Counterfeit Electronic Parts" in May 2014, which:
- implements provisions of both FY12 NDAA Sec. 818 and FY13 NDAA Sec. 833
- establishes counterfeit detection and avoidance system criteria for use by CAS covered contractors (annual contract value of $25M or greater)
DoD policy requires item unique identification (IUID) marking for critical materiel identified as susceptible to counterfeiting to enable authoritative life-cycle traceability and authentication. DoD also maintains a zero tolerance policy for mission-critical electronic parts and electronic parts that could impact human safety. While there may be cost implications for the Defense Industrial Base associated with imposing the DFARS rule, the costs to the nation in potential weapon systems failures and loss of life is worth the investment. Industry has a direct fiduciary interest in detecting and preventing counterfeit parts from infiltrating their own supply chains and passing those on to the Department. DoD actively participates with industry on G19 (electronic counterfeit) and G21 (non-electronic counterfeit) committees to develop and adopt standards. Three industry standards have been adopted by DoD (AS5553A, AS6081, and AS6174) with six more in development. DoD has also demonstrated efficacy of DNA marking for semi-conductors and is expanding to additional product groups and evaluating additional technologies.
Additionally, Defense Standardization Program Office (DSPO) publishes the "SD-2: Buying Commercial & Nondevelopmental Items - A Handbook", which offers guidance to both commercial and governmental organizations to address the counterfeit parts problem. The document widens the definition of counterfeit parts by including, "…for example, a used product sold as new, a commercial product sold as military grade, a product stolen from the manufacturer's production line, a product built without authorization from the intellectual property rights holder, or a product containing pure tin, but sold as containing lead." The DSPO estimates that as much as 7 percent of the world's merchandise trade may be faux goods, perhaps accounting for as much as a trillion dollars in economic activity (2004). The SD-2 presents the threat as pervasive, estimating that incidents increased by more than 240 percent in the few years ending in 2008, with up to 80 percent of the counterfeit components originating in China or other Asian nations along the Pacific Rim. As mitigative measures, the DoD suggests using only trusted and proven suppliers, and absent ability to do so, subjecting components from unknown/unproven/untrusted suppliers to more rigorous testing and authentication. Unfortunately counterfeiting issues are often tied to programs already struggling with DMSMS concerns. Systems with obsolescence problems represent ripe targets – with normal manufacturers and supply chains no longer available, and procurement personnel, with varying degrees of desperation, already looking for new sources.
A GAO report from 2010 titled, "Defense Supplier Base: DOD Should Leverage Ongoing Initiatives in Developing Its Program to Mitigate Risk of Counterfeit Parts", points out that DoD anti-counterfeit efforts were at the time hampered by lack of both a common definition of the term, and a consistent policy and means to identify the scope of the problem within the government. A 2011 Aerospace Industries Association report titled, "Counterfeit parts: Increasing Awareness and Developing Countermeasures", defined counterfeit parts as '...a product produced or altered to resemble a product without authority or right to do so, with the intent to mislead or defraud by presenting the imitation as original or genuine". The same document points out that "Counterfeiting has a long and ignoble history, ranging from art and literature to manufactured goods...", but that identifying and eliminating counterfeit parts in the DoD may be a matter of life and death, as well as a significant financial and security matter.
Even once common language is clarified, identification and control of counterfeit parts continues to be an issue, as organizations at times are slow to make public such issues over concerns about image and reputation, legal issues and financial impacts. However the problem of counterfeit parts is defined and scoped, it is clearly an issue of enormous magnitude, one common to both commercial industry and the DoD, and requiring joint mitigative measures.
A 2009 study by the U.S. Department of Commerce Bureau of Industry and Security titled, "Defense Industrial Base Assessment: Counterfeit Electronics", was completed to "...provide statistics on the extent of the infiltration of counterfeits into U.S. defense and industrial supply chains, to provide an understanding of industry and government practices that contribute to the problem, and to identify best practices and recommendations for handling and preventing counterfeit electronics." Findings included (1) There is a lack of dialogue between all organizations in the U.S. defense supply chain about counterfeits, (2) There is an assumption that others in the supply chain are testing parts, (3) There is a lack of traceability in the supply chain, (4) There is an insufficient chain of accountability within organizations, (5) Recordkeeping on counterfeit incidents by organizations is very limited, (6) Few know what authorities to contact in the federal government regarding counterfeit parts, (6) Few are aware of legal requirements and liabilities regarding counterfeits, (7) Stricter testing protocols and quality control practices are needed, (8) Most DOD organizations do not have policies in place to prevent counterfeit parts from infiltrating their supply chain, (9) No type of company or organization has been untouched by counterfeit electronic parts, and (10) Ultimately, everyone must work together to solve the problem of counterfeit parts. Fortunately, the reports goes on to provide a variety of best practices, categorized for Supply Chain Management, for manufacturers, for procurement, receipt, storage, testing and administrative processes, etc.
In Mar 2012, DUSD (AT&L) published a memorandum called "Overarching DoD Counterfeit Prevention Guidance , identifying counterfeit items as serious threats to safety and operational effectiveness of DoD systems, particularly items such as mission critical components, critical safety items, electronic parts and load-bearing mechanical parts affecting "…system performance or operations, the preservation of life, or safety of operating personnel." Mandated by Congress as part of the 2012 National Defense Authorization Act, this information has been captured and expanded upon in policy in DoD Instruction 4140.67, "Counterfeit Prevention Policy" and Defense Federal Acquisition Regulation Supplement (DFARS): "Detection and Avoidance of Counterfeit Electronic Parts" (DFARS Case 2012–D055) Final Rule (published in the Federal Register on May 6, 2014). In effort to maximize safety and mission performance of warfighting systems, the AT&L memorandum stipulated action, to include -
- Ensuring program managers are notified of acquisition sourcing other than original equipment/component manufacturer or duly authorized distributers.
- Requiring program managers to fully evaluate risk from counterfeit components, and to implement appropriate countermeasures for mission critical components as part of the Program Protection Plan.
- Program or item managers must document risk mitigation measures for other components as part of the program risk mitigation plan or systems engineering plan
- Reaffirming requirement to address considerations of DFARS clause 252.246-7003 in certain solicitations and contracts; participate in DoD review of industry standards for anti-counterfeiting, and to address those standards in contracting.
- Ensure appropriate participation in Government-Industry Data Exchange Program (GIDEP), including reporting of confirmed or suspected counterfeit items.
A follow-on GAO study completed in early 2016 titled, 'DOD Needs to Improve Reporting and Oversight to Reduce Supply Chain Risk', concluded that the DOD supply chain remains vulnerable to the risk of counterfeit parts—which can have serious consequences. To effectively identify and mitigate this risk, DOD and its defense contractors need data on the existence of counterfeit parts in their supply chain; whether those be suspected or confirmed counterfeit. Three years after GIDEP reporting became mandatory, we found evidence that this system may not be effective as an early warning system to prevent counterfeit parts from entering the supply chain. Without proper oversight to ensure the reporting requirement is consistently applied, DOD cannot depend on GIDEP data to ensure it is effectively managing the risks associated with counterfeit parts. DOD’s lack of insight into DLA’s reporting practices is particularly problematic, given DLA’s key role in procuring parts for the department. Further, without a standardized process for establishing the level of evidence needed to submit suspect counterfeit GIDEP reports, defense agencies—particularly DLA—and contractors have demonstrated a reluctance to report suspect parts, creating a delay in knowledge-sharing and an opportunity for counterfeit parts to be used in defense products. Also, DOD needs to be sure that information in GIDEP about suspect counterfeit parts is reaching industry participants whenever possible, but currently lacks necessary guidance to ensure this occurs. The bottom line - for both industry and governmental organizations, particularly the DOD, active counterfeiting defense to include use of joint tools such as GIDEP are essential to winning the war on counterfeiting.
Some DoD components are developing policies and SOPs for counterfeit prevention. As one example, in 2015 the DoN published SECNAVINST 4855.20, Counterfeit Materiel Prevention, and other Services and organizations are also quantifying their policies, best practices and processes in writing.
Within DOD specifically, and within government overall, the problem of counterfeit parts is garnering increased emphasis, funding, corrective policies and conceivably additional regulatory attention, due to both readiness requirements and economic concerns driving policies such as the Department's Better Buying Power Initiatives.