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Pitfalls of Counterfeit-Part Epidemic Exposed

By: Anthony Kimery

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Companies attempting to manage the growing challenge of counterfeit electronic components face a range of government- and industry-related pitfalls that make it virtually impossible to eliminate all risk associated with the plague of fake parts, according to experts speaking at the recent 2012 ERAI Executive Conference co-hosted by El Segundo, Calif.-based information and analytics provider, IHS.


More than 300 industry participants, including homeland security and national defense contractors and distributors, “detailed the challenges associated with the rising tide of counterfeit and fraudulent devices,” according to an IHS statement, which added that “while much of the discussion focused on the impact of fake parts on the military/aerospace sector amid new defense department regulations, the presentations also examined the effect of counterfeits on the broader commercial electronic markets.”


Homeland Security Today earlier reported that the number of counterfeit parts that are vital to the computer industry is expected to reach record high levels as the semiconductor industry enters “a phase of accelerating growth,” according to an analysis of trends conducted by IHS.


“The scale of the counterfeit problem has grown dramatically in recent years, with reports of counterfeit parts quadrupling from 2009 to 2011,” IHS said. “Supply chain participants in 2011 reported 1,363 separate verified counterfeit-part incidents worldwide, a fourfold increase from 324 in 2009.”


Counterfeit parts pose serious security problems that could impact homeland security and national defense, authorities said, pointing to bogus computer chips, other parts and counterfeit products that were supplied for homeland and national security purposes, many of which were substandard and posed safety and security risks for a wide variety of programs and operations.


Audits by the Government Accountability Office have repeatedly warned about the dangers counterfeit parts pose to national security.


“Much of the counterfeit-parts problem can be traced back to the enormous amount of electronic waste (e-waste) generated each year," according to Bob Braasch, senior director, supply chain, for IHS. “People don’t hold on to their old electronic devices. A three-year-old cell phone is ancient, so people are constantly upgrading to the latest device. As the world economy improves and as technology continues to develop, people increasingly will be looking for the latest technology. All of this electronics consumerism translates into e-waste.”


Braasch noted that 58 percent of e-waste generated by the United States is shipped to developing countries, but that “all too often, electronic components such as semiconductors are culled from this waste and then returned to the US and other developed countries in the form of counterfeit parts.”


IHS said that “as the number of counterfeit parts has grown, government regulations covering fake parts have grown more stringent. The US National Defense Authorization Act (NDAA), which was signed into law on December 31, imposes strict regulations and severe criminal penalties on counterfeits supplied for government military and aerospace programs. While this phenomenon is impacting all electronics market, including consumer, communications and computing devices, much of the attention has been focused on defense, due to the NDAA.”


Kirsten Koepsel, director of legal affairs and tax at the Aerospace Industries Association (AIA), said one of the major problems that companies face when attempting to comply with the new regulations is the vague language and difficult-to-comply-with requirements contained in the new law. For example, section 818 of the NDAA calls for the Department of Defense (DoD) to “establish a process for analyzing, assessing and acting on reports of counterfeit electronic parts and suspect counterfeit electronic parts.”


IHS said the NDAA also mandates that DoD contractors and subcontractors must obtain parts “from the original manufacturers of the parts or their authorized dealers, or from trusted suppliers who obtain such parts exclusively from the original manufacturers of the parts or their authorized dealers.”


However, the definitions of “suspect counterfeit part” and “trusted supplier” are unclear, Koepsel said in a statement.


“Despite such ambiguities,” IHS said, “the burden appears to fall on DoD contractors and subcontractors to report any cases of suspect counterfeit parts to the Government Industry Data Exchange Program (GIDEP).”


Continuing, IHS said, “The NDAA also places the onus for detecting counterfeit parts upon importers of devices, calling upon them to arrange for examination and release of the goods. Nevertheless, it can be very difficult to detect imported counterfeits.”


Koepsel pointed to a recent case in which criminals in New Jersey conspired to conceal imported counterfeit goods by using “generic outer lids on boxes and generic labels on products to hide the counterfeit brand-name labels beneath. The counterfeit ring also employed falsified paperwork and fraudulent personal identification documents."


“All someone needs to do is make the boxes of counterfeit parts look like there are shoes inside -- and you will never know that fake parts are coming in,” Koepsel said.


“Counterfeiters are escalating -- they know what we are looking for and move on to the next step,” said Tom Sharpe, vice president at SMT Corp., an independent distributor of electronic components to the defense and aerospace industries.


IHS said “companies that purchase electronic components also face a threat from increasingly sophisticated counterfeiters working to overcome even the most diligent methods to test for fake parts.”


“No matter how much testing there is, there will never be zero risk,” noted Mark Northrup, vice president at contract manufacturer IEC Electronics Corp. “Even the most accurate testing measures can only give a range -- and not a single result.”


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