D.C. Counterfeit Microelectronics Working Group - The Enemy Within

D.C. Counterfeit Microelectronics Working Group
-The Enemy Within
Kristal Snider
Vice President, ERAI Inc.
www.erai.com
ksnider@erai.com
T: 239-261-6268
F: 239-261-9379

© 2012 ERAI Inc.

Why we are here

http://defense-update.com/20120603_counterfeit-electronics-in-dod-are-widespread-and-threaten-national-security.html

Training Outline
Why we are here
Supply Chain Basics
Counterfeit Timeline
Allocation, Obsolescence & Opportunistic Procurement = Opportunity
E-Waste
Portals of Entry
Verification of Product-Counterfeit Identification Methods
Supplier Selection
Material Control
Reporting
Counterfeit Statistics
Industry Standards
Pending Legislation
Industry Initiatives
Education & Networking
Resources

© 2012 ERAI Inc.

Supply Chain Basics

© 2012 ERAI Inc.

Industry Terms
*ORIGINAL COMPONENT MANUFACTURER (OCM)
An organization that designs and/or engineers a part and is pursuing or has obtained the
intellectual property rights to that part.
Notes:
1. The part and/or its packaging are typically identified with the OCM’s trademark.
2. OCMs may contract out manufacturing and/or distribution of their product.
3. Different OCMs may supply product for the same application or to a common
specification.

© 2012 ERAI Inc.

*AS5553 - Counterfeit Electronic Parts; Avoidance, Detection, Mitigation, and Disposition

Industry Terms
*FRANCHISED DISTRIBUTOR
A distributor with which the OCM has a contractual agreement to buy, stock, re-package,
sell and distribute its product lines. Franchised distributors normally offer the product for
sale with full manufacturer flow-through warranty. Franchising contracts may include
clauses that provide for the OCM's marketing and technical support inclusive of, but not
limited to, failure analysis and corrective action, exclusivity of inventory, and competitive
limiters.

© 2012 ERAI Inc.


Industry Terms
*ORIGINAL EQUIPMENT MANUFACTURER (OEM)
A company that manufactures products that it has designed from purchased components
and sells those products under the company’s brand name.

© 2012 ERAI Inc.


Industry Terms
Contract manufacturer ("CM")
A manufacturer that contracts with a firm for components or products. It is a form of
outsourcing.
Benefits
•Cost Savings
•Advanced Skills
•Quality
•Focus
•Economies of Scale

© 2012 ERAI Inc.

Risks
•Lack of Control
•Relationships
•Quality concerns
•Intellectual Property Loss
•Outsourcing Risks
•Capacity Constraints

Industry Terms
*INDEPENDENT DISTRIBUTOR
A distributor that purchases new parts with the intention to sell and redistribute them
back into the market. Purchased parts may be obtained from original equipment
manufacturers (OEMs) or contract manufacturers (typically from excess inventories), or
from other independent distributors. Re-sale of the purchased parts(re-distribution) may
be to OEMs, contract manufacturers, or other independent distributors. Independent
distributors do not have contractual agreements or obligations with OCMs.

*STOCKING DISTRIBUTOR
A type of independent distributor that stocks large inventories typically purchased from
original equipment manufacturers (OEMs) and contract manufacturers. The handling,
chain of custody, and environmental conditions for parts procured from stocking
distributors are generally better known than for product bought and supplied
by broker distributors.

*BROKER DISTRIBUTOR
A type of independent distributor that works in a “Just in Time” (JIT) environment.
Customers contact the broker distributor with requirements identifying the part number,
quantity, target price, and date required. The broker distributor searches the industry and
locates parts that meet the target price and other customer requirements.
© 2012 ERAI Inc.


Discuss
OCM
Original Component Manufacturer
Franchise Distributor
a/k/a Authorized Distributor
OEM
Original Equipment Manufacturer
CM
Contract Manufacturer

After Market Manufacturer

Independent Distributor
a/k/a Broker
© 2012 ERAI Inc.

• 1986 – China’s quest began for admission to WTO
• 1993-1994 - Pilgrim Components
1.) Broker/Stocking Independent Distributor
2.) Buying, Selling
3.) Relationship driven business environment

• 1995 - The Internet was commercialized
March 1, 1995 – Yahoo was incorporated

© 2012 ERAI Inc.

• 1995 - Electronic Resellers Association Inc. (ERA)
– How’s that for perfect timing?
1st Trade Association specifically for the Independent Distributor Community

Primary Objectives:
– Information Sharing
– Education
Most Common Complaint types:
– Cancelled Purchase Orders
– Past Due Invoices
– NSF Checks

© 2012 ERAI Inc.

• 1998 – Google was incorporated as a privately held
company
The company's mission statement: “To organize the world's information and make it
universally accessible and useful.”

Mission Accomplished!

• 1998 - Electronic Resellers Association
International Inc. (ERAI)
Name changed to reflect ERA had become an internationally recognized
organization.

Google made the world a much smaller place
International trade became readily available for everyone; not just large corporations

© 2012 ERAI Inc.


November 9, 2000 – ERAI launches eraiESCROW

Two primary challenges for distributors
• Wire Fraud
• New customers

© 2012 ERAI Inc.

November 2001 – China Admitted to the WTO
“A monumental change to the world trading system”
“An event of historic proportions for the world trading system”
- Kofi Annan, UN Secretary General
"I believe that as this century unfolds and people look back on this day, they
will conclude that in admitting China to the WTO we took a decisive step in
strengthening the global economic trading system."
- Robert Zoellick, US Trade Representative
"Just like every member of the WTO, China will have to deliver on its
commitments, and we will be watching this very carefully,"
-Pascal Lamy, EU trade commissioner
© 2012 ERAI Inc.

November 29, 2001 – ERAI receives
1st nonconforming part complaint against a
China based distributor
3A Century aka Gold Advanced aka JXJ
Part number: TCM3105DW
Description of the product nonconformance:
Parts arrived in Samsung tubes (ordered TI parts). Numerous mixed date
codes arrived in a single tube. Solder splash present on part leads. There
were 'wash marks' and smears on the upper surface of the chip.

Within a few months China distributors began refurbishing and
remarking parts to have consistent date and lot codes in order to
pass used parts off as new.
© 2012 ERAI Inc.

January 2002 – ERAI Launches High Risk /
Suspect Counterfeit Part Database
April 19, 2002
-ERAI Industry Advisory Committee formed
We saw it coming….
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Ethical standards in the industry
Counterfeit/Substandard parts
ISO
ESD
ERAI Role now and in the future
Negative advertising campaigns launched by AGMA & NEDA

© 2012 ERAI Inc.

March 1, 2003 – IDEA – Public Launch
ERAI Executive Conference, Las Vegas NV
Objectives:
1)

Promote the independent distribution industry through a media
advocacy campaign

2)

Improve the quality of products and services through a quality
certification program, educational seminars and conferences.

3)

Promote the study, development, and implementation of
techniques and methods designed to improve the business of
independent distributors

© 2012 ERAI Inc.

January 2004 – ERAI travels to China to investigate
2004 - U.S. Chamber of Commerce's Global Intellectual Property
Center, organized itself through a broad-based business coalition,
the Coalition Against Counterfeiting and Piracy (CACP).

January 27, 2004 – Secretary of Defense releases Memo for Service
Acquisition Executives
Subject: Encouraging Industry Participation in the Trusted
Foundry Pilot Program
Back door threats realized….counterfeits not the only problem!
© 2012 ERAI Inc.


June 2006 SIA launches
the Anti-Counterfeiting
Task Force (SIA ACTF)

© 2012 ERAI Inc.

October 2006- IDEA releases
IDEA-STD-1010-A-Acceptability of
Electronic Components Distributed
in the Open Market
Standard specifically written to identify
nonconforming/suspect counterfeit parts
Counterfeits have a name and a face!

© 2012 ERAI Inc.

Significance of the IDEA-STD-1010-A
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Counterfeit is defined
Wide spread awareness
In-depth training for detection and avoidance
Minimum inspection criteria
Inspection check list
Documented examples of suspect counterfeit parts

Ignorance is not an excuse!

© 2012 ERAI Inc.

November 29, 2006 – Counterfeit Components
Detection & Prevention Symposium hosted by
Component Technology Institute a/k/a
CTI(attended by Phil Zuluetta who later becomes SAE Aerospace G-19
Chairman.)

December 2006 – ERAI – 2nd trip- Investigation
specific to the handling of OEM excess by
Chinese based OEMs and CMs.
April 16, 2007 – ERAI Special Report Released–
A Time For Change
© 2012 ERAI Inc.

A Time For Change Revealed
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The vast majority of product being sold
in the China Open Market originates
from e-waste.
Unknown quantities of e-waste are
exported from China to component
buyers around the world.
Nearly 75 million dollars in revenue is
generated for the local Chinese
Government in the city of Shantou
alone.
What incentive does the government
have to control the import or export of
this product?
Much of the e-waste is remarked and
counterfeited.
Most of the distributors operating in
and around Shenzhen have no
experience in handling, storing or
selling electronic components.

© 2012 ERAI Inc.

Estimated units of E-Waste in the US
The significance of the
escalating volumes of
e-waste:
•
•

We need to control e-waste
but doing so does not resolve
the problem!
Even if the US prevented the
export of all of its e-waste
China produces enough of its
own to fuel this epidemic.
Counterfeits are here to stay!

© 2012 ERAI Inc.

Significance of A Time For Change

Where’s the excess?
Argument:
I have to do business with Chinese
Brokers…manufacturing has shifted to this
region…along with it OEM excess.
Reality:
OEMs/CMs in China reportedly do not do
business with a company/distributor that
does not have a current Chinese VAT
License.
ERAI’s investigation revealed the
majority of the product being offered in
Shenzhen is more likely to have
originated from e-waste
Than from legitimate OEM surplus.
© 2012 ERAI Inc.

Significance of A Time For Change

Where’s the excess?

32
© 2012 ERAI Inc.

Portals of Entry
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Low barrier of entry; “Quick &
Easy to Apply”
Anyone can participate in the
open market
Rapid access to millions of
parts
Minimal membership
requirements
Quick & easy access to a large
audience of buyers
Burn customer and re-register
using a new name
If you choose to participate
you assume high risks
The open market is inherently risky
“caveat emptor”

© 2012 ERAI Inc.

May 2007 – Electronic Resellers Association International Inc. to ERAI

Inc. (the term “resellers” removed as ERAI moves to share services with the
entire supply chain. Membership no longer restricted to distributors only.
Database opened to OEMs, CMs, US Government Agencies, Enforcement,
etc.

June 2007 - the U.S. Department of the Navy, Naval Air Systems

Command (NAVAIR) asked the Bureau of Industry and Security’s (BIS)
Office of Technology Evaluation (OTE) to conduct a defense industrial base
assessment of counterfeit electronics. NAVAIR suspected that an increasing
number of counterfeit/defective electronics were infiltrating the DoD supply
chain and affecting weapon system reliability.

September 2007 - SAE G-19 Committee Charter Counterfeit

Electronic Components Committee
The committee was tasked with developing a document that would
standardize requirements, practices and methods related to
counterfeit parts risk mitigation.
© 2012 ERAI Inc.

September 2007 - The L-3 Counterfeit Parts Team was
established to define and provide guidelines for
managing and controlling the risks associated with
Counterfeit Parts
OEMS ramping up awareness and avoidance efforts

Late 2007 - U.S. and European customs launched
“Operation Infrastructure” resulting in the seizure of over
360,000 counterfeit ICs that were destined for U.S. and
European markets.
Enforcement is engaged

© 2012 ERAI Inc.

April 2008- AIA forms the Counterfeit Parts Integrated
Project Team
AIA Counterfeit Parts IPT Plan of Action
To address the challenges of the today’s supply chain environment, AIA has established
a Counterfeit Parts Integrated Project Team (IPT). The AIA Counterfeit Parts IPT is working in
concert with government agencies, original manufacturers, industry associations and
independent distributors.
Objectives of the IPT are to:
1. Engage the U.S. government in discussions concerning acquisition and procurement
policies to avoid introducing counterfeit parts and materials into aerospace, space and
defense products
2. Create a set of standards for government and industry to ensure that the risk of
introducing counterfeit parts and materials is minimized, is consistent with risks accepted by
the customer and implementable without sacrificing the benefits of buying commercially
available products
3. Engage the U.S. government in discussions concerning enforcement of policies to
avoid the introduction of counterfeit products into the U.S
© 2012 ERAI Inc.

October 2, 2008 - Dangerous Fakes: How counterfeit,
defective computer components from China are getting
into U.S. warplanes and ships
Significance = National | International Media Coverage

© 2012 ERAI Inc.

April 2009 –
AS5553 released

© 2012 ERAI Inc.

August 2009 –
AS5553 adopted by the DoD


October 9, 2009 –
Mustafa Aljaff – MVP Micro /Indictment
November 2009 –
Counterfeit Electronics Survey initiated by the U.S. Dept. of
Commerce, the Bureau of Industry and Security (BIS), and
the Office of Technology Evaluation (OTE).

© 2012 ERAI Inc.

January 2010 Defense Industrial Base
Assessment
Counterfeit Electronics report was released by
the U.S. Dept. of Commerce, the Bureau of
Industry and Security (BIS), and the Office of
Technology Evaluation (OTE).
Purpose: The purpose of this study is 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.

The veil was fully lifted

© 2012 ERAI Inc.

March 2010- GAO Study: DOD Should Leverage Ongoing Initiatives in
Developing Its Program to Mitigate Risk of Counterfeit Parts

April 2010- GAO Study: Observations on Efforts to Quantify the Economic
Effects of Counterfeit and Pirated Goods

September 14, 2010 - Shannon Wren and Stephanie McCloskey
(VisionTech) Press Release / Indictment

December 2010 – Supply & Demand Chain Executive Special EditionSupply Chain RISK

March 20, 2011: AIA releases white paper titled: Counterfeit Parts:
Increasing Awareness and Developing Countermeasures
© 2012 ERAI Inc.

March 2011 - Senators Levin & McCain announced a Senate Armed
Service Committee (SASC) investigation into counterfeit electronic parts
and the risks they pose to the Department of Defense (DoD) supply
chain.

April 2011- IDEA-1010-B Released
June 2011- Senator Whitehouse, proposed his own counterfeit bill, the
Combating Military Counterfeits Act of 2011, to crack down on criminals
who traffic in counterfeit military goods/services.

June 16th 2011- CNN broadcast
http://www.cnn.com/video/#/video/bestoftv/2011/06/16/exp.nr.seg.fake.military.parts.cnn?iref=allsearch

• Counterfeit parts impact 40% of Pentagon’s Supply Chain according to U.S.
Commerce Dept study
• Senator Brown (OH) recommends DOD cancel supplier contracts when
© 2012 ERAI Inc.
counterfeits are found in their supply chain

July 2011- Supply & Demand Chain Executive Special Edition- The
Counterfeit Crisis
November 8, 2011- the SASC held a hearing with DoD contractors,
industry associations and others in Washington, DC after which Senator
Levin promised a swift government response. It was revealed that 1,800
incidents and over 1M parts have been reported.
November 29, 2011- The Whitehouse measure was amended to the
McCain / Levin bill and then unanimously approved by the Senate. It
moved to the House for discussion.
December 1, 2011- Senate passage of the Defense Authorization Act for
Fiscal Year 2012
December 20, 2011 - ARP6178 - Fraudulent/Counterfeit Electronic Parts;
Tool for Risk Assessment of Distributors has been published.

© 2012 ERAI Inc.

December 31, 2011 – Measure signed by President Obama
2012 National Defense Authorization Act (Sec. 818)
Detection and Avoidance of Counterfeit Electronic Parts

© 2012 ERAI Inc.
45

Amendment Timeline
Contractor

All contractors, subcontractors and Department of
Defense employees must provide a written report
on suspect or detected counterfeit parts to the
Inspector General of the Department of Defense
within 30 DAYS

Secretary of Defense shall implement a program
for the improvement of contractor systems for the
detection and avoidance of counterfeit electronic
parts and suspect counterfeit electronic parts
270 Days

Department of Defense
Secretary of Defense shall revise the
Department of Defense Supplement to the
Federal Acquisition Regulation to address the
detection and avoidance of counterfeit
electronic parts
180 Days

Day 0

The Secretary of Defense shall take steps to
address shortcomings in Department of Defense
systems for the detection and avoidance of
counterfeit electronic parts and suspect
counterfeit electronic parts
270 Days

Promulgate the guidelines, policy
statements, or amendments
provided for in this Act

Day 180

Day 270
46

© 2012 ERAI Inc.

February 2012 – Suspect
Counterfeit electronic Parts Can
Be Found on Internet Purchasing
Platforms
Who heard about this investigation?

May 21, 2012- Senate Armed
Services Report released: Inquiry
Into Counterfeit Electronic Parts
In The Department of Defense
Supply Chain
© 2012 ERAI Inc.


Q: What is the significance of the timeline?

© 2012 ERAI Inc.

A: Awareness

© 2012 ERAI Inc.

Counterfeit Statistics

© 2012 ERAI Inc.

“Just One” Incident Can Cost Millions
Design interruptions can cost $0 to over $1M+
“According to the Missile Defense Agency, if the devices
had failed, the THAAD missile itself would likely have
failed. The cost of that fix was nearly $2.7 million”
Senate Armed Services Committee Hearing Opening Remarks
Senator Carl Levin (D-MI) , Committee Chairman

THAAD Photo courtesy of Raytheon Company
Source: http://www.raytheon.com/newsroom/rtnwcm/groups/public/documents/image/rtn_missile_defense_gal_06.jpg

Defense A Small Slice of the Pie
Military / Aerospace Application = Approximately 1.9% of market

© 2012 ERAI Inc.

Source: IHS iSuppli 2011

The Past Decade Has Seen A Steady
Rise in Counterfeit Incidents Reported

Source: IHS Parts Management 2012

Reports of counterfeit parts have quadrupled since 2009
© 2012 ERAI Inc.

2011
Record Number of Incidents Reported


Over 1,000 verified counterfeit part incidents were reported.
© 2012 ERAI Inc.

Short Term Outlook –
2012 Counterfeit Incident Levels to Keep Pace with 2011
Global Reports of Counterfeit Parts
Q1 2011 and Q1 2012


© 2012 ERAI Inc.

Trending At 2011 Levels with Signs of Growth in 2012

Long Term Outlook
- A Steady Rise in Counterfeit Activity from 2012 to 2016

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56

Reported (and Unreported) Counterfeit Incidents Trend Along with Semiconductor
Market Cycles

© 2012 ERAI Inc.

What is Being Counterfeited
In a typical recent two weeks of ERAI provided data (Reported
Companies)
Five suspect counterfeit shipments (3 integrated circuits, 1
transistor, 1 capacitor), $55,169.00
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•
•
•

6,233 ICs at $44,154 = $7.08 per
500 transistors at $1,015 = $2.03 per
200,000 capacitors at $10,000 = $0.05 per
These are just the companies that were reported by ERAI
members, usually due to disputes
• These instances are seldom reported to GIDEP

Slide compliments of Fred Schipp-MDA

What is Being Counterfeited
June-July 2011 ERAI reported
186 suspect counterfeit parts
–

Integrated Circuits – 81%
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•

–
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Processors/Controllers – 14%
Memory – 12% (mostly FLASH)
Transmitter/Receivers – 7%
Operational Amplifiers – 6%
Programmable Logic Devices – 5%
Digital Switches – 5%
Converters – 4%
Field Programmable Gate Arrays
(FPGA) – 4%

Discrete Transistors – 8%
Discrete Diodes – 4%
Capacitors – 4% (mostly aluminum
electrolytic)
Inductors – 1%

Slide compliments of Fred Schipp-MDA

The Top 5 Most-Counterfeited Components in 2011 Were…

#5 Transistors (7.6%)

#4 Programmable Logic Integrated Circuits (8.3%
#3 Memory Integrated Circuits (13.1%)
#2 Microprocessor Integrated Circuits (13.4%)
#1 Analog Integrated Circuits (25.2%)

© 2012 ERAI Inc.

59

Companies Accused of 2011 Incidents Were in
Largely Within Two Countries
According to ERAI, of recorded 2011 losses,
companies located in two countries alone
accounted for nearly two thirds of all
worldwide incidents reported. The rest of
the world accounted for 35%. The two
countries were…
Faulty Product
Remarked Product
Substandard Product
Programmed Product
Suspect Counterfeit Label
Suspect Counterfeit Product
…

#2 China (32%)
#1

United States (33%)

Make No Mistake, The “Enemy” Also Comes from Within

© 2012 ERAI Inc.

61

Why Purchase from the Open Market?
Allocation, Obsolescence & Opportunistic Procurement = Opportunity

© 2012 ERAI Inc.

How Counterfeits Enter The Supply Chain

© 2012 ERAI Inc.

Why Purchase from the Open Market?
• Why Do People Go To Open Market?
–Two reasons only
(1) Price
(2) Shortage
How is Channel Integrity Compromised?
Returns Procedures
Inventory Buys from CM/EMS/OEM
Supply Chain / Forecast Breakdown
Materials Obtained Through Acquisition
© 2012 ERAI Inc.

Why is the U.S. Government at Risk?
Obsolescence (Shortage)
• Air
– B-52 Extended from 2025 to 2040 in 2002 - Boeing
– F-15 A-D USAF could extend by 15 years – Aviation Week
– UH-60A/L Blackhawk extends life to 2025 – Sikorsky
– C-17 likely be extended from 2025 to 2050
• Land
– Equipment used at higher operational rates than peacetime
requiring more repairs & overhauls – Sep 2007 CBO study
• Sea
– DDG-51s & Trident subs extended from 30 years to over 40
– DDG-51 class ships extended from 35 to 40 years – CBO
– Trident D-5 missile system extended from 30 to 40 years
– Enterprise carrier built to last 30 years is 50+ years old

© 2012 ERAI Inc.

No Supplier is Immune to Counterfeit Risk
Open market suppliers are not the only victims of risk
Why are counterfeit parts also sold by authorized sources?
“It is not uncommon, however,
for authorized distributors to
purchase parts outside of the
OCM supply chain in order to
fulfill customer requirements –
58 percent purchase parts from
other sources.
Specifically, 47 percent of
authorized distributors procure
parts from independent
distributors, 29 percent
procure from brokers, and 27
percent procure from Internetexclusive sources.”
Source: U.S. Department of Commerce,
Office of Technology Evaluation,
Counterfeit Electronics Survey,
November 2009.
© 2012 ERAI Inc.

Counterfeit Defined

© 2012 ERAI Inc.

Definition of Counterfeit
-The controversy
Counterfeit Part
A suspect part that is a copy or substitute without legal right or authority to do so or
one whose material, performance, or characteristics are knowingly misrepresented
by a supplier in the supply chain.
Examples of counterfeit parts include, but are not limited to:
a. Parts which do not contain the proper internal construction (die, manufacturer, wire bonding,
etc.) consistent with the ordered part.
b. Parts which have been used, refurbished or reclaimed, but represented as new product.
c. Parts which have different package style or surface plating/finish than the ordered parts.
d. Parts which have not successfully completed the Original Component Manufacturer’s
(OCM)’s full production and test flow, but are represented as completed product.
e. Parts sold as upscreened parts, which have not successfully completed upscreening.
f. Parts sold with modified labeling or markings intended to misrepresent the part’s form, fit,
function, or grade.
Parts which have been refinished, upscreened, or uprated and have been identified as such,
are not considered counterfeit.
© 2012 ERAI Inc.

Source: AS5553

Definition
Suspect, Fraudulent & Counterfeit
3.1

Suspect Part

A part in which there is an indication that it may have been misrepresented by the
supplier or manufacturer and may meet the definition of fraudulent part or counterfeit
part provided below.
3.2

Fraudulent Part

Any suspect part misrepresented to the Customer as meeting the Customer’s
requirements.
NOTE: “Previously used parts, not altered, but represented as new” is a subset of all
potential “Fraudulent Parts”. In addition to counterfeit parts, this document addresses
only this particular category of Fraudulent Part.
3.3

Counterfeit Part

A fraudulent part that has been confirmed to be a copy, imitation, or substitute that
has been represented, identified, or marked as genuine, and/or altered by a source
without legal right with intent to mislead, deceive, or defraud.
© 2012 ERAI Inc.

Source: AS6081

H.R. 1540: National Defense Authorization Act For
Fiscal Year 2012 - Sec. 818 Detection and Avoidance of Counterfeit Electronic
Parts)

…”establish Department-wide definitions
of the terms ‘‘counterfeit electronic part’’
and ‘‘suspect counterfeit electronic part’’,
which definitions shall include previously
used parts represented as new”
Questions:
-Why?
-When might this be a problem?
© 2012 ERAI Inc.

Verification of Product
-Counterfeit Identification Methods

© 2012 ERAI Inc.

4.1.4 Verification of
Purchased Product
Question:
At what stage are
most counterfeit parts
Identified?

Source: AS5553
© 2012 ERAI Inc.

Most suspect counterfeit parts are identified
during basic inspection

© 2012 ERAI Inc.

Discuss
Question:
Based on today’s level of awareness is an
organization that chooses not to screen
incoming shipments a victim?

Discuss
Question:
What is a “Trusted Supplier”

TRUSTED SUPPLIERS.—The revised regulations issued pursuant to paragraph (1) shall—
(A) require that, whenever possible, the Department and Department contractors and subcontractors at all
tiers—
(i) obtain electronic parts that are in production or currently available in stock 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;
and
(ii) obtain electronic parts that are not in production or currently available in stock from trusted
suppliers;
(B) establish requirements for notification of the Department, and inspection, testing, and authentication of
electronic parts that the Department or a Department
contractor or subcontractor obtains from any source other than a source described in subparagraph (A);
(C) establish qualification requirements, consistent with the requirements of section 2319 of title 10, United
States Code, pursuant to which the Department may identify trusted suppliers that have appropriate
policies and procedures in place to detect and avoid counterfeit electronic parts and suspect counterfeit
electronic parts; and
(D) authorize Department contractors and subcontractors to identify and use additional trusted suppliers,
provided that—
(i) the standards and processes for identifying such trusted suppliers comply with established
industry standards;
(ii) the contractor or subcontractor assumes responsibility for the authenticity of parts provided
by such suppliers as provided in paragraph 2); and
(iii) the selection of such trusted suppliers is subject to review and audit by appropriate
Department officials.

Discuss
Question:
How does an Independent Distributor identify a
trusted source?

ERAI’s Potential Trusted Suppliers
Mechanism to avoid blind open market purchases
Shown: SMT Corporation

Shown: World Micro, Inc.

© 2012 ERAI Inc.

Discuss
Question:
What are the most effective ways to screen a
potential source of supply?

Discuss
Question:
Should a distributor disclose “risk” to a
customer?

Discuss
Question:
Why might a distributor NOT disclose risk?

Parts)

NDAA requires a process for debarring sources of supply:

(3) issue or revise guidance applicable to the Department on remedial
actions to be taken in the case of a supplier who has
repeatedly failed to detect and avoid counterfeit electronic
parts or otherwise failed to exercise due diligence in the
detection and avoidance of such parts, including consideration
of whether to suspend or debar a supplier until such time as
the supplier has effectively addressed the issues that led to
such failures;

Discuss
Question(s):
(1)

When should a source of supply be removed from an AVL | ASL?

(2) If a supplier continues to procure from a supplier that provides
nonconforming material is that supplier a victim?

Discuss
Question(s):
Is it time to return to a relationship driven business model?

TRUST & Trusted Supplier

Parts)

NDAA requires a process for ensuring suspect counterfeit parts NOT reenter the supply chain:
(e) IMPROVEMENT OF CONTRACTOR SYSTEMS FOR DETECTION AND
AVOIDANCE OF COUNTERFEIT ELECTRONIC PARTS.—
(2) ELEMENTS—The program implemented pursuant to paragraph (1) shall—
(A) require covered contractors that supply electronic parts or systems that
contain electronic parts to establish policies and procedures to eliminate
counterfeit electronic parts from the defense supply chain, which policies
and procedures shall address—
(i) the training of personnel;
(ii) the inspection and testing of electronic parts;
(iii) processes to abolish counterfeit parts proliferation;
(iv) mechanisms to enable traceability of parts;
(v) use of trusted suppliers;
(vi) the reporting and quarantining of counterfeit electronic parts and
suspect counterfeit electronic parts;

4.1.6 Material Control
4.1.6 Material Control
The documented processes shall
specify methods to:
a. Control excess and nonconforming
parts to prevent them from
entering the supply chain under
fraudulent circumstances.
b. Control suspect or confirmed
counterfeit parts to preclude their
use or reentry into the supply
chain.
Guidelines for control of parts are
provided in Appendix F, Material
Control.

Source: AS5553

Appendix F
F.1.4 Control of Suspect or Confirmed
Counterfeit Parts
In the event that product assurance actions,
in-process inspections/tests, or product failure
experiences indicate that parts may be
counterfeit, the following steps should be
implemented:
a. Physically identify the parts as suspect/counterfeit
product (e.g., tag, label, mark).
b. Physically segregate the parts from acceptable
non-suspect parts and place in quarantine.
Quarantine should consist of physical barriers
and controlled access.
c. Do not return the parts to the supplier for refund,
replacement, etc., except under controlled
conditions which would preclude resale of the
suspect counterfeit parts into the supply chain,
and to allow the supplier to conduct internal
investigation.
d. Confirm the authenticity of the parts. This may
include further part-level testing, communications
with the part’s supposed OCM, third-party
analysis, etc.
e. Upon confirmation that a part is counterfeit, identify
and place on “Hold” all potential additional
counterfeit parts in storage and installed in
product pending disposition by appropriate
authorities.
f. Report counterfeit parts in accordance with
guidelines provided in Appendix G, Reporting.

Discuss
Why is suspect counterfeit material
returned despite the risk of this material
re-entering the chain of supply?
Examples:
(1) Escrow providers require the return of material if parts are not
confiscated by enforcement. (6051S)
(2) Wire Transfer in advance payment terms
(3) Threat of legal action
© 2012 ERAI Inc.

1,800 Counterfeit Cases at SASC Hearing
Total Over 1 Million Individual Parts

“Failing to report suspect counterfeits and
suspect suppliers puts everybody at risk. We
need to make sure our regulations require
contractors
who
discover
suspected
counterfeit parts in a military system to report
that discovery to the military right away.”
Senate Armed Services Committee Hearing Opening Remarks
Senator Carl Levin (D-MI) , Committee Chairman

© 2012 ERAI Inc.
92

Parts)

NDAA requires incidents be reported:
REPORTING REQUIREMENT.—The revised regulations issued pursuant to
paragraph (1) shall require that any Department contractor or subcontractor who
becomes aware, or has reason to suspect, that any end item, component, part, or
material contained in supplies purchased by the Department, or purchased by a
contractor or subcontractor for delivery to, or on behalf of, the Department,
contains counterfeit electronic parts or suspect counterfeit electronic parts report in
writing within 60 days to appropriate Government authorities and the GovernmentIndustry Data Exchange Program (or a similar program designated by the
Secretary).
(5) CONSTRUCTION OF COMPLIANCE WITH REPORTING
REQUIREMENT.—A Department contractor or subcontractor that provides a
written report required under this subsection shall not be subject to civil liability on
the basis of such reporting, provided the contractor or subcontractor made a
reasonable effort to determine that the end item, component, part, or material
concerned contained counterfeit electronic parts or suspect counterfeit electronic
parts.
© 2012 ERAI Inc.

AS5553
-Requirements: 4.1.7 Reporting
The documented processes shall assure that all
occurrences of counterfeit parts are reported, as
appropriate, to internal organizations, customers,
government reporting organizations (e.g., GIDEP),
industry supported reporting programs (e.g., ERAI),
and criminal investigative authorities.
ERAI maintains a database of counterfeit and high-risk items. Data can

be submitted by anyone on the public domain of their website
(www.erai.com).
Companies do not need to be members to report
counterfeit and high-risk items. Submitting companies remain
anonymous in the reporting of counterfeit/high-risk items. Companies
must be ERAI members to view this database.
However, virtually all
electronics-related companies/organizations,
not just resellers, are
candidates for membership.
© 2012 ERAI Inc.
Source: AS5553

How Has ERAI Aligned Itself to Industry’s
Needs and This New Legislation?
ERAI provides proven tools to mitigate risks on
substandard parts, counterfeit parts, vendors and
even customers.
Trusted Suppliers

© 2012 ERAI Inc.

High Risk Suppliers

Suspect Counterfeit & High Risk Parts

ERAI Member Benefits
ERAI = Risk Mitigation Tools for Parts, Customers & Vendors
• Searchable Database of Counterfeit, Faulty & High-Risk Parts.
• Searchable Database of High-Risk Suppliers & Customers.
• Bill of Material /Assembly Cross Checking against Hi-Risk Parts Database.
• Vendor Analysis Tools and Information
• Customer Analysis Tools and Information
• Real Time Complaint Alerts
• Real Time Dispute Alerts
• Real Time Hi-Risk Parts Alerts
• High Risk and Counterfeit Part Reporting
• Reduce Financial Losses Through our Escrow and Mediation Services.
• Proactively Prevent Losses and Reoccurring Problems.
• Complaint Processing
• Dispute Resolution Services
• Import / Export Compliance Tools
• Review Member Profiles for Membership Status and Accolades.
• Fair & Impartial Investigation Services
• Stay Informed on Current Issues Affecting the Supply Chain.

© 2012 ERAI Inc.

What can reporting tell us?
In Seconds A Parts List Can Be Analyzed
Industry Average: 0.5% – 5% Match to Reported ERAI Incidents

© 2012 ERAI Inc.

Discuss
Why do organization’s fear or are they
reluctant to report?
Examples:
(1)
(2)
(3)
(4)

Brand damage
Don’t want procurement habits to be realized
Liability
Lost revenue

© 2012 ERAI Inc.

Discuss
Make no mistake….the enemy IS within….
Examples
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)

Supplier does not qualify sources or buy from the safest source of supply
Procure from high risk regions
Supplier risk not disclosed to customer
Misrepresents the origin of material or supply chain traceability
Quote product available 3-5 days
Supplier does not perform obligatory inspection prior to resale
Misrepresents office type and/or location (google earth, mail boxes etc)
Misrepresents Memberships to ERAI / IDEA, etc.
Demands material be returned and refuses to allow third party
confirmation of nonconformance
(10) Numerous Customs Seizures

© 2012 ERAI Inc.

Resources
-Industry Standards

Brokers
Independent
Franchise

Inspection
Test

Distribution
AS6081

© 2012 ERAI Inc.

Commercial
Defense
Space
Distribution
AS5553

Distribution
AS6171

Resources
Educational Opportunities
•

SAE International

•

SMTA

•

Aerospace Industries Association
(AIA)

•

TechAmerica - G12 Counterfeit
Parts Subcommittee

•

Independent Distributors of
Electronics Association (IDEA)

•

IPC: IPC Surface Mount
Equipment Manufacturers
Association (SMEMA)

•

Best Manufacturing Practices
Center of Excellence (BMPCOE)

•

Government Electronics &
Information Technology
Association (GEIA)

© 2012 ERAI Inc.

For More Information

Send questions and requests for information to:
ksnider@erai.com

Join- ERAI: Counterfeit Part Avoidance, Detection,
Disposition and Reporting
Follow ERAI on Twitter (@ERAI_Inc)
Like ERAI on Facebook
Follow ERAI on Slideshare
© 2012 ERAI Inc.

D.C. Counterfeit Microelectronics Working Group - The Enemy Within

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