Outsourcing and globalization have numerous benefits, but there is a downside—the proliferation of counterfeits and sales through unauthorized channels. This paper demonstrates the impact of counterfeits on electronics companies and gives solutions for finding the violators as well as a four-step roadmap for recovering revenue lost to counterfeits.

1. IP Fraud Protection
Author: Chris Jensen is a Vice President at New Momentum (Irvine, CA), a company that
provides brand/IP Protection software to the electronics industry.
Email: cjensen@newmo.com

2. Abstract
Outsourcing and globalization have numerous benefits, but there is a downside—the proliferation
of counterfeits and sales through unauthorized channels. In 2006 U.S. Customs recorded over 15
billion IC imports. With one out of ten IT products containing counterfeits, according to a study
by AGMA and KPMG, 1.5 billion of those imported ICs are likely counterfeit. Unfortunately,
most semiconductor manufacturers don’t realize the extent of their revenue and reputation lost to
counterfeits. This paper demonstrates the impact of counterfeits on electronics companies and
gives solutions for finding the violators as well as a four-step roadmap for recovering revenue lost
to counterfeits.

3. IP FRAUD PROTECTION
Do You Know What Counterfeits are Costing Your Company?
Outsourcing and globalization have numerous benefits, but they have a significant downside—the
proliferation of counterfeits and sales through unauthorized channels. Semiconductor
manufacturers are losing billions every year to counterfeits and the gray market. In 2006, U.S.
Customs recorded more than 15 billion IC imports‐‐about 500 every second. Results of a study
conducted by AGMA (Association for Abatement of Gray Market and Counterfeits) and KPMG
showed that one out of every ten IT products contains counterfeit semiconductors. That means
1.5 billion of those imported ICs are likely counterfeit…about 50 counterfeits every second
flooding into the US. Do you know how many of those 1.5 billion (and the number is growing all
the time) are yours? Most semiconductor manufacturers don’t realize the extent of their revenue
loss to counterfeits.
And, revenues are not all you are losing. Company and product reputations are being eroded, and
legitimate channel partners lost. Jobs are also being lost. Especially painful in today’s economy,
counterfeits are believed to have cost 750,000 jobs in the US alone. The goal of this paper is to
demonstrate the impact counterfeits have on electronics companies, as well as provide solutions
to stop these unauthorized sales. And most important, this paper will show you why electronic
component manufacturers need to take action now before revenues and reputation are eroded
even further.

4. Here’s how counterfeits have impacted five semiconductor companies
The Semiconductor Industry Association (SIA) recently formed an Anti‐Counterfeiting Task
Force that conducted a study with these results:
 Company A: Over 100 part numbers have been counterfeited in the past 5 years
 Company B: 19 cases reported with 97,000 units
 Company C: Since June 2006 there have been 4 US Customs seizures of counterfeits of
our products by US Customs; units seized ranged from 6,000 to 60,000
 Company D: We estimate that 2‐3% of the purchases of our brand are counterfeit
 Company E: A broker website indicated 40,000 of our devices available, but our
company had only made 200 units of that device with the specified date code. If all
40,000 were available, it would result in a $34-million loss.

5. Can your company afford these kinds of losses? By the way, this is the activity these
companies found without using the advanced technologies discussed later in this paper, which
would give them even greater visibility into counterfeit activity.
Why is now the time to take action?
Once thought to be too complex and sophisticated for counterfeiters, semiconductors, electronics,
and IT (information technology) products are now hot-ticket items in counterfeit manufacturing.
Lost sales, however, only account for a fraction of what companies sacrifice when their
intellectual property (IP) is stolen and their products are illegally produced. Counterfeiters steal
IP backed by million‐dollar investments in research and development, marketing, and
manufacturing. Moreover, illegitimate or substandard chips present the company with additional
costs to repair or replace defective products carrying their brand name.

6. A number of factors have coalesced to create a business environment in which manufacturing
counterfeit IP is not only lucrative, but also much more attainable than ever before. Counterfeiters
are becoming increasingly tech savvy, and their ability to obtain more advanced manufacturing
machinery and techniques has been one of the most crucial factors in fueling the production of
illegal high tech goods.
During the past decade, billions of dollars in foreign direct investment (FDI) have flowed into a
number of developing countries, such as China, leading to the proliferation of sophisticated
manufacturing processes and capabilities to produce high tech products. Counterfeit components
have long been a problem in the electronics industry, but as of late, companies are finding
themselves increasingly challenged with having to deal with counterfeit semiconductor
components. A second contributing factor is the popularity of e‐commerce. Many counterfeiters
are using the Internet to reach potential buyers. Without regulatory bodies able to police and
govern all product‐listing sites or advertisements sent out over email, the Web has become a
bastion for illegal sales of counterfeit products.
Why is the problem becoming more serious for semiconductor
companies?
Remarking one of the biggest problems
In the SIA study, remarking was the most common method of counterfeiting. Remarking involves
scraping a label off a chip package and printing on a new label. This can involve a different and
higher-priced brand, or a faster chip speed, or a military grade lot number on a commercial chip.
Most of the problem is coming from Shenzhen China, located on the border with Hong Kong.
You can find anything in Shenzhen—original, fake, new, and old components. It’s common to

7. find shops making fake “Samsung, Motorola,” etc. labels. The Chinese vendors say that making
the labels is easy—they simply select the specific component maker’s label from the program
library and then modify the data. The label quality is excellent.
Other counterfeiting tricks include incorrect die, inferior packaging materials, reproduction of
chip designs, packages without die, different labels on packages, and false RoHS (Restriction on
Hazardous Substances) notifications. Inaccurate notifications of whether a chip has lead can
affect a semiconductor manufacturer in two different, yet significant ways. First, if the chip
contains lead but has a false RoHS notification, the semiconductor manufacturer may have
products restricted from sale in some countries, face a lawsuit, and experience significant bad
publicity. Of greater concern, however, is when a part does not contain lead and the counterfeiter
asserts that it does. Parts without lead have reliability problems when used in applications in outer
space such as satellites or NASA flights.
How can you solve this problem?
There are several key areas you can focus on to reduce your company’s revenue erosion from
counterfeits: legal, operational, and technology (web search, encryption, lock & key).
What can you do through the legal system?
While many big players in the IT industry are making headlines as they break up crime rings,
small to midsize enterprises face a tough fight in their struggle to protect their IP. A number of
internal and external issues challenge companies’ ability to find, identify, and persecute
transgressors. How about encouraging US Customs to make semiconductor counterfeiting a
priority? While it may be easier to spot counterfeit luxury goods, fake semiconductors can result
much more dangerous (even deadly in the case of medical devices) situations.

8. How about the operational approach?
One important step in reducing counterfeiting is to focus on illegal sales on the gray market.
While some gray market brokers are legitimate, the gray market is an excellent outlet for
counterfeits. AGMA suggests examining companies trying to enter distribution channels and
monitoring contract manufacturers and distributors already in the supply chain. The organization
recommends thoroughly interviewing companies and investigating their background before
allowing them to become resellers or distributors. Once they enter the supply chain, AGMA
advises organizations to establish strict contracts, perform extensive auditing, and maintain close
relationships with its outsourcing partnerships.
Though the listings may be hidden in the deep recesses of the Internet, a couple effective search
words can bring up product listing after product listing of both legitimate and counterfeit goods.
Technology web search
Many companies that have resorted to manually scouring the Web for unauthorized product
listings and counterfeit goods have found this process time-consuming, tedious, and ineffective.
The up‐and‐coming technology is based on the collection and organization of unstructured data.
Unstructured data is information collected from a number of electronic sources that hasn’t been
arranged or organized into an understandable form. In the context of seeking out product listings,
this data can come from a number of sources including market Web sources, XML data sources,
B2B sites, forums, auctions, and emails advertising gray market sales.
Software solutions like this bring a number of benefits to manufacturers. Not only do they
eliminate the significant number of man-hours and resources manual searching required, these

9. systems can tap into information sources previously out of reach by traditional search methods
and thereby increase the amount of “area” a company can keep a watch on the marketplace. They
also highlight other market activity exceptions, such as new sellers entering the market and an
unexpected amount of selling or buying in a particular geographical region. When looking for an
IP-protection solution, make sure all reports and data collected are accessible through a Web
portal and that the supplier is a Software as a Service (SaaS) supplier. This makes data
immediately without any extensive installation processes and, more important, without the
involvement of other departments that may slow the deployment down.
Case Study
One Tier 1 fabless semiconductor manufacturer has already deployed this kind of system and saw
an immediate return on investment. In the first 30 days, the manufacturer found 500 cases of
unauthorized sales or counterfeit products previously undetected by its traditional monitoring
systems. Over a year’s time, if 6,000 unapproved transactions were prevented, the manufacturer
could save itself millions of dollars in lost revenue.
Collecting data and reports, however, doesn’t necessarily result in a decrease in counterfeiting;
the information needs to be put into action. Often when companies manage to receive timely
data on counterfeits or illegal gray market sales, they simply don’t know what to do with it. The
above manufacturer handled one if its instances of unauthorized sales through an unconventional
route: It tried to turn unauthorized distributors into legitimate ones.
The benefit of this strategy is two‐fold. First, if the distributor agrees to join the manufacturer’s
authorized channels, the manufacturer can then more easily monitor buying and selling activities
and more effectively ensure the products distributed are authentic. Second, in the event the

10. distributor declines the offer, its managers know the company has been identified as a
counterfeiter or an unauthorized sales channel and will likely stop selling the manufacturer’s
product.
How much revenue can a manufacturer expect to recover?
.
The four steps to recovering revenue
The roadmap to revenue recovery consists of visibility, plan development, plan
implementation, and the measurement of results.
Visibility – Step one on the map is a concentration on visibility. That means visibility into
the counterfeit and gray markets that require seeing who is doing what where and how much.
This search can isolate data that weeds out duplicate offerings, separates the players
(counterfeit, gray, suspect, etc.) and formats this information into meaningful metrics.
Typically, use of the advanced technologies mentioned earlier are combined with a
company’s investigation team or a company that specializes in high tech counterfeit

11. investigations. The technology is used to drill down not like a Google search or other search
companies, but taking it to the next level, and takes it to a dashboard and beyond to
compilation. When companies are exposed to the extent of their counterfeiting problem, their
eyes are opened.
Visibility depends upon data analysis and consequently cost analysis. This means identifying the
scope of the violations, and the first step is to identify where and with whom your products are
being sold. This translates into identifying counterfeit activity and gray market activity and their
estimated loss to the enterprise. Part of the loss may be unquantifiable as the public perception of
a brand is critical. The accuracy and speed of this information is critical. The technology needs to
find the comprehensive and unstructured market data from websites, email, file transfers as it
incorporates the information from your ERP data, PLM data, transactions history and run it
though data filtering and cleansing. The right market intelligence will help your team focus on
where you will get the highest return on your efforts. You will need to incorporate specific
technology solutions that will allow you to load your products and prices, allow for data analysis,
identify the scope of the violations and be able to report the return on investment (ROI) to
management.
Plan – Step two in revenue recovery is to develop a plan. When investigators work with a client,
they expect them to subscribe to one of the new advanced technologies and thus establish the
means to having visibility and intelligent data structure for creating a plan.
Many organizations underestimate the significance of the proper plan development. The more
time and effort the enterprise places in creating a comprehensive plan, the better the
implementation and results. Like any strong plan, the enterprise will need to set goals and

12. measure frequently. Its goals need to be realistic and cover a one- to two-year time frame. A
concentration on due-diligence investigations comes next. Tom McWeeney, senior VP of a high
counterfeit investigation agency, Corporate Risk International (CRI), says, “Each company we
investigate for has a different system and we work back and forth with them in a customized
manner.” An enterprise will want to plan every aspect of its program including test purchases and
due diligence. After reviewing the data, they will decide exactly how they will go about
approaching the seller that can lead to a buy. Initial questions that need to be answered include: Is
this a massive problem? Is it long-term? How much does the enterprise want to buy it for? What
quantity will allow it to become evidence if the enterprise decides to take civil/criminal action?
Do they need to purchase at a certain price? Is there a price that will strengthen their role as
evidence in future civil/criminal action? Should they get customs, FBI, Customs and Border
Patrol (CBP), and Immigration & Customs Enforcement (ICE) involved?
How should they maintain the evidence and for what time period? A test purchase can lead to the
need for test purchase engineering examination and in time to either civil action or criminal
action, or both. The enterprise may need to set goals for each of its sellers. The goal does not
always need to be civil or criminal action. An enterprise’s goal may be to make life so difficult
for the counterfeiters that they drop their product and move on to something else.
Implement plan – The third revenue recovery step is an implementation plan that carries out the
conclusions of the planning process. During this activity Tom McWeeney says, “Actionable
intelligence from the technology solution leads to whether to do buys or not.” With the right
information as background, the implementation is ready to begin. In this phase, the enterprise will
need to prioritize targets, follow through on plan, and incorporate the ability to consistently add
new data that could alter the actions that are to be taken. The enterprise should not be afraid to
outsource certain parts of its implementation to corporate risk specialists to the extent that such a

13. decision makes sense. With a comprehensive plan in place, the manufacturer can start assigning
due-diligence investigations and conduct strategic under cover test purchases in regard to high-
volume targets. This process identifies whether the subject in question is legally registered, has a
history of counterfeiting, or has a questionable general business profile. This step also may
include engineering analysis, civil action, and criminal action. The enterprise may want to do
some of this work with inside capabilities, but outsourcing is a viable alternative. When doing a
test purchase, CRI recommends a wire transfer because it allows the enterprise to have access to
valuable data on the counterfeiter’s financial institution.
This information may be helpful when taking civil and criminal action. Engineering analyses of
test purchases may lead to civil actions (cease and desist letters, lawsuit, etc.). The outsourced
undercover purchase of a product or part may require setting an undercover company. When
engaging in pursuit of criminal action, there may be a liaison with FBI, or CBP and ICE or all
three. Whatever actions are taken need to be coordinated in-house and with outside counsel. In
the long run, purchasing may require re-purchasing to ensure that the counterfeiters have actually
ceased their illegal activity.
Measure results
Step four is measure the results. Revenue recovery happens by intelligent discovery or as a
famous detective once said, “Just the facts Ma’am.” The measurement of the revenue recovery is
an outtake, a result of the process undergone. Part of any revenue recovery program needs to
include a method to consistently measure results. On a weekly basis, for instance, an enterprise
has to determine the value of the product on and off the market. They will want to record the
amount recovered through test purchases and document progress. They will take note of the
criminal and civil actions taken and their results. The enterprise’s management team needs to take

14. an active role in the revenue recovery process -- continually reviewing results data and
determining changes when needed. Or as Tom McWeeney reminds us, “Not all sales in a gray
market reflect back upon the OEM or legitimate distributor. The price has to be seen in the
context of market price and manufactured price.”
Data value requires close examination, and there are not necessarily experts in each part or
product. Companies need to look for sale prices that are not reasonable. They may do a buy, or
not, depending upon the discount. Is it a price that can lead to profit?
The results have to be presented to enterprise management. At the customer’s request, the
advanced technologies mentioned earlier can implement a monitoring process around an analysis
designed to produce a standard set of outputs that are “meeting” or “boardroom” ready. Armed
with these outputs, an intelligence group can attend high-level or even board-level meetings to
discuss changes in the gray market landscape, new brand, IP, or counterfeiting risks which may
be appearing. These risks can then be reduced with follow-up or ongoing legal action and an
overall strategy for setting priorities based on product families or technology groups. These
reports, which are provided in both a summary and detail level, consist of trending charts across
all product families; by customer assigned product family types showing change in market
activity; by individual part or part family within the product family; by geographical region for
quantity, number of buy/sell offers and number of new companies interested in the customer’s
products. The reports also include top-ten-style rankings of individual companies that trade in the
largest quantities of the customer’s products and that do the most number of transactions,
regardless of total quantity. All of the summaries and analytics above can always “drill” back to
the original open market buy/sell transaction that contributed to the total or summary. This data is
maintained historically and archived so that as patterns of activity or risk emerge in the analytics,
record-by-record research can be done back to the original time period where the pattern started.

15. An ongoing activity
Protecting brands and intellectual property from fraud is not a once in a lifetime event. It is an
ongoing activity. The steps above make it clear that an enterprise has to first understand its
problem and then it must develop a plan to mitigate the problem and this means getting a
management buy-in. Given the go-ahead, the plan must be implemented. After the findings and
action, the plan should be evaluated for its effectiveness.
But, the first and most critical step is to not underestimate the impact of counterfeits on revenues,
brand and distributor loyalty. A significant obstacle to successfully addressing counterfeiting
problems has been underestimating the problem due to the lack of dialogue and understanding of
the enormity of the problem in the electronics industry. Typically, companies grappling with
counterfeiting shy away from publicizing the problem. This relative silence has led many in the
industry to underestimate the enormity of counterfeiting and the amount of assets at stake. Now is
the time to take a stand against counterfeiting and push forward toward effective solutions to this
problem.