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NATIONAL CONTRACTMANAGEMENT ASSOCIATION
BETHESDA NORTH MARRIOTT HOTEL & CONFERENCE CENTER BETHESDA, MD
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 2
Counterfeit Products in the Supply Chain (Part 1)
Breakout Session: 11:40 AM – 12:40 PM
Doris H. Gray, Esq.Senior Contracts Manager
Avnet, Inc.
This presentation represents the views of the speaker and not Avnet, Inc. These materials should not be construed as legal advice or opinion. The contents are intended for information purposes only. Anyone needing specific advice should confer with an attorney.
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 3
Industry’s Perspective:
“Ain’t Nothing Like the Real Thing” [1]
[1] “Ain’t Nothing Like the Real Thing” was a popular R&B song released by Tammy Terrell and Marvin Gaye on the Tamla label in 1968.
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 4
Selling Counterfeits Is A Crime
Counterfeiters…
• Use counterfeits to launder drug money
• Avoid paying taxes• Violate state and federal
anti-counterfeiting laws • Violate patent and
copyright infringement laws• Violate state and federal
anti-fraud laws
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 5
Selling Counterfeits Is A Crime• U.S. Government Anti-Counterfeiting Statute, 18 USCS §
2320– Prohibits intentionally trafficking– Prohibits knowingly using a counterfeit mark– $250,000 fine and up to 5 years imprisonment
• STOP ACT – Stop Counterfeiting in Manufactured Goods Act, H.R. 4279 would permit:– Criminal remedies against counterfeiting– Civil forfeiture of counterfeit products– Civil forfeiture to any property used to commit a violation
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 6
Selling Counterfeits Is A Crime• Merchandise Bearing American Trademark – 19
USCS § 1526– It shall be unlawful to import into the US any
merchandise of foreign manufacture if such merchandise…bears a trade-mark owned by a citizen of…the US and registered in the Patent Office by a person domiciled in the US.
• Fastener Quality Act, P.L. 101-592 – Requires that fasteners in critical applications
conform to their specifications and provides for inspection, testing and certification of fasteners.
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 7
Counterfeits Linked to Terrorism
• FBI linked the bombing of the New York Trade Center in February 1993 to sell of counterfeits
• Interpol testimony in July 2003 to House Committee on International Relations linked counterfeits to Al Qaeda and Hezbollah
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 8
Selling Counterfeits Is Not A Victimless Crime
• Loss of US jobs• Loss of brand reputation• Loss of revenue• Injuries and deaths• Increase in trade deficits• No product warranties or
after sale services
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 9
Definitions of Counterfeit• Wikipedia – A counterfeit is an imitation that is usually made with the intent to deceptively represent its content or origins. • Semiconductor Industries Anti-Counterfeiting – A counterfeit is a:
–Substitute or unauthorized copies of a product–A product in which the materials used or the
performance of the product has been changed without notice by other than the original manufacturer of the product
–A substandard component misrepresented by the supplier
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 10
Definitions of Counterfeit (cont’d.)• Bureau of Industry and Security –
A counterfeit is an electronic part that is not genuine because it
meets one of the 5 criteria:
– Is an unauthorized copy– Does not conform to the Original Component Manufacturer’s
(OCM) design, model and/or performance standards– Is not produced by the OCM or is produced by unauthorized
contractors– Is an off-specification, defective or used OCM product sold
as “new” or working– Has incorrect or false markings and/or documentation
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 11
How Widespread is Counterfeiting?
U.S. Losses as a % of total loss worldwide of $500B/Yr:
• IT Industry: 20%/Yr• Computer S/W: 2%/Yr• U.S. Income: 40%/Yr
Sources: Alliance for Gray Market & Counterfeit Abatement (AGMA)Business Software AllianceWorld Customs OrganizationDepartment of Homeland Security
Factoid: 80% of all Counterfeits are produced in China
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 12
Ways to Combat Counterfeiting
• Buy from authorized distributors • Drastically limit buying from brokers or independent
distributors • Require testing on all broker-acquired parts• Implement a 100% inspection program for all
returned products
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 13
Ways to Combat Counterfeiting
• Immediately report counterfeit products to Government-Industry Data Exchange Program (GIDEP)
• Provide Customs and Border Protection officials with information and resources to detect counterfeit shipments
• Adopt new anti-counterfeiting technologies and markings
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 14
Ways to Combat Counterfeiting (cont.’d)
• Unique Identification (UID) – DOD announced a new policy for identifying items it purchases
• New anti-counterfeit Technology: encryption, coded markings, RFID tags and laser markings
• 3M has developed a new range of innovative and highly efficient counterfeit-proofing products. –3M Deutschland GmbH, Identification and Converter Division, e-mail: dstruwe@mmm.com
Sources:45 No.29 Gov’t Contractor ¶317Rochester Electronics White Paper and “Grey Marketers – Insidious Image Thieves” by 3M Innovation Network
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 15
The Market for Semiconductors • The worldwide market for
semiconductors in 2006 was $245B
• 60% of semiconductors are used by computer and telecommunication companies
• 1% of semiconductors are used by the military
• Original Component Manufacturers (OCMs) sell directly to customers or through indirect distribution channels
Source: Rochester Electronics White Paper
Other
Telecom
Military
-5 45 95 145 195 245
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 16
How Counterfeit Electronics Get Into the Supply Chain
• Asian counterfeiters “pass off” commercial grade semiconductors and used semiconductors as military grade semiconductors
• Counterfeits are then sold to “mom and pop” brokers• Counterfeits are sold to military contractors
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 17
Counterfeit Semiconductors Invade the Military Market
• BAE’s SE&IS division reported to GIDEP only 45 incidents of counterfeiting
• Justice Department is investigating how counterfeits entered their supply chain
• BAE has restricted its purchases to original chipmakers and authorized distributors “except in very limited circumstances.”
Source:
BusinessWeek, October 2, 2008 http://www.businessweek.com/magazine/content/08_41/b4103034193886.htm?chan=top+news_top+news+index+-+temp_top+story
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 18
Why are Semiconductors Susceptible to Counterfeiting?
There are several market factors that make counterfeiting attractive:
• The need to replace obsolete or discontinued parts• The profitability of the parts counterfeited• Products shortages
Source: Rochester Electronics White Paper
Factoid: 45% of all semiconductors are manufactured in Asia
NATIONAL CONTRACT MANAGEMENT ASSOCIATION 19
BUREAU OF INDUSTRY AND SECURITY
• Bureau of Industry and Security (BIS) is conducting assessment covering discrete electronic components, ICs, bare and assembled circuit boards:– To quantify reported counterfeits– To document industry and government
practices– To identify best practices
• Response to BIS’ survey was required by law• Survey was very extensive covering:
– Inventory control– Counterfeit handling and notifications– Reasons for and cost of counterfeits– Anti-counterfeit practices– Certification
Factoid: Seizures of counterfeits in 2006 rose 83% to $155MSource: Department of Homeland Security
GCMC Conference: Counterfeits and the Industrial Base
Mark H. Crawford
Senior Analyst
Industrial Base Studies
Office of Technology Evaluation
November 21, 2008
Bureau of Industry & Security (BIS)
MISSION: Advance U.S. national security, foreign policy and economic interests.
BIS develops export control policies, issues export licenses, prosecutes violators, as well as monitors the capabilities of the defense industrial base.
OTE Industry Assessments-Background
Under the Defense Production Act of 1950, ability to assess: Economic health and competitiveness Defense capabilities and readiness
Enable industry and government agencies to: Monitor trends and benchmark industry performance Raise awareness of diminishing manufacturing and
technological capabilities
More than 50 industry studies & 125+ surveys
Counterfeit Electronics Study-Goals
Assess the impact of counterfeit electronics on U.S. supply chain integrity, critical infrastructure, and industrial capabilities
Recommend best practices to mitigate risk to U.S. supply chain
Study sponsored by Naval Air Systems Command with support from Semiconductor Industry Association (SIA)
Counterfeit Electronics-Broad Definition
An electronic part that is not genuine because: An unauthorized copy Does not conform to original OCM design, model,
and/or performance standards Not produced by the OCM or is produced by
unauthorized contractors An off-specification, defective, or used OCM product
sold as "new" or working Has incorrect or false markings and/or documentation
Counterfeit Electronics Study-OTE surveys distributed
5 separate but related surveys targeting: Microchip & discrete electronic manufacturers – 106 Electronic board producers/assemblers – 37 Distributors and brokers of electronic parts – 144 Prime contractors and subcontractors – 147 DOD arsenals, depots, and DLA – 48
482 total survey participants
Counterfeit Electronics Study-Survey Objectives
Each survey contained approx. 80 questions Scale and scope Past problems and impact Internal procurement policies and protocols Testing, inspection, and inventory management Post-identification procedures Industry and government best practices
Tried to keep questions uniform across surveys.
Type of CompanyEncountered Counterfeits
No Counterfeit Incidents
Total
OCMs
Discrete Electronic
Components9 17 26
Microcircuits 13 15 28
Distributors
Authorized Distributors
6 19 25
Independent Distributors
25 8 33
Brokers 7 1 8
Board Assemblers 5 19 24
Total 65 79 144
BIS Counterfeit Electronics Survey – Preliminary Data
3397
5985
7383
5747
0
1000
2000
3000
4000
5000
6000
7000
8000
2005 2006 2007 2008 (est.)
Total Counterfeit Incidents:OCMs, Distributors, Board Assemblers 2005 - 2008
Counterfeit Incidents by Product Resale Value:Overall (2007)
Counterfeit Incidents by Product Resale Value:Distributors (2007)
Counterfeit Incidents by Type (2007)
64%56% 53% 54%
36%44% 47% 46%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 (est.)
In Production Out of Production
Percent of Counterfeit Incidents Involving In/Out of Production Products
2005 - 2008
How Companies Are Uncovering Counterfeits (2007)
How Companies Are Uncovering Counterfeits: OCMs (2007)
How Companies Are Uncovering Counterfeits: Distributors (2007)
Percent of Companies With Documented Cases of Counterfeits Sold by Specific Entities
* Each company was asked to provide their top five suspected countries
Top Countries Suspected/Confirmed to be Sources of Counterfeits*
Counterfeits Damaging a Company’s Reputation
OCM Comment: “With counterfeit goods in the market, purchasers are not sure if they received genuine or fake goods, so they tend to avoid the brand entirely.”
Distributor Comment: “When distributors or brokers trade in counterfeit parts the entire industry’s reputation is tarnished with a ‘guilty by association’ mentality.”
Percent of Companies Indicating Counterfeits Have Negatively Effected
Their Image or Reputation
Discrete Electronic Component Manufacturers
12%
Microcircuit Manufacturers
36%
Authorized Distributors
8%
Independent Distributors
45%
Brokers 63%
Top 10 Reasons Identified by All Companies for Counterfeits Entering the U.S. Supply Chain
ReasonNumber of Companies
Less Stringent Inventory Management by Parts Brokers 75
Greater Reliance on Gray Market Parts by Brokers 72
Greater Reliance on Gray Market Parts by Independent Distributors
62
Insufficient Chain of Accountability 58
Less Stringent Inventory Management by Independent Distributors
56
Inadequate Purchase Planning by OEMs 50
Insufficient Buying Procedures 49
Purchase of Excess Inventory on Open Market 48
Greater Reliance on Gray Market by Contract Manufacturers 44
Inadequate Production by OCMs 42
Pre-Stock Testing By Type of Supplier(Distributors and Board Assemblers Only)
Only 56% of Distributors and Board Assemblers test products they purchase before placing them in inventory.
Average Percent of Incoming Parts Tested
by Type of Supplier
OCMs 52%
OEMs 44%
Authorized Distributors
52%
Independent Distributors
58%
Brokers 62%
Internet-Exclusive Sources
38%
81%
59%
74%77%
13%
56%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VisualInspection of
Packagesand
Paperwork
Confirm OCMPedigree
Paperwork
Inspection ofOCM
ShippingPackages
VisualInspection
ElectronicTesting
PhysicalEvaluation
Percent of Distributors Conducting Pre-Stock Testing
Percent of Board Assemblers Conducting Pre-Stock Testing
52%
17%13%
0%
15%
30%
45%
60%
75%
Distributors OCMs Board Assemblers
Percent of Companies Performing Inventory Audits for Counterfeits
Contractor Testing Problems
Four companies had problems with Non-U.S. contractors concerning improper management or theft of electronic scrap after testing.
17 companies, 41% of those employing testing contractors, had problems with U.S.-based firms concerning faulty or forged testing. The parts were cleared by the testing house, but were later
found to be counterfeit by the customer.
This is an area that deserves further analysis.
Steps Taken After Notification of a Counterfeit Incident: OCMs
Notify Internal Company Authorities 74%
Trace Supply Chain 70%
Inform Authorized Distributors 41%
Locate Select Inventory 39%
Pull Back Inventory 31%
Perform Random Testing 20%
Notify Industry Associations 19%
Notify Federal Authorities 19%
Other 17%
Wait for Additional Complaints 17%
No Steps Are Taken 6%
Steps Taken After Notification of a Counterfeit Incident: Distributors
Pull Back Inventory 61%
Notify Internal Company Authorities 56%
Notify Industry Associations 52%
Locate Select Inventory 50%
Trace Supply Chain 48%
Perform Random Testing 35%
Inform Authorized Distributors 30%
Inform OCMs 30%
Notify Federal Authorities 11%
No Steps Are Taken 9%
Other 8%
Wait for Additional Complaints 5%
Steps Taken After Notification of a Counterfeit Incident: Circuit Board Assemblers
Pull Back Inventory 63%
Notify Internal Company Authorities 58%
Locate Select Inventory 58%
Inform Authorized Distributors 54%
Inform OCMs 50%
Trace Supply Chain 46%
Perform Random Testing 29%
Notify Industry Associations 8%
Notify Federal Authorities 8%
Other 8%
Wait for Additional Complaints 8%
No Steps Are Taken 8%
Steps Taken After Possession of a Counterfeit Part
Action Taken OCMs DistributorsCircuit Board Assemblers
Enter into USG or Industry Database 11% 41% 4%
Retain Samples for Reference 63% 33% 13%
Test Part 56% 50% 46%
Enter into Company Database 50% 59% 42%
Quarantine Parts 26% 33% 21%
Leave Disposal to Party Filing Complaint
26% 9% 8%
Random Inventory Testing 19% 38% 42%
Disposal of Parts Immediately 17% 36% 13%
Issue Credit 15% 64% 58%
Turn Over to Law Enforcement Authorities for Analysis
15% 7% 29%
Check USG or Industry Database 11% 47% 13%
Other 11% 14% 8%
Turn Over to Law Enforcement Authorities After Analysis
11% 6% 17%
Return to OCM or Distributor 11% 33% 25%
Who Ya Gonna Call?
56% of OCMs,
65% of Distributors, and
75% of Board Assemblers DO NOT KNOW what authorities to contact when they encounter counterfeits.
71% of distributors tell customers to contact their firm if they encounter a counterfeit product.
Top Authorities Contacted(As a Percent of Total Companies)
None at all 35%
GIDEP 10%
FBI 8%
Customs and Border Protection
6%
ERAI 6%
IDEA 6%
DLA 6%
State/Local Authorities
6%
“Fun” Facts Only 38% of surveyed companies maintain a
database to keep track of counterfeit incidents. 63% of these companies are distributors.
67% of Circuit Board Assemblers co-mingle identical parts from multiple suppliers in the same bin. Only 14% of distributors do the same.
40% of companies stated that they find it difficult to identify counterfeits. However, 61% of companies find it easier to identify
counterfeits today than they did five years ago.
Industry Best Practices – 500!
From OCMs: Ensure proper disposal of
all scrap – crush all defective/unused products to prevent re-circulation.
Train all employees on how to identify and handle counterfeit parts.
Tighten contractual obligations with contract manufacturers regarding disposal of unused product.
From Circuit Board Assemblers: Audit OCMs/OEMs to ensure
that the purchased part is made within their facility and not contracted out.
Perform destructive testing if a part cannot be verified by other means.
Establish qualifications for supplier purchases.
Most common responses – Don’t buy from China – Be wary of Brokers
Industry Best Practices (cont.)
From Authorized Distributors: Ask for Certificates of
Compliance for all products purchased.
Educate your sales team regarding the risk of parts brokers.
Create a central database for identifying counterfeit suppliers.
Do not approve returns in greater quantities than the original purchase.
From Independent Distributors/Brokers:
Always purchase parts via escrow payments – Suppliers that believe in their product will not mind waiting for their money.
Audit all inventory purchased before anti-counterfeiting measures were put in place.
Follow IDEA 1010 for incoming inspections.
Use www.icphotos.org for visual verification of parts.
Company Comments “It is encouraging that the U.S. government has finally
recognized the scope of the problem and seems to be taking meaningful steps to counteract the counterfeiting plague.” - Independent distributor
“Our participation in this Assessment has heightened our level of attention and understanding concerning the importance of being proactive in combating counterfeit products … We appreciate the information that was presented within this Assessment and plan to implement appropriate internal/external actions necessary to mitigate the potential for a counterfeit incident to occur within our operation.” - Authorized distributor
Depot/DLA Unique Questions
Parts acquisition criteria Government/industry, low bid/best value, foreign sourcing Direct shipping to field
Commercial supplier criteria Platforms/subsystems affected by counterfeits
(2005-2008) Parts acquisition training Impact of DFAR Quality assurance and testing Record keeping
Next Steps
Continue compliance on the 5 surveys Verify and begin analysis of data Draft report and release public document in early
2009 Work with industry and government to
develop and implement best practices
BIS/OTE Contacts
Brad Botwin Director, Industrial Studies Office of Technology Evaluation 202-482-4060 bbotwin@bis.doc.gov
Mark H. Crawford Senior Industry Analyst 202-482-8239 mcrawfor@bis.doc.gov
www.bis.doc.gov
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