Brace for Impact of New Anti-Counterfeit Law

Commercial chip-makers and OEMs may be held responsible for detecting and investigating counterfeit parts under a new law that applies to US defense contractors. At least, that's the concern of TechAmerica, a technology trade association.

The provision, included in Section 818 of the 2012 National Defense Authorization Act (NDAA), which President Obama signed into law on December 31, 2011, is an effort to stem the growing problem of counterfeit electronics in government systems. It grew out of high-profile hearings held in November by the US Senate Armed Services Committee, which focused on incidents in which counterfeit electronics made their way into military systems. (You can see video of the full hearings by clicking here.)

The committee's investigation revealed dozens of instances of suspect counterfeit electronic parts in defense systems and seven aircraft, including Lockheed Martin's C-130J transport plane and Boeing P-8A Poseidon maritime patrol aircraft.

The anti-counterfeiting measure calls for the Secretary of Defense to “implement a program to enhance contractor detection and avoidance of counterfeit electronic parts.” For the first time, defense contractors will be held responsible not only for detecting and avoiding counterfeit parts but also for the cost of remediation and rework if counterfeit parts are discovered in their products. The law specifically states that the DOD program should include “the flow down of counterfeit avoidance and detection requirements to subcontractors.”

That “flow down” is what concerns TechAmerica. The language means that defense contractors could push the responsibility and liability to their subcontractors, who in turn could push it onto their suppliers, and so on, all the way back to chip and component makers, including commercial suppliers.

In the past, the military required “mil spec” parts or components that were specifically made and qualified for the military. But in an effort to reduce costs and take advantage of rapid advancements in component technology, the military has over the last two decades increasingly relied on commercial off-the-shelf components. That means that many of the components in military and aerospace systems are the same standard parts that are used in commercial products.

Thus, the new law could have a big, perhaps unintended, impact on commercial suppliers. “This applies to all electronics — it's not just for communications, radar, weapons systems,” says Trey Hodgkins, senior vice president for national security and procurement policy at TechAmerica. “It includes everything from handhelds to desktops — all the commodities and all the weapons-related stuff — down to the level of resistors and capacitors.”

Counterfeit parts are just as common — probably more so — in commercial products. Most of them go unidentified as such, however, because when a part fails in a smartphone, the manufacturer just replaces it under warranty. But what if that smartphone happened to have been procured through a Department of Defense contract? Hodgkins worries that the manufacturer would then be required to determine whether the failure was due to a counterfeit component, and, if so, also determine what other products the component was used in.

A lot depends on the final regulations, which are due out later this year. Meanwhile, TechAmerica is trying to stress to DOD officials the impact of the potential unintended consequences. “I get the sense that the statute — as it was being discussed — did not take into account the ramifications for commercial manufacturers who don't know who the end user of their product is,” Hodgkins says, noting that the federal government represents a small fraction (from 1 percent to 5 percent) of most commercial manufacturers' sales.

12 comments on “Brace for Impact of New Anti-Counterfeit Law

  1. jooboyle
    March 2, 2012

    If the OEMs and CMs, especially the CMs, would procure their parts from valid sources of supply rather than going to the lowest cost “supplier” this owuldn't be an issue.  i venture that 100% of these counterfeits were procured from grey market and broker channels.  Stop using those and there mwouldn't be a problem!

  2. _hm
    March 4, 2012

    This may be very effective step. It will enhance the quality of defence products and will provide opportunity to exclusive distributors and discourage surplus/counterfiet supplier.


  3. elctrnx_lyf
    March 4, 2012

    I do not thik this issue is so simple to detect or correct before the parts are used inside the products. The regulations wil deter the commercial component manufacturers to work along with the defense electronics. The design and developments of the defense equpments also will probably slow down due to these higher regulations. Finally, thanks alot for the video. A great information about what is happening exactly on the defense side.

  4. ITempire
    March 4, 2012

    Atleast the defence department should procure their equipments from the manufacturer directly. This issue (security and privacy of defence) is so sensitive that it should take precedence over savings in the procurement process made through buying off-the-shelf items.

    However, if this is not possible, quality control procedures should be tightened at the procurement stage and at the time of selection of contractors. Leaving the liability to contractors whenever the counterfeit is discovered is just aint enough to counter the issue.  

    March 4, 2012

    I heard the recent Russian space mission that failed was the result of counterfeit components so I expect this legslation will be closely monitored across the globe.

  6. Eldredge
    March 5, 2012

    Another likely outcome of this legislation will be an increase in cost to the DOD for implementation of the additional methods, procedures, and mitigation actions to address the counterfeit part issue. It is not uncommon for DOD contracts to limit the profit margin that defense contractors can make on given contract, so they are unlikely to just absorb that cost in future contract negotiations.

  7. tioluwa
    March 5, 2012

    It's just amazing how much trouble lower costs can cause.

    It drove the world to china, and it also drove the Diffense industry into increased risk of counterfeit parts.

    I think lower costs is less important than security and quality.

    If the governmentis pushing the responsibility to the OEMs, and CMs, expecting them to do all the work to ensure the products and components are genuine, what are they offering to help counter this menace?

  8. Barbara Jorgensen
    March 5, 2012

    Once again, a well-intended law misses the mark. If a system works correctly, there should be enough stops in the supply chain to flag a counterfeit well before it gets to the OEM. At the front end, companies can make sure components and old boards are disposed of properly. In the middle, distributors should inspect incoming and outgoing parts. A lot of companies have invested a lot of money in stopgap measures and putting additional burden on OEMs isn't going to solve a thing.

  9. Frederick1337
    October 1, 2012

    “If the government is pushing the responsibility to the OEMs, and CMs, expecting them to do all the work to ensure the products and components are genuine, what are they offering to help counter this menace?”

    Excellent question. Perhaps If you keep asking it, we might get a good answer. Thanks for asking the question wich is most prevalent to the discussion.

  10. spamchecker
    October 1, 2012

    Stop using those and there mwouldn't be a problem!”

    And if they stopped using those, there wouldn't be a profit.


    Frankly, if I were a manufacturer, I just wouldn't deal with anyone who wanted me to sign a contract flowing back from DoD requirements. Too much hassle, too much liability, and only 1-5% of the market?  I'd live without it.


    Which is where things were, when the DoD decided that it couldn't hack the cost needed to have dedicated suppliers… and came begging to private industry.


    Private industry needs to tell 'em to shove it again, and let them stew in their own juices, until they figure out how to make security be cost-effective.

  11. bolaji ojo
    October 1, 2012

    Frederick1337, This shouldn't be just about what the suppliers are able to do to keep counterfeits from military supply chain. I would love to know also how those in charge ofthe military supply chain are preventing infiltration of fake parts into the system aside from just asking someone else to vet the components at the door. It could be that whatever military procurement managers are doing to stop counterfeiters (aside from Congressional actions) can't be openly discussed!

  12. Frederick1337
    October 8, 2012

    Agreed. It is definitely something to consider. Though we will probably see the same arguments about creating “too much” federal oversight, even though it is obviously badly needed.

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