Questions Linger on Anti-Counterfeit Rules

This September, the US government is expected to start issuing regulations to carry out the anti-counterfeiting provision in the 2012 National Defense Authorization Act (NDAA). Is the industry ready? If the presentations at a two-day symposium on counterfeit electronics at the University of Maryland in College Park are any indication, the answer is “maybe.” (See: Brace for Impact of New Anti-Counterfeit Law.)

The provision was prompted by a Senate Armed Services Committee investigation that found more than 1,800 instances of counterfeit electronics in the Department of Defense (DoD) supply chain. Among other things, the provision

  • Prohibits contractors from charging the DoD for remediating problems due to counterfeit parts
  • Requires the DoD and its contractors to buy electronic components from original component manufacturers (OCMs), their authorized distributors, or “trusted suppliers” wherever possible
  • Requires contractors to establish policies and procedures to “eliminate” counterfeit electronic parts from the supply chain
  • Requires contractors that learn about counterfeit parts in the supply chain to notify the appropriate agency and to file a report with the Government-Industry Data Exchange Program
  • Requires the DoD to define the terms “counterfeit electronic part” and “suspect counterfeit electronic part”

Many terms have yet to be defined, and many parts of the provision are still unclear, leaving contractors and their suppliers wondering how it will all play out. Henry Livingston, an engineering fellow and technical director at {complink 11108|BAE Systems plc} and one of the speakers at the symposium, identified several aspects of the provision that will likely prove challenging, including these:

  • The term “eliminate” is definitive but may be hard to achieve in practice. “This is a pretty brave expectation,” said Livingston. He's not aware of any company that can totally eliminate counterfeits. “It will be interesting to see what the assessment criteria are for that.”
  • The provision is unclear regarding responsibility for remedial costs. It refers to “cost of rework or corrective action,” but it doesn't define what a remedy is. Replacement? Reimbursement? And how much responsibility does a company assume for costs up and down the supply chain? If you are a second-tier supplier, do you pay the costs to your customer and to the ultimate end customer?
  • The provision does not focus on where the component enters the supply chain. The DoD has not defined the term “trusted supplier.” And the provision does not contain requirements for independent distributors (or OCMs) to help support the identification of counterfeits in the supply chain. “The facts and data show that most of the counterfeits come from independent brokers, yet nothing in the NDAA requires any change of behavior by independents,” Livingston said.
  • Nothing in the provision addresses what contractors are supposed to do with counterfeits when they are discovered. The logical business decision would be to return them to the distributor and demand a refund, but counterfeit parts should not be put back into the supply chain, where they can then be sold to others.

The industry hopes regulations will clarify many of these issues, but things aren't looking good. By the end of June (180 days after the law was signed), the government was supposed to have defined some of the terms and offered guidance on how suppliers should report counterfeits, but as of June 27, there had been no word. By the end of September (270 days after the signing), the DoD is supposed to propose regulations that outline specific contractor responsibilities, including reporting requirements.

Without these details, companies can't really assess how well they'll be able to meet the requirements. Hopefully, more will be revealed soon.

8 comments on “Questions Linger on Anti-Counterfeit Rules

  1. owen
    July 2, 2012

    Issued on March 16, 2012 by The Under Secretary of the Department of Defense was a – MEMORANDUM FOR SECRETARIES OF THE MILITARY DEPARTMENTS DIRECTORS OF THE DEFENSE AGENCIES – requesting their support in developing “policies and strategies” that address these critical areas. A copy is available here:  – Evidently somebody didn't get the memo.

  2. HenryL
    July 2, 2012

    During my briefing concerning FY2012 NDAA Section 818 and its implications for contractors, I referred to the 16 March memorandum concerning “Overarching DoD Counterfeit Prevention Guidance“, issued by Hon. Frank Kendall, Acting Undersecretary of Defense for AT&L. Though it is premature to speculate on the particulars of DoD policy and modifications to regulations, this memorandum provides insight into what to expect. The memo includes a definition for “counterfeit materiel” and describes actions to be taken across DoD to decrease the probability of counterfeits entering the DoD supply chain. I believe it is reasonable to expect that this  guidance will influence forthcoming policy and regulations.

  3. Barbara Jorgensen
    July 2, 2012

    HenryL: Thanks for taking the time to comment on EBN. I agree that there is inevitably speculation when new rules come out, whether they are related to the government or the environment. But it also helps contractors to prepare when experienced professionals provide well-educated projections about where the challenges will turn up. Counterfeiting is complicated; solutions equally so.

  4. stochastic excursion
    July 3, 2012

    It's clear from the resources mandated that the Federal government is not interested in half-measures when it comes to counterfeiting.  The course remains to be further defined, but the multi-agency directive contained in this act is a positive sign congress intends to get the job done right.

  5. garyk
    July 5, 2012

    Open your eyes, discontinue COTS parts. The saving in price per piece is costing the Military contractors Billions!!!!

  6. garyk
    July 5, 2012

    I'm waiting to find out that the COTS parts were or are made with Lead Free materials, because the COTS units are most likely made off shore and off shore doesn't use Lead or Lead in the solder. If the COTS units are purchased in the US, certification should be provided to show that the units were made per the MIL-Spectification just not MIL Tested.

  7. bolaji ojo
    July 5, 2012

    They may intend to get it right but passing a law and executing are quite different. Does the legislation also provide for compliance monitoring or will this prove to be as ineffectual as some of the other regulations already in the market?

  8. stochastic excursion
    July 6, 2012

    It's true that in recent history, advocates have had some difficulty getting regulators to do their jobs as defined by the congressional acts where they originated.  The effectiveness of this bill is totally dependent on the willingness of DoD, DHS and other agencies involved to comply.

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