6 steps to solving the counterfeit IT problem

Counterfeit and reworked parts have plagued the electronics industry as long as there’s been an electronics industry. Like software bugs (and the first recorded software execution problem involved a real insect) the problem has taken on a new and more sinister meaning in the online age.

No longer merely economically motivated, electronics and software systems can be rigged so that they provide a back door for the extraction of data or overriding of crucial command and control systems.

At least that’s the worry among policy makers and program people after a Senate investigation uncovered over 1 million suspected counterfeit electronic parts in the Department of Defense supply chain.

For three years running, the Congress has been tinkering with language in an attempt to create an implementable counterfeit detection and avoidance scheme to stem the tide of these items flooding into the DOD.

Congress acted in the 2012 Defense Authorization bill, but writing the implementation regulation details has proved troublesome. The first proposed rule, for which the comment period closed in mid-July, ignores the law’s requirement for a risk-based approach focusing instead on changing contractor purchasing systems to detect and avoid counterfeits -- and suspect counterfeits -- without sufficient guidance as to what would constitute an acceptable system.

It also fails to require any of the current industry standards created to address this global challenge.

In fairness, this is but one of several rules in the works and we all hope that the rule writers will find a way to present the complete scheme before finalizing anything in the procurement regulations.

The 2013 National Defense Authorization Act overwrote parts of the counterfeit provision included in the 2012 NDAA to provide contractors a safe harbor from unlimited liability and the cost burden of re-work associated with damages caused by counterfeits giving contractors an out if:

1. The contractor is operating a purchasing system approved by DOD to keep out counterfeits. (The topic of the first rule).
2. Items are purchased from original equipment manufacturers (OEM), or OEM-authorized distributors or resellers. Or if not available from the OEM channel, as is the case with obsolete parts, buy from a “trusted supplier” the standards of which are yet to be determined. 
3. Incidents are reported to the Government-Industry Data Exchange Program. This, too, is a work in progress, including assurance that resolutions, and not only problems, are posted.

The second leg of this three-legged stool addresses the fact that to date, all instances of counterfeit or tainted items have been sold through non-authorized channels. That’s why, at immixGroup, the first step of our trusted supplier program requires and guarantees that products delivered are coming through OEM-authorized channels exclusively.

Looking ahead, the House version of the 2014 NDAA returns to the counterfeit topic with language that would limit counterfeit liability if the government and the contractor agree that parts requested are no longer in production, i.e., “obsolete.” 

The challenge of verifying authenticity of items no longer in production is a global concern.

At one time DOD maintained a facility called the Defense Electronic Supply Center in Dayton. The DESC -- it was pronounced “dessie” -- maintained DOD’s own stocks of spare electronic parts specifically for the purpose of fixing old equipment. It closed back in 1996; even the building was eventually torn down.

Today, these kinds of items are sourced through global networks of brokers, e-waste recyclers, and independent distributors, some of whom are certified to the latest testing and handling standards while others are fraudsters.

My concern is that the rules for detecting and preventing counterfeits are being written and debated primarily from a legal liability perspective, not from a practical hands-on perspective.

While one trade group, the Aerospace Industries Association, has requested a year-long extension to the comment period, others, closer to the day-to-day maintenance of systems our men and women in uniform trust their lives to, are decrying the government’s lack of action given all the investment made by private industry to set testing, marking and handling protocols for items which can so easily be “blacktopped” and sold as something they are not.

Without contractual requirements that specify the necessary level of testing, the lowest priced quoter will always get the order. Sadly, the first rule does nothing to address this gaping hole in the system. Further, this rule exempts small business primes because they are exempt from maintaining government-approved cost accounting purchasing systems.

According to Robert Metzger, the highly knowledgeable attorney with Rogers Joseph O’Donnell, some small subcontractors are staying away from contracts in which the prime responsibility for counterfeits could flow down to them.

Sounds like good advice to me. But it also illustrates how, in the absence of testing, marking and handling standards applied equally to all, the government’s socio-economic policy of favoring small businesses as prime contractors combined with a drive toward lowest price, technically acceptable evaluation criteria is creating demand for the very activity Congress is trying to eliminate.

Congress wrote the law to eliminate counterfeits, a goal industry claims is impossible to achieve. For me, that means we need a risk management approach to the nuts and bolts of this. Define the risk and test appropriately understanding that full-bore testing can involve more than 10 tests turning a five-dollar item into a $1500 item.

Here are some key ways to solve this problem:

• Buying from original manufacturers and authorized distributors for current in-production items as the law requires.
• Requirements for purchasing discontinued items must include current, relevant standards applied equally to all potential sources.
• Eliminating the weak links in the supply chain begins by closing all the current legal loopholes and policies that incentivize current behavior.
• Testing protocols prescribed based on risk. DoD will need to maintain a risk continuum mapped to current industry standards.
• Buyers will need to be trained properly lest their zeal for a great deal take precedence over following the risk-based protocols.
• Sellers should provide explicit descriptions of what is shipped lest a downstream consumer allege “counterfeit” or “suspect counterfeit”.