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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.

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Counterfeit Products in the Supply Chain(Part 1)Breakout Session: 11:40 AM – 12:40 PMDoris H. Gray, Esq.Senior Contracts ManagerAvnet, 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.

industry s perspective ain t nothing like the real thing 1
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.

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

Selling Counterfeits Is A Crime
selling counterfeits is a crime5
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

Selling Counterfeits Is A Crime
selling counterfeits is a crime6
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.

Selling Counterfeits Is A Crime
counterfeits linked to terrorism
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
selling counterfeits is not a victimless crime
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
definitions of counterfeit
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
definitions of counterfeit cont d
Bureau of Industry and Security –

A counterfeit is anelectronic 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

Definitions of Counterfeit (cont’d.)
how widespread is counterfeiting
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

Factoid: 80% of all Counterfeits are produced in China

Sources:

Alliance for Gray Market & Counterfeit Abatement (AGMA)

Business Software Alliance

World Customs Organization

Department of Homeland Security

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

Ways to Combat Counterfeiting
ways to combat counterfeiting13
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

Ways to Combat Counterfeiting
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 ¶317

Rochester Electronics White Paper and

“Grey Marketers – Insidious Image Thieves”

by 3M Innovation Network

Ways to Combat Counterfeiting (cont.’d)
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

The Market for Semiconductors
how counterfeit electronics get into the supply chain
How Counterfeit Electronics Get Into the Supply Chain
  • Asian counterfeiters “pass off” commercial grade semiconductors and usedsemiconductors as military grade semiconductors
  • Counterfeits are then sold to “mom and pop” brokers
  • Counterfeits are sold to military contractors
counterfeit semiconductors invade the military market
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

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

Why are Semiconductors Susceptible to Counterfeiting?

Factoid: 45% of all semiconductors

are manufactured in Asia

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

BUREAU OF INDUSTRY AND SECURITY

Factoid: Seizures of counterfeits in 2006 rose 83% to $155M

Source: Department of Homeland Security

gcmc conference counterfeits and the industrial base

November 21, 2008

GCMC Conference: Counterfeits and the Industrial Base

Mark H. Crawford

Senior Analyst

Industrial Base Studies

Office of Technology Evaluation

bureau of industry security bis
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
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
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
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 s urveys distributed
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
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.

slide37

Top Countries Suspected/Confirmed to be Sources of Counterfeits*

* Each company was asked to provide their top five suspected countries

counterfeits damaging a company s reputation
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.”
pre stock testing by type of supplier distributors and board assemblers only
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.

contractor testing problems
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.

who ya gonna call
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.

fun facts
“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.

Industry Best Practices – 500!

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.

Industry Best Practices (cont.)
company comments
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
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
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
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