Presentation on theme: "NATIONAL CONTRACT MANAGEMENT ASSOCIATION BETHESDA NORTH MARRIOTT HOTEL & CONFERENCE CENTER BETHESDA, MD."— Presentation transcript:
NATIONAL CONTRACT MANAGEMENT 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”   “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 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 –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 Alliance World Customs Organization Department 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, Sources: 45 No.29 Gov’t Contractor ¶317 Rochester 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
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, ntent/08_41/b htm?chan=to p+news_top+news+index+- +temp_top+story ntent/08_41/b htm?chan=to p+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 $155M Source: 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 s urveys 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 – 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 Company Encountered Counterfeits No Counterfeit Incidents Total OCMs Discrete Electronic Components Microcircuits Distributors Authorized Distributors Independent Distributors Brokers718 Board Assemblers Total BIS Counterfeit Electronics Survey – Preliminary Data
Total Counterfeit Incidents: OCMs, Distributors, Board Assemblers
Counterfeit Incidents by Product Resale Value: Overall (2007)
Counterfeit Incidents by Product Resale Value: Distributors (2007)
Counterfeit Incidents by Type (2007)
Percent of Counterfeit Incidents Involving In/Out of Production Products
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% Brokers63%
Top 10 Reasons Identified by All Companies for Counterfeits Entering the U.S. Supply Chain Reason Number of Companies Less Stringent Inventory Management by Parts Brokers75 Greater Reliance on Gray Market Parts by Brokers72 Greater Reliance on Gray Market Parts by Independent Distributors 62 Insufficient Chain of Accountability58 Less Stringent Inventory Management by Independent Distributors 56 Inadequate Purchase Planning by OEMs50 Insufficient Buying Procedures49 Purchase of Excess Inventory on Open Market48 Greater Reliance on Gray Market by Contract Manufacturers44 Inadequate Production by OCMs42
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 OCMs52% OEMs44% Authorized Distributors 52% Independent Distributors 58% Brokers62% Internet-Exclusive Sources 38%
Percent of Distributors Conducting Pre-Stock Testing
Percent of Board Assemblers Conducting Pre- Stock Testing
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 Authorities74% Trace Supply Chain70% Inform Authorized Distributors41% Locate Select Inventory39% Pull Back Inventory31% Perform Random Testing20% Notify Industry Associations19% Notify Federal Authorities19% Other17% Wait for Additional Complaints17% No Steps Are Taken6%
Steps Taken After Notification of a Counterfeit Incident: Distributors Pull Back Inventory61% Notify Internal Company Authorities56% Notify Industry Associations52% Locate Select Inventory50% Trace Supply Chain48% Perform Random Testing35% Inform Authorized Distributors30% Inform OCMs30% Notify Federal Authorities11% No Steps Are Taken9% Other8% Wait for Additional Complaints5%
Steps Taken After Notification of a Counterfeit Incident: Circuit Board Assemblers Pull Back Inventory63% Notify Internal Company Authorities58% Locate Select Inventory58% Inform Authorized Distributors54% Inform OCMs50% Trace Supply Chain46% Perform Random Testing29% Notify Industry Associations8% Notify Federal Authorities8% Other8% Wait for Additional Complaints8% No Steps Are Taken8%
Steps Taken After Possession of a Counterfeit Part Action TakenOCMsDistributors Circuit Board Assemblers Enter into USG or Industry Database11%41%4% Retain Samples for Reference63%33%13% Test Part56%50%46% Enter into Company Database50%59%42% Quarantine Parts26%33%21% Leave Disposal to Party Filing Complaint 26%9%8% Random Inventory Testing19%38%42% Disposal of Parts Immediately17%36%13% Issue Credit15%64%58% Turn Over to Law Enforcement Authorities for Analysis 15%7%29% Check USG or Industry Database11%47%13% Other11%14%8% Turn Over to Law Enforcement Authorities After Analysis 11%6%17% Return to OCM or Distributor11%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 all35% GIDEP10% FBI8% Customs and Border Protection 6% ERAI6% IDEA6% DLA6% 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 for visual verification of parts.www.icphotos.org
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 ( ) 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 Mark H. Crawford Senior Industry Analyst