DoD Sets Tough Counterfeit Prevention Rules

The U.S. Department of Defense wants to limit the procurement of electronic components and equipment to companies that are “legally authorized” in continuation of plans to reduce the incidence of counterfeiting in the military supply chain. In May, the DoD proposed a revision to the 2012 National Defense Authorization Act in a bid to more specifically define the type of enterprises allowed to supply electronic parts military equipment manufacturers.

Today (July 15) is the last day electronic components suppliers and OEMs serving the military industry can submit comments to the proposed rules, which the DoD said were intended to further its goals of detecting and avoiding counterfeit electronic parts.

The proposed guidance will directly address the proliferating problem of counterfeiting in the electronics industry and especially the defense market where fake or substandard parts pose particular danger to military personnel. The DoD wants to shift the responsibility for scrubbing components and assuring they are genuine from its own internal procurement employees to suppliers and equipment manufacturers. Contractors, the DoD said, would be responsible for “detecting and avoiding the use or inclusion of counterfeit electronic parts or suspect counterfeit electronic parts.”

OEMs will also be compelled to certify their supply chain partners and would have to vouch that they use only “trusted suppliers”. Additionally, the proposed rules will compel OEMs and suppliers to “report counterfeit electronic parts and suspect counterfeit electronic parts.” If the proposed rules go into effect they will force OEMs, contract manufacturers, component vendors and distributors to engage only with “legally authorized” partners.

Moreover, the industry will be forced to identify and report the incidence of suspicious parts. At the moment, the reporting of counterfeits in the industry is voluntary and many companies often refuse to identify the source of suspicious components to avoid drawing attention to their own internal operations. The stigma of being known as a source or receiver of counterfeit or substandard parts has been one of the reasons behind the failure to report such activities.

Many other elements of the proposed rules will increase the cost of compliance with Department of Defense procurement rules. For example, contractors will no longer be able to deduct the cost of compliance or, more important, be reimbursed “the cost of counterfeit electronic parts or the cost of rework or corrective action that may be required to remedy the use or inclusion of such parts,” the DoD said. In other words, contractors and suppliers to the DoD will have to write off the cost of counterfeit components and substandard parts.

The list of requirements to be imposed on the defense supply chain is quite long. In addition to streamlining its own internal procurement operations to achieve uniformity and “establish DoD-wide regulations concerning contractors’ requirement to avoid, and report counterfeit and suspect electronic counterfeit parts,” the DoD is also helping define the type of enterprises it wants military equipment OEMs and contractors to recognize as business partners.

Suppliers, it said must deal only with “legally authorized” sources, which it defines as follows: “Legally authorized source means the current design activity or the original manufacturer or a supplier authorized by the current design activity or the original manufacturer to produce an item.”

DoD said contractors must maintain “an acceptable counterfeit electronic part avoidance and detection system,” warning that failure to do so may result in the termination of its engagement with them. The DoD said the system must “address, at a minimum, the following areas”:

The training of personnel
The inspection and testing of electronic parts, including criteria for acceptance and rejection
Processes to abolish counterfeit parts proliferation
Mechanisms to enable traceability of parts to suppliers
Use and qualification of trusted suppliers
The reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts
Methodologies to identify suspect counterfeit parts and to rapidly determine if a suspect counterfeit part is, in fact, counterfeit
The design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts
The flow down of counterfeit avoidance and detection requirements to subcontractors