If the supply chain could cobble together a worst-case scenario in counterfeit components, it would read a lot like the case of Hao Yang. Yang, a Chinese national, was prosecuted earlier this year as a co-conspirator in a scheme to sell counterfeit ICs to the U.S. military. Details of the case, outlined on the Immigration and Customs Enforcement (ICE) home page, are familiar:
1. An individual sets up a U.S.-based import and distribution firm under one or several phony identities. According to ICE: “Yang and his co-conspirators created and operated several companies in Maryland, Pennsylvania, and elsewhere, to facilitate the conspiracy, including MS Technologies and A-One Electronics in Baltimore; A-Best Technologies in China; and ARRCORD Group, SMC Group and Smooth LLC.”
2. The principals then procure counterfeit ICs from China and try to sell them as authentic mil-spec components: "The defendant imported counterfeit goods from China and fraudulently sold them as legitimate merchandise," said U.S. Attorney Rod J. Rosenstein. "Counterfeit integrated circuits from China were falsely represented to be legitimate American-made parts."
The counterfeit circuits received by Yang, a number of which were military-grade, were supplied by one specific co-conspirator located in China.
3. Operate as a distributor: The ICE press release doesn’t divulge how the scheme was uncovered, but from the language of the release it appears that some, if not all, the counterfeits were headed to different secondary handlers before they got into the military supply chain. “This co-conspirator sold, or attempted to sell, the circuits to various individuals, companies and government agencies in the United States,” ICE said in its report. The U.S. government organ outlined the following steps taken by the counterfeiters:
- Yang used his residence to warehouse the counterfeit goods, including counterfeit military goods, sent to him by his co-conspirators in China. He then shipped specific items to buyers in the United States based on the order information provided by his co-conspirators. Yang maintained numerous bank accounts to deposit his illegal commissions and make payments associated with his counterfeit activities. He also used the commissions he received from his co-conspirators to pay for living expenses and other purchases, including his 2010 Acura TSX sedan.
- The counterfeit circuits received by Yang, a number of which were military-grade, were supplied by one specific co-conspirator located in China. This co-conspirator sold, or attempted to sell, the circuits to various individuals, companies and government agencies in the United States. Yang then distributed the counterfeit circuits, via his domestic businesses, to the buyers in the United States sometimes in repackaged form.
- The co-conspirator paid Yang a commission of $500 per month for his distribution services. To conceal the fact that the counterfeit circuits were being imported from China, Yang and his co-conspirator formed ARRCORD Group to create the appearance that the co-conspirator’s company in China (from which the counterfeit circuits were being distributed) was actually based in the United States. By using counterfeit circuits, their malfunction or failure could likely have caused serious bodily injury or impaired military operations, personnel or national security.
- Throughout the course of the conspiracy, Yang also obtained other counterfeit goods, including computer software, DVDs, and sports jerseys, from other co-conspirators in China and Hong Kong, which he then distributed in the United States. As was the case with the counterfeit circuits, Yang and these other co-conspirators concealed the fact that the goods they sold were counterfeit and produced in China and Hong Kong. Yang received commissions from these co-conspirators of $1,000 to $2,000 per month for his distribution services.
- Between March 2011 and April 2013, Yang received hundreds of shipments from China and Hong Kong, including shipments involving integrated circuits. For example, in June 2012, Yang received two shipments of counterfeit military-grade integrated circuits sent to ARRCORD Group at his residence and also received three shipments of other counterfeit goods, including DVDs and counterfeit computer software, sent to SMC Group at Yang’s residence. The Manufacturers Suggested Retail Price of the counterfeit DVDs and computer software was over $58,000.
False-front distribution operations have been around forever and have proliferated with adoption of the Internet. These companies frequently change names and maintain multiple bank accounts. They are often one- or two-person operations. The military market is targeted by counterfeiters because of the high value of military components and because devices that have reached their end of life (EOL) are often sold into the open market; Military equipment has a longer lifespan than commercial products so EOL components are frequently in demand.
After discovering counterfeit electronics components in its supply chain, the U.S. Department of Defense (DoD) stepped up its anti-counterfeit efforts. In December 2011, revisions to the National Defense Authorization Act (NDAA) were signed by President Obama. Among its provisions, the NDAA calls for DoD contractors and subcontractors to report counterfeit electronic parts or suspect counterfeit electronic parts via the Government Industry Data Exchange Program (GIDEP). It also specifies the need to source electronic components from “trusted suppliers” if the devices are not available directly from component manufacturers or through authorized distributors. According to ICE, Yang was selling goods as late as 2013.
The GIDEP requirements and the term “trusted supplier” have spurred controversy in the electronics supply chain. Individuals familiar with GIDEP, for example, point to a possible shortcoming in the requirement. Both buyers and sellers of suspected counterfeit parts are identified in GIDEP reports. Experts posit that companies avoid GIDEP for fear of legal repercussions and the stigma associated with counterfeiting. The ICE release doesn’t say if GIDEP played a role in the Yang case. (EPS has a call into ICE to see if that information is available).
“Trusted supplier” is also a hot button in the industry. Advocates of the authorized supply chain object to the term because it includes independent distributors. Independents differ from authorized distributors in that they are not franchised directly by component suppliers. Also, because independents buy and sell excess inventory in the open market, there’s a higher risk of sourcing counterfeits. Top-tier independents have invested in processes and equipment to minimize the risk of counterfeits and have distanced themselves from brokers – companies that speculate in electronic commodities and fly-by-night companies such as Yang’s.
The government has embarked on other efforts to stem counterfeiting such as the use of plant DNA to track components through the supply chain. Separately, the electronics industry is working on its own counterfeit-mitigation standards. Under the auspices of SAE International, an association of engineers and related technical experts in the aerospace, automotive and commercial-vehicle industries, the G-19CI committee released its first standard, AS5553. The committee is working on a revision. In 2013, SAE released the standard (AS6081) for independent distributors.
Clearly, anti-counterfeiting has become a priority. "Counterfeit military goods pose a threat to our national security as they could end up in the wrong hands and legitimate manufacturing and high technology businesses may believe they are receiving authentic goods," the ICE report noted, adding Homeland Security and ICE "... will continue to protect the American public and America’s warfighters from the introduction of counterfeit, non-conforming, and substandard materials and goods from entering the United States."
However, the electronics industry remains divided on anti-counterfeiting efforts. The authorized channel in general opposes measures that include independent distributors. Military contractors say independents are sometimes their only choice. It’s also difficult to tell just how bad the problem is. GIDEP data, which shows a decline in counterfeiting reports during 2013, is only part of the picture. The commercial supply chain collects data from industry consortia and organizations that accept and investigate anonymous tips.
Yang stopped short of being a worst-case scenario because the scheme was uncovered. As a standalone example, the Yang case counts as an anti-counterfeiting victory. In the grand scheme of things, it's difficult to determine if it also represents progress in any of the government's anti-counterfeiting efforts. Yang offered a plea agreement and faces a maximum of 10 years in prison, according to ICE.