Defense Supplier Base
DOD Should Leverage Ongoing Initiatives in Developing Its Program to Mitigate Risk of Counterfeit Parts Gao ID: GAO-10-389 March 29, 2010Counterfeit parts--generally those whose sources knowingly misrepresent the parts' identity or pedigree--have the potential to seriously disrupt the Department of Defense (DOD) supply chain, delay missions, and affect the integrity of weapon systems. Almost anything is at risk of being counterfeited, from fasteners used on aircraft to electronics used on missile guidance systems. Further, there can be many sources of counterfeit parts as DOD draws from a large network of global suppliers. Based on a congressional request, GAO examined (1) DOD's knowledge of counterfeit parts in its supply chain, (2) DOD processes to detect and prevent counterfeit parts, and (3) commercial initiatives to mitigate the risk of counterfeit parts. GAO's findings are based on an examination of DOD regulations, guidance, and databases used to track deficient parts, as well as a Department of Commerce study on counterfeit parts; interviews with Commerce, DOD, and commercial-sector officials at selected locations; and a review of planned and existing efforts for counterfeit-part mitigation.
DOD is limited in its ability to determine the extent to which counterfeit parts exist in its supply chain because it does not have a departmentwide definition of the term "counterfeit" and a consistent means to identify instances of suspected counterfeit parts. While some DOD entities have developed their own definitions, these can vary in scope. Further, two DOD databases that track deficient parts--those that do not conform to standards--are not designed to track counterfeit parts. A third governmentwide database can track suspected counterfeit parts, but according to officials, reporting is low due to the perceived legal implications of reporting prior to a full investigation. Nonetheless, officials we met with across DOD cited instances of counterfeit parts, as shown in the table below. A recent Department of Commerce study also identified the existence of counterfeit electronic parts within DOD and industry supply chains. DOD is in the early stages of developing a program to help mitigate the risks of counterfeit parts. DOD does not currently have a policy or specific processes for detecting and preventing counterfeit parts. Existing procurement and quality-control practices used to identify deficient parts are limited in their ability to prevent and detect counterfeit parts in DOD's supply chain. For example, several DOD weapon system program and logistics officials told us that staff responsible for assembling and repairing equipment are not trained to identify counterfeit parts. Some DOD components and prime defense contractors have taken initial steps to mitigate the risk of counterfeit parts, such as creating risk-assessment tools and implementing a new electronic parts standard. Also facing risks from counterfeit parts, individual commercial sector companies have developed a number of anticounterfeiting measures, including increased supplier visibility, detection, reporting, and disposal. Recent collaborative industry initiatives have focused on identifying and sharing methods to reduce the likelihood of counterfeit parts entering the supply chain. Because many of the commercial sector companies produce items similar to those used by DOD, agency officials have an opportunity to leverage knowledge and ongoing and planned initiatives to help mitigate the risk of counterfeit parts as DOD develops its anticounterfeiting strategy.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Belva M. Martin Team: Government Accountability Office: Acquisition and Sourcing Management Phone: (202) 512-4285GAO-10-389, Defense Supplier Base: DOD Should Leverage Ongoing Initiatives in Developing Its Program to Mitigate Risk of Counterfeit Parts
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
March 2010:
Defense Supplier Base:
DOD Should Leverage Ongoing Initiatives in Developing Its Program to
Mitigate Risk of Counterfeit Parts:
GAO-10-389:
GAO Highlights:
Highlights of GAO-10-389, a report to congressional requesters.
Why GAO Did This Study:
Counterfeit parts”generally those whose sources knowingly misrepresent
the parts‘ identity or pedigree”have the potential to seriously
disrupt the Department of Defense (DOD) supply chain, delay missions,
and affect the integrity of weapon systems. Almost anything is at risk
of being counterfeited, from fasteners used on aircraft to electronics
used on missile guidance systems. Further, there can be many sources
of counterfeit parts as DOD draws from a large network of global
suppliers.
Based on a congressional request, GAO examined (1) DOD‘s knowledge of
counterfeit parts in its supply chain, (2) DOD processes to detect and
prevent counterfeit parts, and (3) commercial initiatives to mitigate
the risk of counterfeit parts.
GAO‘s findings are based on an examination of DOD regulations,
guidance, and databases used to track deficient parts, as well as a
Department of Commerce study on counterfeit parts; interviews with
Commerce, DOD, and commercial-sector officials at selected locations;
and a review of planned and existing efforts for counterfeit-part
mitigation.
What GAO Found:
DOD is limited in its ability to determine the extent to which
counterfeit parts exist in its supply chain because it does not have a
departmentwide definition of the term ’counterfeit“ and a consistent
means to identify instances of suspected counterfeit parts. While some
DOD entities have developed their own definitions, these can vary in
scope. Further, two DOD databases that track deficient parts”those
that do not conform to standards”are not designed to track counterfeit
parts. A third governmentwide database can track suspected counterfeit
parts, but according to officials, reporting is low due to the
perceived legal implications of reporting prior to a full
investigation. Nonetheless, officials we met with across DOD cited
instances of counterfeit parts, as shown in the table below. A recent
Department of Commerce study also identified the existence of
counterfeit electronic parts within DOD and industry supply chains.
DOD is in the early stages of developing a program to help mitigate
the risks of counterfeit parts.
Table: Examples of Counterfeit Parts in DOD‘s Supply Chain:
Part: GPS oscillators;
Description: The Air Force and Navy use these oscillators for
navigation on over 4,000 systems. Part failure could affect the
mission of certain systems.
Part: Self-locking nuts;
Description: Self-locking nuts, used in aviation braking, were
cracking.
Part: Titanium;
Description: The supplier sold substandard titanium, used in fighter
jet engine mounts.
Part: Brake shoes;
Description: Brake shoes were made with substandard materials,
including seaweed.
Source: DOD.
[End of table]
DOD does not currently have a policy or specific processes for
detecting and preventing counterfeit parts. Existing procurement and
quality-control practices used to identify deficient parts are limited
in their ability to prevent and detect counterfeit parts in DOD‘s
supply chain. For example, several DOD weapon system program and
logistics officials told us that staff responsible for assembling and
repairing equipment are not trained to identify counterfeit parts.
Some DOD components and prime defense contractors have taken initial
steps to mitigate the risk of counterfeit parts, such as creating risk-
assessment tools and implementing a new electronic parts standard.
Also facing risks from counterfeit parts, individual commercial sector
companies have developed a number of anticounterfeiting measures,
including increased supplier visibility, detection, reporting, and
disposal. Recent collaborative industry initiatives have focused on
identifying and sharing methods to reduce the likelihood of
counterfeit parts entering the supply chain. Because many of the
commercial sector companies produce items similar to those used by
DOD, agency officials have an opportunity to leverage knowledge and
ongoing and planned initiatives to help mitigate the risk of
counterfeit parts as DOD develops its anticounterfeiting strategy.
What GAO Recommends:
GAO recommends that DOD leverage existing initiatives to establish
anticounterfeiting guidance and disseminate this guidance to all DOD
components and defense contractors. DOD concurred with each of the
recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-389] or key
components. For more information, contact Belva Martin at (202) 512-
4906 or martinb@gao.gov.
[End of section]
Contents:
Letter:
Background:
The Extent of Counterfeit Parts in DOD's Supply Chain Is Unknown:
DOD's Existing Practices Are Limited in Protecting Its Supply Chain
against Counterfeit Parts:
A Number of Commercial Initiatives Exist to Mitigate the Risk of
Counterfeit Parts in Supply Chains:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Examples of Counterfeit Parts in DOD's Supply Chain:
Appendix III: Comments from the Department of Defense:
Appendix IV: Comments from the Department of Commerce:
Appendix V: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Types of DOD Suppliers of Parts and Components:
Table 2: Examples of Confirmed or Suspected Counterfeits in DOD's
Supply Chain:
Figure:
Figure 1: Visual Detection of a Counterfeit Integrated Circuit:
Abbreviations:
DCMA: Defense Contract Management Agency:
DLA: Defense Logistics Agency:
DOD: Department of Defense:
GIDEP: Government Industry Data Exchange Program:
HMMWV: High Mobility Multi-purpose Wheeled Vehicles:
JDRS: Joint Deficiency Reporting System:
Joint STARS: Joint Surveillance Target Attack Radar System:
MDA: Missile Defense Agency:
OCM: Original Component Manufacturer:
PDREP: Product Data Reporting and Evaluation Program:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
March 29, 2010:
The Honorable Sherrod Brown:
Chairman:
Subcommittee on Economic Policy:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Evan Bayh:
Chairman:
Subcommittee on Security and International Trade and Finance:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
DOD draws from a large network of global suppliers and manages over 4
million different parts at a cost of over $94 billion; therefore,
counterfeit parts can enter its supply chain.[Footnote 1] Almost
anything is at risk of being counterfeited including fasteners used on
aircraft, electronics used on missile guidance systems, and materials
used in body armor and engine mounts. Counterfeit parts have the
potential to cause a serious disruption to DOD supply chains, delay
ongoing missions, and even affect the integrity of weapon systems.
Counterfeits are not limited to the DOD supply chain and exist in
other government entities, such as the National Aeronautics and Space
Administration and the Department of Energy, as well as in many
commercial settings as diverse as software, commercial aviation,
automotive parts, and consumer electronics and can threaten the safety
of consumers.
On the basis of your interest in DOD's ability to detect and prevent
counterfeit parts, we examined (1) the extent of DOD's knowledge of
counterfeit parts in its supply chain, (2) DOD processes to detect and
prevent counterfeit parts, and (3) commercial initiatives to mitigate
the risk of counterfeit parts in their supply chains.
To conduct our work, we reviewed regulations, guidelines, and
databases to determine how DOD defines and tracks counterfeit parts.
We interviewed senior DOD headquarters officials, as well as weapon
system program and logistics officials from the Army, Navy, Air Force,
Missile Defense Agency (MDA), and Defense Logistics Agency (DLA) about
their knowledge of the counterfeit parts problem and instances of
counterfeits. We also reviewed a Department of Commerce study of
counterfeit electronic parts and met with officials to discuss their
findings. To identify practices for preventing and detecting
counterfeit parts, we selected and reviewed a nongeneralizable sample
of 16 weapon systems representing a mix of aerospace, ground vehicle,
and missile defense sectors with mature technologies. We identified
initiatives planned and practices used by DOD and defense contractors
to prevent and detect counterfeit parts. To identify commercial
practices used to mitigate the risk of procuring counterfeit parts, we
interviewed officials from selected companies and associations within
the automotive, aviation, and electronics industries--sectors that
have experienced counterfeit parts in their supply chains or produce
items similar to those used by the DOD programs we reviewed. For more
on our scope and methodology, see appendix I. We performed our review
from January 2009 through March 2010, in accordance with generally
accepted government auditing standards. Those standards require that
we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the
evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Background:
Generally, the term counterfeit refers to instances in which the
identity or pedigree of a product is knowingly misrepresented by
individuals or companies. Counterfeiters often try to take advantage
of the established worth of the imitated product, and the counterfeit
product may not work as well as the genuine article. The threat of
counterfeit parts continues to grow as counterfeiters have developed
more sophisticated capabilities to replicate parts and gain access to
scrap materials that were thought to have been destroyed.
Counterfeiters exist across industries and are able to respond to
changes in market conditions. Counterfeit parts can be quickly
distributed in online markets. Almost every industry can be affected
by counterfeit parts.
Counterfeiting can affect the safety, operational readiness, costs,
and the critical nature of the military mission. DOD procures millions
of parts through its logistics support providers--DLA supply centers,
military service depots, and defense contractors--who are responsible
for ensuring the reliability of the DOD parts they procure. As they
draw from a large network of suppliers in an increasingly global
supply chain, there can be limited visibility into these sources and
greater risk of procuring counterfeit parts. Also, as DOD weapon
systems age, products required to support it may no longer be
available from the original manufacturers or through franchised or
authorized suppliers but could be available from independent
distributors, brokers, or aftermarket manufacturers. Parts and
components bought by DOD can come from different types of suppliers,
as shown in table 1.
Table 1: Types of DOD Suppliers of Parts and Components:
Type of source: Original component manufacturer (OCM); Description:
Organization that designs, or engineers, or both, a part and is
pursuing or has obtained the intellectual property rights to that part.
Type of source: Franchised distributor;
Description: Distributor with which OCM has a contractual agreement to
buy, stock, repackage, sell and distribute its product lines.
Type of source: Independent distributor;
Description: Distributor that purchases new parts with the intention
to sell and redistribute them back into the market, and which does not
have contractual agreements with OCM.
Type of source: Broker/broker distributor;
Description: In the independent distribution market, brokers are
professionally referred to as independent distributors. A broker
distributor is a type of independent distributor that works in a just-
in-time environment by searching the industry and locating parts for
customers.
Type of source: Aftermarket manufacturer;
Description: Manufacturer that either produces and sells replacement
parts authorized by the OCM, or produces parts through emulation,
reverse-engineering, or redesign that match OCM specifications and
satisfy customer needs without violating OCM intellectual property
rights, patents, or copyrights.
Source: GAO summary of SAE International data.
Note: The definitions are based on SAE Aerospace Standard 5553,
Counterfeit Electronic Parts; Avoidance, Detection, Mitigation and
Disposition, issued in April 2009.
[End of table]
The Extent of Counterfeit Parts in DOD's Supply Chain Is Unknown:
DOD Does Not Have a Common Definition for Counterfeit Parts:
DOD lacks a departmentwide definition of the term counterfeit. In our
discussions with DOD logistics and program officials, several told us
they are uncertain how to define counterfeit parts, and many officials
also stated that a common definition would be useful. In the absence
of a departmentwide definition of counterfeit parts, some DOD entities
have developed their own. Although there are similarities among these
definitions, the scope varies. For example, one DLA supply center
defined a part as counterfeit only when it misrepresented the part's
trademark. In contrast, a different DLA supply center defined
counterfeit parts more broadly to include misrepresentations of a
part's quality and performance. In August 2009, DOD endorsed an
aerospace standard created by SAE International that includes a
definition of the term counterfeit part.[Footnote 2] While this
standard is available departmentwide, it is left to the discretion of
each DOD program as to whether it wants to use the standard. Some DOD
officials who support aviation programs, such as the F-15, told us
they were using or considering use of the standard, while other DOD
officials told us they were unaware of it. Others were uncertain how
it would apply beyond avionics to components like fasteners, uniforms,
tires, and brake pads. In some cases, officials stated the definition
is too broad for their use.
DOD Databases Do Not Capture Data on Counterfeit Parts:
The two primary databases DOD uses to report deficient parts--the
Product Data Reporting and Evaluation Program (PDREP) and the Joint
Deficiency Reporting System (JDRS)[Footnote 3]--have data fields that
enable users primarily to track information on deficient parts, but
neither is designed specifically to track counterfeit parts. DOD
considers products that do not conform to quality or design
specifications to be deficient.[Footnote 4] Both of these systems
allow users to enter a cause code for why a part is deficient, but
neither database has a code to capture the deficiency as counterfeit.
As a result, users are limited to reporting a suspected counterfeit
part in narrative descriptions. However, identifying instances of
counterfeit parts through searches of narrative descriptions is
difficult due to a lack of common terminology. For example, an Air
Force official told us that when he searched the JDRS system, he found
3 out of more than 94,000 entries that discussed counterfeit parts. We
performed similar searches and found that the terms associated with
counterfeit are rarely included in narrative fields. In consultation
with database managers from both PDREP and JDRS, we developed a list
of 11 terms associated with counterfeit parts and searched the
systems' narrative fields for these terms over a 5-year period ranging
from October 1, 2004, to September 30, 2009.[Footnote 5] We found that
less than 1 percent of the reports in the databases included one of
our search terms, and a manual review of these cases determined that
only a few were relevant to counterfeit parts.
DOD entities also have access to the Government Industry Data Exchange
Program (GIDEP)--a Web-based database--that allows government and
industry participants to share information on deficient parts,
including counterfeit. Specifically, a GIDEP user can submit
information on a suspected counterfeit part and GIDEP policy allows
for up to 15 days for the supplier to respond before posting this
information to the database. A 1991 Office of Management and Budget
policy letter instructs government agencies to use GIDEP to report
deficient[Footnote 6] parts. However, the GIDEP Deputy Program Manager
told us that GIDEP is not widely used to report suspect counterfeits.
He stated that the policy letter was intended as a short-term
requirement for government use of GIDEP until a Federal Acquisition
Regulation change was made, which never occurred. He further stated
that DOD had previously issued a military standard[Footnote 7]
requiring use of GIDEP, which was canceled during acquisition reform
in 1996. DOD logistical support providers and contractors that we
spoke with cited concerns with using the GIDEP system such as delayed
reporting, liability issues, and effect on criminal investigations.
* Delayed Reporting: A 15-day delay in posting reports to the system
allows suppliers to investigate and respond to reports concerning
their products. However, during this time, a counterfeit part could
continue to be used or purchased.[Footnote 8]
* Liability Issues: Some officials expressed concerns about the legal
implications of reporting a part as suspect counterfeit before it had
been proven. Fear of lawsuits was repeatedly cited as a reason cases
are not reported to GIDEP.
* Effect on Investigations: Another concern officials raised about
reporting cases to GIDEP is the possibility of alerting suppliers to
active investigations, as investigators may want to monitor a
supplier's activities to gather further evidence of possible illegal
activity.
Counterfeit Parts Have Been Found in DOD's Supply Chain:
In the absence of data collected on counterfeit parts, we visited
military services, MDA, DLA, selected defense contractors, and
suppliers; many of these officials provided specific examples of
counterfeit or suspect counterfeit parts. As definitions of
"counterfeit" vary within DOD, they generally refer to instances in
which individuals or companies knowingly misrepresent the identity or
pedigree of a part. Specific examples of the types of counterfeits
encountered by DOD include:
* parts falsely claimed by the supplier to be from a particular
manufacturer,
* parts that deliberately do not contain the proper internal
components or construction consistent with the ordered part,
* authentic parts whose age or treatment have been knowingly
misrepresented, and:
* parts with fake packaging.
We met with DOD program officials and logistical support providers
across 16 DOD programs and three DLA supply centers and discussed
instances of suspect and confirmed counterfeit parts; examples are
shown in appendix II. About two-thirds of these instances involved
fasteners or electronic parts while the remainder included materials
ranging from titanium used in aircraft engine mounts to Kevlar used in
body armor plates. The following illustrates the examples of
counterfeit parts and actions taken provided by officials across DOD.
Army:
* Seatbelt clasps: Seatbelt parts were made from a grade of aluminum
that was inferior to that specified in DOD's requirements. The parts
were found to be deficient when the seatbelts were accidentally
dropped and they broke.
Navy:
* Routers: The Navy, as well as other DOD and government agencies,
purchased counterfeit network components--including routers--that had
high failure rates and the potential to shut down entire networks. A 2-
year FBI criminal investigation led to 10 convictions and $1.7 million
in restitution.
Air Force:
* Microprocessor: The Air Force needed microprocessors that were no
longer produced by the original manufacturer for its F-15 flight-
control computer. These microprocessors were procured from a broker
and F-15 technicians noticed additional markings on the microprocessor
and character spacing inconsistent with the original part. A total of
four counterfeit microprocessors were found and as a result were not
installed on the F-15's operational flight control computers.
* Global Positioning System: Oscillators used for navigation on over
4,000 Air Force and Navy systems experienced a high failure rate and
failed a retest. These oscillators were provided by a supplier that
Global Positioning System engineers had previously disapproved as a
supply source. Air Force officials stated that while the failure would
not cause a safety-of-flight issue, it could prevent some unmanned
systems from returning from their missions.
MDA:
* Operational Amplifiers: A counterfeit operational amplifier, which
can be used on multiple MDA systems, was identified on MDA hardware
during testing. The failed part was found on a circuit board supplied
by a subcontractor. It was later determined that the subcontractor
purchased these parts from a parts broker who was not authorized to
distribute parts by the original component manufacturer. To date, all
parts have been accounted for and secured from further use on any
other products.
* Microcircuits: A counterfeit microcircuit, which can be used on
multiple MDA systems, was identified on MDA hardware. MDA's visual
inspection showed that the part was resurfaced and remarked, which
prompted authenticity testing. Tests revealed surface scratches,
inconsistencies in the part marking, and evidence of tampering. These
parts were purchased from a parts broker who was not authorized to
distribute parts by the original component manufacturer.
DLA:
* Packaging and small parts: During a 2-year period, a supplier and
three coconspirators packaged hundreds of commercial items from
hardware and consumer electronics stores and labeled them as military-
grade items. For example, the supplier placed a rubber washer from a
local hardware store in a package labeled as a brass washer for use on
a submarine. The supplier also labeled the package containing a
circuit from a personal computer as a $7,000 circuit for a missile
guidance system. The suppliers avoided detection by labeling packages
to appear authentic, even though they contained the wrong part. The
supplier received $3 million from contracts totaling $8 million before
fleeing the country. He has been extradited to the United States and
awaits trial; his coconspirators have been convicted.
The Department of Commerce also identified the existence of
counterfeit parts in DOD's supply chain in a study released in January
2010.[Footnote 9] This study, sponsored by Naval Air Systems Command,
was designed to provide statistics on the extent of infiltration of
counterfeit electronic components into the United States industrial
and supply chains, to understand how different segments of the supply
chain currently address the issue, and to gather best practices from
the supply chain on how to handle counterfeits. The department
received completed surveys from 387 respondents representing five
segments in the U.S. supply chain--OCMs, distributors and brokers,
circuit-board assemblers, prime contractors and subcontractors, and
DOD entities. The surveys included questions addressing past
experiences with counterfeit parts and practices used in identifying
them. While the study did not provide a number for the total
counterfeit incidents at DOD, it noted that 14 DOD organizations had
reported incidents of counterfeit parts. The study's survey
respondents identified a growth in incidents of counterfeit parts
across the electronics industry from about 3,300 in 2005 to over 8,000
incidents in 2008. Survey respondents attributed this growth to a
number of factors, such as a growth in the number of counterfeit
parts, better detection methods, and improved tracking of counterfeit
incidents.
DOD Is in the Early Stages of Gathering Information on the Counterfeit
Parts Problem:
In April 2009 DOD formed a departmentwide team--partially in response
to media reports that highlighted the existence of counterfeit parts
in the DOD supply chain[Footnote 10]--to collect information and
recommend actions to mitigate the risk of counterfeit parts in its
supply chain. Standing participants include representatives from DOD's
Office of the Under Secretary of Defense for Acquisition, Technology &
Logistics, DLA, the Defense Contract Management Agency, the Defense
Standardization Program Office, MDA, and military law enforcement and
investigative agencies.[Footnote 11] The team also incorporates
liaisons from groups such as the defense industry, Defense
Intelligence Agency, Federal Aviation Administration, National
Aeronautics and Space Administration, Department of Energy, Department
of Commerce, and state and federal law enforcement organizations.
To gather preliminary information on the counterfeit problem in DOD,
the team has visited three DOD facilities to observe operations and
discuss occurrences of and problems with counterfeit in the supply
chain. The team plans to complete a review of current DOD processes
and procedures for the handling and storage, detection, disposal, and
reporting of counterfeit parts by July 2010. The team then plans to
assess the policies, procedures, and metrics needed to address the
issue of counterfeit parts . Additionally, the team is developing
training materials that it plans to make available through the Defense
Acquisition University, to increase the general awareness of
counterfeit parts and plans to develop additional training on
detection techniques.
DOD's Existing Practices Are Limited in Protecting Its Supply Chain
against Counterfeit Parts:
DOD Relies on Existing Procurement and Quality Control Practices That
Are Not Specifically Designed to Address Counterfeit Parts:
DOD relies on existing procurement and quality control practices to
ensure the quality of the parts in its supply chain. However, these
practices are not designed to specifically address counterfeit parts.
Limitations in the areas of obtaining supplier visibility,
investigating part deficiencies, and reporting and disposal may reduce
DOD's ability to mitigate risks posed by counterfeit parts.
Obtaining supplier visibility: DOD and its prime contractors rely on
suppliers across a global supply chain for parts and materials.
Federal acquisition regulations require that agency contracting
officers consider whether a supplier is responsible before awarding a
contract and note that the award of a contract to a supplier based on
the lowest price alone can result in additional costs if there is
subsequent default, late deliveries, or other unsatisfactory
performance.[Footnote 12] While cost or price is always a
consideration when purchasing goods, an abnormally low price,
especially from an unfamiliar source, can be an indication that there
is a need to assess the supplier's ability to meet the requirements of
the contract. For example, a DLA contracting official described an
instance in which a supplier new to DLA was awarded a contract based
on a low price and a performance score of 100 percent. However, the
score was misleading as the supplier had no past performance to
measure. Ultimately, the supplier was unable to meet the requirements
of the contract. Further, DOD parts can be purchased through the use
of automated systems that have limited visibility on suppliers and can
increase the risk of purchasing counterfeit parts. To address the
risks of using automated source selection, DLA has a pilot project to
create a list of qualified distributors for the supply of two
electronic items--semiconductors and microcircuits. Of the 53
distributors that applied, 13 were selected based on their
qualifications. DLA plans to review other parts to determine if the
pilot can be expanded. In addition, DOD has a number of weapons
systems that have remained in service longer than expected--such as
the B-52 bomber--and require parts that are no longer available from
the original manufacturer or its authorized distributors. When parts
are needed for these systems, they are often provided by brokers or
independent distributors. As buying from these sources reduces DOD's
visibility into a part's pedigree, additional steps are required in
assuring that the part is reliable or authentic.
Detecting Part Deficiencies: DOD can have a part's quality and
authenticity tested through destructive and nondestructive methods
prior to awarding a contract. However, several DOD officials told us
that staff responsible for assembling and repairing systems and
equipment may not have the expertise to identify suspect counterfeit
parts outside of those that demonstrate performance failures because
they are not trained to identify counterfeit parts and have limited
awareness of the issue. In addition, DOD contracting officials told us
that the cost and time associated with testing may be prohibitive,
especially for lower-cost parts such as a 50-cent fastener. Other
factors were cited by DOD officials at several testing centers as
limitations such as the barriers to testing parts that are only
available in limited quantities or are expensive. For instance, the F-
15 program was in need of two spare parts, but only two of these parts
were available in the supply chain, so the preferred destructive
testing could not be performed.
Reporting and disposal: Generally, DOD has processes in place for
reporting and disposal of deficient parts. Reporting of a deficient
part that is suspected to be counterfeit enables further investigation
to confirm that a part is counterfeit. As described above, DOD uses
JDRS and PDREP to report deficient parts, but does not have a specific
field in these databases to report counterfeit parts. Some DOD
officials stated that they report suspect counterfeits to internal
fraud teams, others indicated that they would contact local law
enforcement or the Federal Bureau of Investigation in similar cases.
DOD officials told us that when they found counterfeit parts they have
shared this information through informal methods such as e-mails or
phone calls. Others, such as MDA, use formal methods to convey this
information such as bulletins that alert MDA staff of counterfeiting
techniques and how to detect them as well as advisories on confirmed
counterfeit parts found in MDA programs. MDA officials stated that
these methods are an effective way to immediately alert their staff of
counterfeit parts.
Further, depending on the condition of a noncounterfeit, deficient
part and its related demilitarization code, it can be refurbished,
resold, or destroyed. The disposal of counterfeit and scrapped parts
is an area of vulnerability as they could reenter the supply chain.
According to officials from the Defense Reutilization and Marketing
Service--the agency responsible for destroying and disposing of DOD's
excess and surplus parts--it is critical that a part and its related
demilitarization code be identified as counterfeit when it is sent for
disposal to prevent it from reentering DOD's supply chain. However,
DOD does not have a consistent method to identify parts as counterfeit
when they are sent for disposal. Some parts designated for disposal
have made their way back into the supply chain. For example, DOD
program officials described a helicopter part that had the same serial
number as a defective one that had been destroyed. An X-ray test
revealed the destroyed part had been welded back together and put back
in DOD's inventory.
Some DOD Components and Contractors Have Taken Initial Steps to
Address Counterfeit Parts:
In the absence of a departmentwide policy, some DOD components and
their contractors have supplemented existing procurement and quality-
control practices to help mitigate the risk of counterfeit parts in
the DOD supply chain. For example, MDA has established a 12-person
organization that leverages subject-matter expertise at two DOD
laboratories to identify, evaluate, and track the effects of
counterfeit parts on all MDA hardware. MDA policies to address
counterfeits are part of its Parts, Materials, and Processes Mission
Assurance Plan which includes instructions on part selection,
procurement, receipt, testing, and use of parts. This plan
specifically identifies three steps to offset the presence of
counterfeit parts and materials in the market: (1) preventing
counterfeit parts and materials by using only authorized distributors,
with associated certifying paperwork; (2) detecting and containing
counterfeit parts and materials through appropriate inspection and
test methods; and (3) notifying the user community of potential
counterfeit concerns and assisting in prosecution. The plan also
instructs programs to impound suspect counterfeit parts and all items
from the same lot and to not return suspected counterfeit parts to
suppliers, preventing them from being sold to others. According to MDA
officials, all new contracts include adherence to the plan's section
on counterfeit parts and materials, and MDA has developed policies
that can be applied to existing contracts. MDA further has applied
DOD's item-unique identification technology that provides for the
marking of individual items--whose unit acquisition cost is $5,000 or
more--with a set of globally unique data elements. This technology is
designed to help DOD value and track items throughout their life cycle
by requiring equipment manufacturers to assign unique identification
numbers to parts acquired under DOD contracts, thus enabling better
traceability of a part to a specific manufacturer. MDA also has an
ongoing effort to develop tools to identify, quantify, and manage the
risk of counterfeit parts in the supply chain as counterfeits or
suspect counterfeits are detected. DLA's Supply Center in Columbus,
Ohio, has an established team that investigates suspect counterfeit
parts under the broader scope of fraud. The team is composed of
members from DLA's product verification, contracting, and legal
offices as well as the Defense Criminal Investigative Service and
handles cases ranging from part deficiencies to contractor misconduct.
When encountering a counterfeit part, the team's analysis of
engineering investigations, product testing, and criminal
investigations can be used as evidence in criminal and civil cases.
DOD's prime contractors are also independently taking steps to protect
the supply chain from counterfeits. As DOD relies on its suppliers to
provide weapons, equipment, and raw materials to meet U.S. national
security objectives, these activities directly affect DOD's own
efforts. Several prime contractors told us that they are using a
recently adopted industry standard to develop counterfeit protection
plans.[Footnote 13] The standard provides strategies to mitigate the
risks of procuring counterfeit products and standardizes practices to
maximize availability of authentic parts and procure parts from
reliable sources. Additionally, it standardizes practices to assure
the authenticity of parts, control parts that are identified as
counterfeit, and report counterfeit parts to other potential users and
government investigative authorities. Prime contractors using this
standard are also focusing on ensuring traceability within their
supply chains through flow-down requirements to subcontractors. For
example, one contractor includes a clause in its contracts that states
that its suppliers shall ensure that they do not deliver counterfeits
but if this occurs, the supplier would immediately notify the defense
contractor and assume responsibility for the cost of replacing the
counterfeit parts. Several of the companies also provide training on
detecting counterfeits within their product lines.
A Number of Commercial Initiatives Exist to Mitigate the Risk of
Counterfeit Parts in Supply Chains:
Companies Have Developed Anticounterfeiting Practices to Address
Vulnerabilities to Counterfeit Parts:
As supply chains across industries are also vulnerable to the risk of
counterfeit parts, we met with selected companies representing
commercial aerospace, electronics, and automotive sectors that have
taken measures to address the counterfeiting challenges they face.
Companies we met with cited procedures and practices that they have
incorporated to help mitigate the risk of counterfeit parts in the
areas of supplier visibility, detection, and reporting and disposal.
Supplier Visibility: To ensure that parts and materials are reliable,
commercial companies we met with described several practices to
identify potential sources of counterfeiting activity. These practices
include regular assessments of a supplier's internal controls ranging
from their access to product designs to manufacturing facility
security. Some practices also included instituting extra measures when
purchasing from independent distributors such as internal and external
validation and testing requirements, and part-authenticity
documentation--such as certificates of conformance.
Detection of Counterfeits: Companies we spoke with are using a number
of practices to make their products and packaging more difficult to
replicate and to increase the opportunities to identify counterfeits
in their supply chains. Some companies incorporate rare, proprietary,
or expensive materials on parts and packaging, which can deter
counterfeiters. Some companies also include markings on products and
packaging that, when absent or altered, could alert investigators or
consumers to potential counterfeits. One company allows customers to
report suspected counterfeits on its Web site and posts pictures of
markings and security features for customers and investigators to use
in distinguishing genuine from counterfeit products. Companies have
also coordinated with the Department of Homeland Security's Customs
and Border Protection inspectors to identify counterfeits. One company
visited inspectors at two ports that receive a high volume of imports
for this company, to inform inspectors of product packaging
characteristics and how to easily identify counterfeit packaging. This
effort resulted in an increased number of seizures of suspected
counterfeit products at these two ports.
Reporting and Disposal of Counterfeits: Several company officials
identified the lack of oversight of the scrapping, recycling, and
disposal of parts as an avoidable source of counterfeiting. Specific
practices that companies use to confirm that scrapped, excess, and
suspected counterfeit materials are not used to make more counterfeit
parts include:
* requiring suspect counterfeits to be quarantined upon detection,
* auditing suppliers to ensure proper tracking of the amount of
scrapped material destroyed,
* requiring suppliers to use contract clauses that prevent the resale
of scrap parts to third parties, and:
* witnessing the destruction of seized or returned counterfeit parts.
Industry Associations Identify and Share Anticounterfeiting Practices:
Several industry associations identify and share counterfeit-
mitigation practices. Activities include training, knowledge exchange,
and developing standards. These associations can provide a forum for a
diverse set of participants to arrive at agreement on collaborative
mitigation steps for the counterfeit issue. The recently issued
Department of Commerce report on the existence of counterfeit
electronics across the industry has also recommended mitigation
strategies for counterfeit parts.
In April 2009, SAE International issued Aerospace Standard 5553,
"Counterfeit Electronic Parts; Avoidance, Detection, Mitigation and
Disposition." The standard was created to provide uniform
requirements, practices, and methods to mitigate the risks of
receiving and installing counterfeit electronic parts.[Footnote 14] It
also provides guidance for establishing a counterfeit-control plan to
include parts availability, purchasing process, product verification,
investigation, reporting, and disposal. SAE International is providing
training on applying this standard, including a segment on detection
and visual inspection of actual counterfeit parts. For example, in its
visual inspection segment, the SAE training notes that characteristics
of a part that may indicate it is counterfeit include inconsistencies
in the part's texture, colors, material, or condition; quality of ink
or laser markings; condition of part labels; and markings that include
information such as production dates and manufacturing locations. As
shown in figure 1, visual inspection of a part's texture can uncover
counterfeits that have been resurfaced.
Figure 1: Visual Detection of a Counterfeit Integrated Circuit:
[Refer to PDF for image: illustration]
Illustration indicates the following:
* Shiny, smooth, but orange peel”type finish was not natural looking;
* Scraping the thick-looking black top exposed another logo under the
marking.
Source: SAE International and the Jet Propulsion Laboratory.
Note: Information is from SAE 5553 Training Manual dated November 2009.
[End of figure]
In 2009, a number of conferences were held to facilitate a
collaborative dialogue between industry representatives, law
enforcement, and government agencies. Specifically, in September,
DOD's Defense Standardization Program Office sponsored its annual
Diminishing Manufacturing Sources and Material Shortages and
Standardization Conference where participants discussed the
counterfeit part issue and how to increase awareness across
industries. Additionally, in December, the Center for Advanced Life
Cycle Engineering hosted its third annual symposium on avoiding,
detecting, and preventing counterfeit electronic parts.[Footnote 15]
Sessions at the symposium were aimed at generating awareness of the
counterfeit parts issue and sharing the perspectives of law
enforcement, supply chain managers, and government. The symposium also
provided information on technical tools and methods to detect and
prevent counterfeit parts.
In late 2008, the Aerospace Industries Association established an
integrated project team across aerospace, space, and defense products
to address challenges in the supply chain for mitigating the risk of
counterfeit parts. The team worked with government agencies, original
manufacturers, industry associations, and independent distributors
across three main objectives to: (1) discuss U.S. government
acquisition and procurement policies to avoid introducing counterfeit
parts and materials into products; (2) create a set of recommendations
for government and industry to ensure that the risk of introducing
counterfeit parts and materials is minimized, is consistent with risks
accepted by the customer, and implementable without sacrificing the
benefits of buying commercially available products; and (3) engage the
U.S. government in discussions concerning enforcement of policies to
avoid the introduction of counterfeit products into the United States.
The project team has provided its recommendations to its association
members and expects final recommendations to be available in the fall
of 2010.
The Semiconductor Industry Association established an Anti-
Counterfeiting Task Force in June 2006, which aims to stop counterfeit
semiconductors from entering the marketplace. According to the task
force Chairman, its work with U.S. Customs and Border Protection led
to the seizure of 1.6 million counterfeit semiconductors over the past
2 years.
Other industry associations are also focusing their efforts on
mitigating the risk of counterfeit parts. Business Action to Stop
Counterfeiting and Piracy has developed a clearinghouse for
information about counterfeiting and piracy to facilitate information
exchange.[Footnote 16] The Electronic Industry Citizenship Coalition
developed a risk-assessment tool for technology-industry companies to
help determine the appropriate level of intensity of supplier audits
and also asks suppliers about how they manage their subtier suppliers.
[Footnote 17] The International Anti-Counterfeiting Coalition has
helped the auto industry bring 10 global manufacturers together to
discuss common global counterfeiting problems, and also provides
opportunities to its members to participate in training programs.
[Footnote 18]
The recent Department of Commerce report provided practices for
managing electronic counterfeits industrywide, as well as
recommendations for the U.S. government to mitigate the risk of
electronic counterfeit parts. The practices for managing counterfeits
included (1) provide clear, written guidance to employees on what
steps to take if they suspect a part is counterfeit, (2) remove and
quarantine suspected and confirmed parts from regular inventory, (3)
maintain an internal database to track all suspected and confirmed
counterfeit components, and (4) report suspected and confirmed
counterfeit parts to industry associations and databases and to law
enforcement. The department's report also stated that there is little
information collected on malfunctioning and nonoperational electronic
parts, which gives a false impression of supply-chain security.
According to the report's findings, personnel that use parts need to
file Product Quality Deficiency Reports in a timely manner to report
nonworking electronic components, and if this proves to be impractical
for the field units, then another system of reporting needs to be
developed to facilitate information sharing. Based on its survey
responses, interviews, and field visits, the Department of Commerce
made seven recommendations in the areas of reporting, contract award,
legal guidance, enforcement activities, data collection, information
sharing, and DOD acquisition planning.
Conclusions:
As DOD draws from a large network of suppliers in an increasingly
global supply chain, there can be limited visibility into these
sources and greater risk of procuring counterfeit parts, which have
the potential to threaten the reliability of DOD's weapon systems and
the success of its missions. DOD needs a departmentwide definition and
consistently used means for detecting, reporting, and disposing of
counterfeit parts. Collaboration with government agencies, industry
associations, and commercial-sector companies that produce items
similar to those used by DOD and have reported taking actions to
mitigate the risks of counterfeit parts in their supply chains offers
DOD the opportunity to leverage ongoing and planned initiatives in
this area. Some of these initiatives, such as MDA practices and
industry detection and disposal processes, can be considered for DOD's
immediate use. However, as DOD collects data and acquires knowledge
about the nature and extent of counterfeit parts in its supply chain,
additional actions may be needed to help better focus its risk-
mitigation strategies.
Recommendations for Executive Action:
We recommend that the Secretary of Defense take the following three
actions as DOD develops its anticounterfeit program:
1. leverage existing anticounterfeiting initiatives and practices
currently used by DOD components and industry to establish guidance
that includes a consistent and clear definition of counterfeit parts
and consistent practices for preventing, detecting, reporting, and
disposing of counterfeit parts;
2. disseminate this guidance to all DOD components and defense
contractors; and:
3. analyze the knowledge and data collected to best target and refine
counterfeit-part risk-mitigation strategies.
Agency Comments and Our Evaluation:
In written comments on a draft of this report, DOD concurred with the
recommendations and identified a number of actions that it will take
to address them. DOD noted that it has established teams that will
leverage anticounterfeit initiatives and practices used by DOD
components and industry to develop guidance by late 2010. DOD plans to
include a consistent and clear definition of counterfeit parts and
consistent practices for preventing, detecting, reporting, and
disposing of counterfeit parts in its guidance, and plans to
disseminate it to all of its components and defense contractors by
early 2011. As it collects more knowledge and data on counterfeit
parts, DOD plans to analyze this to best target and refine risk-
mitigation strategies--which it expects to do by October 2010.
According to the official leading DOD's counterfeit parts efforts, DOD
will continue to refine risk-mitigation strategies on an ongoing basis
as it gains more knowledge on counterfeit parts. DOD also provided
technical comments, which were incorporated as appropriate. DOD's
comments are reprinted in appendix III. The Department of Commerce
concurred with the findings in this report. The Department of
Commerce's comments are reprinted in appendix IV.
As arranged with your offices, unless you publicly announce the
contents of this report earlier, we plan no further distribution of it
until 30 days from the date of this letter. At that time, we will send
copies of this report to appropriate congressional committees; the
Secretary of Defense; the Secretaries of the Army, Navy, and Air
Force; the Secretary of Commerce; the Administrator of the Office of
Federal Procurement Policy; as well as other interested parties. In
addition, the report will be made available at no charge on the GAO
Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions concerning this report, please
contact me at (202) 512-4906. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this
report are listed in appendix V.
Sincerely,
Signed by:
Belva Martin:
Acting Director:
Acquisition and Sourcing Management:
[End of section]
Appendix I: Scope and Methodology:
To examine the extent of the Department of Defense's (DOD) knowledge
of counterfeit parts that have entered its supply chain,[Footnote 19]
we reviewed regulations, guidelines, and databases to determine
whether they addressed how DOD should define and collect data on
counterfeit parts. We met with officials from the DOD Acquisition and
Technology, Logistics and Material Readiness, Supply Chain Integration
office; the DOD Defense Logistics Agency and its Supply Centers
located in Columbus, Ohio; Philadelphia, Pennsylvania; and Richmond,
Virginia; the Army, Navy, Air Force, and Missile Defense Agency; and
five defense prime contractors--BAE, Boeing, Lockheed Martin, Northrop
Grumman, and Raytheon--to discuss (1) their definition of the term
counterfeit,(2) their procedures and practices for obtaining knowledge
of counterfeit parts, (3) databases available for documenting
instances of counterfeit or suspect counterfeit parts, (4) their
knowledge of the existence of counterfeit parts, and (5) instances of
counterfeit parts within the DOD supply chain.
We also met with database managers from the Joint Deficiency Reporting
System (JDRS), the Product Data Reporting and Evaluation Program
(PDREP), and the Government Industry Data Exchange Program (GIDEP) to
discuss whether these databases are able to and have been used to
document instances of counterfeit or suspected counterfeit parts.
Additionally, we met with officials from the Department of Commerce,
Bureau of Industry and Security's Office of Technology Evaluation, to
discuss their study of counterfeit electronics, which the office
performed for the Navy, through the office's authority to conduct
surveys and analyses and prepare reports on specific sectors of the
U.S. defense supplier base.
To further examine the processes that DOD has in place to detect and
prevent counterfeit parts from entering its supply chain, we conducted
a case study of DOD weapon programs and interviewed program officials
as well as several logistics support providers. We selected a
nongeneralizable sample of 16 DOD weapon programs based on criteria
including representation of the aerospace, ground vehicle, or missile
defense sectors; representation of the production and deployment or
operations and support phase of the acquisition life cycle, and cross-
representation of DOD components--Army, Navy, Air Force, and the
Missile Defense Agency. GAO also has ongoing work through its annual
"Assessments of Selected Weapon Programs"[Footnote 20] for many of
these programs, which allowed the team to build upon our prior work
efforts and existing DOD contacts. Programs selected were: F-15 Eagle,
F-16 Fighting Falcon, F/A-18E/F Super Hornet, F/A-22 Raptor, C-5
Galaxy, C-130 Hercules, AH-64D Apache, UH-60 Black Hawk, E-2 Hawkeye,
AV-8B Harrier, SH-60 Sea Hawk, V-22 Osprey, Aegis Cruiser, Ground-
Based Midcourse Defense, High Mobility Multi-purpose Wheeled Vehicles
(HMMWV), and M1 Abrams.
We identified initiatives and practices used by industry associations
and commercial companies in selected commercial supply chains
(electronics, automotive, aviation) to mitigate the risk of procuring
counterfeit parts. We selected commercial supply chains and companies
in those supply chains based on one or more of several criteria:
industries in which instances of counterfeiting have taken place;
companies that make products similar to DOD weapons systems in terms
of complexity; and companies that make or buy products similar to
those bought by DOD. We met with company officials from functions
including Quality, Legal, Security, Brand Protection, and Sourcing and
Supplier Management, to discuss their experiences with counterfeits
(both incoming parts and counterfeit versions of their products) and
processes in place to protect against counterfeits. Much of the
information we obtained from these companies is anecdotal, due to the
proprietary nature of the data that could affect the companies'
competitive standing or level of protection against counterfeits. We
visited or spoke with company officials at companies and locations
including Advanced Micro Devices, Sunnyvale, California; Boeing
Commercial Airplanes, Everett, Washington; Cisco Systems, Inc., San
Jose, California; Federal-Mogul Corporation, Southfield, Michigan;
Ford Motor Company, Dearborn, Michigan; Hewlett-Packard Company,
Houston, Texas; Intel Corporation, Santa Clara, California; Meggitt
Aircraft Braking Systems, Akron, Ohio; Microsoft Corporation, Redmond,
Washington; and Rolls-Royce Corporation, Indianapolis, Indiana. We
also met with or obtained documents from several industry
associations, including the Aerospace Industries Association,
Semiconductor Industry Association, Business Action to Stop
Counterfeiting and Piracy, Electronic Industry Citizenship Coalition,
and International Anti-Counterfeiting Coalition. We attended two
counterfeit-mitigation conferences--one sponsored by DOD's Defense
Standardization Program Office and the other sponsored by the Center
for Advanced Life Cycle Engineering--and attended an SAE International
training workshop on Aerospace Standard AS5553.
We conducted this performance audit from January 2009 to March 2010 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Examples of Counterfeit Parts in DOD's Supply Chain:
As shown in table 2, Department of Defense (DOD) officials that we met
with provided examples of counterfeit parts. As definitions of
"counterfeit" vary within DOD, the examples are based on the
individual's understanding of the term; however, the examples
generally refer to instances in which individuals or companies
knowingly misrepresent the identity or pedigree of a part. While many
of the examples are confirmed cases of counterfeit, some include cases
that were not yet confirmed as the case was under investigation or the
DOD official did not know the outcome.
Table 2: Examples of Confirmed or Suspected Counterfeits in DOD's
Supply Chain:
Confirmed Counterfeit: Electronics:
Part: GPS receiver frequency standard oscillators;
Description: The Air Force and Navy use these oscillators on over
4,000 systems, including the Joint Surveillance Target Attack Radar
System (Joint STARS). On the Joint STARS, deficient receivers could
cause mission failure. An approved DOD supplier purchased the
oscillators from a distributor who had used an unapproved source of
supply and the problem was detected when the part had a high failure
rate during depot repair. After detection, the contractor removed
parts from the depot parts bin, but could not account for five parts.
Officials reported that the unaccounted-for five parts may never be
found.
Part: Dual transistor;
Description: Multiple services commonly use this part to provide power
in a system used to defeat shoulder-launched missiles. A supplier
purchased the transistors from a nonfranchised distributor and
detected the problem--counterfeit chips in the transistors--during
routine acceptance testing and failure analysis. After detection, the
supplier realized that 16 components had been shipped against the
contract. The supplier paid for these 16 components to be replaced and
retested.
Part: Microprocessor and nonvolatile random access memory;
Description: The Air Force uses these components in the F-15 Flight
Control Computer, but F-15 officials stated that the parts are in
diminishing supply and difficult to procure. The microprocessors were
procured from a broker, and F-15 technicians detected the problem--a
falsely identified manufacturer in both cases--during repairs when
they noticed additional markings on the microprocessor and character
spacing inconsistent with the original part. Air Force officials
stated that the parts were isolated and never released to the fleet or
into supply.
Part: Radar components;
Description: One of the Navy's suppliers discovered counterfeit radar
components in its supply chain and worked with the Navy Criminal
Investigative Service on the matter.
Part: Electronic components;
Description: These components are used across services in the V-22
Osprey. Suppliers procured the parts--including fuel management units
and dual digital map systems--and the problems were detected in a
supply test house.
Part: Microcircuit component;
Description: This microcircuit, no longer produced by the original
manufacturer, is used by the Navy across a variety of platforms,
including ships, airplanes, and submarines. After the Navy and its
contractor purchased 75 of the microcircuits from a supplier, the Navy
found that they were wired with the wrong material. Upon discovery,
the parts were segregated and did not enter the supply stream.
Part: Counterfeit network hardware;
Description: This hardware was purchased by multiple services and
contractors and had fake labeling. Federal investigators identified
nearly 3,500 counterfeit network components.
Part: Operational amplifiers;
Description: The Missile Defense Agency (MDA) acquired the parts from
a subcontractor who used an unauthorized distributor. MDA discovered
the problem with the amplifiers while testing a circuit board.
Part: Frequency synthesizer;
Description: MDA acquired a part that the supplier had acquired from
an unauthorized distributor. MDA detected the problem--the surface was
resurfaced and remarked--through visual inspections and authenticity
testing. Investigations confirmed that a third party had tampered with
the part.
Part: Electronic piece parts;
Description: MDA acquired counterfeit parts used in booster and flight
termination systems and detected the problem during related
investigations and, in some cases, testing.
Confirmed Counterfeit: Fasteners:
Part: Self-locking nuts;
Description: Self-locking nuts, used in aviation braking, were
cracking. They were purchased from an unauthorized source.
Confirmed Counterfeit: Metals:
Part: Titanium aerospace parts;
Description: Multiple services and government agencies purchased
titanium for use on platforms that included F-15 engine mounts and F-
22 and C-17 parts. The titanium was substandard and, if it had failed,
could have caused casualties and property loss. The supplier has been
charged with selling substandard titanium and repeatedly issuing
fraudulent certifications stating that the titanium passed testing
standards.
Part: Aluminum parts;
Description: A supplier provided parts that it misrepresented as
containing the aluminum bronze alloy required by DOD, but the parts
were made from a lesser-grade of aluminum. Investigators raided the
company's facility, which was located in a barn.
Part: Aluminum parts;
Description: Eighteen DOD and National Aeronautics and Space
Administration programs and 14 commercial programs procured aluminum
for use in items including helicopters, guns, and automobile wheels.
Although the parts passed initial inspections, it was determined that
the aluminum supplier had falsely reported that it had provided the
correct treatments. The failure to properly heat treat the aluminum
made it susceptible to corrosion.
Confirmed Counterfeit: Packaging and labeling:
Part: Assorted small parts;
Description: The Defense Logistics Agency (DLA) purchased assorted
parts, such as washers and circuits, for use on a variety of
platforms. The supplier was substituting the requested military-grade
items with commercial items by providing correctly-labeled packages
but putting the wrong parts inside.
Confirmed Counterfeit: Other hardware:
Part: Brake shoes;
Description: This brake shoe is used on medium tactical trailers--the
largest tactical trailers used by the military. The shoe was no longer
produced by the original manufacturer, so a contract was awarded to a
new company. These brake shoes were made with various materials,
including seaweed. U.S. customs agents had already seized the brake
shoes and DOD never took ownership of them.
Part: Body armor;
Description: DLA procured non-Kevlar material that was misrepresented
as Kevlar and discovered the discrepancy during testing.
Additional Cases Reported: Electronics:
Part: High-voltage diodes;
Description: An Air Force official was familiar with a case in which a
U.S. company purchased diodes from China, rubbed off the part number,
and sold the diodes to DOD. The official reported that the Department
of Justice had successfully prosecuted the company involved.
Additional Cases Reported: Fasteners:
Part: Rotor retaining nut (used to hold the rotor to the mast of some
helicopters);
Description: The rotor retaining nut is used to hold the rotor to the
mast of some helicopters; its failure would cause the helicopter to
crash. The Air Force reported that a supplier willfully supplied a
substandard rotor retaining nut, but the supplier maintained its
innocence and claimed that it was unaware that the part it procured
was a counterfeit part.
Part: Bolt;
Description: The Army reported that a bolt, intended for use in
helicopters, was counterfeit. The problem was detected when Army
officials recognized the serial number on the part and identified it
as a defective part that had been cut in half for destruction. An X-
ray test confirmed the bolt had been welded back together.
Part: Hook point bolts;
Description: DLA procured this part, which is used to help stop
aircraft when they land on aircraft carriers. Failure of the part
could result in loss of life or aircraft. A supplier rubbed serial
numbers off hooks that were too thin to use, welded additional
material onto the hooks, and reused them. This problem was detected
when premature part failure triggered an investigation and the welded
material showed up in X-rays.
Additional Cases Reported: Packaging and labeling:
Part: Hermetically-sealed microwave boxes;
Description: The Air Force reported that a contractor, who bid to
repair parts, was sending them to Russia for repairs and that the
resulting repairs were not done accurately. Part failure could have
posed a risk to the program.
Additional Cases Reported: Other hardware:
Part: Air conditioning component;
Description: Army personnel using the Bradley during operations
detected a component that they suspected was counterfeit. In some
climates, such as Iraq, air conditioning failure would make this
vehicle inoperable and, therefore, compromise missions. Army officials
were uncertain whether there was an investigation in this case.
Part: Seatbelts;
Description: Army officials reported that seatbelts, provided by a
supplier, were made from a cheap aluminum and were falsely certified
to be the correct aluminum. The deficiency was discovered when a
seatbelt part was accidentally dropped and broke. After investigation,
Army investigators banned the company from selling to the Army.
Source: GAO summary of examples provided by DOD officials.
[End of table]
[End of section]
Appendix III: Comments from the Department of Defense:
Office Of The Assistant Secretary Of Defense:
Logistics And Materiel Readiness:
3500 Defense Pentagon:
Washington, DC 20301-3010:
March 25, 2010:
Ms. Belva Martin:
Acting Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, DC 20548:
Dear Ms. Martin:
This is the Department of Defense (DoD) response to the GAO draft
report, GAO-10-389, "Defense Supplier Base: DoD Should Leverage
Ongoing Initiatives in Developing Its Program to Mitigate Risk of
Counterfeit Parts" dated February 24, 2010 (GAO Code 120802). Detailed
comments on the report recommendations are enclosed.
The Department concurs with the draft report's recommendation to
leverage existing anti-counterfeiting initiatives and practices used
by DoD Components and industry to establish guidance that includes a
clear and consistent definition of counterfeit parts and consistent
practices for preventing, detecting, reporting, and disposal of
counterfeit parts. The Department also concurs with the
recommendations to disseminate the guidance to its Components and
defense contractors as well as analyze the knowledge and data
collected to best target and refine counterfeit part risk mitigation
strategies.
The Department appreciates the opportunity to comment on the draft
report. Technical comments are provided separately. For further
questions concerning this report, please contact Mr. Lee Plowden, 703-
604-0098 x137, email lee.plowden@osd.mil.
Sincerely,
Signed by:
Alan F. Estevez:
Principal Deputy:
Enclosure: As stated:
GAO Draft Report Dated February 24, 2010:
GAO-10-389 (GAO Code 120802):
"Defense Supplier Base: Dod Should Leverage Ongoing Initiatives In
Developing Its Program To Mitigate Risk Of Counterfeit Parts"
Department Of Defense Comments To The GAO Recommendations:
Recommendation 1: The GAO recommends that the Secretary of Defense
leverage existing anti-counterfeit initiatives and practices currently
used by DOD components and industry to establish guidance that
includes a consistent and clear definition of counterfeit parts and
consistent practices for preventing, detecting, reporting, and
disposing of counterfeit parts.
DOD Response: Concur. DOD has organized specific teams to address
counterfeit issues in electronic systems and components, as well as,
the logistics supply chain. These teams will leverage existing anti-
counterfeit initiatives and practices used by its Components and
industry to establish guidance that includes a consistent and clear
definition of counterfeit parts and consistent practices for
preventing, detecting, reporting, and disposing of counterfeit parts.
The estimated completion date for establishing sound guidance with a
clear and consistent counterfeit parts definition and consistent
practices is Dec 2010.
Recommendation 2: The GAO recommends that the Secretary of Defense
disseminate this guidance to all DOD components and defense
contractors.
DOD Response: Concur. DOD will disseminate anti-counterfeit guidance
to all of its Components and defense contractors that includes a
consistent and clear definition of counterfeit parts and consistent
practices for preventing, detecting, reporting, and disposing of
counterfeit parts. The estimated completion date is Feb 2011.
Recommendation 3: The GAO recommends that the Secretary of Defense
analyze the knowledge and data collected to best target and refine
counterfeit-part risk mitigation strategies.
DOD Response: Concur. DOD will analyze all knowledge and data it
collects on counterfeit parts to best target and refine risk
mitigation strategies. The estimated completion date is October 2010.
[End of section]
Appendix IV: Comments from the Department of Commerce:
United States Department Of Commerce:
Deputy Under Secretary for Industry and Security:
Washington, D.C. 20230:
March 12, 2010:
Mr. John Neumann:
Assistant Director, Acquisition and Sourcing Management:
Government Accountability Office:
441 G St., NW:
Washington, DC 20548:
Dear Mr. Neumann:
This letter is in response to a request from Relva Martin for comments
on the draft report entitled "Defense Supplier Base; DOD Should
Leverage Ongoing Initiatives in Developing Its Program to Mitigate
Risk of Counterfeit Parts" (GAO-10-389).
After reviewing the material, Commerce has no concerns with the report
and concurs with GAO's findings for executive action. In fact, the
recommendations are in line with a more comprehensive report issued by
the Department of Commerce's Bureau of Industry and Security in
January 2010, "Defense Industrial Base Assessment: Counterfeit
Electronics." A copy of the report is enclosed.
If you need further assistance, please contact Mark Crace at (202)482-
8093 or via e-mail at mcrace@bis.doc.gov.
Sincerely,
Signed by:
Daniel O. Hill:
[End of section]
Appendix V: GAO Contact and Staff Acknowledgments:
GAO Contact:
Belva Martin, (202) 512-4906 or martinb@gao.gov:
Staff Acknowledgments:
In addition to the individual named above, key contributors to this
report were Anne-Marie Fennell, Director; John Neumann, Assistant
Director; Lisa Gardner; Kevin Heinz; Robert Bullock; MacKenzie Cooper;
Jonathan Mulcare; Josie Sigl; Sylvia Schatz; and Jean McSween.
[End of section]
Footnotes:
[1] For purposes of this report, we are using the term "counterfeit"
to refer generally to instances in which individuals or companies
knowingly misrepresent the identity or pedigree of a part.
[2] SAE International is a member organization that shares information
and exchanges ideas for advancing the engineering of mobility systems.
SAE Aerospace Standard 5553 defines a counterfeit part as a suspect
part that is a copy or substitute without legal right or authority to
do so or one whose material, performance, or characteristics are
knowingly misrepresented by a supplier in the supply chain.
[3] PDREP is an automated information system managed by the Navy to
track quality, including part deficiencies, and is used by the Navy,
DLA, the Defense Contract Management Agency (DCMA), Army ground
forces, and the Marine Corps. JDRS is an automated information system
that Naval Air Systems Command developed for reporting of part
deficiencies for aeronautics. JDRS users include Naval Air Systems
Command, Army Space and Missile Defense Command, the Air Force, the
Coast Guard, and DCMA.
[4] A part that is found to be deficient is not necessarily
counterfeit as counterfeit parts involve the intent to misrepresent
the identity or pedigree of a part.
[5] The terms included in the list were "bogus," "counterfeit,"
"deliberate," "falsify," "fraud/fraudulent," "illegal," "intentional,"
"knowingly," "misrepresent," "piracy," and "unauthorized product
substitution."
[6] The policy letter uses the term "nonconforming," which has the
same meaning in DOD as the term "deficient."
[7] Department of Defense, Military Standard (MIL-STD)-1556B,
Government/Industry Data Exchange Program, Contractor Participation
Requirements (Feb. 24, 1986).
[8] According to the GIDEP Deputy Program Manager, this 15-day delay
is in addition to the time--which can range from 30-180 days--that the
DOD logistical support providers and contractors spend gathering
evidence before reporting the suspect supplier to GIDEP.
[9] U.S. Department of Commerce, Defense Industrial Base Assessment:
Counterfeit Electronics (Washington, D.C., January 2010). In
conducting its assessment, the Department of Commerce defined a
counterfeit electronic parts as one that is not genuine because it: is
an unauthorized copy; does not conform to original OCM design, model,
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; or has incorrect or false
markings or documentation, or both.
[10] "Fake Parts are Seeping Into Military Aircraft Maintenance
Depots," Inside the Air Force (Mar. 28, 2008) and "Dangerous Fakes:
How Counterfeit, Defective Computer Components from China Are Getting
into U.S. Warplanes and Ships," Business Week (Oct. 2, 2008).
[11] The Air Force Material Command is also developing a handbook that
aims to educate its workforce on what a counterfeit part is, steps to
be taken to prevent counterfeit parts from entering the supply chain,
detection methods and ways to identify counterfeit parts that have
already entered the supply chain, and what reporting is to be
accomplished when counterfeit parts are identified. However, the
command is delaying the distribution of this handbook to potentially
be incorporated into a departmentwide handbook.
[12] Federal Acquisition Regulations, Part 9.103.
[13] In April 2009, SAE International issued Aerospace Standard 5553,
"Counterfeit Electronic Parts; Avoidance, Detection, Mitigation and
Disposition."
[14] SAE International officials told us that they plan to expand the
aerospace standard to include other sectors such as the automotive
industry.
[15] The Center for Advanced Life Cycle Engineering is an electronic
products and systems research center focused on electronics
reliability and is dedicated to providing a knowledge and resource
base to support the development of competitive electronic components,
products, and systems.
[16] The International Chamber of Commerce established the Business
Action to Stop Counterfeiting and Piracy to take a leading role in the
fight against counterfeiting.
[17] The Electronic Industry Citizenship Coalition mission is to
promote an industry code of conduct for global electronics supply
chains.
[18] The International Anti-Counterfeiting Coalition aims to promote
enforcement standards of the intellectual property owned by its
members whether copyrights, trademarks, or patents.
[19] Our review focused on DOD's knowledge of the aerospace, ground
vehicle, and missile defense sectors of the defense supplier base in
part given congressional interest in these sectors.
[20] GAO, Defense Acquisitions: Assessments of Selected Weapon
Programs, [hyperlink, http://www.gao.gov/products/GAO-09-326SP]
(Washington, D.C.: Mar. 30, 2009).
[End of section]
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