U.S. Senators Laud MDA as Model for Avoiding Counterfeit Parts

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WASHINGTON — U.S. lawmakers are turning to the Missile Defense Agency (MDA) as a possible model for how the U.S. Defense Department can stop counterfeit electronic parts from entering the defense supply chain.

At a Nov. 8 hearing, MDA Director Lt. Gen. Patrick O’Reilly told the Senate Armed Services Committee the steps he has taken to eliminate counterfeit electronics on missile defense systems.

Soon after he took over MDA in 2008, O’Reilly looked into the origin of counterfeit parts after they were found in a missile defense telemetry system.

“We found that all counterfeit parts were coming from independent distributors,” O’Reilly said.

He said MDA was unable to certify 61 percent of the independent distributors researched. O’Reilly said these distributors were deemed moderate- to high-risk because they could not produce a sufficient paper trail for the origins of their parts.

The Senate Armed Services Committee recently completed its investigation, which showed most of the counterfeit electronics that make their way into U.S. military systems originate in China.

After this discovery, the MDA director signed a ban in 2009 that prohibited all contractors from going to independent distributors without first coming to MDA for permission. O’Reilly said the best way to eliminate counterfeit parts is to eliminate their source, and MDA does this by limiting the use of independent parts distributors.

Contractors working with MDA are limited to buying parts from the original manufacturer or authorized distributors. If this is not an option, the contractor has to prove to MDA why it needs to go to an independent distributor and also must agree to rigorously test those parts.

Sen. Carl Levin (D-Mich.), the committee’s chairman, and Sen. John McCain (R-Ariz.), the panel’s ranking member, said they plan to review MDA’s procedures when they draft new legislation to be included in the 2012 defense authorization act.

Levin and McCain expressed concern that counterfeit parts will lead to operational failures, which could risk service members’ lives. They are also frustrated that the government continues to pick up the costs of replacement parts when counterfeits are discovered.

O’Reilly told them it does not matter if a contract is cost-plus or fixed­price if it includes a clause that makes it clear the contractor has to pick up replacement costs if it buys parts from an unauthorized distributor.

Levin said the MDA’s model should be followed by the military services and the rest of the Defense Department.

“We’d appreciate your input into any legislative fixes that need to be made between now and the next week or two, when hopefully we’ll take up the [defense authorization bill],” McCain said.

The Nov. 8 hearing came the day after Levin and McCain released the results of their monthslong investigation. Committee staff traced the Defense Department supply chain back to its start for more than 100 counterfeit parts and found that 70 percent of them originated in China.

“Nearly 20 percent of the remaining cases were tracked to the U.K. and Canada — known resale points for counterfeit electronic parts from China,” a background memo from the committee said.

According to a January report from the Commerce Department, counterfeit electronics in the defense industry are on the rise. In 2005, there were 3,868 incidents detected, compared with 9,356 in 2008, according to the report.

Levin and McCain want the Pentagon to better enforce laws that protect the Defense Department supply chain, but they admit the laws do not go far enough.

The Senate panel is considering adding language to the defense authorization act for 2012 that would hold contractors responsible for the costs of replacing a part that is discovered to be counterfeit, Levin said at a Nov. 7 press briefing.

Levin said that under cost-plus contracts, it is difficult to make the contractor pay for a replacement part unless the government can prove the contractor bought the part knowing that it was counterfeit. Today, the multimillion-dollar price tag of replacing these parts more often falls to the government and the taxpayer, he said.

He would like to see the Pentagon use fewer cost-plus contracts and more fixed-price ones, where bargaining above the negotiated price is limited. Levin said this could help motivate companies to take stronger steps to avoid buying counterfeit parts.

The life of a counterfeit electronic part is long. It often begins as electronic waste, shipped from the United States and the rest of the world to Hong Kong. From there, the raw material makes its way to China, where it is broken down, “burned off of old circuit boards, washed in the river, and dried on city sidewalks,” according to the Senate report. Part of this process includes removing any identifying marks, including date codes and part numbers.

Once the old part is made to look brand new, it is shipped to the Chinese city of Shenzhen, which Levin described as the “epicenter” of counterfeit electronics. There, the part can be sold openly in the markets or on the Internet.

From China, the counterfeit part makes its way through the Defense Department supply chain, often passing through four or five subcontractors before a prime contractor has integrated it onto a weapon system.

The committee found that the Defense Department is particularly vulnerable to counterfeit electronics, because the life of a weapon system long outdates the production of a specific commercial electronic part. “An electronic part may be manufactured for two years, while a defense system it is used on may be in service for more than two decades,” according to the Senate report.

Quoting the director of Defense Department’s Microelectronics Activity Unit, the Senate report says, “The defense community is critically reliant on a technology that obsoletes itself every 18 months, is made in unsecure locations and over which we have absolutely no market share or influence.”

 

Three Examples

During the Nov. 7 press briefing, committee staff members highlighted three examples of counterfeit parts making their way into and through the Defense Department supply chain.

In the first instance, Raytheon notified the U.S. Navy Sept. 8 that counterfeit transistors had been found on a night vision, or FLIR, system used on Navy SH-60B helicopters. If the FLIR system were to fail, the Navy said, the helicopter would be unable to conduct surface warfare missions using Hellfire missiles. The committee traced the transistors back to Huajie Electronics in Shenzhen. From there, the parts passed through five companies before they got to Raytheon.

The second example involved the Air Force’s C-27J aircraft, for which L-3 Communications is the prime contractor. On Sept. 19, L-3 told the Air Force that 38 video memory chips installed on the plane’s display units were suspected to be counterfeit. Again, the parts originated in Shenzhen with a company called Hong Dark. From there, they were sold to Global IC Trading Group, which sold them to L-3 Displays, a business unit of L-3 Communications. According to the Senate investigation, L-3 first learned Hong Dark was the source of counterfeit parts in October 2009. “In total, the committee identified nearly 30 shipments, totaling more than 28,000 parts from Hong Dark to Global IC Trading Group that were subsequently sold to L-3,” the report says.

The final example the committee gave to reporters was on the Navy’s P-8A Poseidon, a Boeing 737 that has been modified to include anti-submarine capabilities. Boeing alerted the Navy program office Aug. 17 that an ice detection module contained a “re­worked part that should not have been put on the airplane originally and should be replaced immediately.” After a failure of that subsystem on the flight line, BAE Systems, which makes the ice detection modules, discovered many of the system’s parts were not new.

This time, the committee traced the part to A Access Electronics in Japan, a company affiliated with A Access Electronics in Shenzhen. The company in Japan sold it to Abacus Electronics in Florida, which wired payment to a bank in Shenzhen. Abacus sold the part to Tandex Test Labs, which BAE had hired to “source the parts and screen them for signs of counterfeiting,” according to the Senate report.

The Senate committee staff found that Tandex screened the first 50 and sent the remaining 250 to BAE without inspecting them.

In the case of the C-27J and the P-8A, the committee found the companies in question did not notify the government early enough about the suspected parts.