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U.S. Senate Panel Targets Counterfeit Electronic Parts

Nov. 7, 2011 - 03:45AM   |  
By KATE BRANNEN   |   Comments
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The U.S. Senate Armed Services Committee is planning to crack down on counterfeit electronic parts, which more often than not originate in China and eventually make their way to U.S. military weapon systems.

The committee, led by Sen. Carl Levin, D-Mich., and Sen. John McCain, R-Ariz., released the results of a months-long investigation on Nov. 7. As part of the investigation, committee staff traced the DoD 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 DoD supply chain, but they also admit those laws don't 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, with many stops along the way. 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 indentifying 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 DoD 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 DoD'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."

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

In the first instance, Raytheon notified the U.S. Navy on Sept. 8 that counterfeit transistors had been found on a night vision or FLIR system used on the Navy's 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 Shenzen. From there, the part passed through five different companies before it 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 part originated in Shenzhen with a company called Hong Dark. From there, it was 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 that 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 airplane that has been modified to include anti-submarine capabilities.

On Aug. 17, Boeing alerted the Navy program office 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.

The Senate committee is schedule to hold a hearing on the subject Nov. 8, when three different panels of witnesses will testify, including the head of the Missile Defense Agency and several industry officials.

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