Defense Supplier Base: DOD Should Leverage Ongoing Initiatives in Developing Its Program to Mitigate Risk of Counterfeit Parts
Published: 2010-03-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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.
subsections: section_title: Background
paragraphs: 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.
section_title: The Extent of Counterfeit Parts in DOD’s Supply Chain Is Unknown
subsections: section_title: DOD Does Not Have a Common Definition for Counterfeit Parts
paragraphs: 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. 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.
section_title: DOD Databases Do Not Capture Data on Counterfeit Parts
paragraphs: 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)—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. 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. 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 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  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.
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.
section_title: Counterfeit Parts Have Been Found in DOD’s Supply Chain
paragraphs: 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    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    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.
subsections: section_title: Army
paragraphs: 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.
section_title: Navy
paragraphs: 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.
section_title: Air Force
paragraphs: 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.
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.
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. 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.
section_title: DOD Is in the Early Stages of Gathering Information on the Counterfeit Parts Problem
paragraphs: 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—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. 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.
section_title: DOD’s Existing Practices Are Limited in Protecting Its Supply Chain against Counterfeit Parts
subsections: section_title: DOD Relies on Existing Procurement and Quality Control Practices That Are Not Specifically Designed to Address Counterfeit Parts
paragraphs: 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. 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.
section_title: Some DOD Components and Contractors Have Taken Initial Steps to Address Counterfeit Parts
paragraphs: 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. 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.
section_title: A Number of Commercial Initiatives Exist to Mitigate the Risk of Counterfeit Parts in Supply Chains
subsections: section_title: Companies Have Developed Anticounterfeiting Practices to Address Vulnerabilities to Counterfeit Parts
paragraphs: 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.
section_title: Industry Associations Identify and Share Anticounterfeiting Practices
paragraphs: 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. 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.
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. 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. 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. 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.
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.
section_title: Conclusions
paragraphs: 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.
section_title: Recommendations for Executive Action
paragraphs: 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  3.  analyze the knowledge and data collected to best target and refine  counterfeit-part risk-mitigation strategies.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
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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.
section_title: Appendix I: Scope and Methodology
paragraphs: To examine the extent of the Department of Defense’s (DOD) knowledge  of counterfeit parts that have entered its supply chain, 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” 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.
section_title: Appendix II: Examples of Counterfeit Parts in DOD’s Supply Chain
paragraphs: 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.
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: Comments from the Department of Commerce
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: 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.