Presented at October 1, 2009 Counterfeit Workshop

1. October 1, 2009
Counterfeits and the U.S. Industrial Base
Brad Botwin
Director, Industrial Studies
Office of Technology Evaluation
JPL Counterfeits Workshop

2. Office of Technology
Evaluation (OTE)
MISSION:
OTE is the focal point within
BIS for assessing:
 The effectiveness of export
controls
 The capabilities of the U.S.
industrial base to support the
national defense

3. Beyond Gucci and Hollywood
 Groundbreaking focus on national security
 Grounding of aircraft in-theater
 Defense, critical infrastructure, and other government
programs impacted
 Sponsored by Naval Air Systems Command
 Comprehensive study
 Discrete electronic components + microcircuits
 5 surveys (manufacturers, assemblers, distributors,
contractors, DOD)
 Interviews, site visits

4. Counterfeit Electronics Study
-Survey Scope and Objectives
 Scale and scope
 Past problems and impact
 Internal procurement policies and protocols
 Testing, inspection, and inventory
management
 Post-identification procedures
 Industry and government best practices

5. Organizations Encountering Counterfeit Electronics
Type of Encountered No Counterfeit
Total
Company/Organization Counterfeits Incidents
Discrete
Original Electronic 18 21 39
Component Components
Manufacturers
Microcircuits 24 20 44
Authorized
10 35 45
Distributors
Distributors
Unauthorized
44 9 53
Distributors
Board Assemblers 11 21 32
Prime/Sub Contractors 31 90 121
DLA
3 16 19
Department Organizations
of Defense Non-DLA
11 23 34
Organizations
Total 152 235 387
Source: U.S. Department of Commerce, Office of Technology Evaluation,
Counterfeit Electronics Survey, August 2009.

6. Total Counterfeit Incidents: OCMs,
Distributors, Board Assemblers, Prime/Sub
Contractors 2005 - 2008
10,000
9,356
9,000 8,600
8,139
8,000
7,000
6,000
142%
5,000
3,868
4,000
3,000
2,000
1,000
0
2005 2006 2007 2008 (est.)

7. Types of Counterfeit Incidents (2005-2008)
Type of Product 2005 2006 2007 2008 (est.)
Industrial/Commercial 1739 4860 3841 2839
Consumer 154 345 398 531
High Reliability – Industrial 49 81 164 488
Qualified Manufacturers List
49 77 161 261
(QML)
Critical Safety 42 63 93 277
Qualified Products List
16 39 111 144
(QPL)
High Reliability – Medical 1 24 58 105
ITAR Controlled 15 10 67 19
Commercial Aviation 9 15 17 27
High Reliability – Automotive 2 6 8 25
Generalized Emulation
0 0 0 2
Microcircuits (GEM)

8. Percent of Counterfeit Incidents Involving
In/Out of Production Products 2005 - 2008
100%
90%
34%
80% 42% 43% 43%
70%
60%
50%
40%
66%
30% 58% 57% 57%
20%
10%
0%
2005 2006 2007 2008 (est.)
In Production Out of Production

9. In
dep
In en
te de
rn
0%
20%
40%
60%
80%
100%
et nt Bro
ke
Ex Dis
A cl tr rs
ut us ib
64%
iv ut
ho
riz e or
s
So
ed ur
46%
Di ce
st s
C rib
on ut
tr or
ac Ind s
tM iv
an idu
uf a
ac l s
Pr tu
im re
e/ rs
Su
b O
14% 13% 12% 12%
C
on EM
tr
ac
8%
to
rs
O
7%
O D th
O
th D er
er De
3%
U
S po
ts
Fe
de
1%
U
S ra OC
St lA M
* Only includes companies that encountered counterfeits
at ge
1%
e/ nc
Lo ie
ca s
Who is Selling Counterfeits?*
lG
1%
ov D
er LA
nm
1%
en
ts
1%

10. Inventory Control and Return Policies
Circuit
Prime/Sub
OCMs Distributors Board
Contractors
Assemblers
Accept Returns From
96% 100% 84% 81%
Customers
Buy Back Excess
Inventory From 25% 46% 16% 7%
Customers
Restock/Re-circulate
Returns or Excess
61% 54% 13% 21%
Inventory From
Customers
Have Cases of Individual
Customers Returning 17% 31% 3% 2%
Counterfeits

11. Percent of Companies Performing
Inventory Audits for Counterfeits
75%
60%
47%
45%
30%
19% 19%
17% 17% 16%
15%
0%
ns
rs
ns
s
rs
s
er
M
to
io
to
io
bl
C
ac
at
at
bu
em
O
iz
iz
tr
tri
an
on
an
ss
is
rg
rg
C
A
D
O
O
b
rd
Su
LA
LA
oa
e/
-D
B
D
im
on
Pr
N

12. Percent of Distributors Purchasing Parts
from Different Suppliers
Authorized Unauthorized
Type of Supplier
Distributors Distributors
OCMs 98% 79%
Authorized Distributors 78% 91%
Independent Distributors 47% 94%
Brokers 29% 92%
OEMs 11% 85%
Internet-Exclusive Sources 27% 58%
Contract Manufacturers 7% 66%
DOD Depots 2% 11%
DOD Manufacturing Centers 2% 9%
DOD Surplus 4% 4%
DLA 2% 2%

13. How Companies Are Uncovering Counterfeits
(2008 est.)
Returned as Defective 1261
Discovered Defective Parts/Poor Performance 1116
Markings, Appearance, Condition of Parts 929
Notification by OCM 835
Testing 776
Customer Suspected Part Was Counterfeit 693
Notification by US Customs 604
Self-Initiated Investigations 341
Notification by OEM 180
Returned as Wrong Merchandise 50
Absence of Original Documentation 15
Returned as Excess Inventory 8
Notification by GIDEP 6
Notification by DLA 6
Notification by Other US Government Agencies 3
Notification by Non-US Government Agency 3
Other 2
Unauthorized Overrun by Contract Manufacturers
0 200 400 600 800 1000 1200 1400

14. Top Authorities Notified After Counterfeit
Incidents
None at All 51%
Government-Industry Data Exchange Program (GIDEP) 14%
Defense Logistics Agency (DLA) 11%
State/Local Authorities 8%
Customs & Border Protection 7%
Federal Bureau of Investigation (FBI) 6%
Defense-Related Investigative Services (e.g., DCIS, NCIS, etc.) 5%
Federal Aviation Administration (FAA) 5%

15. Internal Actions Taken to Prevent Infiltration
of Counterfeits
Circuit
Distributor Prime/Sub
Action OCMs Board DOD
s Contractors
Assemblers
Performing screening and testing on inventory 27% 8% 41% 37% 21%
Training staff on the negative economic and safety
31% 65% 28% 36% 15%
impacts of counterfeit products
No internal actions taken 35% 19% 34% 32% 72%
Revising procurement procedures to more carefully
screen/audit/evaluate authorized returns from 35% 76% 25% 23% 11%
customers
Revising company procedures for disposal of
34% 44% 22% 17% 11%
“seconds,” defective parts, and production overruns
Other 8% 12% 9% 17% 0%
Revising procurement procedures to reduce purchases
- - 13% 4% 11%
from independent distributors and brokers
Embedding new security measures in existing product
12% 4% 3% 2% 2%
lines
Adding security markings to existing inventory 12% 0% 0% 2% 8%

16. External Actions Taken to Prevent Infiltration
of Counterfeits
Circuit Board Prime/Sub
Action OCMs Distributors
Assemblers Contractors
No external actions taken 35% 29% 59% 69%
Tightening contractual obligations of contract
manufacturers with regard to disposal of “seconds,” 29% 11% 3% 12%
defective parts, and overruns
Educating customers/suppliers on the negative
31% 52% 16% 9%
economic and safety impacts of counterfeit products
Educating customers about risks associated with grey
40% 57% 28% 8%
market products
Other 8% 5% 3% 9%
Referring customers to companies that could identify
suitable substitute products or re-engineer system 19% 30% 25% 6%
components
Referring customers to authorized after-market
27% 21% 9% 5%
manufacturers
Prohibiting authorized distributors from buying back
31% 10% 6% 5%
excess inventory on the grey market
Prohibiting authorized distributors from buying back
6% 5% 0% 3%
excess inventory from their customers

17. Counterfeit Electronics Study
-Findings
 Lack of dialogue between all organizations in the
U.S. defense supply chain
 Assumption that others are testing parts
 Lack of traceability in the supply chain
 Insufficient chain of accountability within
organizations
 Record keeping of counterfeit incidents is limited
 Few know what USG authorities to contact

18. Counterfeit Electronics Study
-Findings
 Few are aware of legal requirements and liabilities
 Stricter testing protocols and quality control practices
are needed
 Most DOD organizations do not have policies to
prevent supply chain infiltration
 No type of company or organization has been
untouched by counterfeit electronic parts
 Ultimately, everyone must work together to solve the
problem of counterfeit parts

19. Counterfeit Electronics Study
-Best Practices
 Establish clear written policies and procedures
 Increase internal/external communication
 Institute counterfeit part training programs
 Ensure physical destruction of defective parts
 Inspect all returns and buy-backs to verify
authenticity

20. Counterfeit Electronics Study
-Best Practices
 Buy parts from OCMs and authorized distributors
when possible
 Establish lists of trusted and unapproved suppliers
 Implement contract requirements for counterfeit
avoidance policies and practices
 Scrutinize suppliers with cheap prices/short lead times
 Require traceability of parts back to OCMs

21. Counterfeit Electronics Study
-Best Practices
 Verify parts meet purchase order requirements and
documentation (inspections/testing)
 Establish strict inventory controls
 Remove counterfeits from regular inventory; quarantine
 Maintain internal database to track counterfeits
 Report counterfeits to law enforcement and industry
associations/databases

22. Counterfeit Electronics Study
-Recommendations for USG
 Establish a Federal reporting mechanism and database
 Clarify FAR and DFAR procurement requirements
 USG should issue clear legal guidance
 Increase inspections, coordination, and prosecutions
 Address deficiencies related to electronic parts
information, standards, and training
 Develop international agreements
 Address procurement obsolescence issues

23. Keys to Success
- Communication
-Documentation
U.S. Defense Electronic -Notification
Parts Supply Chain
Original Component Manufacturers (OCM)
parts
Authorized Distributors Independent Distributors and Brokers
parts
Circuit Board Assemblers Defense Prime Contractors
and Subcontractors
Parts, subsystems, and systems
Department of Defense Depots and Installations

24. Counterfeit Electronics Study
-What’s Being Done Since Surveys
 Defense Supply Center Columbus procedural changes
 DOD Action Plan
 SAE Standard AS5553
 NASA quality assurance/counterfeit avoidance training
 Federal Acquisition Regulation (FAR) changes
 Anti-Counterfeit Trade Agreement negotiations
 Other…

25. BIS/OTE Contacts
 Brad Botwin
 Director, Industrial Studies
 Office of Technology
Evaluation
 202-482-4060
 bbotwin@bis.doc.gov
 www.bis.doc.gov