Background

The DoD is supported by a network of global suppliers and, in fiscal year 2014, managed over 4.7 million parts that are used in, for example, communication and weapon systems, at a cost of over $96 billion. The existence of counterfeit parts in the DoD supply chain can delay missions, affect the integrity of systems, and ultimately endanger the lives of service members. Almost anything is at risk of being counterfeited, including microelectronics used in aircraft and missile guidance systems, fasteners used in shipboard applications, and materials used in engine mounts. In 2013, DoD created a Counterfeit Prevention Policy for department-wide action to mitigate the risk of counterfeit parts, which included steps to prevent the introduction of counterfeit materials into the supply chain, as well as testing and other means by which to detect materials that may have already entered it. DoD also issued regulations, as required by the 2012 National Defense Authorization Act, requiring that its personnel and contractors report suspected counterfeit electronic parts to a cooperative activity between government and industry for sharing technical information called the Government-Industry Data Exchange Program (GIDEP)—a program that allows government and industry participants to share information on nonconforming parts, including suspect counterfeit parts, via a web-based database—and that contractors develop and maintain systems to detect and avoid counterfeit electronic parts.

The reliance on that large network of global suppliers, in both the acquisition phase and throughout a system’s operational and sustainment phases—provides multiple opportunities for the introduction of counterfeit parts into these systems. DoD contractors rely on thousands of subcontractors and suppliers, including the original component manufacturers that assemble microcircuits and the mid-level manufacturers subcontracted to develop the individual subsystems that make up a complete system or supply.  

One major criminal case from the early 2000s involved counterfeit helicopter parts. A person sold flight-critical rubber seals intended for UH-60 (Army), SH-60 (Navy) and HH-60 (Air Force) helicopters. The person was required by contract to purchase the parts from a DoD-approved supplier, but instead purchased them from an unapproved company and mislabeled them, giving the appearance that the parts came from the approved supplier. The substandard parts may have failed when installed, placing the lives of U.S. military service members at risk.

Another example is a scheme perpetrated by a company that imported thousands of counterfeit integrated circuits (ICs) from unapproved DoD suppliers. From 2007 to 2012 the company sold these counterfeits to U.S. customers, one of which was the Navy, who unknowingly purchased the counterfeits for use in nuclear submarines. These ICs contained counterfeit marks from major electronics manufacturers. While the company stated the ICs were new products manufactured in Europe by approved suppliers, product testing by the Navy revealed the data code had been altered to hide the fact that they were refurbished and branded with counterfeit marks.

While the true extent and impacts of counterfeit parts can only be estimated, there is growing consensus that it is accelerating and increasingly difficult to contain. The actual scope of counterfeiting in the DoD supply chain, similar to other types of counterfeiting and crime generally, is likely greater than what is currently known, making prevention, detection and reporting vital.  

Counterfeit Parts and the DoD Supply Chain

There has been no known loss of life or catastrophic mission failure due to counterfeit parts; however, it requires continued vigilance on the part of both government and industry to ensure that this remains the case. Consider the following:

• Counterfeit parts have implications for every stage of the DoD supply chain, from plan, source, and make, to deliver and return
• Intrusion can happen at any level (system, sub-system, component, sub-component)--and intervention requires more than just contract action
• A single micro-circuit can impact multiple weapon systems and Foreign Military Sales (FMS) partners; for example, one individual National Stock Number (NSN) item can support multiple weapon systems within and beyond DoD

DoD takes a holistic risk-based approach to counterfeit prevention across the entire acquisition process and product life-cycle, including actions such as:

• Strengthening procurement processes
• Partnering with industry to develop/adopt counterfeit prevention standards
• Increasing workforce awareness through counterfeit prevention training
• Detecting counterfeit parts through materiel inspection and testing
• Reporting counterfeit occurrences in GIDEP and monitoring trends
• Proactively managing obsolescence throughout a weapon system's life cycle

Counterfeit Prevention 

DoD published DoD Instruction (DoDI) 4140.67,  DoD Counterfeit Prevention Policy, which:

• Establishes risk-based approach to counterfeit prevention
• Provides procurement guidance for critical materiel
• Directs application of authentication technologies
• Requires reporting of suspect counterfeit materiel within 60 days

DoD issued Defense Federal Acquisition Regulation Supplement (DFARS) rule 2012-D055, Detection and Avoidance of Counterfeit Electronic Parts, which:

• Implements counterfeit parts provisions of both FY12 National Defense Authorization Act (NDAA) Sec. 818 and FY13 NDAA Sec. 833
• Establishes counterfeit detection and avoidance system criteria for use by Cost Accounting Standards (CAS) covered contractors (annual contract value of $25M or greater)

DoD policy requires Item Unique Identification (IUID) marking for critical materiel identified as susceptible to counterfeiting to enable authoritative life cycle traceability and authentication. DoD also maintains a zero-tolerance policy for mission-critical electronic parts and electronic parts that could impact human safety. While there may be cost implications for the Defense Industrial Base associated with imposing the DFARS rule, the costs in potential weapon systems failures and loss of life is worth the investment. Industry has a direct fiduciary interest in detecting and preventing counterfeit parts from infiltrating their own supply chains and passing those on to customers. DoD actively participates with industry on G19 (electronic counterfeit) and G21 (non-electronic counterfeit) committees to develop and adopt standards. Three industry standards have been adopted by DoD (AS5553A, AS6081, and AS6174). 

Additionally, Defense Standardization Program Office (DSPO) publishes SD-2, DOD Acquisitions: Buying Commercial & Nondevelopmental Items, which offers guidance to both commercial and governmental organizations to address counterfeit parts. The document widens the definition of counterfeit parts by including, "…for example, a used product sold as new, a commercial product sold as military grade, a product stolen from the manufacturer's production line, a product built without authorization from the intellectual property rights holder, or a product containing pure tin, but sold as containing lead." DSPO estimates that as much as 7% of the world's merchandise trade may be faux goods, perhaps accounting for as much as a trillion dollars in economic activity (2004). The SD-2 presents the threat as pervasive, estimating that incidents increased by more than 240 percent in the few years ending in 2008, with up to 80 percent of the counterfeit components originating in China or other Asian nations. As mitigative measures, the DoD suggests using only trusted and proven suppliers, and absent ability to do so, subjecting components from unknown/unproven/untrusted suppliers to more rigorous testing and authentication. Unfortunately, counterfeiting issues are often tied to programs already struggling with Diminishing Manufactures and Materiel Shortages (DMSMS) concerns. Systems with obsolescence problems represent ripe targets – with legacy manufacturers and supply chains no longer available, and procurement personnel continually identifying alternate sources of support.

Ongoing Challenges

A Government Accountability Office (GAO) report from 2010 titled, Defense Supplier Base: DOD Should Leverage Ongoing Initiatives in Developing Its Program to Mitigate Risk of Counterfeit Parts, states that DOD anti-counterfeit efforts were at the time hampered by lack of both a common definition of the term, and a consistent policy and means to identify the scope of the problem within the government. 

Even once common language is clarified, identification and control of counterfeit parts continues to be an issue, as organizations at times are slow to divulge such issues over concerns about image and reputation, legal issues and financial impacts. No matter how the problem of counterfeit parts is defined and scoped, it is clearly an issue of enormous magnitude, one common to both commercial industry and the DoD, and requiring joint mitigative measures. Ultimately, teamwork is required to solve the problem of counterfeit parts. Fortunately, the reports goes on to provide a variety of best practices, categorized for Supply Chain Management (SCM), for manufacturers, for procurement, receipt, storage, testing and administrative processes, etc.

In Mar 2012, Undersecretary of Defense for Acquisition Technology and Logistics (USD(AT&L)) published a memorandum called Overarching DoD Counterfeit Prevention Guidance, identifying counterfeit items as serious threats to safety and operational effectiveness of DoD systems, particularly items such as mission critical components, critical safety items, electronic parts and load-bearing mechanical parts affecting "…system performance or operations, the preservation of life, or safety of operating personnel." Mandated by Congress as part of the 2012 NDAA, this information has been captured and expanded upon in policy in DoDI 4140.67 and DFARS Case 2012–D055. In an effort to maximize safety and mission performance of warfighting systems, the AT&L memorandum stipulated action, to include -

• Ensuring Program Managers (PM) are notified of acquisition sourcing other than original equipment/component manufacturer or duly authorized distributors
• Requiring PMs to fully evaluate risk from counterfeit components, and to implement appropriate countermeasures for mission critical components as part of the Program Protection Plan (PPP)
• PMs or item managers must document risk mitigation measures for other components as part of the program risk mitigation plan or Systems Engineering Plan (SEP)
• Reaffirming requirement to address considerations of DFARS clause 252.246-7003 in certain solicitations and contracts; participate in DoD review of industry standards for anti-counterfeiting, and to address those standards in contracting
• Ensure appropriate participation in GIDEP, including reporting of confirmed or suspected counterfeit items

More on Supply Chain Risk Management

A follow-on 2016 GAO study titled DoD Needs to Improve Reporting and Oversight to Reduce Supply Chain Risk, concluded that the DoD supply chain remains vulnerable to the risk of counterfeit parts—which can have serious consequences. To effectively identify and mitigate this risk, DoD and its defense contractors need data on the existence of counterfeit parts in their supply chain; whether those be suspected or confirmed counterfeit. Three years after GIDEP reporting became mandatory, they found evidence that this system may not be effective as an early warning system to prevent counterfeit parts from entering the supply chain. Further, without proper oversight to ensure the reporting requirement is consistently applied, GAO found that DoD cannot depend on GIDEP data to ensure it is effectively managing the risks associated with counterfeit parts. DoD’s lack of insight into Defense Logistics Agency's (DLA) reporting practices is particularly problematic, given DLA’s key role in procuring parts for the department. Further, without a standardized process for establishing the level of evidence needed to submit suspect counterfeit GIDEP reports, defense agencies—particularly DLA—and contractors have demonstrated a reluctance to report suspect parts, creating a delay in knowledge-sharing and an opportunity for counterfeit parts to be used in defense products. Also, DoD needs to be sure that information in GIDEP about suspect counterfeit parts is reaching industry participants whenever possible, but currently lacks necessary guidance to ensure this occurs. The bottom line for both industry and governmental organizations, particularly the DoD, is that active counterfeiting defense, including use of joint tools such as GIDEP, is essential to winning the war on counterfeiting.

Policies and Procedures

Some DOD agencies and components are developing policies and Standard Operating Procedures (SOP) for counterfeit prevention. In addition to DODI 4140.67 discussed above, here are a few examples: 

• SECNAVINST 4855.20A Counterfeit Materiel Prevention
• Army Regulation (AR) 70-77 Program Protection (Chapters 2, 3, 6)
• GIDEP Suspect Counterfeit Report

Additional resources and references are included below.