Counterfeit electronics in supply chain put contractors on the hook

In a day-long Senate Armed Services Committee hearing addressing the issue of counterfeit parts in the U.S. military supply chain, top Capitol Hill officials proposed new rules that would hold contractors responsible for fake electronics destined for U.S. weapons systems.

Sen. John McCain (R-Ariz.), the committee’s ranking Republican, and Sen. Carl Levin (D-Mich.), committee chairman, were among the officials who questioned defense contractors on oversights that allowed the phony parts into the supply chain during the hearing, held Nov. 8. Levin stressed that the counterfeit goods are a “clear and present danger” and a “threat to our troops.”

“There is a flood of counterfeits and it is putting our military men and women at risk and costing us a fortune,” Levin said.

The two senators pledged that they would use the 2012 Defense Authorization Act, which McCain said he hoped would be taken up next week, to modify acquisition rules and make contractors responsible for the costs of replacing the fake parts. The hope is that contractors will implement tougher standards on their suppliers.

McCain said that encouraging small businesses to operate in the U.S. military supply chain has enabled the entry of fraudulent companies and parts.

McCain and Levin’s amendment may also include language for a new Pentagon certification process that would scrutinize the suppliers of components for military systems, Levin said.

A month-long congressional investigation yielded at least 1,800 cases of counterfeit electronics in U.S. weapons, with an estimated 1 million parts suspected of infiltrating the supply chain, according to the Washington Post. Counterfeit parts have resulted in millions of dollars in waste and have cost taxpayers heavily once contractors realize the parts must be replaced, the report said.

Brian Toohey, president of the Semiconductor Industry Association, told the committee that counterfeiting costs U.S. companies $7.5 billion per year and represents 11,000 lost jobs in U.S. industry.

Counterfeit parts have been found on at least 7 Air Force aircraft made by Boeing, Lockheed Martin and L-3, according to committee documents, and the Missile Defense Agency has encountered at least 7 incidents of counterfeit parts on its own systems, MDA Director Lt. Gen. Patrick O’Reilly testified.

O’Reilly said MDA has found 800 fake parts on one missile interceptor system, at a cost of over $2 million to replace them.

James Ives, assistant Pentagon inspector general for investigative operations, told the Associated Press via e-mail that the Pentagon’s Defense Criminal Investigative Service is conducting 225 investigations “involving potentially defective or substandard parts and components,” which could involve counterfeit products.

The Government Accountability Office has also been investigating counterfeit parts in DOD platforms, according to Richard Hillman, GAO managing director, forensic audits and investigative service.

“Counterfeit parts – generally those whose sources knowingly misrepresent the parts’ identity or pedigree – have the potential to seriously disrupt the DOD supply chain, delay missions, affect the integrity of weapon systems, and ultimately endanger the lives of our troops,” Hillman testified in a prepared statement. “Almost anything is at risk of being counterfeited, from fasteners used on aircraft to electronics used on missile guidance systems. There can be many sources of counterfeit parts as DOD draws from a large network of global suppliers.”

Hillman detailed GAO efforts in which the organization created a fictitious company that bought military-grade electronic parts. So far GAO has purchased 13 parts, seven of which have been tested so far and are suspected to be counterfeit.