to improve their business systems and be better prepared for DOD review and approval as will likely be required per NDAA 2012 Section 818(e).

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3 C ounterfeit parts avoidance and detection has emerged as an area of business and legal risk that aerospace and defense (A&D) contractors should incorporate into compliance programs. Section 818 of the National Defense Authorization Act for Fiscal Year 2012 (NDAA 2012) 1 requires the secretary of defense to implement a program to enhance contractor detection and avoidance of counterfeit electronic parts. The implementation of this program must include processes for the review and approval of contractor systems for the detection and avoidance of counterfeit electronic parts and suspect counterfeit electronic parts.? Furthermore, Department of Defense (DOD) processes for the review and approval of contractor systems are to be similar to those established for contractor business systems under Section 893 of the Ike Skelton National Defense Authorization Act for Fiscal Year Though these new counterfeit parts avoidance and detection requirements were developed with DOD in mind, both DOD and foreign defense customers (whether foreign military sale or direct commercial) will benefit 2 as U.S. defense suppliers improve their supply chain security. To the extent that A&D contractors have not already established programs and systems to avoid and detect counterfeit parts, the clear direction of Congress and DOD on this subject compels A&D contractors to establish such a program now. For those A&D contractors that have already implemented programs, current DOD activity in this area provides useful and predictive insights into what DOD will likely require A&D contractors to incorporate as part of their business systems. Incorporation of these changes will now enable A&D contractors to improve their business systems and be better prepared for DOD review and approval as will likely be required per NDAA 2012 Section 818(e). A&D contractors should establish a compliance program for counterfeit parts avoidance and detection that mitigates risk to the business enterprise and aligns with DOD s expectations described within NDAA 2012 Section 818. Though new DOD instructions, implementation guidance, and regulations have not yet been released, industry and 48 Contract Management May 2013

4 ?? U.S. federal government subject matter experts generally agree that the following central tenets should drive effective counterfeit part avoidance and detection practices: Apply supplier preferences for electronic components purchased from original manufacturers or their authorized distributors, Perform due diligence in accordance with recognized industry standards to avoid counterfeits when purchases from sources of supply other than the original component manufacturer and its authorized distribution chain are necessary, and Notify government and industry of suspected counterfeits when they are encountered. 3 The following thoughts are offered for A&D contractors to consider while establishing and implementing a compliance program for counterfeit parts avoidance and detection. NDAA 2012 Section 818(e) Improvement of Contractor Systems for Detection and Avoidance of Counterfeit Electronic Parts Section 818(e) of the NDAA 2012 lists several elements that should be addressed within contractor policies and procedures. Though some have yet to be clearly defined, subsection (c) provides insight into many of these elements and can help guide compliance program development. The elements include: Contract Management May

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The training of personnel; The inspection and testing of electronic parts; Processes to abolish counterfeit parts proliferation; Mechanisms to enable traceability of parts; Use of trusted suppliers;

6 The training of personnel; The inspection and testing of electronic parts; Processes to abolish counterfeit parts proliferation; Mechanisms to enable traceability of parts; Use of trusted suppliers; The reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts; Methodologies to identify suspect counterfeit parts and to rapidly determine if a suspect counterfeit part is, in fact, counterfeit; The design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts; and The flow down of counterfeit avoidance and detection requirements to subcontractors. DOD has been evaluating contractor counterfeit detection and avoidance systems based on requirements of NDAA 2012 Section 818 and key industry standards such as SAE Aerospace Standard AS These evaluations cover purchasing and subcontract management, receiving and inspection, control of nonconforming material, and reporting. Contactors engaged in this assessment activity will gain firsthand insight as DOD devises parameters for formal review and approval of contractor systems in this area. Overarching DOD Counterfeit Prevention Guidance According to inputs received from DOD representatives, the March 16, 2012, memorandum of the Honorable Frank Kendall, acting undersecretary of defense (acquisition, technology, and logistics) on Overarching DOD Counterfeit Prevention Guidance 5 (the DOD Memorandum ) describes much of what new regulations will require. The DOD Memorandum outlines specific actions directed to DOD departments to prevent, detect, remediate, and investigate counterfeiting in the DOD supply chain. Specific areas within the DOD Memorandum that provide insight into areas A&D contractors might consider addressing within their respective compliance programs are as follows. Scope Though the scope of NDAA 2012 Section 818 is specific to electronic parts, the DOD Memorandum states that particular focus will be expected for mission critical components, critical safety items, electronic parts, and loadbearing mechanical parts. It may be reasonable and prudent, then, for A&D contractor emphasis to similarly focus on these elements first and foremost to ensure that DOD primary concerns are addressed and to avoid dissipating resources devoted to the problem on all manner of potential counterfeits. Definitions The DOD Memorandum employs a definition for counterfeit materiel, which may appear in forthcoming regulations. A used item represented as a new item is highlighted as being potentially subject to fraudulent representation procedures. Contract Management May

Though it does not offer a definition for the term trusted supplier, 6 the DOD Memorandum sets forth a clear preference for materiel acquired from the original equipment manufacturer, original

Risk Mitigations In the case of mission-critical components, DOD program managers are expected to implement a risk-based approach described in a guidance document concerning Program Protection

7 Though it does not offer a definition for the term trusted supplier, 6 the DOD Memorandum sets forth a clear preference for materiel acquired from the original equipment manufacturer, original component manufacturer, or an authorized distributor. Risk Mitigations In the case of mission-critical components, DOD program managers are expected to implement a risk-based approach described in a guidance document concerning Program Protection planning, 7 which includes the requirement to evaluate counterfeit risk and implement countermeasures. For other than mission-critical components, where a counterfeit risk warrants action, the program risk management plan or systems engineering plan must document risk mitigation for the item. The contractor s compliance program should include provisions for counterfeit risk mitigation that 1) emphasize purchases from the original manufacturers or authorized distributors, and 2) apply inspection, testing, and authentication 8 when parts are purchased from other than original manufacturers or authorized distributors. Use of Industry Standards Department-level reviews will identify appropriate industry standards for use in contracting requirements. Contractors will likely be expected to apply these standards to suppliers below the prime contract. As will be discussed later in this article, this may present issues for A&D contractors in the near term as there are issues with gaps in standards and with the maturity of certain standards. Notification to DOD of Certain Purchases Contractors can expect a requirement to notify DOD of purchases of critical items from other than original manufacturers or authorized distributors, whether or not a known defect exists or a failure is attributed to the specific item. According to the DOD Memorandum, this requirement is also expected to apply to suppliers below the prime contract. Testing and Verification Requirements Contractors can expect testing and verification requirements from DOD for items identified as having high risk for counterfeit potential 9 and are acquired from suppliers other than an original equipment manufacturer, original component manufacturer, or authorized distributor. According to the DOD Memorandum, this requirement is also expected to apply to suppliers below the prime contract. Reports of Suspected or Confirmed Counterfeit Items Contractors and subcontractors will be expected to report suspected or confirmed counterfeit items via the Government- Industry Data Exchange Program (GIDEP), 10 which will serve as the DOD central reporting Many of you have requested a way to read the full magazine online. The digital edition of CM is your answer. Now you can read the paper copy AND check CM magazine from your computer, ipad, or even your smartphone. The digital edition of CM magazine is not a replacement for the print edition it is a companion online edition; an extra member benefit available to you at no additional cost. Scan here to access the digital edition! 52 Contract Management May 2013

8 repository. This requires A&D contractors to have processes in place to surface, investigate, and report such findings via the GIDEP. Moreover, for an A&D contractor to receive the full benefits of GIDEP reports of suspected or confirmed counterfeit items, the A&D contractor must also have an internal process that promptly reviews these reports, compares the information contained therein against its own purchases of that part identified and from that source listed, and takes appropriate action when it finds that it may have purchased the part in question and/or items from this same source. Notification of Potential Safety Issues The DOD Memorandum reaffirms the importance of Defense Federal Acquisition Regulation Supplement , Notification of Potential Safety Issues, which requires a contractor to notify the government within 72 hours after discovery of credible information concerning nonconformances and deficiencies for critical safety items. Investigation of Suspected Counterfeit Incidents DOD programs will be expected to investigate incidents confirmed as counterfeit and report them to the appropriate criminal authorities. In the case of suspect counterfeits, the parts should be held until resolution of It is important for DOD personnel and contractors to recognize that while much has been accomplished in recent years toward developing standards for counterfeit parts avoidance and detection, significant gaps remain. the potential nonconformance is complete. Parts that are confirmed to be counterfeit should not be returned to the supplier. Personnel Training DOD is expected to develop and provide training to DOD personnel to address counterfeit avoidance and detection. DOD will likely expect A&D contractors to train their personnel in conjunction with their compliance programs for counterfeit parts avoidance and detection. Industry Standards The DOD Memorandum also describes how DOD will depend on the use of industry standards for anti-counterfeiting and apply those standards in contracting requirements. A&D contractors should, therefore, incorporate the implementation of key anti-counterfeiting standards and supporting documents within their compliance programs. The document that is generally accepted as the central standard describing how contractors should approach counterfeit parts avoidance and detection is SAE Aerospace Standard AS5553. Newer SAE standards have been developed and others are in process, both to support the implementation of AS5553 and to cover counterfeit parts avoidance and detection practices to be applied by lower-level suppliers (e.g., electronic component distributors). While this author has continued concerns that standards recently developed for independent distributors may focus on their limited abilities rather than on those processes and tests that increase the probability of actual detection of counterfeit parts, the introduction of any reasonable national standards would likely result in the reduction of coun- Contract Management May

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10 terfeit parts introduced through this link in the supply chain. It is important for DOD personnel and contractors to recognize that while much has been accomplished in recent years toward developing standards for counterfeit parts avoidance and detection, significant gaps remain. The presence of counterfeit avoidance and detection requirements in quality management system (QMS) standards and associated certification programs would help drive implementation of a robust counterfeit part avoidance program throughout the supply chain and foster alignment with new DOD requirements directed to uppertier contractors. Organizations involved in maintaining key U.S. and international QMS standards, however, have yet to embed these requirements into QMS standards and supplier certification programs. With regard to lower-level standards developed specifically for counterfeit prevention, a standards gap analysis prepared by the author 11 reveals that significant coverage exists for electronic parts, but very limited coverage exists for other parts and materials. Furthermore, standards committees that developed the existing standards for electronic parts are pursuing changes to newly released standards in order to address unresolved issues. In the interim, DOD and A&D contractors will need to bridge implementation gaps by developing or otherwise securing subject matter expertise to select and specify counterfeit prevention practices and to monitor the execution of these practices throughout the supply chain. Closing Remarks As A&D companies establish and implement compliance programs for counterfeit parts avoidance and detection, it is important to recognize that a number of implementation issues and standards gaps exist and will take time for DOD and industry to address and resolve. A&D companies, therefore, must be prepared to adjust their compliance programs for counterfeit parts avoidance and detection as regulations are developed, industry standards mature, and implementation approaches evolve. CM About the Author HENRY LIVINGSTON is an engineering fellow and technical director at BAE Systems Electronic Systems. He has published papers on component reliability assessment methods, obsolescence management, semiconductor industry trends, and counterfeit electronic components. He was recognized at the DMSMS and Standardization 2009 Conference for his leadership role in the detection, mitigation, and reporting of counterfeit parts with the government and industry. He is a member of the SAE International G-19 Counterfeit Electronic Parts Committee and major contributor to SAE AS5553, the industry advisory group to the GIDEP, and the IEEE. Send comments about this article to cm@ncmahq.org. Endnotes 1. Pub. L , Section 818, Detection and Avoidance of Counterfeit Electronic Parts. 2. New regulation to hit price but not demand for U.S. military sales to India analysis, Policy and Regulatory Report (February 13, 2013). 3. See Henry Livingston, Securing the DOD Supply Chain from the Risks of Counterfeit Electronic Components (October 2010), available at com/2012/02/securing_the_dod_supply_ chain_from_the_risks_of_counterfeit_ electronic_components.pdf. 4. SAE International Aerospace Specification AS5553, Counterfeit Electronic Parts; Avoidance, Detection, Mitigation, and Disposition, available at as5553a/. 5. Hon. Frank Kendall, Overarching DOD Counterfeit Prevention Guidance (March 16, 2012), available at Policy%20Documents/Attachments/3321/ Counterfeit-Prevention-Guidance.pdf. 6. See NDAA 2012 Section 818(c)(3). 7. See Protection Plan (PPP) Outline & Guidance (July 2011), Version 1.0, available at osd.mil/se/docs/ppp-outline-and-guidancev1-july2011.pdf. 8. See NDAA 2012 Section 818(c)(3). 9. See the Definitions and Risk Mitigation sections in this article. 10. See See Henry Livingston, Counterfeit Prevention, Detection, and Avoidance Standards Gap Analysis for Hardware Products (February 2013), available at files.wordpress.com/2013/03/stds_gap_ analysis3.pdf. Contract Management May

DOD Anti-Counterfeit Rule Requires Immediate Action --By Craig Holman, Evelina Norwinski and Dana Peterson, Arnold & Porter LLP

Published by Government Contracts Law360 on May 19, 2014. Also ran in Aerospace & Defense Law360 and Public Policy Law360. DOD Anti-Counterfeit Rule Requires Immediate Action --By Craig Holman, Evelina