[Senate Hearing 112-340]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-340
 
                  THE COMMITTEE'S INVESTIGATION INTO 
                  COUNTERFEIT ELECTRONIC PARTS IN THE 
                 DEPARTMENT  OF  DEFENSE  SUPPLY  CHAIN

=======================================================================

                                HEARING

                               before the

                      COMMITTEE ON ARMED SERVICES

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 8, 2011

                               __________

         Printed for the use of the Committee on Armed Services




        Available via the World Wide Web: http://www.fdsys.gov/

                               __________




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                      COMMITTEE ON ARMED SERVICES

                     CARL LEVIN, Michigan, Chairman

JOSEPH I. LIEBERMAN, Connecticut     JOHN McCAIN, Arizona
JACK REED, Rhode Island              JAMES M. INHOFE, Oklahoma
DANIEL K. AKAKA, Hawaii              JEFF SESSIONS, Alabama
E. BENJAMIN NELSON, Nebraska         SAXBY CHAMBLISS, Georgia
JIM WEBB, Virginia                   ROGER F. WICKER, Mississippi
CLAIRE McCASKILL, Missouri           SCOTT P. BROWN, Massachusetts
MARK UDALL, Colorado                 ROB PORTMAN, Ohio
KAY R. HAGAN, North Carolina         KELLY AYOTTE, New Hampshire
MARK BEGICH, Alaska                  SUSAN M. COLLINS, Maine
JOE MANCHIN III, West Virginia       LINDSEY GRAHAM, South Carolina
JEANNE SHAHEEN, New Hampshire        JOHN CORNYN, Texas
KIRSTEN E. GILLIBRAND, New York      DAVID VITTER, Louisiana
RICHARD BLUMENTHAL, Connecticut

                   Richard D. DeBobes, Staff Director

               David M. Morriss, Minority Staff Director

                                  (ii)




                            C O N T E N T S

                               __________

                    CHRONOLOGICAL LIST OF WITNESSES

The Committee's Investigation into Counterfeit Electronic Parts in the 
                   Department of Defense Supply Chain

                            november 8, 2011

                                                                   Page

Sharpe, Thomas R., Vice President, SMT Corporation and Liberty 
  Component Services.............................................    15
Hillman, Richard J., Managing Director, Forensic Audits and 
  Investigative Service, Government Accountability Office; 
  Accompanied by Dr. Timothy Persons, Chief Scientist, Center for 
  Science, Technology, and Engineering, Government Accountability 
  Office.........................................................    25
Toohey, Brian C., President, Semiconductor Industry Association..    34
O'Reilly, LTG Patrick J., USA, Director, Missile Defense Agency..    72
Kamath, Vivek, Vice President, Supply Chain Operations, Raytheon 
  Company........................................................    83
DeNino, Ralph L., Vice President, Corporate Procurement, L-3 
  Communications Corporation.....................................    86
Charles Dabundo, Vice President and P-8 Poseidon Program Manager, 
  Boeing Defense, Space and Security.............................    90
Tab 1............................................................   129
Tab 2............................................................   130
Tab 3............................................................   131
Tab 4............................................................   133
Tab 5............................................................   135
Tab 6............................................................   137
Tab 7............................................................   138
Tab 8............................................................   140
Tab 9............................................................   141
Tab 10...........................................................   145
Tab 11...........................................................   146
Tab 12...........................................................   147
Tab 13...........................................................   151
Tab 14...........................................................   155
Tab 15...........................................................   156
Tab 16...........................................................   159
Tab 17...........................................................   174
Tab 18...........................................................   175
Tab 19...........................................................   176
Tab 20...........................................................   180
Tab 21...........................................................   184
Tab 22...........................................................   185
Tab 23...........................................................   191
Tab 24...........................................................   195
Tab 25...........................................................   196
Tab 26...........................................................   199
Tab 27...........................................................   201
Tab 28...........................................................   202
Tab 29...........................................................   203
Tab 30...........................................................   205
Tab 31...........................................................   209

                                 (iii)


THE COMMITTEE'S INVESTIGATION INTO COUNTERFEIT ELECTRONIC PARTS IN THE 
                   DEPARTMENT OF DEFENSE SUPPLY CHAIN

                              ----------                              


                       TUESDAY, NOVEMBER 8, 2011

                                       U.S. Senate,
                               Committee on Armed Services,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:34 a.m. in room 
SD-G50, Dirksen Senate Office Building, Senator Carl Levin 
(chairman) presiding.
    Committee members present: Senators Levin, Udall, Hagan, 
Manchin, McCain, Inhofe, Chambliss, Brown, Ayotte, and Collins.
    Committee staff members present: Richard D. DeBobes, staff 
director; and Leah C. Brewer, nominations and hearings clerk.
    Majority staff members present: Joseph M. Bryan, 
professional staff member; Ilona R. Cohen, counsel; Ozge 
Guzelsu, counsel; Richard W. Fieldhouse, professional staff 
member; and Peter K. Levine, general counsel.
    Minority staff members present: David M. Morriss, minority 
staff director; Daniel A. Lerner, professional staff member; 
and Bryan D. Parker, minority investigative counsel.
    Staff assistants present: Kathleen A. Kulenkampff, Brian F. 
Sebold, and Bradley S. Watson.
    Committee members' assistants present: Casey Howard, 
assistant to Senator Udall; Roger Pena, assistant to Senator 
Hagan; Joanne McLaughlin, assistant to Senator Manchin; Jordan 
Baugh, assistant to Senator Gillibrand; Charles Prosch, 
assistant to Senator Brown; Brad Bowman and John Easton, 
assistants to Senator Ayotte; and Ryan Kaldahl, assistant to 
Senator Collins.

       OPENING STATEMENT OF SENATOR CARL LEVIN, CHAIRMAN

    Chairman Levin. Good morning, everybody. Today's hearing is 
a product of the Armed Services Committee's ongoing 
investigation into counterfeit electronic parts in the 
Department of Defense's (DOD) supply chain. We will probably 
hold at least one additional hearing to discuss what the 
Department is doing to keep counterfeit electronic parts out of 
defense systems.
    We have three panels of witnesses today, so I expect that 
the hearing may continue into the afternoon, and I also expect 
that we will break for lunch. This will all be determined by 
how long these first two panels take. We also have a vote 
scheduled, I understand, for 12:15 which also could affect that 
decision.
    I want to thank Senator McCain for his efforts in this 
investigation. I want to thank our staffs, the investigative 
staffs, for their very, very hard work.
    The systems that we rely on for national security and the 
protection of our military men and women depend on the 
performance and reliability of small, highly sophisticated 
electronic components. Our fighter pilots rely on night vision 
systems enabled by transistors the size of paper clips to 
identify targets. Our troops depend on radios and Global 
Positioning Systems (GPS) devices and the microelectronics that 
make them work to stay in contact with their units and to get 
advance warning of threats that may be just around the next 
corner. The failure of a single electronic part could leave a 
soldier, sailor, airman, or marine vulnerable at the worst 
possible time. A flood of counterfeit electronic parts has made 
it a lot harder to have confidence that will not happen.
    In some industries, the term ``counterfeit'' suggests an 
unauthorized fake, a knock-off of an original product. The 
definition of ``counterfeit'' as it relates to electronic 
parts, which has been endorsed by DOD and defense contractors 
alike, includes both fakes and previously used parts that are 
made to look new and are sold as new.
    In March of this year, we announced an Armed Services 
Committee investigation into counterfeit parts in the DOD 
supply chain. During the course of the committee's 
investigation, virtually every one of the dozens of people our 
investigators have spoken with, from defense contractors to 
semiconductor manufacturers, to electronic component brokers--
every one of them has pointed to China, specifically the City 
of Shenzhen in Guangdong Province as the primary source of 
counterfeit electronic parts.
    While this hearing is focused mainly on the national 
security implications of counterfeit electronic parts, the 
rampant theft of U.S. Intellectual Property by Chinese 
counterfeiters also severely impacts our economic security. 
According to the Semiconductor Industry Association (SIA), U.S. 
semiconductor manufacturers employ nearly 200,000 American 
workers. Counterfeiting puts those jobs at risk and robs us of 
American jobs yet to be created. The SIA estimates that 
counterfeiting costs U.S. semiconductor manufacturers $7.5 
billion a year in lost revenue and costs U.S. workers nearly 
11,000 jobs.
    This spring, we attempted to send Armed Services Committee 
staff to mainland China to get a firsthand look at the 
counterfeiting industry. I wrote the Chinese Ambassador to the 
United States informing him that the trip was part of the 
committee's official duties. Shortly after my letter, an 
official at the Chinese embassy told committee staff that if 
the results of the investigation were not positive, it could be 
``damaging to the U.S.-China relationship.'' That is exactly 
backwards. What is damaging to U.S.-China relations is China's 
refusal to act against brazen counterfeiting that is openly 
carried out in China.
    In June, we sent our staff to Hong Kong where a visa is not 
required and the staff again sought entry into mainland China. 
But appeals on our behalf through our most senior diplomats in 
Hong Kong and Beijing fell on deaf ears and our staff was 
refused entry. That refusal only highlights the Chinese 
Government's total lack of transparency and their unwillingness 
to act to stem the tide of dangerous counterfeits produced in 
China that are swamping the market.
    Looking at just a slice of the defense contracting 
universe, committee staff asked a number of large defense 
contractors and some of their testing companies to identify 
cases in which they had found suspected counterfeit parts over 
a 2-year period. They reported 1,800 cases covering a total of 
1 million individual parts. Of those 1,800 cases, we selected 
about 100 to track backwards through the supply chain. So where 
did the trails ultimately lead? The overwhelming majority, more 
than 70 percent, led to China, and with few exceptions, the 
rest came from known resale points for parts that came from 
China.
    Counterfeit parts from China all too often end up in 
critical defense systems in the United States. China must shut 
down the counterfeiters that operate with impunity in their 
country. If China will not act promptly, then we should treat 
all electronic parts from China as suspect counterfeits. That 
would mean requiring inspections at our ports of all shipments 
of Chinese electronic parts to ensure that they are legitimate. 
The cost of these inspections would be borne by shippers, as is 
the case with other types of border inspections.
    I want to describe now how these counterfeits are made and 
why they are so dangerous.
    Much of the material used to make counterfeit electronic 
parts is electronic waste, e-waste, shipped from the United 
States and the rest of the world to China. E-waste is shipped 
into Chinese cities like Shantou in Guangdong Province where it 
is disassembled by hand, sometimes washed in dirty river water, 
and dried on city sidewalks. Once they have been washed, parts 
may be sanded down to remove the existing part number and other 
marks on the part that indicate its quality or performance. In 
a process known as ``black topping,'' the tops of the parts may 
be recoated to hide sanding marks. State-of-the-art printing 
equipment is used to put false markings on the parts showing 
them to be new or of higher quality, faster speed, or able to 
withstand more extreme temperatures than those for which they 
were originally manufactured. When the process is complete, the 
parts are made to look brand new to the naked eye. Once they 
have been through the counterfeiting process, the parts are 
packaged and shipped to Shenzhen or other cities to be sold in 
the markets or to be sold on the Internet.
    One of our witnesses today has described to the committee, 
``whole factories set up in China just for counterfeiting'' and 
counterfeit electronic parts are sold openly from shops in 
Chinese markets.
    This morning, we will hear from Richard Hillman of the U.S. 
Government Accountability Office (GAO), about just how 
pervasive the presence of China-based counterfeiters is online. 
Mr. Hillman will share the preliminary results of the 
investigative work that we asked him to undertake. GAO's 
stunning results not only point directly to China as the source 
of the counterfeiting problem, they show just how far the 
counterfeiters are willing to go for money. GAO investigators 
went out to buy electronic parts that go into defense systems 
and found that not only would companies supply counterfeit 
parts when the GAO sought legitimate parts, suppliers also sold 
GAO investigators, acting undercover, parts that had 
nonexistent part numbers, part numbers that were made up from 
whole cloth by committee staff. All of those sellers that sent 
those parts with nonexistent numbers were in China.
    Now, I am going to go through very quickly a presentation 
of how one of these counterfeit parts made its way through the 
defense supply chain. The SH-60B is a Navy helicopter that 
conducts anti-submarine and anti-surface warfare surveillance 
and targeting support. The SH-60B deploys on Navy cruisers, 
destroyers, and frigates and has a forward-looking infrared 
(FLIR) system, which provides night vision capability. The FLIR 
also contains a laser used for targeting the SH-60B's Hellfire 
missiles.
    On September 8, 2011, the Raytheon Company sent a letter to 
the U.S. Naval Supply Systems Command alerting the Navy that 
electronic parts suspected to be counterfeit had been installed 
on three electromagnetic interference filters installed on FLIR 
units delivered by Raytheon. Raytheon only became aware of the 
suspect counterfeit, by the way, after being alerted by our 
committee's investigation. According to the Navy, the failure 
of an electromagnetic interference filter could cause the FLIR 
to fail. The Navy also told the committee that an SH-60B could 
not conduct surface warfare missions involving Hellfire 
missiles without a reliable, functioning FLIR. One of the FLIRs 
was sent to the USS Gridley in the Pacific fleet.
    So how did a suspect counterfeit part end up in a night 
vision and targeting system intended for a Navy helicopter in 
the Pacific fleet? These filters were sold to Raytheon by a 
company called Texas Spectrum Electronics. This is the map we 
are showing you about the path of these counterfeit parts. That 
is a defense subcontractor in Texas. Those three FLIRs contain 
transistors that Texas Spectrum bought in 2010 from a company 
called Technology Conservation Group (TCG). TCG, it turns out, 
is both an electronics recycling company and an electronics 
distributor. The transistors at issue were mixed in among 72 
pounds of miscellaneous excess inventory that a Massachusetts 
company called Thomson Broadcast sent to TCG as, ``e-scrap.'' 
According to TCG, the parts arrived in what appeared to be the 
original packaging. So TCG sold the transistors as new and 
unused parts.
    Now, where did Thompson Broadcasting get the parts? They 
bought them from a company called E-Warehouse in California, 
and E-Warehouse? They bought them from Pivotal Electronics, an 
electronics distributor in the UK. We asked Pivotal where they 
bought them and their answer was Huajie Electronics Limited in 
Shenzhen, China.
    The C-27J is a military aircraft used for tactical support 
and to support combat operations. The U.S. Air Force has 
ordered 38 C-27Js, 11 of which have been delivered. Two C-27Js 
are currently deployed now in Afghanistan. The C-27J is 
equipped with display units that provide the pilot with 
information on the health of the airplane, including engine 
status, fuel use, location, and warning messages. The display 
units are manufactured by L-3 Display Systems, a division of L-
3 Communications, and they are manufactured for Alenia 
Aeronautica. Alenia is a subcontractor to L-3 Integrated 
Systems, another division of L-3 Communications and the 
military's prime contractor for the C-27J.
    In November 2010, after a part failed on a fielded 
aircraft, and in internal testing L-3 Display Systems 
discovered that a memory chip used on its display unit was 
counterfeit. L-3 Display Systems had already installed the 
parts on more than 500 of its display units, including those 
intended for the C-27J, as well as the Air Force's C-130J and 
C-17 aircraft and the CH-46 used by the Marines. Failure of the 
memory chip could cause a display unit to show a degraded 
image, lose data, or even go blank altogether. But L-3 
Integrated Systems, the prime contractor to the Air Force, did 
not notify its customer, the Air Force, that the C-27Js were 
affected by the part until September 2011, nearly a year after 
it had been discovered.
    Where did these counterfeit chips come from? The supply 
chain is somewhat shorter in this case, but it started off in 
the same place. L-3 Display Systems bought the parts from 
Global IC Trading Group, an electronics distributor in 
California, which in turn bought the chips from Hong Dark 
Electronic Trade, a company in Shenzhen, China.
    That is not the end of it. In total the committee 
discovered that Hong Dark supplied more than 28,000 electronic 
parts to divisions within L-3 Communications, and at least 
14,000 of those parts have already been identified as suspect 
counterfeit. Neither the committee nor L-3 Communications knows 
whether the remaining 14,000 parts are authentic, and the 
company has not yet identified what military systems they might 
be in.
    Another example. The P-8A Poseidon is a Boeing 737 airplane 
modified to incorporate anti-submarine and anti-surface warfare 
capabilities. Three P-8A flight test aircraft currently are in 
test at the Naval Air Station at Patuxent River, Maryland, and 
the Navy intends to purchase 108 of the aircraft from Boeing.
    On August 17, 2011, Boeing sent a message marked, quote, 
priority critical to the P-8 program office. The message said 
that an ice detection module installed on one of the P-8 test 
aircraft contained a, ``reworked part that should not have been 
put on the airplane originally and should be replaced 
immediately.'' The part at issue is critical to the 
functioning, in other words, of the P-8's ice detection module.
    Boeing first identified a problem with the part in December 
2009 when an ice detection module failed on the company's 
flight line. In that case, the part had literally fallen out of 
its socket and was found rattling around inside the module on 
the airplane. BAE Systems, which manufactures the ice detection 
system for Boeing, investigated the failure. They discovered 
that the part that had fallen out of the socket and dozens of 
other parts from the same lot were not new parts at all. 
Rather, they were previously used parts counterfeited to make 
them appear new. On closer inspection, BAE discovered that the 
parts had likely been sanded down and remarked. The leads on 
many parts were bent and marking on the parts were 
inconsistent. Parts that should have been virtually identical 
to one another were actually found to be of different sizes.
    In January 2010, BAE notified Boeing of suspect counterfeit 
parts on a P-8, calling the counterfeit parts, ``unacceptable 
for use,'' and recommending that they be replaced. BAE 
engineers believed their use created a long-term reliability 
risk. But it took Boeing more than a year and a half to notify 
the Navy or its other customers about the suspect counterfeit 
parts. Those notifications only came after our committee asked 
about them. Why it took so long for Boeing to notify its 
customers is something which we will discuss with Mr. Dabundo, 
the Program Manager for Boeing Defense, Space, and Security 
Systems P-8 Program Office who is a witness on our third panel.
    The Navy recently wrote Boeing that, ``the Government's 
position is that any counterfeit material received is 
nonconforming material and shall be immediately reported.''
    So where did the counterfeit parts come from in that case? 
BAE purchased around 300 of the parts from a company called 
Tandex Test Labs in California. Tandex bought the parts from a 
company called Abacus Technologies in Florida. Abacus, in turn, 
purchased the parts from an affiliate of A Access Electronics 
in Shenzhen, China, and wired payment for the parts to A 
Access's account at a bank in Shenzhen, China.
    The three cases I just described are a drop in the bucket. 
There is a flood of counterfeits and it is putting our military 
men and women at risk and costing us a fortune. In terms of the 
cost, just one example, to the Government now.
    In September 2010, the Missile Defense Agency (MDA) learned 
that mission computers for Terminal High Altitude Area Defense 
(THAAD) missiles contained suspect counterfeit memory devices. 
According to the MDA, if the devices had failed, the THAAD 
missile itself would likely have failed. The cost of that fix 
was nearly $2.7 million, and who paid for it? The American 
taxpayer.
    We must change our acquisition rules to ensure that the 
cost of replacing suspect counterfeit parts is paid by the 
contractor, not the taxpayer. No ifs, no ands, no buts, and 
regardless of the type of contract involved.
    So let us be clear, though. The risk is not created by the 
contractors. The risk stems from the brazen actions of the 
counterfeiters. Mr. Kamath of Raytheon, another one of our 
witnesses, told the committee that ``what keeps us up at night 
is the dynamic nature of this threat because by the time we 
figured out how to test for these counterfeits, they have 
figured out how to get around it.''
    Now, some have argued that even if a counterfeit is not 
identified right away, that a contractor's testing process will 
weed out counterfeit parts. If a system containing a 
counterfeit part passes that testing, they argue, then the 
counterfeit part should work just like a new part. But that is 
not what the manufacturers of these parts tell us, and it is 
also not what our military leaders tell us.
    We wrote to Xilinx, a large semiconductor manufacturer, 
about the anomalies that BAE had identified on the counterfeit 
parts that were intended for ice detection modules in that P-
8A. Again, the parts were counterfeits of original Xilinx 
devices. This is what Xilinx told us. ``These cases pose a 
significant reliability risk. Some of these could be 
catastrophic. Though the devices may initially function, it may 
be next to impossible to predict what amount of life is 
remaining or what damage may have been caused to the 
circuitry.''
    In those cases, when DOD or a contractor in the defense 
industry needs a spare electronic part to fix a 10- or 20-year-
old system, there is a good chance that that part may no longer 
be available from its original manufacturer and there may be 
little choice but to go to the open market to find the 
replacement part. In other words, the parts that we buy are 
still supposed to be new even if they are no longer being 
manufactured.
    Now, too few contractors and distributors consistently file 
reports with the Government-Industry Data Exchange Program 
(GIDEP), a DOD-run system that provides a forum for industry 
and Government to report suspect counterfeit parts and the 
suppliers who sold them. That has to change too. Failing to 
report suspect counterfeits and suspect suppliers puts 
everybody at risk. We need to make sure our regulations require 
contractors who discover suspected counterfeit parts in a 
military system to report that discovery to the military right 
away.
    We will hear today from three panels of witnesses. Our 
first panel has three witnesses, now four witnesses I believe. 
Mr. Brian Toohey is President of SIA. Mr. Tom Sharpe is Vice 
President of SMT Corporation, an independent distributor of 
electronic components, as well as I believe Vice President of 
its affiliated test lab, Liberty Component Services, and Mr. 
Richard Hillman, the Managing Director, Forensic Audits and 
Investigative Service at GAO. Mr. Hillman is accompanied by the 
chief scientist for the GAO, Dr. Timothy Persons.
    The witness on our second panel is Lieutenant General 
Patrick O'Reilly. General O'Reilly is the Director of MDA.
    Our final panel has three witnesses: Mr. Vivek Kamath, the 
Vice President for Supply Chain Operations at Raytheon; Mr. 
Ralph DeNino, Vice President of Corporate Procurement at L-3 
Communications; and Charles Dabundo, Vice President and P-8 
Poseidon Program Manager for Boeing Defense, Space and Security 
Systems.
    We appreciate the attendance of our witnesses this morning. 
By the way--and this is an important point--all of the 
companies and agencies represented here today have cooperated 
with the committee's investigation. We and the companies and 
the industry here, as well as, obviously, our troops and their 
families, are all on the same side of this battle. The only 
people who benefit from counterfeits are people who are making 
money off those counterfeits, and we have to end that.
    We also have to end the attitude of the Chinese who will 
not cooperate with this investigation and who will not act 
against the counterfeiters. We wrote the Chinese Ambassador 
last week, invited him to send a representative to testify 
today, but he declined.
    [The prepared statement of Senator Levin follows:]
                Prepared Statement by Senator Carl Levin
    Today's hearing is a product of the Armed Services Committee's 
ongoing investigation into counterfeit electronic parts in the 
Department of Defense's (DOD) supply chain. We will probably hold at 
least one additional hearing to discuss what DOD is doing to keep 
counterfeit electronic parts out of defense systems. We have three 
panels of witnesses today so I expect the hearing to continue into the 
afternoon, and I also expect that we will break for lunch. I want to 
thank Sen. McCain for his efforts in this investigation, and to 
recognize the hard work of our investigative staff.
    The systems we rely on for national security and the protection of 
our military men and women depend on the performance and reliability of 
small, highly sophisticated electronic components. Our fighter pilots 
rely on night vision systems, enabled by transistors the size of paper 
clips, to identify targets. Our troops depend on radios and global 
positioning systems devices, and the microelectronics that make them 
work, to stay in contact with their units and get advance warning of 
threats that may be just around the next corner. The failure of a 
single electronic part can leave a soldier, sailor, airman, or marine 
vulnerable at the worst possible time. A flood of counterfeit 
electronic parts has made it a lot harder to have confidence that won't 
happen.
    In some industries, the term ``counterfeit'' suggests an 
unauthorized fake, a knock-off of an original product. The definition 
of counterfeit, as it relates to electronic parts, which has been 
endorsed by DOD and defense contractors alike includes both fakes and 
previously used parts that are made to look new, and are sold as new. 
Previously used parts sold as new parts present a significant risk 
because, while they may pass initial screening, they are far more 
likely than new parts to exhibit reliability and performance problems 
later on when deployed in the field.
    In January 2010, the Department of Commerce Bureau of Industry and 
Security published a report entitled ``Defense Industrial Base 
Assessment: Counterfeit Electronics.'' The report was the result of a 
survey of 387 companies and organizations in DOD's supply chain, 
including electronic parts manufacturers, distributors, assemblers, 
defense contractors, and the Department itself. The report highlighted 
``an ``increasing number of counterfeit incidents being detected, 
rising from 3,868 incidents in 2005 to 9,356 incidents in 2008.'' The 
Commerce survey asked respondents to identify particular countries 
suspected or confirmed to be sources of counterfeits. China was 
identified nearly five times more often than any other country.
    In March of this year, we announced an Armed Services Committee 
investigation into counterfeit parts in the DOD supply chain. During 
the course of the committee's investigation, virtually every one of the 
dozens of people our investigators have spoken with--from defense 
contractors to semiconductor manufacturers to electronic component 
brokers--has pointed to China, specifically the city of Shenzhen in 
Guangdong Province, as the primary source of counterfeit electronic 
parts.
    U.S. Government reports also identify Shenzhen as the epicenter of 
the global trade in counterfeit electronic parts. In April 2011 the 
United States Trade Representative (USTR) issued its ``Notorious 
Markets List,'' which identified the worst of the worst markets that 
sell counterfeit goods. The report stated that Shenzhen and Guangzhou, 
in Guangdong province, are ``reportedly home to dozens of markets 
offering counterfeit or pirated goods.'' Also in April USTR issued its 
``Special 301'' report reviewing the global state of intellectual 
property rights. In it, USTR said that China's manufacturing ``extends 
to all phases of the production and global distribution of counterfeit 
goods.'' USTR stated point blank: ``Many of these activities can be 
traced back to Guangdong Province.''
    While this hearing is focused mainly on the national security 
implications of counterfeit electronic parts, the rampant theft of U.S. 
intellectual property by Chinese counterfeiters also severely impacts 
our economic security. According to the Semiconductor Industry 
Association (SIA), U.S. semiconductor manufacturers employ nearly 
200,000 American workers. Counterfeiting puts those jobs at risk and 
robs us of American jobs yet to be created. SIA estimates that 
counterfeiting costs U.S. semiconductor manufacturers $7.5 billion a 
year in lost revenue and costs U.S. workers nearly 11,000 jobs. But the 
Chinese government is obviously unwilling to take the necessary steps 
to shut the counterfeiters down. Raytheon's Vice President of Supply 
Chain Operations Vivek Kamath, one of our witnesses today, told us 
about his experience in China stating: ``the amazing thing about 
[counterfeiting] is it's very open. There is nothing discreet about it. 
And it's just almost as if it's just accepted as another business model 
in the country.''
    This spring, we attempted to send Armed Services Committee staff to 
mainland China to get a first-hand look at the counterfeiting industry. 
I wrote the Chinese Ambassador to the United States, informing him that 
that the trip was part of the committee's official duties. Shortly 
after my letter, an official at the Chinese Embassy told committee 
staff that the issues we were investigating were ``sensitive'' and that 
if the results of the investigation were not positive, it could be 
``damaging'' to the U.S.-China relationship. That's exactly backwards. 
What is damaging to U.S.-China relations is China's refusal to act 
against brazen counterfeiting that is openly carried out in that 
country.
    In June, we sent our staff to Hong Kong, where a visa is not 
required, and the staff again sought entry into mainland China. But 
appeals on our behalf, through our most senior diplomats in Hong Kong 
and Beijing, fell on deaf ears and our staff was refused entry. That 
refusal only highlighted the Chinese Government's total lack of 
transparency and unwillingness to act to stem the tide of dangerous 
counterfeits produced in China that is swamping the market.
    In the course of the investigation, the committee staff scoured 
more than 100,000 pages of documents, including purchase orders and 
invoices, test reports and failure analyses identifying counterfeit 
parts. Staff met with and interviewed dozens of individuals, from 
defense officials, to manufacturers of electronic parts, to defense 
contractors and subcontractors, independent testing laboratories, and 
electronic parts distributors.
    Looking at just a slice of the defense contracting universe, 
committee staff asked a number of large defense contractors and some of 
their testing companies to identify cases in which they had found 
suspected counterfeit parts over a 2-year period. They reported 1,800 
cases, covering a total of 1 million individual parts. Of those 1,800 
or so cases, we selected about 100 to track backwards through the 
supply chain. In some instances, the trail was a short one. In others, 
we chased parts across the country and around the world, as they 
changed hands from one parts broker to another. So where did those 
trails ultimately lead? The overwhelming majority--more than 70 
percent--led to China. With few exceptions, the rest came from known 
resale points for parts from China, in Canada and the U.K.
    Counterfeit parts from China all too often end up in critical 
defense systems in the United States. To cite a few examples, the 
investigation uncovered suspected counterfeit parts on thermal weapons 
sights delivered to the Army, on mission computers for the Missile 
Defense Agency's Terminal High Altitude Area Defense (THAAD) missile, 
and on military airplanes including the C-17, C-130J, C-27J, and P-8A 
as well as on AH-64, SH-60B, and CH-46 helicopters. Today's hearing 
will explore three cases where suspect counterfeit parts from China 
were installed on military systems manufactured by Raytheon, L-3 
Communications, and Boeing, respectively. They and other contractors 
have been cooperative with the committee's investigation. They 
recognize the threat that counterfeit electronic parts pose to national 
security and to their businesses. While they need to do a better job 
knowing where their parts come from and notifying the military when 
there's a problem, the source of the counterfeit problem is China. 
China must shut down the counterfeiters that operate with impunity in 
their country. If China will not act promptly, then we should treat all 
electronic parts from China as suspected counterfeits. That would mean 
requiring inspections at our ports of all shipments of Chinese 
electronic parts to ensure that they are legitimate. The costs of these 
inspections would be borne by shippers, as is the case with other types 
of border inspections.
    Before I talk about those three cases, I want to describe how these 
counterfeits are made and why they are so dangerous.
    from the scrap heap to the internet--the making and selling of 
                              counterfeits
    Much of the material used to make counterfeit electronic parts is 
electronic waste (e-waste) shipped from the United States and the rest 
of the world to China. In its January 2010 study, the Department of 
Commerce's said that e-waste has ``turned into an abundance of discrete 
electronic components and microcircuits for counterfeit parts.''
    In fact, e-waste is shipped into Chinese cities like Shantou in 
Guangdong Province where it is disassembled by hand. Tom Sharpe, who is 
one of our witnesses today, visited Shantou's counterfeiting district, 
where he saw first-hand electronic debris stacked in huge mounds and 
piles of components that had been burned off of old circuit boards. He 
witnessed electronic parts being washed in a dirty river and dried on 
city sidewalks in Shantou.
    Once they have been washed, parts may be sanded down to remove the 
existing part number, the date code (which tells you when a part was 
made), and other marks on the part that indicate its quality or 
performance. In a process known as ``black topping,'' the tops of the 
parts may be recoated to hide sanding marks. State-of-the-art printing 
equipment is used to put false markings on the parts, showing them to 
be new, of higher quality, faster speed, or able to withstand more 
extreme temperatures than those for which they were originally 
manufactured. When the process is complete, the parts are made to look 
brand new to the naked eye.
    Once they have been through the counterfeiting process, the parts 
are packaged and shipped to Shenzhen or other cities to be sold in the 
markets or on the Internet.
    While the counterfeiting process for electronic parts is shocking 
to us, it is no secret in China. Mr. Kamath of Raytheon described 
``whole factories, set up [in China] just for counterfeiting'' and 
counterfeit electronic parts are sold openly from shops in Chinese 
markets. But the counterfeiters' target is much bigger than a Shenzhen 
bazaar. The internet puts the entire world at their doorstep. In fact, 
there are dozens of internet sites that specialize in the trade of 
electronic parts, with a large number of China-based distributors 
posting parts for sale. While some of them may be legitimate 
businesses, many others are nothing more than fronts for 
counterfeiters. This morning we will hear from Mr. Richard Hillman, the 
Managing Director, Forensic Audits and Investigative Service at the 
U.S. Government Accountability Office (GAO) about some of those front 
companies and just how pervasive the presence of China-based 
counterfeiters is online. Mr. Hillman will share the preliminary 
results of the investigative work that we asked him to undertake. GAO's 
stunning results not only point directly to China as the source of the 
counterfeiting problem, but show just how far the counterfeiters are 
willing to go for money. GAO investigators went out to buy electronic 
parts that go into defense systems, and found that not only would 
companies supply counterfeit parts when GAO sought legitimate parts. 
Suppliers also sold GAO investigators parts with nonexistent part 
numbers. And all of those sellers are in China.
    I would now like to move to three cases where counterfeit 
electronic parts that the committee traced back to Chinese suppliers 
made their way into defense systems sold to the U.S. military.
      suspect counterfeit parts in the u.s. navy sh-60b helicopter
    I am now going to run through a presentation of how one of these 
counterfeit parts made its way through the defense supply chain. The 
SH-60B is a Navy helicopter that conducts anti-submarine and anti-
surface warfare, surveillance and targeting support. The SH-60B deploys 
on Navy cruisers, destroyers, and frigates and has a Forward Looking 
InfraRed (FLIR) System which provides night vision capability. The FLIR 
also contains a laser used for targeting the SH-60B's hellfire 
missiles.
    On September 8, 2011, the Raytheon Company sent a letter to the 
U.S. Naval Supply Systems Command alerting the Navy that electronic 
parts suspected to be counterfeit had been installed on three 
Electromagnetic Interference Filters (EIF) installed on FLIR units 
delivered by Raytheon. Raytheon only became aware of the suspect 
counterfeit after being alerted by the committee's investigation. 
According to the Navy, the failure of an EIF could cause the FLIR to 
fail. The Navy also told the committee that an SH-60B could not conduct 
surface warfare missions involving hellfire missiles without a 
reliable, functioning FLIR. A FLIR failure would also compromise the 
pilot's ability to avoid hazards and identify targets at night, 
limiting the SH-60Bs ability to be deployed in night missions. One of 
the FLIRs was sent to the USS Gridley in the Pacific Fleet.
    So, how did a suspect counterfeit part end up in a night vision and 
targeting system intended for a Navy helicopter in the Pacific Fleet?
    The Electromagnetic Interference Filters were sold to Raytheon by a 
company called Texas Spectrum Electronics, a defense subcontractor in 
Texas. Those three FLIRs contained transistors that Texas Spectrum 
bought in July 2010 from a company called Technology Conservation Group 
or TCG.
    TCG, it turns out, is both an electronics recycling company and an 
electronics distributor. The transistors at issue were mixed in among 
72 pounds of miscellaneous excess inventory that a Massachusetts 
company called Thomson Broadcast sent to TCG as ``E-scrap.'' According 
to TCG, the parts arrived in what appeared to be the original packaging 
so TCG sold the transistors as ``new'' and unused parts. Incidentally, 
after TCG sold the parts to Texas Spectrum, it tried to sell other 
parts from the same lot to two other customers. Both prospective 
customers rejected the parts because of concerns about their condition. 
An independent testing laboratory hired by one of the two companies 
identified the parts as suspect counterfeits and notified TCG. TCG did 
not share that information with Texas Spectrum. In an October 25, 2011 
letter, Fairchild Semiconductor, the manufacturer identified on the 
parts, informed the committee that it believes the TCG parts are ``not 
Fairchild Semiconductor devices.''
    Where did Thompson Broadcasting get the parts? They bought them in 
April 2008 from a company called E-Warehouse in California. And E-
Warehouse? They bought them from Pivotal Electronics, an electronics 
distributor in the UK. We asked Pivotal where they bought them. Their 
answer? Huajie Electronics Ltd. in Shenzhen, China.
         suspect counterfeit parts in the u.s. air force c-27j
    The C-27J is military aircraft used for tactical transport and to 
support combat operations. The U.S. Air Force has ordered 38 C-27Js, 11 
of which have been delivered. Two C27Js are currently deployed in 
Afghanistan. The C-27J is equipped with display units that provide the 
pilot with information on the health of the airplane, including engine 
status, fuel use, location, and warning messages. The display units are 
manufactured by L-3 Display Systems, a division of L-3 Communications, 
for Alenia Aeronautica. Alenia is a subcontractor to L-3 Integrated 
Systems, another division of L-3 Communications and the military's 
prime contractor for the C-27J.
    In November 2010, L-3 Display Systems detected that their failure 
rate for a chip installed on display units had more than tripled, from 
8.5 percent to 27 percent. L-3 Display Systems also noticed that the 
same part, which was failing in house, had also failed on a fielded 
military airplane in June 2010. The company sent the chip that failed 
on the plane and other samples from the lot for testing. That testing 
identified ``multiple abnormalities'' with the chips, including a 
blacktopped surface. The tester concluded they were ``suspect 
counterfeit.'' Unfortunately, L-3 Display Systems had already installed 
parts from the suspect lot on more than 500 of its display units, 
including those intended for the C-27J, as well as the Air Force's C-
130J and C-17 aircraft, and the CH-46, a helicopter used by the Marine 
Corps for assault support. Failure of the memory chip could cause a 
display unit to show a degraded image, lose data, or even go blank 
altogether--again, these displays provide the pilot with warning 
messages and other information on the health of the airplane.
    L-3 Display Systems had learned of the counterfeit chip in November 
2010 and informed their customer, Alenia, shortly thereafter. Despite 
being a division of the same company as L-3 Display Systems, which 
identified the counterfeit part, L-3 Integrated Systems, the prime 
contractor to the Air Force, told the committee that it only learned of 
the problem as a result of the committee's investigation. As a result, 
L-3 Integrated Systems did not notify the Air Force that the C-27Js 
were affected by the part until September 19, 2011--nearly a year after 
it had been discovered and just one day before committee staff was 
scheduled to meet with the Air Force's C-27J program office on the 
issue.
    We will ask Ralph DeNino, L-3's Vice President for Corporate 
Procurement, who is a witness on our third panel, about breakdowns that 
led to the company's failure to provide timely notification to the 
government.
    Where did the counterfeit chips come from? The supply chain is 
somewhat shorter in this case, but it started off the same place. L-3 
Display Systems bought the parts from Global IC Trading Group, an 
electronics distributor in California, which in turn, bought the chips 
from Hong Dark Electronic Trade, a company in Shenzhen, China.
    It turns out that the chips destined for the C27J, C130J and other 
aircraft was not the only lot of counterfeit parts that divisions of L-
3 received from Hong Dark through Global IC. Hong Dark was also the 
source of another lot of counterfeit parts discovered by L-3 Display 
Systems in October 2009.
    Moreover, a year ago, Global IC notified L-3 Display Systems that 
they had also supplied the company with a third lot of parts from Hong 
Dark, some of which were installed on display units intended for EA-6B 
military aircraft. L-3 submitted them for testing only a few weeks ago, 
after committee staff asked about them. The testing has since 
identified them as ``suspect counterfeit.''
    But that's not even the end of it. In total, the committee 
discovered that Hong Dark made nearly 30 shipments in 2009 and 2010, 
totaling more than 28,000 electronic parts, to Global IC Trading Group, 
that were then sold divisions within L-3. At least 14,000 of those 
parts have already been identified as suspect counterfeit. Neither the 
committee nor L-3 knows whether the remaining 14,000 parts are 
authentic and L-3 has not yet identified what military systems they 
might be in.
          suspect counterfeit parts in the navy p-8a poseidon
    The P-8A Poseidon is a Boeing 737 airplane modified to incorporate 
antisubmarine and anti-surface warfare capabilities. Three P-8A flight 
test aircraft currently are in test at the Naval Air Station at 
Patuxent River, Maryland and the Navy intends to purchase 108 of the 
aircraft from Boeing.
    On August 17, 2011, Boeing sent a message marked ``Priority: 
Critical'' to the P-8 program office. The message said that an ice 
detection module installed on one of the P-8 test aircraft contained a 
``reworked part that should not have been put on the airplane 
originally and should be replaced immediately.'' The part at issue is 
critical to the functioning of the P-8's ice detection module.
    Boeing first identified a problem with the part in December 2009 
when an ice detection module failed on the company's flight line. In 
that case, the part had literally fallen out of its socket and was 
found rattling around inside the module on the airplane.
    BAE Systems, which manufactures the ice detection system for 
Boeing, investigated the failure. They discovered that the part that 
had fallen out of the socket, and dozens of other parts from the same 
lot, were not new parts at all. Rather, they were previously used parts 
counterfeited to make them appear new. On closer inspection, BAE 
discovered that the parts had likely been sanded down and remarked. The 
leads on many parts were bent and markings on the parts were 
inconsistent. Parts that should have been virtually identical to one 
another were actually found to be of different sizes. In January 2010, 
BAE notified Boeing of their findings, calling the counterfeit parts 
``unacceptable for use'' and recommending they be replaced. BAE 
engineers believed their use created a long-term reliability risk.
    It took Boeing more than a year and a half to notify the Navy or 
its other customers about the suspect counterfeit parts. Those 
notifications only came after the committee asked about them. Why it 
took so long for Boeing to notify its customers is something we will 
discuss with Mr. Dabundo, the Program Manager for Boeing Defense and 
Security Systems' P-8 Program office, who is a witness on our third 
panel. The Navy recently wrote Boeing that ``The Government's position 
is that any `counterfeit' material received . is nonconforming material 
and shall be immediately reported.''
    So where did the counterfeit parts come from? Over a period of 
several months from the fall of 2008 until the spring of 2009, BAE 
purchased around 300 of the parts from a company called Tandex Test 
Labs in California. BAE hired Tandex to source the parts and screen 
them for signs of counterfeiting. Tandex, it turns out, only screened 
the first 50. The company sent the remainder--around 250 parts--to BAE 
without inspecting them at all.
    Tandex bought the parts from a company called Abacus Technologies 
in Florida. Abacus, in turn, purchased the parts from an affiliate of A 
Access Electronics in Shenzhen, China and wired payment for the parts 
to A Access's account at the Chartered Bank Shenzhen, China.
  counterfeit parts are costing dod and the defense industry millions
    The three cases I just described are a drop in the bucket. There is 
a flood of counterfeits and it is putting our military men and women at 
risk and costing us a fortune.
    To cite just one example, in September 2010, the Missile Defense 
Agency learned that mission computers for THAAD missiles contained 
suspect counterfeit memory devices. According to MDA, if the devices 
had failed, the THAAD missile itself would likely have failed. The 
memory devices were purchased by Honeywell, a MDA subcontractor, from 
an independent distributor. Honeywell installed them on mission 
computers which it sold to Lockheed Martin. Lockheed, in turn, supplied 
them to MDA. To their credit, Honeywell and Lockheed notified MDA when 
they figured out the parts were suspect and put together a plan to fix 
the problem. But the cost of that fix was nearly $2.7 million. And who 
do you think paid for it? The American taxpayer. That's an area where 
we need reform. There is no reason on earth that the replacement of a 
counterfeit part should be paid for by American taxpayers, instead of 
by the contractor who put it in a military system. We must clarify our 
acquisition rules to ensure that the cost of replacing suspect 
counterfeit parts is paid by the contractor, not the taxpayer--no ifs, 
ands, or buts.
          how counterfeits find their way into defense systems
    One might ask, how do all these counterfeit parts make it through 
the system? The answer, in part, is that counterfeiters are shrewd, and 
they are getting shrewder. That is not only true about how they produce 
counterfeits but how they package and sell them. Sophisticated 
counterfeiters may mix counterfeit parts with authentic parts, in a 
method called ``sprinkling,'' to increase the chance that the 
counterfeits will avoid detection. For example, some electronic 
components are purchased in reels. A counterfeiter might buy a reel of 
good parts, cut that reel up, and splice authentic parts into the 
beginning, middle, and end of several reels of counterfeit parts. The 
counterfeiters know that companies often test components from the 
beginning, middle and end of a reel to validate the authenticity of the 
entire reel.
    In the case of L-3's counterfeit memory chip, the suppliers in 
China selected and sent the distributor a sample of 18 parts to test. 
Once those few parts were tested and validated as authentic, the 
supplier sold another 10,000 of those memory chips for use by L-3. L-
3's process at the time allowed the company to accept the chips without 
additional testing.
    It is a constant battle to stay ahead of the counterfeiters. Mr. 
Sharpe, the Vice President of an independent test laboratory and one of 
our witnesses today, is confronted every day with new counterfeiting 
techniques. Mr. Kamath of Raytheon, another one of our witnesses, told 
the committee that ``what keeps us up at night is the dynamic nature of 
this threat because by the time we've figured out how to test for these 
counterfeits, they've figured out how to get around it. And it's 
literally on almost a daily basis they change and the sophistication of 
the counterfeiting is amazing to us. We're finding that you have to go 
down to the microns to be able to figure out that [a part is] actually 
a counterfeit.''
    Some have argued that, even if a counterfeit is not identified 
right away, a contractor's testing process--where systems may be 
subjected to heat, vibration and other stresses--will weed out 
counterfeit parts. If a system containing a counterfeit part passes 
that testing, they argue, then the counterfeit part should work just 
like a new part.
    The Boeing Service Engineer responsible for determining the 
company's handling of counterfeit parts on the P-8 told the committee 
that ``[m]any used parts tend to have the same reliability as a new 
part.'' And the Chief Engineer for L-3 Integrated Systems' C-27J 
program stated that L-3's process for testing its systems ``would show 
whether [a part in an L-3 system] was functional or not.''
    But that's not what the manufacturers of these parts tell us. And 
it is also not what our military experts say either.
    We wrote to Samsung, the manufacturer of the original parts that 
were counterfeited on the L-3 display units, to ask them about the 
reliability and performance risks associated with using parts with the 
identified anomalies. Samsung said simply, ``one cannot expect such 
parts to function properly, or at all.''
    We wrote to Xilinx, a large semiconductor manufacturer, about the 
anomalies that BAE had identified on the counterfeit parts that were 
intended for the ice detection modules in the P-8A. (The parts were 
counterfeits of original Xilinx devices.) Listen to what Xilinx told 
us:
    The devices may have been reclaimed and potentially exposed to 
excessive heat in order to dismount them from a circuit board. These 
cases pose a significant reliability risk. there are many potential 
damage mechanisms that could have affected the devices. Some of these 
could be catastrophic; others may create a damage mechanism that is 
latent for an undetermined amount of time. Though the devices may 
initially function, it would be next to impossible to predict what 
amount of life is remaining, or what damage may have been caused to the 
circuitry.
    As to the belief that parts in a system which pass a contractor's 
acceptance testing should work just fine, here's what the Director of 
the Missile Defense Agency, General Patrick O'Reilly told the 
committee:
    A counterfeit part may pass all production testing. However, it is 
possible that the part was damaged during unauthorized processing 
(e.g., removing the part from a previous assembly, or sanding the 
surface in order to place a new part number) causing the deployed 
system to fail. Similarly, reliability may be affected because a 
counterfeit part may be near the end of its useful life when it is 
installed. Should any mission critical component fail, that system 
fails and national security is impacted.
    That is a risk we cannot tolerate. General O'Reilly will be 
testifying today.
                 why dod is vulnerable to counterfeits
    Given the risk, one might ask, why are we buying parts for defense 
systems from Hong Dark Electronic Trade, Huajie Electronics and other 
Chinese companies? Why don't we buy our parts from Intel and Freescale 
and Texas Instruments?
    Part of the reason is that when an electronic part is no longer 
economical to produce due to declining demand, manufacturers stop 
making it. In many cases, the demand from the defense industry just is 
not enough to keep a manufacturing line up and running. Ted Glum, who 
is the Director of DOD's Microelectronics Activity Unit, the 
government's official authority on this issue, put it this way: ``The 
defense community is critically reliant on a technology that obsoletes 
itself every 18 months, is made in unsecure locations and over which we 
have absolutely no market share influence.'' An electronic part may be 
manufactured for 18 months, while the defense systems it is used on may 
be in service for 18 years--or longer.
    In those cases when DOD or a contractor in the defense industry 
needs a spare electronic part to fix a 10- or 20-year-old system, there 
is a good chance that part may be obsolete and there may be little 
choice but to go to the open market to find the replacement part. But 
the parts we buy are still supposed to be new, they are just obsolete. 
The open market is where the risk is the highest. That is also where 
DOD and its contractors must be most vigilant. Defense contractors and 
DOD simply have to do a better job finding out where their parts come 
from and in validating the authenticity of parts not sourced from the 
original manufacturer or a franchised distributor. But we must also 
confront the issue of counterfeit parts from China head-on. As I stated 
earlier, if China does not act against the counterfeiters then we will 
have no choice but to treat all electronic parts from China as suspect.
                     the importance of transparency
    Another place where the defense industry is coming up short is in 
reporting cases of counterfeit parts. Our investigation uncovered 
approximately 1,800 cases where parts suspected to be counterfeits have 
been identified by companies in the defense supply chain. However, the 
vast majority of those cases appear to have gone unreported to DOD or 
criminal authorities. In addition, too few contractors and distributors 
consistently file reports with the Government Industry Data Exchange 
Program (GIDEP), a DOD-run system that provides a forum for industry 
and government to report suspect counterfeit parts and the suppliers 
who sold them. That has to change. Failing to report suspect 
counterfeits and suspect suppliers puts everyone at risk. We need to 
make sure our regulations require contractors who discover suspected 
counterfeit parts in a military system to report that discovery to the 
military right away. We should also require DOD and contractors to 
report cases of suspected counterfeits found in the supply chain into 
GIDEP, so that others are alerted.
    On September 30, 2011, the U.S. Attorney for the District of 
Columbia submitted a filing to the U.S. District Court relating to the 
sentencing of the former Administrative Manager of VisionTech 
Components. Between 2006 and 2010, VisionTech sold counterfeit 
electronic components, imported from China, to more than 1,000 buyers 
in the United States and abroad. Among those customers were several 
major defense contractors. There are other VisionTechs out there and we 
cannot afford to let them operate with impunity.
                               witnesses
    We will hear from three panels of witnesses today. Our first panel 
has three witnesses: Mr. Brian Toohey is the President of the 
Semiconductor Industry Association; Mr. Tom Sharpe is the Vice 
President of SMT Corporation, an independent distributor of electronic 
components, and its affiliated test lab, Liberty Component Services; 
and Mr. Richard Hillman, the Managing Director, Forensic Audits and 
Investigative Service at the U.S. Government Accountability Office 
(GAO). Mr. Hillman is accompanied by the Chief Scientist for GAO, Mr. 
Timothy Persons. The witness on our second panel is Lieutenant General 
Patrick O'Reilly. General O'Reilly is the Director of the Missile 
Defense Agency. Our final panel has three witnesses: Mr. Vivek Kamath, 
the Vice President for Supply Chain Operations at Raytheon Company; Mr. 
Ralph DeNino, Vice President of Corporate Procurement at L-3 
Communications; and Mr. Charles Dabundo, Vice President and P-8 
Poseidon Program Manager for Boeing Defense, Space & Security Systems.
    We appreciate the attendance of our witnesses this morning. All of 
the companies and agencies represented here today have cooperated with 
the committee's investigation. Last week, we wrote the Chinese 
Ambassador and invited him to send a representative to testify today, 
but he declined.

    Chairman Levin. Again, with my thanks, Senator McCain.

                STATEMENT OF SENATOR JOHN McCAIN

    Senator McCain. Thank you, Mr. Chairman, and I thank the 
witnesses for being here.
    We are talking about an issue that is a risk to national 
security. These counterfeit electronic parts in our supply 
chain result, as we all know, in reduced reliability, 
availability, and frankly our ability to defend this Nation's 
national security interests.
    As the chairman has pointed out, much of the raw material 
for counterfeit electronic parts is salvaged electronic waste, 
e-waste, shipped from the United States and other countries to 
China where old computers and other electronic products are 
disassembled by hand. There is an article in Business Week 
magazine entitled ``Dangerous Fakes,'' which I would like to 
quote from. It says, much of that pollution emanates from the 
Chinese hinterlands. Business Week tracked counterfeit military 
components used in gear made by BAE Systems to traders in 
Shenzhen, China. The traders typically obtain supplies from 
recycled chip emporiums such as the Guiyu Electronics Market 
outside the City of Shantou in southeastern China. The garbage-
strewn streets of Guiyu reek of burning plastic as workers in 
back rooms and open yards strip chips from old PC circuit 
boards. The components, typically less than an inch long, are 
cleaned in the nearby Lianjiang River and then sold from the 
cramped premises of businesses such as the Jinlong Electronics 
Trade Center.
    A sign for Jinlong Electronics advertises in Chinese that 
it sells, quote, military circuitry, meaning chips that are 
more durable than commercial components and able to function at 
extreme temperatures. But proprietor Lu Weilong admits that his 
wares are counterfeit. His employees sand off the markings on 
used commercial chips and relabel them as military. Everyone in 
Guiyu does this, he says. The dates on the chips are 100 
percent fake because the products pulled off the computer 
boards are from the 1980s and 1990s, while customers demand 
products from after 2000.
    The chairman has described the situation in detail, and I 
will not go on at length because we need to hear from the 
witnesses. But this is a serious issue. The Chinese Government 
can stop it. If the Chinese Government does not stop it, then 
it continues to pose a national security risk.
    There are other problems associated with that which the 
chairman has outlined about how defense contractors are often 
forced to purchase parts from independent distributors or 
brokers who may stock or have access to obsolete parts. There 
is risk, which I hope the witnesses will explore a little bit, 
in obtaining parts in the ``independent market.'' We know that 
some of these people that are advertised as small business 
people are simply conduits with a phone and a desk for some of 
these parts. The chairman outlined the various layers and 
places that these parts go through. We have to address that 
side of the issue. We all want the small business people to be 
able to obtain DOD contracts, but not the kind of abuse that 
apparently also is practiced here.
    I want to thank you, Mr. Chairman, and the staff for their 
many hours of long, hard work. I look forward to hearing from 
the witnesses. Thank you, Mr. Chairman.
    Chairman Levin. Thank you, Senator McCain.
    Let us start with Mr. Sharpe. Ordinarily we probably would 
call on the GAO witness first, but I think today we are going 
to start with the problem and kind of a very vivid description 
of the problem, and then, Mr. Hillman, you can give us the GAO 
investigation here that you undertook. So we are going to 
start, though, with Mr. Sharpe.

STATEMENT OF THOMAS R. SHARPE, VICE PRESIDENT, SMT CORPORATION 
                 AND LIBERTY COMPONENT SERVICES

    Mr. Sharpe. Mr. Chairman, Senator McCain, and members of 
this committee, first I want to thank you for allowing me to 
come in and provide this testimony.
    The issues with counterfeit parts in DOD is a big problem, 
obviously, and it is a big focus of our job at SMT Corporation. 
My company's job is to authenticate, source, and supply parts 
to the defense and aerospace industry. We take this quite 
seriously.
    I will explain to you what exactly I saw while I was in the 
City of Shenzhen and then into the City of Shantou, as well as 
some of the counterfeits that we are seeing out there today.
    In July 2008, I had an opportunity, while traveling into 
the City of Hong Kong on business, to go into the nearby City 
of Shenzhen. The reason why I wanted to go in was to visit the 
marketplace that has been mentioned here. The photos are up 
there on the screen. I had an interpreter go with me. We walked 
through the marketplace for the day. While I was touring the 
marketplace, the interpreter told me that the marketplace 
district was the largest in the world of its kind, that 30 to 
40 percent of all parts sold here were counterfeit, that many 
of the booths that we passed were owned by counterfeiters who 
owned off-site locations that actually did the counterfeiting 
and brought the product into the marketplace to sell, that the 
local brokers and manufacturers shop here openly to receive the 
70 percent cost savings on buying parts that are counterfeit as 
opposed to buying brand new parts, knowing full well that the 
fall-out on these parts is up to 15 percent will not work.
    Products sold to brokers outside of China are represented 
to be ``new and unused at the time that they are sold,'' into 
the United States and elsewhere.
    Also, that most of the component counterfeiting was 
performed in the nearby City of Shantou. Now, I had never heard 
of Shantou prior to going to Shenzhen. So this was new to me.
    The next morning, we traveled to Shantou. We spent the day 
touring this area, and we visited select businesses that were 
known to the driver that was with us. While there, I witnessed 
e-scrap piled outside of buildings throughout large areas of 
the town, throughout the outskirts of the town, used electronic 
parts being washed in a river, and laid on the riverbank to 
dry, nylon sacks with harvested components being dumped onto 
sidewalks and sorted by women and children, laid out there for 
the monsoon rains of July to wash them naturally, cardboard and 
plastic bins filled with expensive brand name components and 
harvested from scrap printed circuit boards ready for 
processing. The actual counterfeiting process of electronic 
components actually taking place while I was there within some 
of the buildings. A wide variety of counterfeit parts for sale 
within the counterfeiting facility sales areas. So materials 
that come from most manufacturers that we know of for sale. 
Overall, a huge infrastructure of similar or supporting 
businesses in and around Shantou for harvesting components from 
e-scrap and processing into counterfeit electronic parts.
    It is interesting to note that counterfeiting performed in 
Shantou, from speaking to the people there, was not regarded as 
intellectual property theft or wrong in any way whatsoever. It 
was seen more as a positive green initiative for the 
repurposing and reuse of perfectly good used product.
    In the past several years, SMT has identified and 
documented several new counterfeit processes and threats 
specifically designed to evade the current inspection processes 
known to be in use by our industry at the time. These include a 
new surface recoating material that is immune to acetone 
surface-permanency tests that has a surface that looks just 
like the manufacturer's top coat. SMT released this to DOD and 
prime contractors in August 2009. A process to remove 
manufacturer part markings without requiring surface 
recoatings. We released this to DOD and primes in June 2011. A 
process to remove and recondition the top surfaces of ceramic 
components which was released just yesterday to DOD, prime 
contractors, and others.
    The counterfeiters are most certainly monitoring our level 
of detection expertise and quickly evolving newer processes to 
introduce into the global supply chains. Many of the current 
counterfeit techniques are already beyond the in-house 
capabilities of most open-market suppliers.
    Over the last several years, the defense and aerospace 
industry has made steady progress in laying the foundational 
groundwork for an effective counterfeit avoidance plan. We hope 
to begin to see the fruits of this labor in 2012.
    Lastly, I personally believe that the work of this 
committee is playing a significant role in the industry 
transformation needed to effectively mitigate the counterfeit 
threat within DOD.
    Thank you.
    [The prepared statement of Mr. Sharpe follows:]
                  Prepared Statement by Thomas Sharpe
    Mr. Chairman, Senator McCain, and members of this committee, I am 
honored to have been requested to provide testimony on the counterfeit 
issue and its effect on the supply-chain of the Department of Defense 
(DOD).
    My company, SMT Corporation, is an independent stocking distributor 
of board-level electronic components. We specialize in the sourcing, 
authentication testing and supply of obsolete components to the Defense 
& Aerospace Industry.
              city of shenzhen, guangdong providence china
    In July 2008, while on business in Hong Kong, I had made it a point 
to visit the Electronic component marketplace in the nearby city of 
Shenzhen China.
    While touring the Shenzhen marketplace with a local interpreter I 
was told:

    (1)  The electronic marketplace district was the largest wholesale 
component distribution area of its type in the world.
    (2)  30-40 percent of all broker-sold products at this marketplace 
are counterfeit.
    (3)  Many of the booths we passed contained companies that own 
counterfeiting operations elsewhere within China.
    (4)  Local brokers and manufacturers purposely buy counterfeits for 
a 70 percent savings off authentic component prices--fully aware that 
up to 15 percent may not function at all.
    (5)  Products sold to brokers outside of China are represented to 
be new, original factory product at time of sale.
    (6)  Most component counterfeiting was performed in the nearby city 
of Shantou.
              city of shantou, guangdong providence china
    The next morning we traveled to Shantou and spent the day touring 
the area and visiting selected businesses known to the driver.
    While in Shantou I witnessed:

    (1)  E-scrap piled outside buildings throughout large areas of the 
town.
    (2)  Used electronic components being washed in a river and dried 
on the riverbank.
    (3)  Nylon sacks filled with harvested components being dumped onto 
sidewalks, sorted and naturally washed in the daily monsoon rains.
    (4)  Piles of sorted scrap circuit boards that supposedly had just 
arrived from the United States.
    (5)  Cardboard and plastic bins filled with expensive brand-name 
components harvested from scrap PCBs ready for processing.
    (6)  The actual counterfeit processing of electronic components 
taking place.
    (7)  A wide variety of counterfeit parts for sale within the 
counterfeiting facility sales area.
    (8)  A huge infrastructure of similar or supporting businesses in 
and around Shantou for harvesting components from e-scrap and 
processing into counterfeit electronic parts.

    Counterfeiting performed in Shantou was not regarded as 
intellectual property theft or improper in any way. It was seen more as 
a positive ``green initiative'' for the repurposing of discarded 
electronic component material.
    counterfeit processes are constantly evolving to evade detection
    In the past several years SMT has identified and documented many 
new counterfeit process threats specifically designed to evade the 
current inspection processes known to be in use by our industry at the 
time.
    These include:

    (1)  A new surface recoating material that is immune to acetone 
surface-permanency tests. (released by SMT in August 2009)
    (2)  A process to remove manufacturer part markings without 
requiring surface re-coatings. (released by SMT in June 2011)
    (3)  A process to remove and recondition the top surfaces of 
ceramic components. (released by SMT in November 2011)

    The counterfeiters are most certainly monitoring our level of 
detection expertise and quickly evolving newer processes to introduce 
into the global supply chains. Many of the current counterfeiting 
techniques are already beyond the in-house detection capabilities of 
most open-market suppliers.
          much is being accomplished on the counterfeit threat
    Over the last several years the Defense & Aerospace Industry has 
made steady progress in laying the foundational ground-work for an 
effective counterfeit avoidance plan. We will begin to see the fruits 
of this labor in 2012.

    (1)  New quality standards have been released and/or nearing 
release which focus on counterfeit mitigation: (Much thanks and 
recognition go to NASA and JPL for these--among many others as well.)

                a. AS5553--Counterfeit avoidance standard for 
                manufacturers.
                b. AS6081--Counterfeit avoidance standard for 
                distributors.
                c. AS6171--Test methods standard for the identification 
                of counterfeit electronic parts.

    (2)  There have been very significant test and inspection additions 
to counterfeit mitigation flow-down requirements from the Defense 
contractors to open-market suppliers.
    (3)  The total approved vendor list (AVL) of open-market suppliers 
to Defense contractors has been/is being reduced to three or four total 
in all cases I am aware of. This small group of extensively audited 
suppliers must meet stringent customer requirements that include:

                a. Significant counterfeit mitigation capability and 
                quality processes
                b. Certification to Aerospace & Industry standards
                c. Performance, training and constant improvement 
                metrics
                d. Fair pricing and on-time delivery track records
                e. Product ``pedigree'' documentation supplied in all 
                cases possible
                f. Documented proof of supplier due-diligence to 
                perform quality and authentication test flow-down 
                requirements from contractors

    (4)  In the past year, I have seen significant effort on the part 
of the component manufacturers to provide component authentication help 
to government agencies for the purpose of counterfeit detection.
   important tools needed from government to help fight counterfeits
    (1)  Federal funding for the creation and ongoing concern of a 
``Counterfeit Repository'' where suspect-counterfeit components can be 
sent for final authenticity determination, disposition to intellectual 
property holders or Federal law enforcement agencies.
    (2)  In an effort to curtail the export of e-scrap material 
containing PCBs which become the counterfeiter's feedstock, legislation 
must be passed banning the export of this material. This legislation 
should require the complete destruction and green-processing of PCB 
scrap within the United States only.
    (3)  Provide significant funding for new PCB designs within DOD 
systems in an effort to reduce obsolescence issues and the need to 
procure open-market product from non-authorized sources when 
maintaining older electronic systems.

    I personally believe the work of this committee is playing a 
significant role in the industry transformation needed to effectively 
mitigate the counterfeit threat within the DOD.

      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    Chairman Levin. Thank you very much, Mr. Sharpe. Your 
entire statement, if you did not give it, will be made part of 
the record, and that would be true with all the statements of 
all of our witnesses because we know in some cases they are 
reducing the length of that statement for time purposes.
    Mr. Hillman.

 STATEMENT OF RICHARD J. HILLMAN, MANAGING DIRECTOR, FORENSIC 
  AUDITS AND INVESTIGATIVE SERVICE, GOVERNMENT ACCOUNTABILITY 
 OFFICE; ACCOMPANIED BY DR. TIMOTHY PERSONS, CHIEF SCIENTIST, 
  CENTER FOR SCIENCE, TECHNOLOGY, AND ENGINEERING, GOVERNMENT 
                     ACCOUNTABILITY OFFICE

    Mr. Hillman. Chairman Levin, Ranking Member McCain, and 
members of the committee, thank you for the opportunity to 
discuss the preliminary observations of our ongoing 
investigation into the availability of counterfeit parts on 
Internet trading platforms.
    Counterfeit parts have the potential to seriously disrupt 
DOD supply chain, affect the integrity of weapons systems, and 
ultimately endanger the safety of our military personnel.
    This committee cited concerns about the availability of 
counterfeit parts on Internet platforms and asked us to 
purchase certain electronic parts and have their authenticity 
tested. I would like to briefly summarize how we are conducting 
this ongoing investigation and our results to date.
    In conducting this work, we created a fictitious company to 
gain access to Internet platforms that sell military-grade 
electronic parts. Our company included a fictitious owner and 
employees, mailing and e-mailing addresses, a Web site, and a 
listing on the central contractor registration. We attempted to 
purchase membership to three Internet platforms that were of 
interest to this committee and were granted membership to two 
platforms.
    We then requested quotes from vendors on both platforms to 
purchase a total of 13 parts from a list of parts this 
committee provided that fell into one of three categories: one, 
authentic part numbers for obsolete and rare parts; two, 
authentic part numbers with post-production date codes or date 
codes after the last date the part was manufactured; and three, 
bogus part numbers.
    We independently verified with the Defense Logistics Agency 
(DLA) that the authentic part numbers were used for military 
applications. We also confirmed with DLA and selected part 
manufacturers that the bogus part numbers were not associated 
with actual parts. We requested parts from vendors that were 
new in original packaging, not refurbished, and not with mixed 
date codes. We selected the first vendor amongst those offering 
the lowest prices that provided enough information such as 
name, addresses, and payment method to make a purchase. We then 
contracted with SMT Corporation for component authentication 
analyses of the parts that we received. We are not disclosing 
the names of the Internet trading platforms we are using and we 
altered all part numbers in this testimony due to the ongoing 
nature of our investigation.
    Regarding our preliminary results, as shown in figure 1 of 
my prepared statement, as of today we have purchased 13 parts, 
and none of the seven parts we have complete test results for 
are authentic. Specifically, according to SMT Corp., all three 
parts tested, after we requested legitimate but rare or 
obsolete parts, failed at least three of seven authentication 
analyses and were suspected counterfeits. These parts included 
two voltage regulators and one operational amplifier, the 
failure of which could pose risk to the functioning of the 
electronic systems where the parts reside.
    SMT Corp. also made the same determination for another 
operational amplifier we received after requesting a legitimate 
part number with a post-production date code. In this instance, 
the part failed four of seven authentication analyses and the 
vendor also misrepresented the part as 9 years newer than the 
date it was last produced.
    In addition, we received three bogus parts after submitting 
orders using invalid part numbers. Because no legitimate parts 
in this final category exist, we did not send them for 
authentication testing.
    We are also awaiting testing results on two additional 
parts and have not yet received another four purchases. We will 
report the results for these and additional parts we plan to 
purchase in a future product.
    While we sent requests to both domestic and international 
companies, all of the parts we have purchased and received to 
date were provided by vendors in China. More specifically, all 
four of the parts that SMT Corp. tested were suspected 
counterfeits. The parts were subject to a component 
authentication analysis which included visual, chemical, x-ray, 
and microscopic testing. Figures 2 and 3 on pages 6 and 10 of 
my prepared statement provide photos and detailed test results 
for each part. Overall, each was a suspect counterfeit because 
the results of the tests indicated that the parts were likely 
used parts that were harvested from older equipment and then 
altered to appear as new.
    For example, SMT Corp. found that some parts were found to 
have scratches similar to suspect counterfeit devices that had 
been remarked and confirmed by both visual inspection and 
scanning electronic microscopic analysis. Tooling marks were 
also found on the bottom of some components suggesting the 
components were pulled from a working environment. Further 
testing between the top and bottom of leads revealed 
inconsistencies in chemical composition, leading SMT Corp. to 
conclude that the leads were extended with the intention to 
deceive. Microscopic inspection also revealed that different 
revision numbers of the die and differences in various die 
markings were found in some parts even though the samples were 
advertised to be from the same part number and production date. 
Commonly components manufactured with the same date and lot 
code have the same die revisions.
    Finally, the manufacturer of certain parts confirmed their 
end-of-life designation leading SMT Corp. to conclude that 
certain parts were misrepresented as being newer than the 
actual parts could possibly be.
    As previously stated, as of today, we have also received 
three bogus parts after submitting requests using invalid part 
numbers. The fact that vendors fulfilled our requests indicate 
that they were willing to sell parts stamped with nonexistent 
part numbers essentially taking money in exchange for bogus 
parts. Figure 4 of my prepared statement provides photos of the 
fictitious parts we received to date.
    In conclusion, preliminary observations from our ongoing 
investigation indicate that counterfeit electronic parts can be 
found on Internet purchasing platforms.
    I will be pleased to report to you the full results of our 
work once our investigation is complete.
    I would also like to extend my appreciation to the entire 
investigation team for their dedication and commitment in 
delivering this interim report. With the combined assistance of 
investigators, analysts, and methodologists, we are pleased to 
provide these investigative services to Congress.
    Chairman Levin and Ranking Member McCain and members of the 
committee, this concludes my prepared remarks and I would be 
happy to respond to any questions you may have.
    [The prepared statement of Mr. Hillman follows:]
                Prepared Statement by Richard J. Hillman
    Chairman Levin, Ranking Member McCain, and members of the 
committee:
    Thank you for the opportunity to discuss the preliminary 
observations of our ongoing investigation into the availability of 
counterfeit military-grade electronic parts on Internet purchasing 
platforms. 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, affect the integrity of weapon systems, and ultimately 
endanger the lives of our troops. 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.\1\
---------------------------------------------------------------------------
    \1\ Government Accountability Office (GAO), Defense Supplier Base: 
DOD Should Leverage Ongoing Initiatives in Developing Its Program to 
Mitigate Risk of Counterfeit Parts, GAO-10-389 (Washington, DC: Mar. 
29, 2010).
---------------------------------------------------------------------------
    We recently reported that the increase in counterfeit electronic 
parts is one of several potential barriers DOD faces in addressing 
parts quality problems.\2\ In your request letter, you cited specific 
questions about the availability of counterfeit parts on Internet 
platforms commonly used to buy hard-to-find military-grade electronic 
parts, including those used in weapon systems. My statement today 
summarizes preliminary observations from our ongoing investigation into 
the purchase and authenticity testing of selected, military-grade 
electronic parts that may enter the DOD supply chain. We will issue our 
final report when our investigation is complete.
---------------------------------------------------------------------------
    \2\ GAO, Space and Missile Defense Acquisitions: Periodic 
Assessment Needed to Correct Parts Quality Problems in Major Programs, 
GAO-11-404 (Washington, D.C.: June 24, 2011).
---------------------------------------------------------------------------
    In conducting this investigation, we created a fictitious company 
to gain access to Internet platforms that sell military-grade 
electronic parts. Our company included a fictitious owner and 
employees, mailing and e-mail addresses, a Web site, and a listing on 
the Central Contractor Registration.\3\ We attempted to purchase 
memberships to three Internet platforms that were of interest to this 
committee. We were granted memberships to two platforms but denied by 
the third. We then requested quotes from vendors on both platforms to 
purchase a total of 13 parts from a list of parts this committee 
provided that fell into one of three categories: (1) authentic part 
numbers for obsolete and rare parts, (2) authentic part numbers with 
post production date codes (date codes after the last date the part was 
manufactured), and (3) bogus part numbers. We independently verified 
with the Defense Logistics Agency (DLA) that the authentic part numbers 
were used for military applications using DLA's Federal Logistics 
Information System and by interviewing DLA officials.\4\ We also 
confirmed with DLA and selected part manufacturers that the bogus part 
numbers were not associated with actual parts. We altered all part 
numbers in this testimony due to the ongoing nature of our 
investigation. We requested parts from vendors that were new in 
original packaging, not refurbished, and had no mixed date codes. We 
selected the first vendor among those offering the lowest prices that 
provided enough information, such as name, addresses, and payment 
method, to make a purchase. We attempted to avoid using the same vendor 
more than once unless no other vendor responded to our request; 
however, vendors may operate under more than one name. We did not 
attempt to verify the independence of any vendor before we made our 
purchases. Finally, we contracted with the SMT Corp. for full component 
authentication analysis. For details on this analysis, see appendix I. 
The results of this investigation are based on the use of a 
nongeneralizable sample, and these results cannot be used to make 
inferences about the extent that parts are being counterfeited. We 
began this investigation in August 2011 and are conducting it in 
accordance with standards prescribed by the Council of the Inspectors 
General on Integrity and Efficiency.
---------------------------------------------------------------------------
    \3\ The Central Contractor Registration is the primary contractor 
registrant database for the U.S. Federal Government. The Central 
Contractor Registration collects, validates, stores, and disseminates 
data in support of agency acquisition missions.
    \4\ DLA's Federal Logistics Information Service via the World Wide 
Web provides general information about more than 8 million supply items 
used by the U.S. Government and North Atlantic Treaty Organization 
(NATO) allies.
---------------------------------------------------------------------------
    In summary, as of November 8, 2011, we have purchased 13 parts. 
None of the seven parts we have complete results for are authentic. 
Specifically, according to SMT Corp., all three parts tested after we 
requested legitimate but rare or obsolete parts failed at least three 
of seven authentication analyses and were ``suspect counterfeit.''\5\ 
These parts included two voltage regulators and one operational 
amplifier, the failure of which could pose risks to the functioning of 
the electronic system where the parts reside. SMT Corp. also made the 
same determination for the other operational amplifier we received 
after requesting a legitimate part number with a post production date 
code. In this instance, the part failed four of seven authentication 
analyses, and the vendor also misrepresented the part as 9 years newer 
than the date it was last produced. In addition, we received three 
bogus parts after submitting orders using invalid part numbers. Because 
no legitimate parts in this final category exist--the part numbers are 
not in DLA's Federal Logistics Information System and selected 
manufacturers confirmed they have never been produced--we did not send 
them for authenticity testing. We are awaiting authentication analysis 
results for two additional parts, and have not yet received another 
four purchases. We will report the results for these and additional 
parts we plan to purchase in a future product. While we sent requests 
to both domestic and international companies, all of the parts we 
purchased and received to date were provided by vendors in China. We 
will issue our final report when our investigation is complete.
---------------------------------------------------------------------------
    \5\ According to SMT Corporation, industry standards dictate that 
the term ``counterfeit'' cannot be used by an independent test lab; 
only the product manufacturer can deem a product counterfeit. 
Therefore, the term ``suspect counterfeit'' is defined as items that 
are produced or distributed in violation of intellectual property 
rights, copyrights, or trademark laws, as well as any items that are 
deliberately altered in such a way as to misrepresent the actual 
quality of the item with intent to defraud or deceive the purchaser.
---------------------------------------------------------------------------
   preliminary observations point to availability of counterfeit and 
                           nonexistent parts
    Figure 1 shows the preliminary status of the 13 parts we have 
purchased as of November 8, 2011. The text below details our 
preliminary findings for each of the three categories of parts.
      
    
    
      
Authentic Part Numbers for Obsolete or Rare Parts
    All three of the obsolete or rare parts that SMT Corp. tested were 
suspected counterfeits. The parts were subject to a component 
authentication analysis, which included visual, chemical, x-ray, and 
microscopic testing. Figure 2 provides photos and detailed test results 
for each part. We purchased two additional parts; one is currently 
being tested by SMT Corp., while we have not yet received the other. 
All five parts were purchased through the same Internet platform.
      
    
    
      
    For two of the tested parts, purchased with part number MLL1, 
evidence lots contained a number of samples that failed three of seven 
analyses leading SMT Corp. to conclude that they are suspect 
counterfeit. Both parts were purchased from different vendors using the 
same part number, as pictured in figure 2. An authentic part with this 
number is a voltage regulator that may be commonly found in military 
systems such as the Air Force's KC-130 Hercules aircraft, the Navy's F/
A-18E Super Hornet fighter plane, the Marine Corps' V-22 Osprey 
aircraft, and the Navy's SSN-688 Los Angeles Class nuclear-powered 
attack submarine. If authentic, these parts provide accurate power 
voltage to segments of the system they serve. Failure can lead to 
unreliable operation of several components (e.g., integrated circuits) 
in the system and poses risks to the function of the system where the 
parts reside.
    Visual inspection was performed on all evidence samples for both 
parts. Different color epoxy seals were noted within both lots 
according to SMT Corp., which is common in suspect counterfeit devices 
because many date and lot codes are remarked to create a uniform 
appearance. Moreover, according to SMT Corp., x-ray fluorescence (XRF) 
testing of the samples revealed that the leads contain no lead (Pb), 
which, according to military performance standards defined in section 
A.3.5.6.3 of the MIL-PRF-38535J DOD Performance Specification for 
Integrated Circuits (Microcircuits) Manufacturing, should be alloyed 
with at least 3 percent of lead (Pb).6,7 Further, XRF data 
between the top and bottom of the lead revealed inconsistencies in 
chemical composition, leading SMT Corp. to conclude that the leads were 
extended with the intention to deceive. Microscopic inspection revealed 
that different revision numbers of the die and differences in various 
die markings were found even though the samples were advertised to be 
from the same lot and date code.\8\ Commonly, components manufactured 
within the same date and lot code will have the same die revisions. 
According to SMT Corp.'s report, the manufacturer also stated that ``it 
is very unusual to have two die runs in a common assembly lot. This is 
suspicious.'' Finally, the devices found in the first lot tested went 
into ``last time buy'' status--an end-of-life designation--on September 
4, 2001, meaning that the parts were misrepresented as newer than they 
actually were. The manufacturer confirmed this status and added that 
the part marking did not match its marking scheme, meaning that the 
date code marked on the samples would not be possible.
---------------------------------------------------------------------------
    \6\ XRF analyzers quickly and nondestructively determine the 
elemental composition of materials commonly found in microelectronic 
devices. Each of the elements present in a sample produces a unique set 
of characteristic x-rays that reveals the chemistry of the sample in an 
analogous manner to a fingerprint. A lead is an electrical connection 
consisting of a length of wire or soldering pad that comes from a 
device. Leads are used for physical support, to transfer power, to 
probe circuits, and to transmit information.
    \7\ Department of Defense, MIL-PRF-38535J (Dec. 28, 2010).
    \8\ A die is a small wafer of semiconducting material on which a 
functional circuit is fabricated.
---------------------------------------------------------------------------
    For the third tested part, purchased as part number DAA6, evidence 
lots contained many samples that failed four authentication analyses, 
leading SMT Corp. to conclude that they are suspect counterfeit. An 
authentic part with this part number is an operational amplifier that 
may be commonly found in the Army and Air Force's Joint Surveillance 
and Target Attack Radar System (JSTARS); the Air Force's F-15 Eagle 
fighter plane; and the Air Force, Navy, and Marine Corps' Maverick AGM-
65A missile. If authentic, this part converts input voltages into 
output voltages that can be hundreds to thousands of times larger. 
Failure can lead to unreliable operation of several components (e.g., 
integrated circuits) in the system and poses risks to the function of 
the system where the parts reside.
    Visual inspection for DAA6 found inconsistencies, including 
different or missing markings and scratches, which suggested that 
samples were remarked. Scanning electron microscopy analysis revealed 
further evidence of remarking. Similarly to parts MLL1, XRF testing of 
the DAA6 samples revealed that the leads contain no lead (Pb) instead 
of the 3 percent lead (Pb) required by military specifications.\9\ Five 
samples were chosen for delidding because of their side marking 
inconsistencies. While all five samples had the same die, the die 
markings were inconsistent. According to SMT Corp., die markings in 
components manufactured within the same date and lot code should be 
consistent. Finally, the devices found in the first lot tested went 
into ``last time buy'' status in 2001, meaning that the parts were 
misrepresented as newer than they actually were. The manufacturer 
confirmed this status and added that the part marking did not match its 
marking scheme, meaning that the date code marked on the samples would 
not be possible.
---------------------------------------------------------------------------
    \9\ Department of Defense, MIL-PRF-38535J.
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Authentic Part Numbers with Postproduction Date Codes
    As of November 8, 2011, the part we received and tested after 
requesting a legitimate part number but specifying a postproduction 
date code was also suspected counterfeit, according to SMT Corp. Figure 
3 provides a photo and detailed test results. We have purchased three 
additional parts with postproduction date codes; one is with SMT Corp. 
for testing, while we have not yet received the other two. By 
fulfilling our requests, the vendors agreed to provide parts that they 
represented as several years newer than when they were last 
manufactured. We verified the last date the parts were produced with 
the part manufacturers. Nonetheless, the parts will be subject to a 
full component authentication analysis.
      
    
    
      
    For the part purchased with part number DAA6, evidence lots 
contained many samples that failed four of seven analyses, leading SMT 
Corp. to conclude that they are suspect counterfeit. This is the same 
part number used to purchase the DAA6 part tested under category one, 
which was also suspected counterfeit. However, for this part our order 
included a postproduction date code in place of a valid one, and the 
part we received was supplied by a different vendor.
    Surfaces on the parts in the evidence lots were found to have 
scratches similar to suspect counterfeit devices that have been 
remarked, as confirmed by both visual inspection and scanning electron 
microscopy analysis. In addition, the quality of exterior markings, 
including a lack of consistency between the manufacturer's logo, was 
lower than would be expected for authentic devices. Tooling marks were 
also found on the bottom of all components within the evidence lot; 
these marks suggest the components were pulled from a working 
environment. Further inspection led SMT Corp. to conclude that many 
samples with refurbished leads were extended with the intention to 
deceive. Moreover, XRF analysis revealed the leads contain no lead 
(Pb), which according to military performance standards defined in 
section A.3.5.6.3 of the MIL-PRF-38535J DOD Performance Specification 
for Integrated Circuits (Microcircuits) Manufacturing, should be 
alloyed with at least 3 percent of lead (Pb).\10\ Delidding, which 
exposes parts' die, revealed that the die, while correct for this 
device, were inconsistent. As previously stated, multiple die runs are 
considered suspicious. Finally, some of the samples went into ``last 
time buy'' status in 2001, despite the fact that we requested 2005 or 
later and the vendor agreed to provide 2010 or later.
---------------------------------------------------------------------------
    \10\ Department of Defense, MIL-PRF-38535J.
---------------------------------------------------------------------------
Bogus Part Numbers
    As of November 8, 2011, we have received three bogus parts after 
submitting requests using invalid part numbers. The fact that vendors 
fulfilled our requests indicates that they were willing to sell parts 
stamped with nonexistent part numbers essentially taking money in 
exchange for bogus parts. According to selected manufacturers, the part 
numbers we requested and received parts for, GDD4, DAA5, and 3MM8, are 
not associated with parts that have ever been manufactured. In 
addition, the parts were not listed in DLA's Federal Logistics 
Information Service. As such, we did not send the parts to SMT Corp. 
for authentication analysis. Figure 4 provides photos of the fictitious 
parts we received. We purchased a fourth part with an invalid part 
number but have not yet received it.
      
    
    
      
    Chairman Levin, Ranking Member McCain, and members of the 
committee, this concludes my prepared statement. I would be happy to 
respond to any questions you may have.
          appendix i: details of authentication analysis tests
    This appendix provides details on each of the tests that constitute 
the authentication analysis SMT Corp. conducted for the parts we 
purchased.
Visual Inspection:
    Visual inspection is performed on a predetermined number of samples 
(usually 100 percent) to look for legitimate nonconformance issues as 
well as any red flags commonly found within suspect counterfeit 
devices.
X-Ray Florescence (XRF) Elemental Analysis:
    The XRF gathers and measures the elements within a target area. 
This is used specifically for testing components for RoHS or Hi-Rel 
conformance, which refer to dangerous substances such as Lead (Pb), 
Cadmium (Cd), Mercury (Hg) that are commonly used in electronics 
manufacturing. For suspect counterfeit devices, it helps determine if a 
component has the correct plating for the specification it supposed to 
adhere to.
Package Configuration and Dimensions:
    This test measures key areas of the device to see if they fall 
within industry specifications.
Real-Time X-Ray Analysis:
    X-ray analysis is performed on a predetermined number of samples 
(usually 100 percent). The internal construction of components is 
inspected (depending on the component package type) for legitimate 
issues such as broken/taut bond wires, electrostatic discharge damage, 
broken die, and so forth. For suspect counterfeit devices, the 
differences in die size/shape, lead frames, bond wire layout, etc. are 
inspected.
Scanning Electron Microscopy:
    A scanning electron microscope is used to perform an exterior 
visual inspection--more in-depth than the previous visual inspection. 
This is usually performed on a two-piece sample from the evidence lot. 
Depending on the package type, indications of suspect counterfeit 
devices are sought, including surface lapping, sandblasting, and 
sanding with regards to part marking removal.
Solderability:
    This test is usually for legitimate components to determine if they 
will solder properly when going to be used in production.
Decapsulation/Delidding and Die Verification:
    The die of a component is exposed with either corrosive materials 
or a cutting apparatus. This is done to inspect the die or ``brain'' of 
a component to determine its legitimacy. This process is performed on 
numerous samples to look for differences between samples such as die 
metallization layout, revisions, part numbers, and so forth--all of 
which are red flags for suspect counterfeits.

    Chairman Levin. Thank you so much, Mr. Hillman, for your 
investigation here and for all the other great work that GAO 
does.
    Mr. Toohey.

STATEMENT OF BRIAN C. TOOHEY, PRESIDENT, SEMICONDUCTOR INDUSTRY 
                          ASSOCIATION

    Mr. Toohey. Chairman Levin, Ranking Member McCain, and 
members of the committee, I greatly appreciate the opportunity 
to testify today to aid in your investigation into counterfeit 
electronic parts in the DOD supply chain and about the dangers 
that counterfeit semiconductors pose to U.S. national security 
and public safety.
    The issue is of more and more importance as semiconductors 
are key components to an increasing number of mission-critical 
civilian applications such as lifesaving medical devices, 
automotive safety systems, airplanes, but even more alarmingly, 
counterfeit semiconductors have infiltrated the tools, systems, 
and communications equipment that our military is using today.
    By way of brief background, a semiconductor is the 
foundation or brains of any electronic device. The popular 
terms, ``microelectronics,'' ``integrated circuits,'' and 
``computer chips,'' are synonymous with semiconductors.
    Our industry is America's largest exporter, and 
semiconductor innovations form the foundation for America's 
$1.1 trillion technology industry that supports a workforce of 
nearly 6 million. The semiconductor industry is a great 
American innovation story, and our companies still lead the 
world in the rapid pace of innovation and global market share. 
We consider our industry a model for the innovation economy of 
the future, and our companies still do the vast majority of 
advance design and manufacturing here in the United States and 
sell nearly 85 percent of our products internationally.
    First, a note on how legitimate semiconductors are 
manufactured versus counterfeits. Our members, which include 
the largest U.S. headquartered semiconductor companies, invest 
billions of dollars in state-of-the-art facilities in order to 
manufacture semiconductors in ultra-clean rooms. The highly 
sensitive chips are then tested to ensure they function to 
exacting specifications and standards. In the case of military-
grade chips, these specific semiconductors are designed and 
tested to withstand intense temperature and movement variables 
to meet the performance standards necessary for combat and 
military situations.
    In contrast, as the chairman and ranking member noted, 
counterfeiters abroad rummage through piles of e-waste--in some 
instances, this includes old computers and circuit boards from 
the 1980s and 1990s--and use crude techniques like surface 
sanding, acid washes, and open flames to conceal the true 
origin and purpose of the chip. These chips, already weakened 
from their original state and at great risk of failure, are 
then relabeled sometimes as military-grade using digital 
printing and laser etching and packaged for sale to 
international brokers. Recently counterfeiters have begun 
acquiring more sophisticated equipment and advanced labeling 
techniques making it increasingly difficult to identify fake 
semiconductors.
    Our members have also found factories that manufacture 
blank chips on which counterfeit markings are added later in a 
made-to-order fashion even if the chip's functionality does not 
match the order specifications.
    As a result, more and more counterfeit chips make it 
through our borders into a wide range of products. Given the 
high failure risk, this places our citizens and our military 
personnel in unreasonable peril. A counterfeit semiconductor is 
a ticking time bomb.
    A prime example of counterfeits making their way into the 
military supply chain is the VisionTech case which recently 
resulted in the first felony conviction for counterfeit IC 
trafficking. The counterfeit semiconductor sold by VisionTech 
included chips destined for naval vessel and land-based 
identification friend or foe systems, memory chips for the Harm 
Testing System used by F-16s to track hostile radar systems, 
chips intended for an application the U.S. Navy Cobra Judy 
Replacement Program, and chips that control the braking system 
in high-speed trains. This is a very real and very alarming 
problem. Americans' lives are at risk every time a counterfeit 
semiconductor makes its way into one of these highly complex 
and mission-critical systems.
    Experts have estimated that as many as 15 percent of all 
spare and replacement parts purchased by the Pentagon are 
counterfeit.
    Overall, as the chairman noted, we estimate that 
counterfeiting costs U.S.-based semiconductor companies more 
than $7.5 billion per year, which translates into nearly 11,000 
lost American jobs.
    Our industry takes this threat very seriously and we are 
committed to doing everything within our power to stop 
counterfeits from entering the United States and being used in 
our military and civilian supply chains. We believe this is a 
multi-faceted problem that will require a multi-pronged 
approach with a coordinated effort from Government and 
industry.
    While I understand this is primarily an investigative 
hearing, I would like to offer five steps that we view as 
critical to combating this clear and present danger.
    First, we should continue our successful partnerships with 
DOD and the Department of Justice and the semiconductor 
industry and others to develop a more robust and effective 
authentication system.
    Second, DOD should implement strengthened procurement 
procedures for mission-critical components, including 
purchasing exclusively from authorized distributors or DOD-
certified resellers.
    Third, we should strengthen our ability, the industry's 
ability, to partner with customs officials to stop counterfeit 
semiconductors at the border. In 2008, Customs and Border 
Protection (CBP) stopped the successful practice of sharing key 
information regarding suspect counterfeit chips with 
manufacturers and began redacting or crossing out critical 
manufacturing codes making it virtually impossible to determine 
if the suspect chips are authentic or counterfeit. Returning to 
the pre-2008 practice would significantly improve our Nation's 
ability to stop counterfeits at our border.
    Fourth, we should continue to aggressively prosecute 
counterfeit traffickers.
    Finally, we should leverage every trade tool at our 
disposal to encourage stronger enforcement of intellectual 
property rights, especially trademarks, internationally.
    Thank you for this opportunity to testify, and I would 
welcome any questions.
    [The prepared statement of Mr. Toohey follows:]
                   Prepared Statement by Brian Toohey
                           executive summary
    Chairman Levin, Ranking Member McCain, and other members of the 
Senate Committee on Armed Services, my name is Brian Toohey. I am the 
President of the Semiconductor Industry Association (SIA). I thank the 
committee for inviting me to testify about the dangers counterfeit 
products and specifically semiconductors pose to the U.S. military and 
the civilian population at large.
    The importation of counterfeit semiconductor ``chips'' is a growing 
national security threat. For years, counterfeiters abroad (primarily 
in China) have used crude techniques, including open fires, surface 
sanding, and acid washes, to turn ``e-waste'' into counterfeit 
semiconductors. This is in stark contrast to SIA Members high-quality 
production of semiconductors. The counterfeits are re-labeled using 
digital printing and laser marking and packaged for sale to 
international brokers. The processes used for converting these chips to 
remarks or counterfeits weakens them and ensures that they will fail 
sooner than expected and/or not perform to specification. However, 
counterfeiters have begun acquiring more sophisticated equipment and 
advanced counterfeiting techniques, making it increasingly difficult to 
identify counterfeit semiconductors.
    This puts tools, systems, vehicles, and missions at great risk of 
failure and endangers lives. As a result, more and more counterfeit 
chips make it through our borders and into a wide range of 
technologies, including automotive products such as brake systems, 
medical devices such as defibrillators, and, most troubling, into 
military equipment such as missiles, navigation systems, and jets. 
Given the high risk of failure, counterfeit infiltration places our 
military personnel and citizens, critical infrastructure and mission-
critical applications across the United States and the world in 
unreasonable peril.
    To address the threat with military applications, SIA and the 
Department of Defense (DOD) have been working closely to develop a new 
product authentication process to increase the ability of our industry, 
with DOD and other agencies to work more cooperatively to identify 
counterfeit products and potentially their sellers or importers. Our 
goal is to develop a process that will make both industry and 
government more effective and timely in fighting counterfeiters. The 
SIA Anti-Counterfeiting Task Force (ACTF), DOD, as well as the National 
Aeronautics and Space Administration (NASA), Jet Propulsion Laboratory, 
and other trade associations and companies formed the DOD Working 
Group. The Working Group has created a Product Identification/
Authentication Request Form that will assist government agencies in 
requesting authentication services, from the manufacturer, for suspect 
products found during acquisition or already in the government supply 
chain. That form and authentication process are in the final review 
stage. The next Working Group project will be to draft recommendations 
for better procurement procedures for mission-critical and life/safety 
products to avoid procuring counterfeit products or products with 
embedded malware and back doors. Finally, SIA's Anti-Counterfeit Task 
Force, DOD and other government agencies are participating in the 
Department of Justice's (DOJ) DC Counterfeit Microelectronics Working 
Group where government agencies and industry exchange information on 
counterfeiting and anti-counterfeiting activities with a focus on 
identifying, investigating and prosecuting people that make or sell 
counterfeits in the United States.
    Unfortunately, a U.S. Customs and Border Protection (CBP) policy is 
undermining our cooperative anti-counterfeiting partnership with DOD 
and could endanger working relationships with other Federal law 
enforcement agencies. Despite our efforts with DOD and others, today 
the number of counterfeit semiconductors coming into the United States 
is on the rise and unfortunately is being inadvertently aided by the 
application of this policy.
    Prior to 2000 when port officers suspected a shipment contained 
counterfeit chips, they would contact the trademark owner and share one 
of the products. After 2000, but before 2008, Port Officers 
photographed the outside of a suspect chip and sent the publicly 
viewable information to the chip manufacturer whose trademark appeared 
on the surface of the chip to determine whether the chip was 
counterfeit. Using a highly confidential database, the trademark owner 
could then determine very quickly, for almost 85 percent of the 
requests, whether or not the chips were counterfeits by analyzing the 
codes on the surface of the chip.
    In mid-2008, however, CBP officers were instructed to redact any 
identifying marks in the photographs, except the trademark, before 
sending them to manufacturers, thereby scuttling the cooperative system 
that worked so well for 8 years. The current redaction practice makes 
it impossible for the industry, much less CBP, to authenticate 
suspected counterfeit semiconductors. CBP officials argue this change 
in practice is intended to shield port officers from criminal liability 
for the disclosure of confidential information. However, to the extent 
the codes on the surface of semiconductors--which are publicly-viewable 
by anybody who picks up a chip or looks at a chip's packaging label--
are confidential; they belong to the manufacturers to whom photographs 
would be sent and not the importer.
    SIA simply asks CBP to revert to its historical pre-2008 practice 
and share unredacted photographs, and where necessary physical 
products, of suspected counterfeit semiconductors with their original 
manufacturers. Such a policy is clearly in the Nation's interest to 
continuously improve our security. Preventing counterfeit 
semiconductors from entering the United States will safeguard the 
military supply chain and protect public health and safety.
                      background on semiconductors
    Semiconductor ``chips'' are used in everything that is computerized 
or uses radio waves. Indeed, semiconductors are components in a 
staggering variety of products, from computers and smart phones to 
medical devices, LEDs and smart meters, automobiles and military 
equipment, including missiles, radar, navigation systems and jets. They 
are making the world around us smarter, greener, safer, and more 
efficient. They form that backbone of our critical infrastructure and 
are economically vital to the Nation's growth and productivity.
    In 2010, U.S. semiconductor companies generated over $140 billion 
in sales--representing nearly half the worldwide market, and making 
semiconductors the Nation's largest export industry on a 5-year 
average. Our industry directly employs nearly 200,000 workers in the 
U.S. Studies show that semiconductors, and the information technologies 
they enable, represent 3 percent of the economy, but drive 25 percent 
of economic growth.
                         background on the sia
    SIA is the voice of the U.S. semiconductor industry, America's 
largest export industry since 2005 and a bellwether of the U.S. 
economy. Semiconductor innovations form the foundation for America's 
$1.1 trillion technology industry affecting a U.S. workforce of nearly 
6 million. Founded in 1977 by five microelectronics pioneers, SIA 
unites more than 60 companies from across the United States that 
account for 80 percent of the Nation's semiconductor production. Our 
industry has an especially robust presence in Arizona, California, 
Colorado, Idaho, Maine, Massachusetts, New York, New Hampshire, North 
Carolina, South Carolina, Oregon, Rhode Island, Texas and Virginia.
    SIA seeks to strengthen U.S. leadership in semiconductor design and 
manufacture by working with Congress, the administration, and other 
industry groups to enable the right ecosystem for technology 
development and commercialization. Specifically, SIA encourages 
policies and regulations that fuel innovation, propel business and 
drive international competition in order to maintain a thriving 
semiconductor industry in the United States.
                 increasing prevalence of counterfeits
    Due to the increasing availability and decreasing price of 
equipment needed to counterfeit semiconductors, unscrupulous brokers 
looking to garner illicit profits are importing ever greater numbers of 
counterfeit chips into the United States. In fact, the Department of 
Commerce has reported that counterfeit incidents discovered by the 
military and military suppliers more than doubled between 2005 and 
2008, from 3,868 to more than 9,356 cases.\1\
---------------------------------------------------------------------------
    \1\ U.S. Department of Commerce, Defense Industrial Base 
Assessment: Counterfeit Electronics available at http://
www.bis.doc.gov/defenseindustrialbaseprograms/osies/
defmarketresearchrpts/final--counterfeit--electronics--report.pdf; see 
also Michele Moss, Systems Assurance, The Global Supply Chain, and 
Efforts to Increase Communication Between Acquisition and Development, 
available at http://www.dtic.mil/ndia/2010CMMI/WednesdayTrack4--
11328Moss.pdf; Surge in counterfeit items in Pentagon's supplies, 
Homeland Security Newswire, Aug. 10, 2010, available at http://
www.homelandsecuritynewswire.com/surge-counterfeit-items-pentagons-
supplies.
---------------------------------------------------------------------------
    In July of this year Greg Schaffer, the Acting Deputy Under 
Secretary for the Department of Homeland Security National (DHS) 
Protection and Programs Directorate, provided testimony to the House 
Oversight and Government Reform Committee. During the hearing, Mr. 
Schaffer was asked, and admitted that DOD had purchased counterfeit 
electronic products with embedded security risks that were found in the 
DOD supply chain.\2\
---------------------------------------------------------------------------
    \2\ DHS: Imported Devices Infected with Malware, https://
infosecisland.com/blogview/15095-DHS-Imported-Devices-Infected-with-
Malware.html.
---------------------------------------------------------------------------
    Mr. Schaffer went on to say, ``imported consumer electronics have 
been sold in this country containing malware or spyware. Unknown 
foreign parties have preloaded the devices with code that could 
compromise security.'' Schaffer added, ``many devices made in the 
United States contain foreign components and that it is possible that 
these components could also contain malware.'' \3\
---------------------------------------------------------------------------
    \3\ DHS: Imported Consumer Tech Contains Hidden Hacker Attack 
Tools, http://www.datamation.com/news/dhs-imported-consumer-tech-
contains-hidden-hacker-attack-tools-.html.
---------------------------------------------------------------------------
    Alarmingly, counterfeit chips can be found in automobile airbag 
systems, defibrillators, and even highly-sensitive military equipment. 
As a 2008 Business Week article explains:

          The American military faces a growing threat of potentially 
        fatal equipment failure--and even foreign espionage--because of 
        counterfeit computer components used in warplanes, ships, and 
        communications networks. Fake microchips flow from unruly 
        bazaars in rural China to dubious kitchen-table brokers in the 
        United States and into complex weapons. Senior Pentagon 
        officials publicly play down the danger, but government 
        documents, as well as interviews with insiders, suggest 
        possible connections between phony parts and breakdowns. In 
        November 2005, a confidential Pentagon-industry program that 
        tracks counterfeits issued an alert that ``BAE Systems 
        experienced field failures,'' meaning military equipment 
        malfunctions, which the large defense contractor traced to fake 
        microchips . . . . In a separate incident last January, a chip 
        falsely identified as having been made by Xicor . . . was 
        discovered in the flight computer of an F-15 fighter jet at 
        Robins Air Force Base . . . . Special Agent Terry Mosher of the 
        Air Force Office of Special Investigations confirms that the 
        409th Supply Chain Management Squadron eventually found four 
        counterfeit Xicor chips.\4\
---------------------------------------------------------------------------
    \4\ Brian Grow et al., Dangerous Fakes: How counterfeit, defective 
computer components from China are getting into U.S. warplanes and 
ships, BusinessWeek, Oct. 2, 2008, available at http://
www.businessweek.com/magazine/content/08--41/b4103034193886.htm.

    Some experts have estimated that as many as 15 percent of all spare 
and replacement semiconductors purchased by the Pentagon are 
counterfeit.\5\
---------------------------------------------------------------------------
    \5\ Id.
---------------------------------------------------------------------------
    Many counterfeit chips are traced back to China. BusinessWeek 
writers visited China and described the counterfeiting economy as 
follows:

          The traders typically obtain supplies from recycled-chip 
        emporiums such as the Guiyu electronics Market outside the city 
        of Shantou in southeastern China. The garbage-strewn streets of 
        Guiyu reek of burning plastic as workers in back rooms and open 
        yards strip chips from old PC circuit boards. The components, 
        typically less than an inch long, are cleaned in the nearby 
        Lianjiang River and then sold from the cramped premises of 
        businesses such as Jinlong Electronics Trade Center. A sign for 
        Jinlong Electronics advertises in Chinese that it sells 
        ``military'' circuitry, meaning chips that are more durable 
        than commercial components and able to function at extreme 
        temperatures. But proprietor Lu Weilong admits that his wares 
        are counterfeit. His employees sand off the markings on used 
        commercial chips and relabel them as military. Everyone in 
        Guiyu does this, he says:

          ``The dates [on the chips] are 100 percent fake, because the 
        products pulled off the computer boards are from the 1980s and 
        1990s, [while] consumers demand products from after 2000.''\6\
---------------------------------------------------------------------------
    \6\ Id.

    The methods used by the counterfeiters to produce counterfeit chips 
differ significantly from those of our semiconductor manufacturers. Our 
members invest billions of dollars in state-of-the-art facilities--most 
located in the United States--and manufacture semiconductors in ultra-
clean rooms. The chips are then tested to make sure they function to 
their specifications and--in the case of many military specification 
circuits--further tested to rigid environmental standards. As noted 
above, the counterfeiters strip chips from eWaste--subjecting the chips 
to high temperature and vibration--then acid wash the leads, grind off 
the surface, literally wash them in a local river, dry them on the 
sidewalk, and retop coat them and etch fake production codes on to the 
semiconductors' surface.
    Using such a counterfeit chip is like playing Russian roulette. 
With luck, the chip will not function at all and will be discovered in 
testing. But in some cases the chip may work for a while, but because 
of the environmental abuse it could fail at a critical time--when the 
product containing the chip is stressed--as in combat. Attached is a 
detailed presentation of the various threats counterfeit chips pose to 
reliability, prepared by and submitted with the permission of Analog 
Devices, Inc.--an SIA member.\7\
---------------------------------------------------------------------------
    \7\ Attachment 1.
---------------------------------------------------------------------------
    While Chinese Officials have admitted to the prevalence of 
semiconductor counterfeiting in China, they claim they can do little 
about it. As Wayne Chao, Secretary General of the China Electronics 
Publishing Association and anti-counterfeiting advocate said, 
``[e]veryone wants to blame China. But it's difficult to differentiate 
between a legitimate product and a fake.'' \8\
---------------------------------------------------------------------------
    \8\ Id.
---------------------------------------------------------------------------
             administration resolve to combat counterfeits
    Mr. Chao is correct--it is difficult to differentiate between a 
legitimate semiconductor and a fake. It is precisely because of the 
difficulties inherent in differentiating between a legitimate and 
counterfeit semiconductor that the government must place a single-
minded emphasis on preventing the importation of counterfeit chips.\9\
---------------------------------------------------------------------------
    \9\ See Exhibit 1, a photograph comparing a genuine and counterfeit 
semiconductor.
---------------------------------------------------------------------------
    The Obama administration--like the previous Bush and Clinton 
administrations--has shown an admirable resolve to combat 
counterfeiting and other forms of intellectual property theft. Indeed, 
President Obama himself has promised:

          We're going to aggressively protect our intellectual 
        property. Our single greatest asset is the innovation and the 
        ingenuity and creativity of the American people. It is 
        essential to our prosperity and it will only become more so in 
        this century.\10\
---------------------------------------------------------------------------
    \10\ Victoria Espinel, 2010 Joint Strategic Plan on Intellectual 
Property Enforcement 3, available at http://www.whitehouse.gov/sites/
default/files/omb/assets/intellectualproperty/intellectualproperty--
strategic--plan.pdf (``IPEC Report'').

    Last year, Department of Justice (DOJ), Immigration and Customs 
Enforcement (ICE), the Office of Homeland Security Investigations, 
Naval Criminal Investigative Service (NCIS), Postal Inspection Service, 
Internal Revenue Service, Department of Transportation and General 
Services Administration worked together with the semiconductor industry 
on an investigation that led to the indictments of the principals of a 
Florida-based company that generated nearly $16 million in gross 
receipts between 2007 and 2009 by importing nearly 60,000 counterfeit 
semiconductors from China and selling them to the military as 
``military grade.'' \11\ As the U.S. Attorney in charge of the 
investigation explained:
---------------------------------------------------------------------------
    \11\ Press Release, U.S. Department of Justice, Owner and Employee 
of Florida-based Company Indicted in Connection with Sales of 
Counterfeit High Tech Devices Destined to the U.S. Military and Other 
Industries (Sept. 14, 2010), available at http://www.justice.gov/
criminal/cybercrime/wrenIndict.pdf; Spencer H. Hsu, U.S. charges 
Florida pair with selling counterfeit computer chips from China to the 
U.S. Navy and military, Washington Post, Sept. 14, 2010, available at 
http://www.washingtonpost.com/wp-dyn/content/article/2010/09/14/ 
AR2010091406468.html.

          Product counterfeiting, particularly of the sophisticated 
        kind of equipment used by our Armed Forces, puts lives and 
        property at risk. This case shows our determination to work in 
        coordination with our law enforcement partners and the private 
        sector to aggressively prosecute those who traffic in 
        counterfeit parts.\12\
---------------------------------------------------------------------------
    \12\ Id.

    From 2006 to 2010, VisionTech Components knowingly sold counterfeit 
integrated circuits to approximately 1,101 buyers in the United States 
and abroad, including counterfeit integrated circuits destined for 
military applications. VisionTech shipped 75 counterfeit chips destined 
for naval vessel and land-based Identification Friend or Foe system. As 
the U.S. Attorney noted, ``if the system failed during an engagement 
and could not identify an approaching threat aircraft 25 miles away, a 
missile fired from the threat aircraft could hit a ship 1 minute 
later.'' \13\ Other shipments included 1,500 counterfeit memory chips 
destined for the Harm Testing System installed on F-16s to track 
hostile radar systems,\14\ 350 counterfeit ICs intended for an 
application in the Beam Steering Control Module board within Multiple 
Sub-Array of Testable Antenna for the U.S. Navy Cobra Judy Replacement 
Program,\15\ 1,500 counterfeit chips to control the braking system in a 
high speed train,\16\ and 196 counterfeit chips to be used in a hand-
held portable nuclear identification tool, a device offered for sale on 
the Federal Emergency Management Agency (FEMA) Web site as suggested 
emergency equipment for first responders.\17\ For her part in the 
scheme, VisionTech's administrator, Stephanie McCloskey, was sentenced 
to 38 months imprisonment and $166,141 in fines.
---------------------------------------------------------------------------
    \13\ Government's Consolidated Memorandum In Aid Of Sentencing and 
Motion for Downward Departure Pursuant to U.S.S.G. Sec. 5K1.1, 
September 9, 2011 at 50.
    \14\ Id. at 51.
    \15\ Id. at 54.
    \16\ Id. at 55.
    \17\ Id at 56-57.
---------------------------------------------------------------------------
    The VisionTech case has exposed a truly dangerous type of fraud our 
country is facing. Our industry is grateful to the investigators and 
prosecutors that have contributed to the successful prosecution and 
penalties. Lives are put at risk if these devices are not reliable, 
safe, effective and free of counterfeit parts. This is why it is 
absolutely imperative that counterfeiters and the people knowingly sell 
them--and who violate our trust--are brought to justice.
    The Obama administration's Intellectual Property Enforcement 
Coordinator (IPEC), Victoria Espinel, also understands the importance 
of enforcing intellectual property laws and preventing the importation 
of counterfeit semiconductors. In the administration's 2010 Joint 
Strategic Plan on Intellectual Property Enforcement, Ms. Espinel 
explained the vital role of intellectual property enforcement in 
protecting the consumer safety and national security:

          Violations of intellectual property rights, ambiguities in 
        law and lack of enforcement create uncertainty in the 
        marketplace, in the legal system and undermine consumer trust. 
        Supply chains become polluted with counterfeit goods. Consumers 
        are uncertain about what types of behavior are appropriate and 
        whether the goods they are buying are legal and safe. 
        Counterfeit products can pose a significant risk to public 
        health, such as . . . military systems with untested and 
        ineffective components to protect U.S. and allied soldiers, 
        auto parts of unknown quality that play critical roles in 
        securing passengers and suspect semiconductors used in 
        lifesaving defibrillators . . . . Intellectual property 
        infringement [also] can undermine our national and economic 
        security. This includes counterfeit products entering the 
        supply chain of the U.S. military, and economic espionage and 
        theft of trade secrets by foreign citizens and companies.\18\
---------------------------------------------------------------------------
    \18\ IPEC Report at 4.

         cooperation between dod and the semiconductor industry
    The SIA Anti-Counterfeiting Task Force (ACTF) and DOD have been 
collaborating to develop a new product authentication process to 
increase the ability of our industry and the U.S. Government to work 
more cooperatively to identify counterfeit products and potentially 
their sellers or importers. Our goal is to develop a process that will 
make both industry and government more effective and timely in fighting 
counterfeiters. The SIA ACTF, DOD, as well as NASA, Jet Propulsion 
Laboratory, and other trade associations and companies formed the DOD 
Working Group. The Working Group has created a Product Identification/
Authentication Request Form that will assist DOD and other government 
agencies in authenticating suspect products during acquisition or 
already in the government supply chain. That form and authentication 
process is in the final review stage.
    In addition, last year DOJ started a cross-agency and cross-
industry working group on microelectronics counterfeiting last year 
that has enabled better working relationships, information sharing and 
investigative coordination. This effort has contributed to current 
investigations into counterfeits being sold into the supply chain 
destined for DOD and their prime contractors and suppliers.
    Finally, working with DOJ to convict felonious distributors, such 
as in the VisionTech case, will deter those who would profit from 
selling dangerous counterfeits into the military and civilian supply 
chain.
 current government purchasing practices increase counterfeits in the 
                            dod supply chain
    The next Working Group project will be to draft recommendations for 
better procurement procedures for mission-critical and life/safety-
critical products to avoid procuring products with embedded 
counterfeits.
    Changing the procurement regulations requiring government 
contractors and subcontractors to purchase critical components from 
authorized brokers is another important step. Today's practice of 
purchasing based on low price allows the government to procure products 
containing semiconductors that can be either counterfeit or, even if 
authentic, doomed to fail unexpectedly because of improper salvage, 
storage, transportation and handling. We have picked, at random, some 
purchases made by DOD and found the seller to be not what they 
advertised. Such sellers are unable to guarantee that such products are 
authentic. Even if legitimate, such sellers are unable to ensure that 
the government receives products with a clear chain of custody and 
appropriate handling since leaving the manufacturer.
    In some cases a simple Google Maps search shows that instead of a 
brick and mortar facility, as shown on the seller's web page, the 
products were being sold from an apartment or farm house. The clear and 
present danger is that, unlike some other products, semiconductors, 
even if authentic, if mishandled, exposed to static electricity, harsh 
chemicals, or corrosive environments will either not perform to 
specification or will stop working long before expected. This endangers 
military personnel and missions and at a minimum costs the government 
significant dollars to identify and replace the products even if the 
failure was minor.
    The SIA respectfully recommends that the U.S. Government, and in 
particular DOD, should change its purchasing policies to ensure that 
products critical to life, health, safety, mission-critical 
applications and critical infrastructure are purchased from the 
manufacturer's authorized distributors when available. When those 
products are no longer available, such as legacy hardware 5 to 30 years 
old, then the government should implement new purchasing and product 
security processes. Buying critical components at low prices only saves 
money upfront and in the end could cost DOD far more in lives, failed 
missions, and replacement costs.
    cbp action halts industry assistance in combating counterfeiting
    Unfortunately, despite the Obama administration's understanding of 
the dangers posed by counterfeit semiconductors, and the excellent 
working relationship on anticounterfeiting between SIA, DOD, DOJ, NCIS, 
ICE, FBI and other Federal agencies, a 2008 CBP action is frustrating 
the efforts of those government agencies to combat the importation of 
counterfeit chips.
    Historically, when a CBP Port Officer suspected an imported 
semiconductor was counterfeit, CBP would send the semiconductor 
manufacturer (as identified by the trademarks featured on the 
semiconductor) either a sample of a suspect semiconductor or a 
photograph of the surface of the suspect chip. The surface of a 
semiconductor contains identifying manufacturing marks--these usually 
represent part number, lot number, date of manufacture, and place of 
manufacture--all in clear sight to anyone looking at the chip. The 
meaning of these identifying marks, however, is known only to the 
manufacturer--and only the manufacturer of the semiconductor can 
identify the authenticity of the chip using highly confidential and 
proprietary company-specific databases. After receiving a photograph of 
a suspected counterfeit chip, a semiconductor manufacturer would 
quickly locate the specific product in its internal computer systems, 
determine the product's authenticity, and inform CBP of its 
determination. CBP could then seize the counterfeit chips. While this 
policy did not prevent all counterfeits from entering the country, it 
did lead to numerous successful raids of counterfeit manufacturers in 
China and brokers in the United States.\19\
---------------------------------------------------------------------------
    \19\ See note 8; Press Release, U.S. Department of Justice, Three 
California Family Members Indicted in Connection with Sales of 
Counterfeit High Tech Parts to the U.S. Military (Oct. 9, 2009), 
available at http://www.justice.gov/criminal/cybercrime/
aljaffIndict.pdf.
---------------------------------------------------------------------------
    However, in August 2008 manufacturers discovered Customs Officers 
had been ordered to stop sending photographs (or samples) of suspect 
chips showing the information required by a manufacturer to 
authenticate a chip--even though CBP had been sending such photographs 
for nearly 8 years. Instead, CBP began sending redacted photos that 
obscured identifying information and left only the manufacturer's 
trademark visible. Given the advanced labeling technology now available 
to counterfeiters, manufacturers cannot determine whether chips are 
counterfeit based on these logo-only pictures. Not surprisingly, before 
August 2008, seizures of counterfeit semiconductors were increasing 
year after year.
    Since CBP changed its practice, interdictions at the border have 
been down and SIA members have reported receiving an increased number 
of complaints about counterfeits from end customers when the chip 
fails. Semiconductor manufacturers were not notified or provided an 
opportunity to comment before CBP began implementing the new practice; 
one day in August 2008, the identifying markings on photographs sent to 
manufacturers were simply redacted.
    The CBP's new post-2008 redaction practice is based on an April 
2000 Customs Directive which instructed Customs Officers to ``remove or 
obliterate any information indicating the name and/or address of the 
manufacturer, exporter, and/or importer, including all bar codes or 
other identifying marks'' before providing samples of chips suspected 
to bear ``confusingly similar'' trademarks to semiconductor 
manufacturers.\20\ Of course, Customs Officers understood that this 
policy could not effectively prevent the importation of counterfeit 
semiconductors. The Officers did not interpret the restrictive 
Directive to apply to photographs until August 2008; when, we have been 
told, CBP Port Officers were ``reminded'' by Treasury officials that 
the April 2000 Directive applies to photographs.
---------------------------------------------------------------------------
    \20\ Customs Directive No. 2310-008A (April 7, 2000), available at 
http://www.cbp.gov/linkhandler/cgov/trade/legal/directives/2310-
008a.ctt/2310-008a.pdf.
---------------------------------------------------------------------------
  customs needs manufacturers' support to prevent the importation of 
                       counterfeit semiconductors
    CBP cannot effectively prevent the importation of counterfeit 
semiconductors without the manufacturers/trademark owners' assistance. 
A semiconductor is very different from apparel, for example, where a 
photograph of a fake luxury handbag redacted per the Customs 
Directive's instructions likely still provides sufficient information 
for an intellectual property rights holder to determine the 
authenticity of merchandise. In contrast, semiconductor manufacturers 
use common exterior packages (which fit in common board designs) for 
their semiconductors. Moreover, counterfeiters have obtained 
professional and up-to-date laser etching equipment to place fake codes 
on counterfeit chips. Thus, it is almost always impossible to determine 
whether a given chip is legitimate or counterfeit based on the redacted 
photographs.\21\
---------------------------------------------------------------------------
    \21\ See Exhibit 1.
---------------------------------------------------------------------------
    Semiconductor manufacturers can only assist CBP in preventing 
importation of counterfeit merchandise if CBP provides manufacturers 
with sufficient information to determine whether suspect chips are 
authentic. An unredacted photograph of a suspect chip would ordinarily 
be sufficient to provide the manufacturing codes (that usually 
represent lot numbers, dates and locations of assembly) a manufacturer 
needs to authenticate a chip. Alternatively, CBP could provide 
manufacturers with these numbers or a sample chip.
    However, a photograph that has been redacted to remove these 
numbers does not provide sufficient information to determine the 
authenticity of a chip. Unless CBP provides manufacturers unredacted 
photographs of suspect chips (or provides the manufacturing codes and 
dates and locations of assembly reflected on the face of the suspect 
chips that only manufacturers can decipher), CBP cannot discharge its 
statutory obligation to ensure that imports comply with U.S. 
intellectual property laws. In such circumstances, the risk increases 
that counterfeit chips will enter U.S. commerce and ultimately end up 
as components in commercial, industrial and military systems, as we 
have witnessed since Treasury's policy shift.
           customs has the authority to enlist industry help
    The most frustrating aspect of the current policy is the fact that 
CBP has all the legal authority necessary to provide semiconductor 
manufacturers with the information necessary to stem the tide of 
counterfeit chips. CBP officials have claimed the 2000 Directive is 
meant to protect Customs Officers from liability under the Disclosure 
of Confidential Information (DCI) provision of the Trade Secrets 
Act.\22\ However, such protection is unnecessary, as Customs Officers 
are only exposed to DCI liability to the extent that CBP decides that 
information is confidential and may not be disclosed.\23\ Therefore, 
CBP can effectively protect Customs Officers by simply declaring that 
the information included on the surface of semiconductors is not 
confidential information, as it had implied prior to its policy shift. 
Indeed, it is unclear how a code that is readily visible to anyone 
looking at the product label on a container containing semiconductors 
or the surface of a semiconductor can be confidential information. 
Tellingly, when Customs promulgated the rule the 2000 Directive was 
intended to ``fix,'' \24\ it identified two potential trade secrets 
that might be divulged when disclosing information: the identity of the 
manufacturer and the identity of the importer.\25\ But sharing the 
codes on the surface of semiconductors and product labels on the 
packaging with semiconductor manufacturers would not reveal either, as 
the manufacturer knows its own identity and the surface codes reveal no 
information about a chip's importer.
---------------------------------------------------------------------------
    \22\ 18 U.S.C. Sec. 1905.
    \23\ In United States v. Wallington, 889 F.2d 573 (5th Cir. 1989), 
the Fifth Circuit logically found that the DCI only prohibits the 
disclosure of confidential information. In addition, the Fifth Circuit 
clarified that Customs agents cannot be held liable for DCI violations 
without ``at least . . . knowledge that the information is confidential 
in the sense that its disclosure is forbidden by agency official policy 
(or by regulation or law).'' Thus, since the Trade Secret Act does not 
address the information at issue, CBP Officers could be shielded from 
any potential DCI liability (to the extent such liability may exist) 
with a stroke of a pen if CBP were to clarify the Directive to permit 
Customs agents to share with semiconductor manufacturers unredacted 
photographs.
    \24\ 19 C.F.R. Sec. 133.25 (``Customs may disclose to the owner of 
the trademark or trade name . . . in order to obtain assistance in 
determining whether an imported article bears an infringing trademark 
or trade name . . . [a] description of the merchandise'').
    \25\ Copyright/Trademark/Trade Name Protection; Disclosure of 
Information, 63 Fed. Reg. 11996, 11997 (Mar. 12, 1998); see also Gray 
Market Imports and Other Trademarked Goods, 64 Fed. Reg. 9058 (Feb. 24, 
1999).
---------------------------------------------------------------------------
    CBP has failed to understand that even if the publicly-viewable 
codes were confidential, Congress clearly contemplated CBP disclosing 
such information to rights holders in order to permit CBP to fulfill 
the many laws and treaties requiring it to stop counterfeits from 
entering the United States. The DCI simply prohibits government 
officials from disclosing confidential information that ``concerns or 
relates to . . . the identity . . . of any person'' to ``any extent not 
authorized by law.'' Accordingly, Congress has authorized CBP to 
provide unredacted photos to semiconductor manufacturers through the 
Tariff Act of 1930, the Lanham Act, the North American Free Trade 
Agreement, and the GATT Agreement on Trade-Related Aspects of 
Intellectual Property Rights. In addition, CBP's own Disclosure of 
Information Regulation authorizes such disclosure.\26\ It is truly 
difficult to understand why CBP believes disclosing information to 
semiconductor manufacturers is unlawful when ICE, DOD, DOJ, NCIS, and 
even the FBI--the agency tasked with enforcing the Trade Secrets Act--
do not, and in fact routinely disclose such information to 
semiconductor manufacturers.
---------------------------------------------------------------------------
    \26\ See note 24.
---------------------------------------------------------------------------
                               conclusion
    As a trade association that represents one of America's most vital 
industries, SIA hopes that all executive agencies will support the 
Obama administration's intellectual property enforcement efforts by 
working together to reduce counterfeit imports expeditiously. 
Counterfeit semiconductors are a clear and present national security 
threat and danger to human health because they are used in many 
mission-critical applications.
    SIA member companies have a long history of working side-by-side 
with Federal agencies, law enforcement and DOD to prevent counterfeits 
from entering the defense supply chain. We have: cofounded university 
research to maintain U.S. leadership in semiconductor technologies that 
are important for our defense, participated in the trusted foundry 
program to provide trusted devices for defense applications; and been 
advisors on measures to maintain the robust industrial base necessary 
for a vibrant defense supply chain.
    We are pleased with the SIA-DOD Working Group's progress on 
creating a system for assisting our armed forces in detecting 
counterfeit chips already in the DOD supply chain. We are optimistic 
that the Working Group will also craft recommendations to reform 
government procurement practices to ensure that products critical to 
life, health, safety, mission-critical applications and critical 
infrastructure are purchased from the manufacturers' authorized 
distribution when available.
    SIA is also pleased with the efforts by the U.S. Attorney for the 
District of Columbia, ICE, NCIS, FBI, and other Federal law enforcement 
agencies to bring to justice unscrupulous brokers selling dangerous 
counterfeits into the military and civilian supply chains. However, the 
post-2008 CBP policy prevents the U.S. Government from most effectively 
working with industry to prevent counterfeit chips from being imported 
into the United States. This is alarming, especially given the danger 
such chips so obviously present.
    We respectfully request this committee and Congress work with DOD 
to require government contractors and subcontractors to purchase 
critical components from authorized sources. We also respectfully 
request this committee and Congress to work with CBP to ensure that the 
pre-2008 practice of sharing unredacted pictures of suspected 
counterfeit semiconductors and product labels with manufacturers is 
reinstated in the interest of safeguarding the health and safety of the 
American public and our military.
    In summary the fight against counterfeiting and counterfeit 
products is to:

         Ensure that the critical infrastructure that supports 
        our economy and citizens performs to expectations;
         Protect U.S. intellectual property and the U.S. jobs 
        it supports;
         Safeguard the equipment we use, fly, or drive or treat 
        our illnesses; and,
         Ensure the safety and protection of our military in 
        their day-to-day operations.

        
        
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    Chairman Levin. Thank you so much, Mr. Toohey. Let us try a 
7-minute first round for questioning. If we need a second 
round, we will have one.
    Let me start first with you, Mr. Hillman. This action or 
activity of the GAO to try to test this market produced some 
really stunning results. The idea that you can give any part 
number, make up a part number, and you can find somebody who 
will act as though they are responding to that order on the 
Internet is an amazing result. They are all coming from China 
so far. It fits with what our investigation shows, that China 
is the source of the counterfeits.
    When you set out to buy parts, when the GAO set out to buy 
parts, you did not specifically aim at any particular country. 
Right? You went on a global marketplace, the Internet.
    Mr. Hillman. That is correct. We did not target any 
specific region such as Asia, Europe, or North America. What we 
looked at specifically was individual part numbers requested by 
this committee. We entered those numbers on the Internet 
trading platforms. Vendors then offered quotations for us and 
we selected quotations that were amongst the lowest prices that 
had available information to allow us to make the purchase. It 
just so happens that the results of our tests show that for the 
13 purchases that we have made to date, 12 have come from 
Shenzhen, China and one from Beijing.
    Chairman Levin. How much time elapsed between the time that 
the GAO's fake company, that you created, requested the parts 
with the bogus part number and the time that you actually 
received the bogus part? Is that a matter of days, months, 
weeks?
    Mr. Hillman. It is a matter of days, Senator. We made 
purchases and waited for approximately a 24-hour period, 
sometimes a little longer, to obtain quotations of individuals 
willing to supply us these part numbers. Upon receiving 
information from the lowest price bidders on available 
information with which to make the payment for these purchases, 
it could have taken from several days to a little over a week 
for the purchases to actually arrive.
    Chairman Levin. How did you pay for the parts?
    Mr. Hillman. We contracted with the vendors through Western 
Union services to supply the funds for the purchases.
    Chairman Levin. They were wire transfers?
    Mr. Hillman. Wire transfers.
    Chairman Levin. Did you find that there were any operators/
counterfeiters that were working more than one company? In 
other words, did one person, as far as you can say or tell, 
have more than one company? Was there like a boiler room 
anywhere?
    Mr. Hillman. It appeared from the results of our 
discussions over the Internet that there were individuals with 
similar names that were supporting multiple vendors that were 
willing to supply us these parts.
    Chairman Levin. Mr. Sharpe, you do independent testing--
right--at one of your companies that you are affiliated with.
    Mr. Sharpe. Yes, sir, we do.
    Chairman Levin. When you did the testing here on the parts 
I guess with GAO, did you know who you were testing those parts 
for?
    Mr. Sharpe. We only knew that we were testing them on 
behalf of GAO.
    Chairman Levin. You did not know that it was for this 
committee, though.
    Mr. Sharpe. No, sir.
    Chairman Levin. You sell parts too.
    Mr. Sharpe. The biggest part of our business.
    Chairman Levin. Can you compare the way you saw parts being 
handled in China with the way you handle parts that you sell?
    Mr. Sharpe. There are really no words to describe it. 
Watching parts literally being washed in rivers, dropped on 
riverbanks, dumped into cardboard boxes. There was nothing done 
whatsoever to protect the component at any phase of what we saw 
going on over there. If anything, the entire process would 
serve to ruin the component. The processes that are followed by 
SMT begin with strict ESD controlled rooms and areas, clothing 
by our employees. The areas are dehumidified, kept between a 
relative humidity level of between 25 percent and 45 percent 
not only where we work on them but where we store them. All 
packaging is ESD compliant and tested. It is a completely 
different world.
    Chairman Levin. What impact does the way electronic parts 
are handled have on performance and reliability?
    Mr. Sharpe. Well, in the case of the parts that we saw in 
Shantou that were either on the sidewalks or in the river, for 
instance, one of the biggest enemies of an electronic component 
is moisture. So there is absolutely no safeguards whatsoever to 
stop moisture ingression into the components. Moisture 
ingression into the components leads to delamination and die 
voiding, things that begin to become the beginning of the end. 
When we look at parts at SMT through an acoustical microscope, 
we can see the evidence of that moisture ingression, and on 
parts that are counterfeit, that is a very prevalent thing for 
us to see.
    Chairman Levin. In other words, the lifespan of the part is 
dramatically affected by the way in which they are handled?
    Mr. Sharpe. Absolutely.
    Chairman Levin. When you were there, did there appear to be 
any steps taken by the Chinese Government to stop the sale and 
the marketing of these parts? I mean, the Chinese tell us they 
act against counterfeiters. That is what they tell us. We got a 
statement today from the Chinese or they issued a statement to 
the press that they are always taking action against 
counterfeiters. Did you see any evidence when you were there of 
any Chinese Government action against what was openly being 
sold as counterfeits?
    Mr. Sharpe. No, I did not. When I was in the Shenzhen 
marketplace, the parts that were there--the interpreter was 
reading to me cards that were inside of the showcases where it 
was describing what level of refurbishment had taken place as 
they were regarded. This was all right out in the open. When we 
got into the City of Shantou, the entire business purpose of 
everything that we saw there was very obviously to harvest 
components from e-scrap and go through complete refurbishment 
right there in the open. There was nothing that was hidden.
    Chairman Levin. Thank you.
    Senator McCain.
    Senator McCain. Thank you, Mr. Chairman. I thank the 
witnesses. Mr. Hillman, how serious do you think this problem 
is?
    Mr. Hillman. The results of our work to date is based off 
of a non-generalizable sample of parts that we were requested 
to purchase. Therefore, we are unable to discuss the prevalence 
of this activity.
    Senator McCain. But it is a serious problem, not so 
serious, a waste of your time?
    Mr. Hillman. No, Senator, not at all. We consider the 
problem itself to be a very serious one, possibly affecting the 
lives of our military personnel and the capabilities of the 
systems that they utilize.
    Senator McCain. Mr. Toohey, do you agree with that 
assessment?
    Mr. Toohey. Yes, absolutely. This is a very, very serious 
and growing problem, Senator.
    Senator McCain. So, Mr. Toohey, what do we need to do about 
it?
    Mr. Toohey. Well, Senator, I outlined a number of steps 
briefly that I think we ought to continue and expand. Certainly 
working to strengthen the authentication procedures, and we are 
working in a cooperative way with DOD officials to do this. I 
think ensuring that that process continues and is strengthened 
makes sense.
    Ensuring that the procurement system is strengthened so 
that for these mission-critical components, they are only 
purchased through authorized distributors or DOD-certified 
resellers. That would be a critical----
    Senator McCain. We are doing that now. People are getting 
certified to be a reseller, but obviously there is very little 
scrutiny or examination of the people who are getting this 
certification. Would you agree, Mr. Hillman?
    Mr. Hillman. There are certainly on the Internet purchasing 
platforms that we observed a wide variety of attesting or lack 
thereof associated with the parts that are being made available 
for sale.
    Senator McCain. Mr. Sharpe, we have been told by a number 
of independent distributors and testing laboratories that more 
often than not, semiconductor manufacturers refuse to assist 
them in determining the authenticity of an electronic part. Has 
that been your experience?
    Mr. Sharpe. We have seen it both ways, sir. We generally 
try to reach out to the component manufacturers to get 
information on die markings, information on the front markings, 
things like that on obsolete parts so we do not have data on--
--
    Senator McCain. Sometimes you do not get the cooperation of 
the manufacturer.
    Mr. Sharpe. Sometimes we do not.
    Senator McCain. Mr. Toohey, what have you got to say about 
that?
    Mr. Toohey. Well, Senator, our companies work very closely 
with Government officials. As a matter of fact, one of the 
steps that I----
    Senator McCain. So you do not agree with Mr. Sharpe's 
assessment.
    Mr. Toohey. Senator, we work very closely with Government 
officials and cooperatively work----
    Senator McCain. Do you agree or disagree with Mr. Sharpe's 
assessment?
    Mr. Toohey. Senator, I think our industry has an 
outstanding record of working cooperatively with both private 
sector and Government officials to authenticate chips. As a 
matter of fact, one of the steps that I recommended was 
changing a customs policy to allow us to cooperate because in 
many cases at the border, only the manufacturer can 
authenticate the chip, and right now, given the policy that is 
in place, we are not allowed to do that. So we do cooperate and 
we would like to strengthen that cooperation, Senator.
    Senator McCain. Well, we would certainly like to help you 
in that effort.
    Mr. Hillman, have you been involved in this issue at all, 
that some of the laboratories and testing distributors are 
not--people are not given assistance by the semiconductor 
manufacturers?
    Mr. Hillman. Results of our investigation to date have not 
led us into that area.
    Senator McCain. Which means to you in terms of your 
investigation?
    Mr. Hillman. In terms of our investigation, we have shown 
that it is possible to purchase counterfeit parts on Internet 
purchasing platforms. We have not, as part of this ongoing 
work, delved into the potential issues that exist currently 
within those platforms or across the supply chain but hope to 
be doing additional work as part of the ongoing investigation.
    Senator McCain. Mr. Toohey, Mr. Sharpe and others have 
given us information that the manufacturers many times refuse 
to assist. I suggest you get on that, and I suggest you get on 
it quickly. We will be glad to consider legislative changes but 
if manufacturers are not cooperating, it makes the problem even 
worse. So I hope you will look at these allegations, find out 
if they are true or not true, and if they are true, get to work 
on it.
    Mr. Toohey. We will absolutely do that.
    Senator McCain. Mr. Sharpe, how long has this been going on 
in your view?
    Mr. Sharpe. I have been in the industry for 15 years and I 
have spoken to folks who have been around the industry since 
the 1960s and they said they have seen counterfeits going back 
to the 1960s.
    Senator McCain. Is it growing worse, better, or the same?
    Mr. Sharpe. It is growing much worse, and the reason why I 
call it much worse is that the counterfeiters are changing 
their processes to get in front of the processes that they know 
that we are currently doing to detect their processes. So the 
process is evolving and it is getting harder to detect.
    Senator McCain. So really it would be extremely difficult 
to stop this unless we get the active cooperation of the 
Chinese Government.
    Mr. Sharpe. I would agree with that, yes, sir.
    Senator McCain. There is very little doubt in your mind 
that the Chinese Government is aware that this significant 
industry is taking place.
    Mr. Sharpe. Absolutely no doubt.
    Senator McCain. Have you ever had a conversation or heard 
anything from the Chinese Government about this?
    Mr. Sharpe. No, sir, I have not.
    Senator McCain. Have you, Mr. Hillman?
    Mr. Hillman. No, sir, I have not.
    Senator McCain. Mr. Toohey, I am a great admirer of your 
association and its members and the enormous contributions that 
they make to America's economy, but I suggest you give this 
some priority so that members of this committee and the 
American people can be assured that there is active cooperation 
on your part. Okay?
    Mr. Toohey. Yes, Senator.
    Senator McCain. Mr. Hillman, again I have read reports of 
the desk and the phone, the middle person who basically is just 
the pass-through, and part of it is because of our 
encouragement of small business people being able to be 
involved in DOD procurement. How serious is that part of the 
problem?
    Mr. Hillman. Well, we all value the participation by small 
businesses. In this instance, though, on this investigation, 
what we have learned in several purchases that we have made is 
that individuals are posing to be representatives of multiple 
companies and are willing to supply parts to us that are not 
authentic where no actual part numbers exist.
    Senator McCain. I thank the witnesses. Thank you, Mr. 
Chairman.
    Chairman Levin. Thank you very much, Senator McCain.
    Senator Udall.
    Senator Udall. Thank you, Mr. Chairman.
    Let me first say I think the most important and sobering 
thing that I have heard is that this is a serious and growing 
problem. I would like to build on the comments and the 
questions the chairman and Senator McCain have asked.
    I think Senator McCain really put his finger on it here. We 
need a team effort. The Federal Government and industry have to 
work together. Mr. Toohey, I look forward to hearing the 
results of your increased focus in this area as you 
acknowledged this morning. I am not here to pick on you per se, 
but I do think this is something that has really gotten the 
attention of the committee. To my way of thinking, there are 
roles that the State Department and Customs and Border Patrol 
(CBP), component manufacturers and suppliers alike can play. It 
does not seem like there is one solution but it seems like 
there are a number of relatively simple solutions that we could 
provide that would, in turn, provide a screen to get at the 
heart of this.
    Let me get into more detail. I think there is something 
called the Trusted Foundry Program (TFP), and it is a joint 
DOD-NSA program that ensures that only certified chips and 
microprocessors are allowed into the supply chain. But as I 
understand it, we do not require components to be certified 
through the TFP.
    If I could, I would like to ask the industry experts here, 
would there be any benefit to requiring electronic components 
to be certified as TFP-compliant before they are allowed into 
the DOD supply chain. Would a trusted supplier certification 
requirement not protect manufacturers and the DOD alike? Given 
that we are spending billions on the fake components, would the 
investment in such a certification program not pay for itself 
in a fairly short period of time? Mr. Sharpe, maybe we could 
start with you and Mr. Toohey in turn.
    Mr. Sharpe. Senator, so I understand the question as it is 
posed to me, is it that I would send parts to this program to 
have them certified before I was to send them in to DOD?
    Senator Udall. I think that is in part what I am getting 
at, but we are basically taking suppliers at their word for the 
authenticity of the components they provide even though it 
seems that the suppliers cannot always say for sure where those 
chips come from. But we do not know how many other systems, 
whether they are in vehicles or part of the radio and coms 
efforts we put forth. Aircraft, weapons systems themselves 
could be at risk of failure. So it seems like we have to go the 
extra mile here. Again, I am searching, as I think the 
committee is, for ways to get at this quickly and in a cost-
effective manner.
    Mr. Sharpe. Well, as far as the TFP goes, as I understand 
it, this is a group of foundries where material can be built 
directly for the Government with no brokers in between. So this 
would be an area where an independent distributor would not 
have any access to, as far as I know, unless we were to ask 
them to do work for us. But generally, this is direct from them 
to you.
    As far as product coming from the independent channel, we 
all know that due to the huge amount of obsolescence that 
becomes part of weapons systems, that lots and lots of material 
has to come from our industry, meaning independent sector.
    I personally believe that the way into this to mitigate it 
properly is for heavy requirements on testing being done by the 
supplier, and I am talking about documented proof of all tests. 
I will not run through the whole list, but there is an awful 
lot out there that can be done, including full electrical. This 
is now being done and required, by the way, by many of the 
primes that we currently deal with.
    Senator Udall. Mr. Toohey, I would welcome your comments.
    Mr. Toohey. Senator, as you very well noted, this is a 
multi-pronged problem and it will require a multifaceted 
solution. In that regard, part of the solution is certainly 
continuing the work that we are doing with DOD for the 
authentication process and ensuring that that process works and 
so that manufacturers can very easily authenticate chips that 
are in the supply chain.
    The TFP also plays an important role for a relatively minor 
part of what the DOD procures, but I understand that process is 
being reevaluated as well. So I think there are many parts of 
the solution that we ought to implement in order to ensure we 
know which chips are going into the DOD supply chains.
    Senator Udall. Could I turn to the Chinese Government? What 
more can we do? What should we be doing to encourage them, 
shall I say, to stop the flow of these fake components into the 
United States? I would welcome any of you on the panel to 
comment.
    Mr. Sharpe. Since the Chinese Government is so well aware 
of what is going on as far as the counterfeiting in the 
country, it would seem to me that they could get a handle on 
this rather quickly if they were to make that effort to do so. 
Since everything is out in the open, I believe that China can 
put the right restrictions and penalties in place within their 
own country and stop an awful lot of this right at the bud 
quickly. So that is the way I would see it.
    Senator Udall. Mr. Toohey, do you have further thoughts?
    Mr. Toohey. Certainly more can be done in China to stop 
counterfeiting and enforce intellectual property, although I 
would note that our association has been working with Chinese 
Government officials both at the state level and the provincial 
and local level for quite some time on this problem. For 
example, part of our work was the establishment of a legitimate 
market in Shenzhen so that there is a legitimate way in which 
to procure legitimate chips, and that has been established.
    The Chinese Government, certainly during the special 
campaign implemented earlier this year, has demonstrated that 
when it focuses, it can have real results. Semiconductors were 
not part of that special campaign on intellectual property 
enforcement, but those industries that were involved, 
pharmaceuticals and others--and officials from the U.S. Embassy 
also indicated that there was strong progress. So I think 
having our trade officials and our bilateral relations 
encouraging stronger enforcement is the right way to go, 
Senator.
    Senator Udall. Mr. Hillman, do you have any insights into 
this counterfeit market in China and the Chinese Government's 
role? Are they simply turning a blind eye or is there evidence 
of complicity?
    Mr. Hillman. That is nothing that our investigation has 
uncovered to date. We will be continuing our investigation and 
reporting our final results later this year.
    Senator Udall. Did your investigation determine that any of 
our servicemembers had been injured or that there was loss of 
life tied to these counterfeit chips?
    Mr. Hillman. The parts that we have purchased that were 
authentic fit into a variety of significant military 
applications. The results of our investigation to date suggests 
that those parts can be purchased on a counterfeit basis. We 
have not gone to the extent to determine whether counterfeit 
parts have actually been placed into those systems, therefore, 
whether or not lives have been endangered.
    Senator Udall. Let me end with a comment tied to your 
answer and my question. I think that is why this committee is 
so concerned. Our servicemembers face enough peril, put 
themselves on the line day in and day out, and if there is an 
unseen danger tied to the electronics on which we depend, this 
is a very, very serious situation.
    So, again, we have work to do. We are going to have to do 
it as a team, DOD, this committee, the private sector. The 
Chinese Government has an important role to play here.
    So thank you again for your appearance. Mr. Chairman, thank 
you.
    Chairman Levin. Thank you, Senator Udall.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Mr. Chairman, I had a question back to you. I want to make 
sure I understood what you said. You indicated in your initial 
statement that we are obviously paying for product, and then 
we, in turn, have determined that those products are being 
supplied with defective materials. Then not only are we paying 
for the product in the first go-round, did you say also we are 
paying for the replacement and repair of those defective----
    Chairman Levin. Depending on the contract. There is 
evidence. We will hear more about that on our second panel. But 
the example I gave, yes, we paid for the repair because it was 
a cost-plus contract, and unless you can prove intention, that 
something is intentionally counterfeit and with knowledge, then 
we end up paying for it. That is something we can change.
    Senator Brown. Well, count me on the amendment that does 
that as a cosponsor because it only makes sense here on Capitol 
Hill that we would do something like that, Mr. Chairman. The 
fact that we are paying top dollar for a product and then, in 
fact, we get the product and it is filled with sometimes 
defective components is mind-boggling.
    Chairman Levin. We can correct it on Capitol Hill, but the 
problem is the contracts the Pentagon enters into, if they are 
cost-plus contracts, do allow and maybe require that the 
Pentagon pay for replacement unless you can prove that the 
defective part was put in knowingly by the contractor.
    Senator Brown. We should not have to make that proof. It 
should be a given that everything that we pay for is of the 
highest quality.
    Chairman Levin. That is what our amendment will do.
    Senator Brown. Thank you, Mr. Chairman.
    Also, Mr. Hillman, you said the middleman--you described it 
when you went out and did your research and kind of your sting 
operation. You provided them with numbers that were not real, 
and in fact, it came back with some fictitious product. Is that 
a fair statement?
    Mr. Hillman. Yes, Senator.
    Senator Brown. What has been done to those people? Have 
they been let go? Are you not doing business with them anymore? 
I mean, what does it take to stop doing business with people 
like this here in Washington?
    Mr. Hillman. We will be referring the results of our 
investigation to the Inspector General (IG) of DOD for further 
review and potential action.
    Senator Brown. With a recommendation, I hope, to terminate 
any and all contact and recoup any and all payments. Is that a 
fair statement?
    Mr. Hillman. Yes, Senator.
    Senator Brown. Thank you.
    I mean, this is another reason to not only manufacture in 
America but buy American so we know what we are getting, we 
know where the supply chain is going. To rely on entities like 
you have described, Mr. Sharpe, through your investigation--how 
did you actually get into the country to do that when we had 
representatives that were denied? Did you go over like, oh, 
golly, gee, I want to see what they are doing and maybe have an 
opportunity to buy some more product? How did that work? I am 
curious.
    Mr. Sharpe. We do not buy product over there, Senator. The 
trip began as a business trip to visit a U.S.-based customer in 
Hong Kong that was then to turn into a vacation in Beijing, and 
it was 2 weeks before the Olympics in 2008. The borders were 
very porous. When I got into Shenzhen, not knowing that I was 
going to then be traveling the next day to Shantou, it was 
nothing more than paying some money to the driver and hiring 
someone to take me out there. There seemed to be no issues 
whatsoever. No one really questioned me. There were just areas 
where I was told that I could not take photographs.
    Senator Brown. I share Chairman Levin and Ranking Member 
McCain's concerns. From 2005 to 2008, counterfeit incidents 
have almost tripled possibly as a result of, quite frankly, the 
manufacturers failing to adhere to the testing requirements. Do 
you think that is the reason?
    Mr. Sharpe. Yes, that is a reason, sir. I agree with that.
    Senator Brown. A lot of the recommendations that you have 
made and I think, Mr. Toohey, you are making you feel it would 
change that?
    Mr. Toohey. Yes, Senator. We believe it would significantly 
help to strengthen the authentication procedures, to strengthen 
the procurement policies, to ensure that we are stopping these 
at our border and ensuring we are using all tools available, 
and to leverage our law enforcement community as well to 
continue to aggressively prosecute these----
    Senator Brown. Mr. Toohey, are you giving recommendations 
to the chairman and ranking member on what you need in terms of 
legislation to get that done? Are you doing that?
    Mr. Toohey. Senator, we would be happy to follow up with a 
more detailed set of proposals.
    Senator Brown. Yes. I would like to be included in that 
because, quite frankly, I find this--this is unbelievable. So I 
want to really thank you both for pursuing this. It came out of 
left field and another thing we have to worry about.
    I guess take a shot, any one of you. What is your thought 
about the likelihood that everything that has been done is 
malicious in fact, not just out there to make money, but 
malicious in terms of trying to deliberately breach our DOD 
equipment and try to gain some type of tactical advantage? Is 
there anything like that going on, or is it just really, hey, 
they are just going out to get money just to make money? That 
is my first question.
    My second question is, so why do we not go to the source? 
Is there a different way we can process a lot of this waste? We 
can do it internally. Do we not have the ability to do this 
stuff within our country? Take that supply chain and just cut 
it off at its head. I mean, it makes no sense to me that we are 
sending this stuff over there in barges and then they are able 
to do what they are doing. It is clear from the pictures. I 
mean, did anyone send over this investigation to the embassy 
here--the Chinese Ambassador and say, hey, sir, can you explain 
what is going on here?
    So I guess there are a couple of questions in there. Do you 
think there is any malicious intent to deliberately breach our 
DOD equipment, number one? Number two, is there a different way 
we can do it to stop the supply chain from going over in the 
first place? I cannot believe America, one of the greatest 
countries in the world and one of the most innovative countries 
in the world obviously, cannot do more with this waste.
    So anyone can take a shot at that. Dr. Persons, you have 
been silent. Why not take a shot at one of those?
    Dr. Persons. Thank you, Senator.
    In terms of understanding any malicious intent, sir, that 
was out of scope of our particular investigation which is still 
going on. In terms of dealing with those things, GAO has done 
reports on e-waste and recycling and so on, just that general 
issue and the legitimacy thereof. I believe the core issue or 
one of the core issues has to do with just who wants that to 
happen in their proverbial back yard and who pays for that and 
that sort of thing.
    Senator Brown. It seems like the American taxpayers are 
paying indirectly by the fact that we are double paying for 
equipment that we should be getting that should be top of the 
line in the first place. Then we are paying by the potential 
breaches in our security in the way that we are providing 
equipment to our men and women that are serving. My time is up. 
I appreciate your holding this, Mr. Chairman.
    Chairman Levin. Thank you, Senator Brown.
    Senator Manchin.
    Senator Manchin. Thank you, Mr. Chairman.
    This will probably be to Mr. Sharpe or Mr. Toohey. Do you 
know of any Chinese company or government agency that makes any 
product that they have researched, designed, done the research 
and brought it to market, that no other country does right now 
or no other company outside of China does? Do you know of 
anything unique that they have brought to market in your realm 
of business?
    Mr. Sharpe. I am not aware of any, Senator.
    Mr. Toohey. Senator, there are a number of domestic Chinese 
semiconductor manufacturers and design companies. There is a 
legitimate foundry, a very----
    Senator Manchin. I am saying do you know of anything they 
have, let us say, invented?
    Mr. Toohey. Senator, there are some specific applications, 
semiconductors, that have been designed in China. There are a 
couple of good foundries that manufacture quality products, 
some for American companies even, in China. So while it is very 
small--the domestic industry is extremely small--in world 
standards there are examples of research. I should add that the 
Chinese Government has singled out the semiconductor industry 
in their 5-year plan as one that they want to build because 
they know what it means to our country. So they are putting a 
lot of investment into developing a domestic semiconductor----
    Senator Manchin. How many of your members have a presence 
in China?
    Mr. Toohey. Several of our members, Senator. Several of our 
large members have a presence in China.
    Senator Manchin. So it would be right for us to understand 
that you would be concerned about their protection, also an 
ability to do business there.
    Mr. Toohey. Yes.
    Senator Manchin. Are they there because of price?
    Mr. Toohey. Senator, it is a global market. China is 
actually the largest market for semiconductors globally. Not a 
lot is produced by local companies I mentioned, but they are 
actually the largest market and that drives many of our 
international global companies to have presence in China.
    Senator Manchin. Are we still purchasing these products as 
a Government? To Mr. Hillman or Dr. Persons, are we still as 
the U.S. Government for our DOD purchasing, doing business with 
these people?
    Mr. Hillman. The parts that we have been purchasing as a 
part of this ongoing investigation are rare, hard-to-find, and 
obsolete parts that are still being utilized in major weapons 
systems. The Internet purchasing platforms demonstrate that 
contractors or subcontractors that are in need of these hard-
to-find, rare, obsolete parts have an outlet through these 
purchasing platforms to acquire these parts. The concern, 
though, is that the intent to deceive certainly exists and----
    Senator Manchin. Are we still purchasing, sir? I just asked 
a very simple question. Is the U.S. Government still purchasing 
from these counterfeiters who are putting out inferior 
products?
    Mr. Hillman. The Internet trading platforms have 40 million 
to 60 million line items and parts that are purchased on a 
regular basis. Yes, sir, Senator.
    Senator Manchin. So we are still doing business with the 
people that we know that are making inferior products that 
could affect our service people.
    Mr. Hillman. Those businesses certainly continue to be 
available to----
    Senator Manchin. Mr. Sharpe, if I may ask you. Your company 
basically does this after-market. Right?
    Mr. Sharpe. Yes, sir, we do.
    Senator Manchin. Do you know of any companies other than 
yourself or other companies like yourself that are unable to 
produce the quality products that are needed for our service 
people?
    Mr. Sharpe. Well, we do not make products over at SMT, but 
we produce products that have been inspected properly.
    Senator Manchin. Right.
    Mr. Sharpe. Yes. There are other companies in the United 
States like ours.
    Senator Manchin. So we would not have to go to China to 
these counterfeiters if we did not want to because of price.
    Mr. Sharpe. We absolutely do not need to go to China.
    Senator Manchin. Okay.
    Who writes the specs? Mr. Hillman, who in the world in our 
Government writes these specs for these products and does not 
follow up? The specifications for what we are going to purchase 
is not written stringent enough that if you basically do not 
meet those specifics, then you are banned, like in any other 
purchaser, from State purchasing or Federal purchasing. You 
should be banned if you are found to be neglective of doing 
what was supposed to be done. Who would want to answer that?
    Dr. Persons. I will answer that, sir. In the context of our 
work, there is a DOD specification. It is called MIL-PRF-38535J 
in terms of the context of the tests that we ran on the various 
parts that we acquired in our undercover operation. There are 
specs being written----
    Senator Manchin. Who writes the specs? I mean, does the 
Government? I am sure we have spec writers. Right?
    Dr. Persons. Yes, sir.
    Senator Manchin. From all different agencies, DOD agencies?
    Dr. Persons. In this case, this was a DOD specification. So 
I am sure there are others.
    Senator Manchin. Who follows up on that? We have you all in 
here to basically check to see if this type of a scam was going 
on. We found out it was not only going on, it was flourishing. 
It still is flourishing as we are here at this committee 
hearing right now. It seems to me you get back to the source. 
If we are writing the specs, who is following up? Why would you 
let it get that far? You could shut that down in a heartbeat.
    Dr. Persons. Sir, I am not aware of who is supposed to 
follow up, but I do know the specification does exist and is 
written by, in this case----
    Senator Manchin. Well, does anybody in DOD--have you 
brought your report to anybody in DOD?
    Dr. Persons. Because it was preliminary, no, sir.
    Senator Manchin. They did not request it all. It was 
basically this committee that did.
    Dr. Persons. Yes, sir.
    Chairman Levin. If I could just interrupt for one second. 
This was a very specific report that we asked the GAO very 
recently to try to go on to the Internet and to see what parts 
would show up when they put in orders, and the cheapest parts 
that showed up from--they are all from China--turned out to be 
counterfeit although it had been tested. Some of the numbers 
that were given to them were totally fake numbers. So they have 
just been involved working for us very, very recently. We are 
going to have a third panel here where we are going to have 
contractors for which those questions would be very----
    Senator Manchin. Mr. Chairman, the only thing--this is not 
rocket science. Basically I do not know if they have had an 
original idea or brought a product to market that would benefit 
mankind, if you will, from China. Everything from the handbags 
to watches to mining equipment--everything has been basically 
stolen by them as far as property rights and those types of 
things.
    I just cannot figure out if we are getting bad product and 
we know where it is coming from, why do we not shut it down. I 
think that is the question that you would ask later. Why did 
DOD not jump in and say, listen, we are paying and getting bad 
products, inferior, we are buying and paying for it twice to 
try and get the right product, and we are putting people in 
harm's way, especially our military people? Why would it take 
us as a committee? Why would DOD not have an internal audit 
asking for this?
    You were not asked, Mr. Hillman, by DOD at all to check 
this out? Did they know they were getting inferior products?
    Mr. Hillman. We are releasing preliminary results of our 
ongoing investigation this morning and have not had contact 
with any other outside party associated with these products, 
other than the DLA, in order to determine whether or not the 
parts that we were purchasing were being integrated into major 
weapons systems and to determine that the bogus part numbers 
that we were attempting to purchase were not an authentic part.
    Senator Manchin. Thank you.
    Chairman Levin. Thank you, Senator Manchin.
    Senator Ayotte.
    Senator Ayotte. Thank you, Mr. Chairman. I wanted to follow 
up with what Senator Manchin said. As I understand it, Mr. 
Sharpe, you said in your view we do not need to go to China. 
Can you explain that?
    Mr. Sharpe. There is an awful lot of product over in China 
that is certainly not counterfeit. Going to China to buy from 
the non-authorized sources is a sure way, as far as we can see 
right now, to get ourselves into trouble. There are authorized 
sources in China that get products directly from the authorized 
component manufacturers. I would not say that dealing with 
those folks, as long as they are selected and audited, would 
not be a reason why we could not buy from them. But the open 
market of China is definitely not a place to go.
    Senator Ayotte. I certainly appreciate that we have a need 
to trade and to trade with China. However, they seem to be 
flaunting our intellectual property laws. They, obviously, in 
this instance, the counterfeit products--let us just be clear. 
It is a matter of life and death with these products. When I 
see that some of these counterfeit products--if you are a Navy 
helicopter pilot or an Air Force C-27J pilot and you cannot 
trust your flight system or your night vision capability, I 
mean, this could be a matter of life and death, could it not, 
for our soldiers?
    Mr. Sharpe. Yes, Senator.
    Senator Ayotte. It seems to me that when we know that there 
is a particular area of China, Shenzhen, that is producing, 
openly producing, these counterfeit products, why would we even 
allow those products to come across our borders to get into our 
supply system.
    Mr. Sharpe. It is a very good question. If it is coming 
from the open market, I agree.
    Senator Ayotte. In my view, I think we need to send a 
stronger message to China rather than trying to continue to 
talk when the response we get back is, oh, we are taking care 
of this and clearly they are openly allowing this to happen. It 
is a matter of life and death for our soldiers. I hope that we 
will take stronger actions to cut them off.
    As a follow-up, I wanted to ask--one of the concerns that I 
have had since I have been a member of this committee--Chairman 
Levin talked about cost-plus contracts and how they could 
expose U.S. taxpayers to the cost of replacing counterfeit or 
fraudulent goods. We are basically paying both ways for this. 
That is one of the reasons why Senator McCain and I--certainly 
we have introduced legislation to minimize the use of cost-plus 
contracts. But, Mr. Toohey, can you tell me why should the 
contractors not bear the risk here within the supply chain for 
counterfeit products?
    Mr. Toohey. Well, Senator, from our perspective, everything 
ought to be done that can be done to ensure that legitimate 
product is going into these products. While I am not very 
familiar with the details of defense contracting, it seems like 
a reasonable approach to expect companies and contractors to do 
everything they can to ensure that these products are 
legitimate.
    Senator Ayotte. So you would agree with me that taxpayers 
should not have to pay twice for the goods and obviously the 
important military equipment that we are paying quite a bit of 
money for.
    Mr. Toohey. Certainly when measures can be done and 
policies that can be put in place to better ensure the 
authentication of these products, I would certainly agree, 
Senator.
    Senator Ayotte. The other issue I wanted to ask you about--
you mentioned the case of VisionTech which was a prosecution in 
Federal court to address--aggressively prosecute the 
counterfeiting traffickers. I believe you identified it as a 
first case of its kind. Why is that? Why are we not prosecuting 
more of these cases? Because if we prosecute people who are 
putting these products in the line and obviously know that they 
are trafficking in counterfeited products, that will also be a 
great deterrent particularly to contractors within the United 
States.
    Mr. Toohey. Senator, I could not agree more. We ought to be 
aggressively prosecuting these criminal entities, and that is 
what they are. They are criminal entities that are putting the 
lives of our soldiers at risk.
    I should say my understanding is VisionTech is the first 
felony conviction for it. There are several other pending 
cases. But from our perspective, the work of the U.S. Attorney 
here for the District of Columbia and specifically the 
assistant U.S. Attorney, Sherri Schornstein, in this regard and 
really single-handedly sort of forcing these cases and these 
prosecutions forward has just been extraordinary. It ought to 
be recognized and we need to do more of it as a country.
    Senator Ayotte. I could not agree with you more. I would 
like to see more felony prosecutions because we are talking 
about life or death decisions here. The more we aggressively 
prosecute these individuals, particularly if we find out that 
there is a contractor or a company in the United States that 
knows they are trafficking in counterfeit goods to our military 
that go into important parts that they have--equipment that 
they have to rely on, I can tell you that that will also be a 
way to stop them.
    Mr. Toohey. Senator, if I could just add, we cooperated 
closely with the U.S. Attorney on those cases and on a number 
of other cases, and we stand ready to strengthen that. It needs 
to be a partnership to authenticate which chips are 
counterfeit. We have a very strong cooperation with law 
enforcement officials here, and we would like to strengthen 
that.
    Senator Ayotte. Mr. Hillman, I believe Senator Brown asked 
you a question about--one of the issues that leaps to mind for 
me about this--now it seems to be a profit motive. These cases 
seem to be the Chinese trying to make money off of us and other 
countries, but primarily the Chinese are participating in this. 
But if it is that easy to do this, could this not also easily 
become a way for sabotage to be conducted on our military 
espionage? Is this something we should be concerned about not 
only as something that is undermining and putting our troops at 
risk with the equipment they are using, but in the context of 
our national security?
    Mr. Hillman. There certainly is the possibility that there 
could be counter-motives other than financial benefits 
associated with the counterfeiting and harvesting of old parts 
put into a fashion that they appear to be new. The vendors that 
we have purchased these parts from appear to be more of a 
boiler room operation where they are willing to supply parts of 
unknown authenticity for the remuneration that is provided from 
those parts.
    Senator Ayotte. But certainly this represents a 
vulnerability that goes--could be far-reaching if we do not 
address it within DOD.
    Mr. Hillman. I agree.
    Senator Ayotte. Thank you.
    Chairman Levin. Thank you, Senator Ayotte.
    We will have a chance in the next few weeks, when our bill 
comes to the floor, to take some statutory legislative steps, 
which I hope we will all be able to support. At any rate, we 
will have that opportunity that you made reference to. So we 
thank you for that.
    Senator Ayotte. I appreciate your leadership.
    Chairman Levin. Senator Collins.
    Senator Collins. Thank you, Mr. Chairman. Mr. Chairman, let 
me start by thanking you and the ranking member for conducting 
such an in-depth investigation into such an important problem.
    I would point out that this problem is not a new one. I 
recall back in 2004 looking into this issue of the security of 
the supply chain. At that time in 2004, DOD initiated the TFP, 
which Senator Udall referred to. This program was intended to 
ensure that mission-critical national defense systems have 
access to trusted parts and assured supplies. Under this 
program, DOD actually accredits suppliers that provide 
microelectronic design, manufacturing, and assembly services to 
meet certain standards to ensure the integrity and the 
reliability of the product.
    I happen to be familiar with this program because one of 
the trusted foundries is in South Portland, ME. It is now 
operated by Texas Instruments. It used to be National 
Semiconductor.
    So my question is, what happened to this program? Has it 
not worked as well as was hoped back in 2004 when it was 
launched by the Pentagon? Should Government and the owners and 
operators of critical infrastructure be making better use of 
these trusted foundries? What is your assessment?
    We will start with you, Mr. Toohey, and then go down the 
panel.
    Mr. Toohey. Well, Senator, you very well pointed out the 
TFP is a very important system that allows certain mission-
critical items, especially new items to go into the DOD supply 
chain in a very assured way.
    In many ways what we are talking about here are parts that 
are no longer manufactured and are replacement parts for 
systems that have been in place for many, many years. That is 
an area that, at least from my understanding, the TFP does not 
deal with. I think just given the increasing amount of 
semiconductor content in so many different products, civilian 
products and defense products, probably a single solution is 
not going to do it. There does need to be a broader solution to 
authenticate in partnership with the TFP.
    Senator Collins. Well, I guess my reaction to that is 
similar to the point that Senator Brown raised which is maybe 
we should look at where we are buying these parts and 
reconsider the manufacturing of those parts in the United 
States. We do have the capability, and if the problem of 
counterfeiting is that high and if, in fact, it is causing us 
to pay twice for the same part, then perhaps we should look at 
not only the integrity of the supply chain but whether we are 
dealing with reputable countries as sources for vital 
equipment.
    Mr. Toohey. Senator, if I could just add. In many cases 
these counterfeiters are remarking these products. So they may 
appear as if they were made in the United States. So that is 
clearly part of the problem. From a third party, these criminal 
enterprises like VisionTech present these products as certified 
military spec products, and that is all just fake. That is a 
big part of the problem.
    Senator Collins. Actually that leads me very well into my 
next question. So I still want to hear the rest of the panel's 
assessment of the TFP, but let me first go to my next question.
    Mr. Toohey, in your written testimony, you noted that the 
CBP agency plays an important role in anti-counterfeiting 
efforts by notifying trademark owners of suspected shipments 
that are coming into our ports.
    Now, previously this effort by CBP included sending photos 
of seized chips to the original industry manufacturer, and they 
could assess whether or not they were legitimate chips or 
whether they were counterfeit. But I understand that CBP 
officers have now been given revised guidance to redact the 
identifying marks on the chips in the photographs except for 
the trademark. I have to say that makes no sense to me 
whatsoever because they are redacting information that would 
allow the manufacturer to assess whether the chip is legitimate 
or not.
    What is your judgment on the change in policy?
    Mr. Toohey. Well, Senator, you articulated it very well. It 
was a system that for many years worked very well. Especially 
now where counterfeiters have very advanced marking techniques, 
it is almost impossible to tell just by visual inspection 
whether a chip is counterfeit or not. Really the only way is 
with the code that is on the chip, and our companies can 
instantly identify whether that is a counterfeit or an 
authentic chip--instantly. It is a process that worked very 
well for many years.
    As a result of an interpretation inside CBP, they have 
changed that practice, and we have been working very hard to 
encourage them to revert to the practice of sharing those 
codes. It is virtually the only way that our customs officials 
can stop a suspect chip and know whether or not it is 
counterfeit at the border--the only way. We have been really 
asking anyone who will listen to us about how we can work with 
CBP to change that policy to allow us to stop these chips at 
our border. We talked about the industry cooperating. We stand 
very ready and we have been eagerly asking Government officials 
to let us help them. It is a policy change that in our view, 
Senator, needs to happen to protect our borders. We need to 
close our front door.
    Senator Collins. Mr. Chairman, I would just note that that 
is a baffling policy change and one that I hope we can remedy.
    I would like to very quickly ask the rest of our panel to 
comment on those two issues: the TFP and the change by CBP.
    Mr. Hillman. As part of our ongoing investigation, the 
parts that we are purchasing are rare, obsolete, hard-to-find 
parts that would not be included in this trusted accreditation 
program. Although it is very clear that DOD continues to rely 
on parts that have old manufacture dates, something similar to 
what is being done for newer parts would be a possibility that 
could be considered for these older, obsolete parts as well.
    Also, regarding the customs activities, for one of the 
purchases that we have received there was evidence that CBP did 
open up our package and reviewed the part that was there. There 
is no evidence as to what actually occurred as a result of that 
review, but it was stamped as being opened by our CBP.
    Senator Collins. Thank you.
    Dr. Persons?
    Dr. Persons. Yes, thank you, Senator. In terms of the TFP, 
we are aware of that program although again in the scope of 
this investigation, the analysis of whether TFP would be 
appropriate and so on is just beyond the scope of our current 
work. So we do not have any information to share with you at 
this time.
    Senator Collins. It seems like it is a good model.
    Dr. Persons. Sure.
    In terms of the CBP, it is the same thing. We did not 
evaluate CBP's processes and so on. So thank you.
    Senator Collins. Mr. Sharpe?
    Mr. Sharpe. Senator, the TFP, as I had mentioned before, 
really is not something that is part of what is available to 
independent distribution. That would be where Government is 
dealing directly with the trusted foundry. So I really would 
not have much to say there.
    With regards to the redaction, I completely agree with 
being able to provide the component manufacturer with as much 
information as possible from what is being seen at the borders 
right now.
    I will say that the most recent counterfeit report that we 
have released had a part in it that if the date code was 
correct, instead of being incorrectly stated, it would have 
most likely passed the scrutiny of a photograph from the 
component manufacturer as well. So that is the level of 
difficulty they are currently facing.
    As far as the word ``trusted'' with regards to independent 
distribution, what we need to do is we need to get a group of 
trusted distributors whom are required to do over and above a 
significant amount of testing and have the abilities to do so. 
That is one of the biggest problems we have out there right now 
is there are lots of people who are in business and need to be 
in business, but they do not have the capabilities that are 
required to mitigate counterfeit parts as we see them today. 
There are some that do, but we need to identify who they are 
and use them and let the other ones who do not have that 
ability know what they need to do to get up to that level as 
well.
    Senator Collins. Thank you. Thank you, Mr. Chairman.
    Chairman Levin. Thank you very much, Senator Collins.
    Senator Chambliss.
    Senator Chambliss. Thanks, Mr. Chairman.
    Mr. Hillman, I will direct this first question to you, but 
if anyone else has a comment, I would appreciate it. What 
indication do we have that the Chinese Government is complicit 
in this counterfeiting operation?
    Mr. Hillman. As part of our investigation, we have 
contracted with vendors to supply us part numbers, sometimes 
legitimate, sometimes totally bogus, and have found that they 
were willing to supply those parts. The extent to which the 
Chinese Government itself is complicit in these activities has 
not been part of our investigation, although it appears clear 
from the presentation from Mr. Sharpe that those activities are 
being undertaken in the open.
    Senator Chambliss. Mr. Sharpe, I assume, from what you said 
and what was just stated by Mr. Hillman, that you said about 40 
percent, I believe, of the parts that you saw in the 
marketplace are estimated to be counterfeit. We have notified 
the Chinese of it. Basically they have done nothing. Is that 
your indication that the Chinese Government is complicit in 
this?
    Mr. Sharpe. I would have to say that the local businessman 
who accompanied me--I am working off of what he said as far as 
the percentages go. I have heard also this information floating 
around from other folks as well. That is as good as my 
information gets with regard to that as far as just what the 
accurate percentage number is.
    Regarding the Chinese Government knowing about this, it 
would be basically impossible for them not to know what is 
taking place in this marketplace and also in the nearby area of 
Shantou. It cannot be missed.
    Senator Chambliss. Mr. Hillman, your report was focused on 
the defense industry, and all of you have spoken with reference 
to that. I assume this is prevalent in every other agency of 
the Federal Government just as well?
    Mr. Hillman. Yes. Counterfeit parts and other items that 
are produced on a counterfeit basis is something that impacts 
all industries.
    Senator Chambliss. Mr. Toohey, that would be the same for 
individuals going on the Internet and purchasing items such as 
this. Is that correct? Mr. Toohey?
    Mr. Toohey. Excuse me. I am sorry, Senator.
    Senator Chambliss. I mean, anybody that goes on the 
Internet and buys these products is going to be subject to the 
same potential for purchasing counterfeit parts.
    Mr. Toohey. Absolutely, Senator. This is an enormous 
problem that affects a broad range of industries and 
individuals from health care to automotive systems to airplanes 
mission-critical and non-mission-critical. Unfortunately, 
though, the biggest incentive is to sell into the most mission-
critical systems because that is where the highest markup for 
these counterfeiters is. But it is a broad problem affecting 
many industries and it is a growing one, Senator.
    Senator Chambliss. In the January 2008 timeframe, a 
counterfeit chip was found in an F-15 flight control at Robins 
Air Force Base, and thank goodness it was found by the folks at 
Robins before it was ever installed. Subsequently, there were 
another three or four chips that were found to be counterfeit. 
Do any of you have any information relative to that particular 
issue?
    Mr. Hillman. No.
    Senator Chambliss. What other resources are there out there 
other than the Chinese that we know are counterfeit operators? 
What other countries are the potential resources?
    Mr. Sharpe. Senator, we have seen Department of Commerce 
report, and it shows that there are many other countries that 
are involved in counterfeiting. There certainly is. It is just 
that probably the vast majority is coming out of China. We have 
counterfeiters right here in the United States, without a 
doubt, right now who are remarking product, and that is pretty 
scary to know that.
    Mr. Hillman. For the purchases that we had made as part of 
this ongoing investigation, we did an analysis of vendors that 
were willing to supply the parts that we requested, and 79 
percent of the responses came from East Asia. The remaining 21 
percent were from Central Asia, Europe, North America, and the 
Pacific Islands.
    Senator Chambliss. Staggering.
    Mr. Hillman, I listened to your description of what I 
basically guess you would call a sting operation that you set 
up. I also noted in a press report last month about a lady and 
her mother in Bakersfield, CA, just creating a company--just 
built it out of nowhere and got on some approved list and 
started delivering parts to DOD over a period of 3 or 4 years. 
So according to this report, $2.7 million worth of parts were 
purchased and sold to DOD, and they just got them off the 
Internet, just went and got numbers, and it turned out that a 
number of them were counterfeit. Obviously, action has been 
taken.
    But I am astounded that you could carry out that operation 
with DOD. I look at it as certainly a problem on the other end, 
but there is obviously a problem on our end too with respect to 
how these companies like the company you created are able to 
get on that list.
    What sort of recommendation would you have for us to think 
in terms of how we address that issue?
    Mr. Hillman. In our investigation, we attempted to obtain 
membership on three different Internet trading platforms. Each 
of the three platforms appeared to have a varying degree of 
validation in order to determine the authenticity of our 
company. In one instance through social engineering when we 
simply talked to the individuals, we were able to pretty much 
gain access with very little background information.
    In another instance when we gain access to a tracking 
platform, we were asked to provide references, addresses, Web 
sites, and other information. Based upon the results of our 
work to date, there was no indication that any of our 
references were checked or determine whether or not we were an 
authentic company doing a valuable service.
    In the third instance, though, we were denied access to 
that Web site and they did not really explain their reasons.
    Senator Chambliss. Were you asked to give any financial 
references?
    Mr. Hillman. Yes, we were asked to provide bank references 
as well.
    Senator Chambliss. How many transactions did you negotiate 
with DOD in that operation?
    Mr. Hillman. DOD has not been made aware of our 
investigation. We are releasing preliminary results this 
morning.
    Senator Chambliss. Thank you, Mr. Chairman.
    Chairman Levin. Thank you very much, Senator Chambliss.
    We will just have a fairly brief second round.
    Mr. Hillman, some of the numbers on these parts were real 
numbers that you were checking out. Some were phony numbers, 
and you got responses for both. But on the real numbers, those 
were for real systems. Is that correct?
    Mr. Hillman. That is correct.
    Chairman Levin. Those are systems that while they need 
replacement parts, still need parts.
    Mr. Hillman. That is correct.
    Chairman Levin. What systems were they? What weapons 
systems were those parts for?
    Dr. Persons. Mr. Chairman, if I may, on the two voltage 
regulators that we purchased, that is a part that goes into the 
Air Force's KC-130 Hercules aircraft, also the Navy's F/A-18E 
Super Hornet fighter plane, the Marine Corps' V-22 Osprey 
aircraft, and then also the Navy's SSN-688 Los Angeles class 
nuclear-powered attack submarines.
    Chairman Levin. Those parts may not be currently 
manufactured but they still must be currently acquired. Is that 
correct?
    Dr. Persons. Yes, sir, that is correct.
    Chairman Levin. That is the millions figure that our staff 
looked at millions of parts for the 1,800 cases that they 
looked at which is just a sliver of the problem. So even though 
these are, you say, ``rare''--Mr. Hillman used the word--these 
are very important current requirements for these parts. Is 
that correct?
    Mr. Hillman. That is correct.
    Chairman Levin. Now, you said that 21 percent of the 
parts--or the inquiries or the responses that you got were not 
from Asia I believe you said, other parts of the world. Most do 
come from Asia and we all know from other testimony, the vast 
majority comes from China, and they are openly sold in China. 
But of the 21 percent not from Asia, many of those could be 
transshipment points, could they not be, for Chinese 
counterfeit parts?
    Mr. Hillman. Yes, that is absolutely correct.
    Chairman Levin. You do not know the origin of the parts by 
the fact that you got a response from a particular country.
    Mr. Hillman. That is correct. Even for the parts that we 
purchased, oftentimes negotiating with individuals in certain 
cities within China, at the time that we received payment 
information, the addresses may have changed considerably, 
pointing to Shenzhen as the source for the payment as opposed 
to the manufacturing.
    Chairman Levin. Mr. Sharpe, you made reference to three new 
processes that were released by DOD, and I was not sure, but I 
think they were testing processes. But I am not sure what you 
were referring to in your original testimony. Do you know what 
I am referring to?
    Mr. Sharpe. Yes.
    Chairman Levin. Can you explain that a little?
    Mr. Sharpe. Yes, Mr. Chairman. I was referring to three 
test processes that were identified by SMT Corporation that 
were new counterfeit processes that we had not seen before.
    Chairman Levin. Processes to try to determine what is 
counterfeit.
    Mr. Sharpe. Processes that we knew the Chinese are now 
using on the parts themselves.
    Chairman Levin. Got you.
    Mr. Sharpe. So we did extensive reports on these three 
processes showing what they looked like, what the evidence is 
of them, and what is being used to create them.
    Chairman Levin. We are going to act. We cannot rely on the 
Chinese to act. I think that has been proven for a long period 
of time. The Chinese say that they have an effort going on to 
act against counterfeits and it is baloney. They are openly 
sold. It is a growing problem.
    On the other hand, as you pointed out, Mr. Toohey, some of 
our manufacturers manufacture in China, and so we can put into 
place a certification system that the supplier of these parts 
has been certified to be a legitimate supplier, whatever 
country might have the manufacturer. In China, there is a lot 
of counterfeiting going on. It is a clear and present danger, 
as one of you put it. It is a threat to our troops, and we are 
not going to let it go on.
    So here is what at least I am going to be trying to do. We 
are going to try to put into place a requirement that DOD adopt 
a certification program for parts suppliers. While they are 
doing that, we have to defend ourselves. We cannot rely on the 
Chinese to take action against counterfeits. It has been going 
on too long. It has been pointed out to them too long. They are 
not cooperative. They will not even let our staff in, and so 
forth. We just cannot rely on them. So while we are telling 
DOD, which I intend to do in an amendment which I will offer, 
to require a certification for parts suppliers, that these are 
reliable suppliers, we have to at the border put in an 
inspection system for parts coming from China.
    We do this with agricultural products. If we have a product 
coming from a particular place which we think will endanger our 
health, we have a ban on those products or an inspection system 
on products. We do it with dairy products. We have limits as to 
what dairy products can come in and so forth.
    So what I also would be offering is that while we get a 
certification program in place, that we require inspection of 
all electronic parts coming in from China. It is a proven, 
known source of the problem. It is an epicenter of counterfeits 
coming into this country.
    A third thing which we can do is to put some pressure on 
our contractors to go back up the chain or down the chain to 
make sure that the people supplying the supplier and the people 
supplying the supplier to the supplier, just going all the way 
down, are legitimate people. The only way I know to do that, 
other than just requiring contractors to so notify folks, is to 
make our contractors responsible to replace the parts. We 
cannot any longer have the Government paying for the 
replacement of these parts no matter what kind of contract it 
is. If the contractors are going to be responsible to replace 
parts which are determined to be counterfeit, we believe--I 
believe--that they will take very significant steps to make 
sure that those folks down the chain are not buying counterfeit 
parts.
    We can try to stop this flood--and it is a growing flood 
according to testimony--in two ways. One, we can try to get it 
at the source. I am determined and I think we are determined, 
and I know Senator McCain has spoken on this and other members 
have spoken. We are going to try to stop this at the source, 
but we cannot rely on it. So we have to take all the steps we 
can to put our fingers in the dyke while we are building the 
dyke at the same time. We are going to build our wall against 
counterfeits. We are going to, at the same time, have to put 
our fingers in the dyke by doing whatever we can that is 
reasonable, working with our contractors, using the systems 
which we have to notify the Government and other contractors 
through the system that we have put in place to make sure that 
that is used more often.
    I guess my last question would be to you, Mr. Toohey, and 
to you, Mr. Sharpe. While we are asking our DOD to design a 
system of certification and to help design a requirement for 
inspection at our border of these parts that are coming in--and 
we are only talking about the parts that are coming in--we will 
need the assistance of the industry in trying to figure out how 
to do that. I want to do it quickly because I would like to 
offer an amendment, and I know I have a lot of cosponsorship. I 
would like to do that on this defense bill. So within the next 
week or so, would you be willing to help us with the actual 
wording of those provisions? Mr. Toohey, can your organization 
help in that?
    Mr. Toohey. Absolutely, Senator. We would enthusiastically 
be willing to work with you. Let me just say we have been 
working with DOD to already begin this process of 
authentication. We want to strengthen that. We would be 
enthusiastic to work with the committee and ultimately with CBP 
to ensure that we are catching the parts that are coming in at 
our border. The industry is critical for that and we have for 
many years been a partner and we want to strengthen that 
partnership. So, yes, absolutely, Senator.
    Chairman Levin. We will be calling on you. Mr. Sharpe, we 
will be calling on you as well.
    Mr. Hillman, I think it is fairly clear now that your 
mission here was fairly recently given to you, and it is a 
mission which is a very important one, but it is kind of a 
limited mission. This is not a broader investigation where you 
have looked at a whole lot of things which you might have been 
asked about, but you were asked to see could you buy--what 
would be the response if you went on the Internet to buy parts. 
You did it and so far every single one where you have had a 
response is counterfeit and every single one of the seven that 
you know the origin of comes from China. That is pretty strong, 
clear testimony.
    I was just wrapping up with this panel.
    Senator McCain. I want to thank them.
    Chairman Levin. As I just mentioned, they are going to be 
working with us to try to design amendment language which we 
might be able to offer in the defense authorization bill on two 
things to try to build some kind of a certification system for 
parts suppliers so we can have real authenticity assured, and 
second, while we are doing that, to have an inspection 
requirement for parts coming in from China just the way we 
would with certain vegetables or certain dairy products coming 
in from certain places where we know there is a problem. We do 
that with agriculture products. The lives of our troops and the 
mission of our troops is surely important just the way the 
good, healthy ag products coming in is important as well.
    Senator McCain. Well, I eagerly await the opportunity to 
put it on the defense authorization bill.
    Chairman Levin. There is a double meaning in that statement 
by the way--[Laughter.]
    Chairman Levin.--which I share, by the way, totally.
    We thank this panel. Thank you very much.
    We are delighted to have an old friend of ours and a great 
patriot with us this morning, General Patrick O'Reilly, 
Director of MDA. We are delighted to have you with us, General, 
please proceed.

 STATEMENT OF LTG PATRICK J. O'REILLY, USA, DIRECTOR, MISSILE 
                         DEFENSE AGENCY

    General O'Reilly. Thank you, sir.
    Good morning, Chairman Levin, Ranking Member McCain, and 
other distinguished members of the committee. I appreciate the 
opportunity to testify before you today on the serious problem 
of counterfeit electronic parts infiltrating our critical 
defense systems and the steps that MDA is taking to prevent 
their use in the Ballistic Missile Defense System (BMDS).
    The missile defense mission requires that thousands of 
parts which comprise the BMDS perform flawlessly under 
stressful conditions over their operational life to confidently 
protect our homeland, deployed forces, allies, and friends 
against ballistic missiles. Our confidence in the BMDS is only 
as good as the least reliable component.
    We categorize a part as counterfeit if it is a copy sold 
without the original manufacturer's permission or a part whose 
material performance or characteristics are misrepresented by a 
parts distributor. Whether the part was knowingly 
misrepresented has little consequence to MDA. We still have to 
resolve the unanticipated parts replacement challenge 
regardless of the intent of the supplier. Although a 
counterfeit part may pass acceptance testing, we do not know 
its remaining operational life as it may have been damaged when 
removed from a previous product or handled in a destructive 
manner. Additionally, there is a risk of counterfeit parts 
having malicious functions that could be activated to disable a 
critical component of the BMDS. Thus, we simply cannot tolerate 
the presence of counterfeit parts in our missile defense 
system.
    There are more than 3,000 suppliers providing parts to the 
BMDS supply chain.
    The genesis of MDA's problem with counterfeit parts is the 
rapidly changing nature of electronic parts specifications 
driven by broad market applications which frequently present us 
with component obsolescence problems. In other words, a 
manufacturer changes a part specification and we face a 
decision to either redesign our components at a prohibitive 
cost or seek other sources for the original parts through 
independent or unauthorized distributors.
    Despite our efforts to eliminate the use of counterfeit 
parts, we have discovered through acceptance testing, stockroom 
inspections, and screening for parts bought from independent 
distributors, seven incidents of counterfeit parts since 2006. 
One incident resulted in the removal and replacement of almost 
800 parts from an assembled missile hardware. In another, 38 
assemblies had to be reworked and 250 parts were discarded. A 
stockroom sweep at another independent distributor found 67 
parts that were remarked and falsely sold as new. All those 
counterfeit parts were identified prior to their installation 
into our components.
    Due to the diligence of the MDA's quality control personnel 
and our contractors, we have been able to limit the cost and 
schedule impact of counterfeit parts. To date, MDA and its 
contractors have suffered $4.5 million in rework costs due to 
counterfeit parts. Of that $4.5 million, the cost to MDA has 
been $352,000 and industry has paid $1.35 million, with the 
remainder of the industry costs to be determined by the MDA. 
However, if a counterfeit part is discovered years after a 
missile defense product has been produced, replacing the parts 
in operationally deployed systems could cost hundreds of 
millions of dollars.
    The best way to eliminate the threat of counterfeit parts 
in the DOD supply chain is to eliminate their source by 
restricting the use of independent parts distributors through 
instituting contract clauses and enforcing their strict 
compliance. In June 2009, I instituted a policy requiring that 
only parts acquired from the original manufacturers or 
authorized distributors will be used in MDA contracts. In cases 
where a part is no longer manufactured and we must use an 
independent part distributor, MDA contractors must first verify 
that they cannot use an authorized distributor. Then our 
contractors must conduct intensive inspections and testing in 
order to scrutinize the part's authenticity, including using 
industry accepted tests like x-rays, die verification, and 
chemical tests for false coatings.
    Additionally, MDA performs site assessments of independent 
distributors. To date, 51 independent distributors have been 
inspected and more than 60 percent were assessed as moderate to 
high risk for providing counterfeit products.
    Since 2006, MDA has compiled industry quality assurance 
best practices called our Parts, Materials, and Process Mission 
Assurance Plan (PMAP), and incorporated them into all our new 
contracts. The PMAP provides additional assurances that our 
parts are not counterfeit. As MDA developed part authentication 
expertise, we also participate in the Office of the Secretary 
of Defense (OSD) Anti-Counterfeit Part Working Group. 
Additionally, we issue mission assurance advisories, GIDEP 
alerts, and notify the Defense Contract Management Command 
(DCMC) and the Defense Criminal Investigative Service (DCIS) 
when counterfeit parts are discovered.
    MDA has no indication of a counterfeit part in any of our 
fielded BMDS hardware, but aside from the financial impacts, 
our greatest concern from the use of counterfeit parts is the 
operational cost of a malfunctioning interceptor, a cost 
measured in lives lost or the negative impacts on our national 
security strategy.
    I am grateful for this committee's attention for the 
debilitating impact counterfeit parts can have on our missile 
defense system and the rest of DOD. We do not want a $12 
million missile defense interceptor's reliability compromised 
by a $2 counterfeit part.
    Thank you, Mr. Chairman, and I look forward to answering 
the committee's questions.
    [The prepared statement of General O'Reilly follows:]
           Prepared Statement by LTG Patrick J. O'Reilly, USA
    Good morning, Chairman Levin, Ranking Member McCain, and other 
distinguished members of the committee. I appreciate the opportunity to 
testify before you today on the problem of counterfeit electronic parts 
infiltrating our critical defense systems and the steps the Missile 
Defense Agency (MDA) is taking to detect and prevent unauthorized or 
defective parts from being integrated into the Ballistic Missile 
Defense System (BMDS).
    MDA integrates technologically advanced sensor, fire control, 
battle management, and interceptor systems into a single BMDS to 
provide a reliable, continuously available, defense of our homeland, 
deployed forces, allies, and friends against a variety of regional 
ballistic missiles. The BMDS is one of the most complex systems being 
developed in the Department of Defense (DOD), and the reliability of 
the BMDS is only as good as the least reliable component of an 
interceptor, or any vital subsystem.
    There are more than 3,000 suppliers providing parts, materials, 
subassemblies and assemblies for the BMDS. Each one of our missile 
defense interceptors comprises hundreds of assemblies containing items 
such as circuit boards, wire harnesses, connectors, valves, solid 
rocket motors, and electro-mechanical motors. There are also imagery 
systems, electro-explosive devices, optical devices and precision 
inertial components. Each assembly has a specific function to fulfill 
at specific times and it must perform in harsh environments and 
stressful conditions. We expect the piece parts of these assemblies to 
perform flawlessly when needed.
    Throughout the development process, we carefully scrutinize the 
designs to make sure design margins exist. We manage the build process 
to ensure product manufacturing repeatability. Prior to fielding such 
systems, we test each assembly under stressful environments, thus 
assuring ourselves and the American people that the systems we employ 
will perform as required. A simple change in material, an improper 
technique in material application, or a lack of cleanliness during 
manufacturing can result in a loss of quality and, hence, a loss of 
system reliability.
    DOD contractors primarily obtain parts from Original Equipment 
Manufacturers (OEM) or from distributors the OEMs authorize. An 
unauthorized distributor is one who is not licensed by the OEM to sell 
its product. We view a counterfeit part as a part procured from an 
Unauthorized Distributor that is a copy or substitute assembled or sold 
without the OEM's permission or authority to do so; or one whose 
material, performance, or characteristics are misrepresented by a 
supplier in the supply chain. Whether the part was knowingly 
misrepresented has little programmatic consequence to the execution of 
MDA programs, we still have to deal with an unanticipated parts 
replacement challenge.
    One type of counterfeit part is a used part that is remarked, has 
an unknown pedigree and, when sold as new, has most likely been exposed 
to extreme environments such as high temperature necessary to remove 
the part from a printed wiring board. Delamination of the internal die 
bonding can occur as a result of the thermal shock from the heat source 
used to remove the part from a used circuit board. These unknown 
conditions expose the part to potential failure modes that could be 
manifested after acceptance testing. Additionally, exposure levels to 
humidity and electro-static discharge are unknown. The mechanical 
parameters of the part may also be changed. Lead wire integrity may be 
impacted during the removal and remanufacturing operations. 
Hermetically sealed military parts may get cracked during removal, 
exposing them to humidity and corrosion that would not appear during 
acceptance testing but could appear as a failure in the field.
    Parts can be remarked as being a fully military compliant part when 
in fact the part may only be a commercial version of the part. Later 
revisions of a part may operate in a slightly different manner than 
previous versions of the part (one or more performance specs may have 
been tightened over time). If the circuit application requires a newer 
part, a previous version remarked as a later version may cause latent 
failures. Because counterfeiting continually evolves in sophistication, 
it is possible that electronic parts may have embedded functionality 
created by an enemy seeking to disable a system or obtain critical 
information. Detecting hidden functionality would be a difficult 
undertaking.
    MDA has encountered incidents of counterfeit parts dating back to 
2006. We identified seven incidents (six assemblies) of counterfeit 
parts. Part-level testing, acceptance testing, stockroom sweeps and an 
identification of parts bought by unauthorized distributors helped 
surface these instances. In one counterfeit part incident, a single 
acceptance test failure prompted further investigation into the 
pedigree of the part that failed. The subsequent investigation found 
that over 1,700 read-only memory parts were procured from an 
unauthorized distributor and had questionable attributes, such as 
multiple lot date codes and indications that the parts were previously 
used. This case resulted in removal and replacement of almost 800 parts 
from assembled hardware. In another system, a non-mission critical 
system, electrical testing during acceptance testing yielded erroneous 
functionality from a voltage regulator. Further investigations showed 
that the parts were procured from an Unauthorized Distributor and had 
external markings that were not in accordance with the part drawing. 
Further investigations found variations of the internal part die. As a 
result, 38 assemblies were reworked and 250 parts were discarded. In 
another mission critical system, two acceptance testing failures 
prompted failure investigations that resulted in the identification of 
a counterfeit operational amplifier. In this case, 20 assemblies and 
150 parts were impacted. A stockroom sweep found 67 frequency 
synthesizer parts to be re-marked and falsely sold as new parts. These 
67 parts were not installed into an MDA system, but would have been in 
MDA hardware if they had not been detected as part of the stockroom 
sweep. Three other MDA counterfeit incidents involved non-mission 
critical telemetry hardware, resulting in approximately 30 parts being 
discarded.
    Total counterfeit parts found to date number about 1,300. All of 
them were procured from Unauthorized Distributors. We estimate the 
total cost to MDA for the seven instances is about $4 million. Our 
largest case cost the Agency $3 million to remove counterfeit parts 
discovered in the mission computer of our production Terminal High 
Altitude Area Defense (THAAD) interceptor.
    MDA has taken several steps to identify and remove counterfeit 
parts from within the BMDS supply chain. The Agency:

         Invokes the Parts, Materials, and Processes Mission 
        Assurance Plan on its contracts;
         Uses an extensive ground-testing program to identify 
        quality and performance concerns prior to flight; and
         Supports interagency and DOD efforts to address this 
        problem--MDA participates in the OSD Anti-Counterfeit Working 
        Group and has shared its internal policies and knowledge base 
        with that group.

    Remedial actions are considered in each instance and the actions 
taken necessarily are dependent upon the facts and the responsiveness 
of the contractors involved.
    Although the source of each MDA counterfeit part occurrence was an 
unauthorized distributor, there are circumstances, such as parts 
obsolescence, that require procurement of parts from an unauthorized 
distributor. Contractors must notify the program office with 
justification and test data in order to purchase any electronic part 
from an unauthorized distributor. MDA performs site assessments of 
unauthorized distributors, pre-flight test reviews and risk assessments 
of the purchased products from unauthorized distributors, and evaluates 
contractor and subcontractor counterfeit part detection processes. When 
MDA evaluates an unauthorized distributor, we first check prior 
history, such as memberships in reputable unauthorized distributor 
trade groups. We search for complaints and disputes from other 
unauthorized distributors during the previous 2 years and review any 
history we may have with the unauthorized distributor. At the 
unauthorized distributor's site, we evaluate their part-level handling 
for electro-static discharge and environmental controls, inspection and 
testing capabilities, and training records, to verify that they follow 
proper procedures and perform sufficient testing to detect possible 
counterfeits. If the unauthorized distributor plans to sell a product 
to MDA, we evaluate the overall risk based on the criticality of the 
part.
    To date, 51 unauthorized distributors have been visited and 
assessed. Over 50 percent of the unauthorized distributors assessed 
were viewed as unacceptable by MDA. MDA also has developed part 
authentication expertise and issues Mission Assurance Advisories and 
Government-Industry Data Exchange Program (GIDEP) alerts to provide 
program offices and contractors information related to the discovery of 
new counterfeiting techniques and any specific counterfeit part 
discovery.
    The best time to detect a counterfeit part is at receiving 
inspection before the part enters production inventories. Robust 
inspection of parts procured from unauthorized distributors is 
absolutely necessary at receiving inspection. Our experience indicates 
counterfeit parts are also discovered during end item acceptance 
testing when electrical stimuli and harsh environments are imposed. 
However, some counterfeit parts that include the correct die, but are 
actually used parts, can pass acceptance tests, be fielded and result 
in a reliability risk.
    Due to the early recognition of the counterfeit part problem and 
the diligence of our contractors, we have been fortunate to identify 
and limit the cost and schedule impact of counterfeit parts. However, 
if a counterfeit part is discovered years after it was integrated into 
the BMDS, recovering the parts through the disassembly of possibly 
hundreds of operationally deployed systems could be extremely 
expensive, potentially costing hundreds of millions of dollars. Aside 
from the financial impacts, the greatest potential impact of 
counterfeit parts is the operational cost of an interceptor that does 
not perform as designed when it is needed, a cost that could be 
measured in lives lost or the negative impacts on foreign policy and 
national security strategy.
    The predominant threat of counterfeit parts in missile defense 
systems is reduced reliability of a major DOD weapon system. We do not 
want to be in a position where the reliability of a $12 million THAAD 
interceptor is destroyed by a $2 part. Among the more significant steps 
MDA has taken to combat the counterfeit parts risk is establishing 
requirements in its contracts to provide the pedigree of every single 
mission critical part used in the BMDS. To date, MDA has had no 
indication that any mission critical hardware in the fielded BMDS 
contains counterfeit parts.
    Thank you, Mr. Chairman. I look forward to answering the 
committee's questions.

    Chairman Levin. Thank you very much, General.
    First, let me thank the MDA for providing the committee 
with assistance in this investigation. It has been very 
helpful. Our staffs have repeatedly called on Mr. Fred Schipp 
who is currently supporting MDA from the Naval Surface Warfare 
Center Crane. He has engineering expertise and other technical 
advice has come from him, and it has been invaluable. We also 
would recognize Mr. Isaiah Mullis, I believe his name is, from 
MDA and also from the Naval Surface Warfare Center who has 
likewise provided us assistance.
    You made reference to your looking into independent 
distributors to try to certify them. Your preference is to get 
parts only from the original manufacturers or from authorized 
distributors, but if there are none available, you say that 
then independent distributors can be used providing you take a 
look at them and certify them.
    I was trying to find in your testimony--and it probably is 
in here--your written testimony the number that you used as to 
how many of them could not be certified with confidence.
    General O'Reilly. 61 percent, sir. 61 percent of the ones 
we have looked at we could not certify. I do not accept a 
moderate risk. So 61 percent were determined to have either 
moderate or high risk because of their accounting methods, 
their stockroom accuracy of how they actually manage their 
inventories, and their paper trail proving that the components 
are authentic.
    Chairman Levin. All right. So part of that process is 
looking at where do they get the parts that they are 
distributing.
    General O'Reilly. Yes, sir, and how do they account for it.
    Chairman Levin. How they account for it, as well as the 
other factors that you mentioned.
    The care that you take is care that we need to take in 
other weapons systems, and I think the model that you have used 
needs to be shared, if it has not already been shared, with all 
of our other agencies that are buying components for our 
weapons systems. I am wondering is your model unique to MDA, or 
is it something which is agency-wide through DOD that you have 
just used and modified? Where did you get that model?
    General O'Reilly. Sir, we came up from the--after I took 
over the agency in 2008, we had had two recent counterfeit 
parts incidents with telemetry. I know we talk about the 
operational systems, but when I conduct a flight test, if I 
lose my telemetry, I lost the complete value of that test and 
that is quite expensive also.
    Looking into that, we determined on ourselves that, in 
fact, the history and working with our aerospace industry 
partners, we found that the independent distributors is where 
we found all of the counterfeit parts were coming from that 
were affecting the MDA. So at that point we banned--I signed a 
policy that, in effect, bans the aerospace companies from using 
independent distributors without first coming to my agency and 
gaining approval. Then we scrutinize the specific component 
which they are buying.
    I understand some parts of the Navy have a similar program 
to that, and I am unaware of any other programs.
    Chairman Levin. Now, when you had the telemetry problems, 
were they traceable to particular parts?
    General O'Reilly. Yes, sir. Before they were used, we found 
them as failures in acceptance testing actually at a sub-tier 
level. I have in my supply chain five levels of companies, and 
at the middle level is where we found the problem with the 
specific components, which was an operational amplifier and a 
frequency synthesizer. Those parts that we found were in a 
particular company, and we went then and traced where did that 
company get its parts. It was eventually from an independent 
distributor.
    Chairman Levin. Do you know where they got their parts 
from?
    General O'Reilly. No. At that point, we handed it over to 
the DCMC and the DCIS.
    Chairman Levin. Do you know whether that amplifier and that 
synthesizer were counterfeits?
    General O'Reilly. Yes. Our indications were they were black 
topped, which is the die is not correct. It does not match what 
the paperwork said it would be. In the other case, the parts 
were remarked. There was evidence that the age codes were 
remarked on those components.
    Chairman Levin. Again, I am trying to get the chronology 
here. Did that investigation take place after there was the 
flight problems or before?
    General O'Reilly. It was before. We actually caught all of 
these before, and so we have not had a failure that we know of 
related to a counterfeit part. But it was only because our 
supply chain--at some point someone caught the fact that a part 
did not look right or it failed an acceptance test.
    Chairman Levin. There was what? A real possibility of 
failure if you had not caught it? Is that where you are at?
    General O'Reilly. Sir, yes. There is a risk and it is a 
risk we cannot take. We do not know the history of that 
component. A lot of times they are damaged when they are 
removed from their previous product due to heat and then they 
will be susceptible to stressful conditions in our tests. We 
are very concerned then about a failure.
    Chairman Levin. It has been argued that these parts can 
last some time, and if they fail, that it would be downstream 
at some point.
    General O'Reilly. Yes, sir.
    Chairman Levin. That is what the argument is of some folks 
who say that the risks are not real. Your answer to that is, as 
I understand it, what?
    General O'Reilly. Sir, the risks are real. Just because 
they pass an acceptance test, that only gives you a limited 
insight to what the remaining life of that component could be, 
and we cannot take the chance for one of our interceptors to 
fail.
    Chairman Levin. So that the life of that part is what is at 
issue, not whether it can pass an immediate acceptance test, 
but how long it will last if it is a counterfeit part and how 
reliable it is.
    General O'Reilly. Yes, Senator, or if there is some other 
damage that occurred that we could not tell because we were not 
looking for it at the time of the acceptance test.
    Chairman Levin. Now, in your written testimony, you used a 
slightly different figure than you did in your oral testimony 
in terms of the cost to MDA of the seven instances of 
counterfeit parts, and you used a figure of $4 million. What is 
the difference between those two numbers?
    General O'Reilly. I checked the math of my staff this 
morning, sir.
    Chairman Levin. I sometimes do that too, they will tell 
you. But you are known for that kind of leadership and that is 
the kind of leadership which we very much welcome. Thank you.
    Senator McCain.
    Senator McCain. Well, thank you, Mr. Chairman, and thank 
you, General, for your important testimony. I guess I would 
like to start out by asking you what I asked the other panel. 
How serious a problem do you think this is?
    General O'Reilly. Extremely serious, sir.
    Senator McCain. The largest case, as you have already 
testified, cost MDA $3 million to remove counterfeit parts 
discovered in the mission computer of the production THAAD 
interceptor. Is that correct?
    General O'Reilly. Yes, sir. The exact number is $2.74 
million, but yes, sir.
    Senator McCain. How many counterfeit parts were there in 
this incident? I believe it was about 800. Is that correct?
    General O'Reilly. Yes, sir. It was 800 and there were 49 
that were--actually 50 that were used in a mission computer and 
one mission computer was flown in a flight test. So 49 were 
actually used in building up computers for the interceptor.
    Senator McCain. So I guess my question is--maybe you could 
briefly trace it for me how the parts could infiltrate so 
deeply into the supply chain.
    General O'Reilly. Sir, it was at one of our subcontractors, 
Orbital, that builds up the booster system and it was in the 
control units of that. During their Advanced Testing Procedure 
(ATP), they then--when they bought the lot of parts, it was a 
large lot of parts. Therefore, they caught--out of several 
hundred, one of them found did not perform right 
electronically. Then they were able to look into it and 
discovered that it made the whole lot suspect.
    Senator McCain. You made up the cost rather than the 
contractor for the replacement. Is that correct?
    General O'Reilly. Sir, there is an award fee process that 
is associated with this, and we are going through the 
evaluation of that award fee period that is to Lockheed Martin 
and we take this into account. We have not completed that work. 
It will be due within 60 days, and we have been very strict in 
the past on ensuring compliance with quality assurance 
provisions.
    Senator McCain. Well, we will try to help you with 
legislation to make sure that responsibility does not apply to 
the American taxpayer.
    It seems to me that one of the understated or not 
sufficient emphasis has been placed on these intermediaries. 
Chairman Levin at the beginning of the hearing, I am sure you 
noticed that these different entities--they do not go direct 
from China to THAAD. They go through three or four different 
iterations. It seems to me that that is a serious problem. Some 
of these people who are, quote, subcontractors who are 
intermediaries are simply a phone and a desk and rake off some 
of the money as it goes through. Is that too stark a 
generalization?
    General O'Reilly. Senator, it is not the subcontractors, 
but it is the suppliers which they use.
    Senator McCain. Intermediaries.
    General O'Reilly. But yes, sir, I would say that. That is 
why we have banned the use of these intermediaries. They must 
buy directly from an original manufacturer or one of their 
authorized dealers. If we are in a situation where that source 
does not exist, my agency has to approve the use of an 
intermediary or an independent distributor.
    Senator McCain. So you are trying to take steps to make 
sure that never again would you see a graph like Chairman Levin 
put up on the screen here today, the different layers of 
intermediaries.
    General O'Reilly. Yes, sir. That is exactly what we are 
trying to do, go directly to the manufacturer or their 
authorized dealer.
    Senator McCain. Are the other Services doing the same 
thing?
    General O'Reilly. Sir, we present our models and our 
results to the working group that OSD has established. I do not 
have direct insight into what the other Services are doing.
    Senator McCain. Well, Senator Levin and I are committed to 
trying to put legislation into the defense authorization bill, 
as he mentioned. Obviously, we do not want to be guilty of 
overreach. We do not want to be guilty of overreaction. But 
since you and others have recognized and testified that this is 
a serious issue, we would appreciate your input in any 
legislative fixes that need to be made between now and the next 
week or 2 when, hopefully, we take up the defense authorization 
bill. Have you got some ideas for us?
    General O'Reilly. Sir, one of the implications of the 
policy which the MDA has established is if--this creates 
clauses in our contract. Regardless if they are cost-plus or 
fixed price, if a clause is violated by the contractor and in 
this case he does not verify authenticity of the parts he is 
using, then that cost becomes unallowable, and an unallowable 
cost, including the rework, then would be borne by industry.
    Senator McCain. Well, then why did we end up giving $2.9 
million back to Lockheed Martin?
    General O'Reilly. Sir, that contract is 10 years old, that 
particular one, and that was not a clause in the contract. But 
it still does not exhaust my remedies. I still have award fee 
and other steps I can take in order to remedy the cost to the 
Government.
    Senator McCain. Well, I guess finally you are in complete 
agreement with the Chinese foreign minister's spokesman Hung Li 
who said, quote, the Chinese government has always paid a great 
deal of attention to and has promoted cooperation with relevant 
overseas bodies in the fight against counterfeits. This is 
universally acknowledged. Do you agree with the Chinese foreign 
ministry spokesman, General?
    General O'Reilly. Sir, the data indicates the opposite.
    Senator McCain. I am shocked to hear that that is the case. 
[Laughter.]
    I thank you, Mr. Chairman.
    Chairman Levin. Thank you very much, Senator McCain.
    If you would get to us, General, immediately because we are 
going to be drafting language. The procedures that you use in 
terms of certification where there is no original manufacturer 
or supplier available. If you can get us that procedure, I 
presume it is your own procedure. It is in writing or however 
it is, or write it up for us.
    Also that clause that you just made reference to. Was that 
a clause which says that you cannot be reimbursed if you have 
not used a certified--give us that clause again.
    General O'Reilly. Our new policy puts into all new 
contracts a clause that says the contractor has to use--he is 
responsible for using original manufacturer's parts or their 
authorized dealer only. If they violate that, the cost that is 
incurred in the Government, when that is discovered and the 
remedy is implemented, will then not be an allowable cost to 
the contract.
    Chairman Levin. Got it. Does that include if they are not 
able to get to the original manufacturer, they can get to one 
of your certified distributors?
    General O'Reilly. No, sir. If they come to us and we have 
done our due diligence and we authorize it and then we find out 
later that it is still a counterfeit part, which we do our best 
to ensure that does not happen, but in that case, it would be 
an allowable cost.
    Chairman Levin. Okay, and that is also in the language then 
that would be in the contract?
    General O'Reilly. Yes, sir.
    Chairman Levin. Can you get us that contract language? It 
would be helpful.
    Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman. General O'Reilly, 
it is a pleasure to see you again, and thank you for your work 
as the Director of MDA.
    Hearing this testimony and thinking about the telemetry and 
all of the very fine-tuned calculations that every part has to 
adhere to--and I think of probably millions of pieces of parts 
that we are talking about and dealing with--I guess the 
question is how comfortable do you feel now with these 
protocols that you have put in place. I think at one point you 
said that if they use an independent supplier that is not on 
this approved, authorized original part, then the companies 
would have to come to you. I just think if you would have to 
have a whole other agency just to deal with the sort of 
contracting issues.
    General O'Reilly. Senator, we actually do. We work very 
closely with the DCMC. They have onsite personnel. I have 50 
onsite personnel myself. It is a combined effort. Also, most of 
these incidents are occurring at lower levels of the supply 
chain, a third or fourth level, and the prime contractors--
obviously, they are motivated not to have this happen too. So 
we literally form a very large set of scrutinizers that work 
through the supply chain. But being coordinated and working 
across industry and with other agencies is the key.
    I am not comfortable, even after I have implemented these, 
because as you sit there in a flight test or in a live fire and 
you watch the operation of these systems, you know how 
precisely they must perform, as you have referred to, and we 
sweat the details. So I really would not be comfortable that 
would remove the vigilance which we have already put in place. 
It is necessary.
    Senator Hagan. Certainly.
    How comfortable are you that the prime contractors and 
their subcontractors are also having the due diligence where 
they are looking out for these same instances that you are?
    General O'Reilly. Senator, I believe they are highly 
motivated to make sure. One is they need to get through the 
developmental phase to get to production contracts. Then most 
of our production contracts are fixed price, which means they 
bear the cost, in fact, if a counterfeit part is discovered.
    Senator Hagan. I know that you do not have this aging 
equipment as some of the other branches of our military might 
have. But what if a part is no longer produced by the original 
either independent supplier or the original authorized dealer 
and it then has to be remanufactured? Is there a chain of--
following that chain, how would you--do you have that as a 
problem?
    General O'Reilly. Yes. There is a series of engineering 
decisions that have to be made between the prime contractor and 
the subcontractors affected and MDA. We have to make the 
decision, is it worth it to go out and produce our own 
components?
    The problem is and the problem referred to before of the 
trusted foundries is we use very few components, but they are 
spread out over a large spectrum of part types. So in many 
cases, we are less than one-tenth of 1 percent of the overall 
market for our component. So we are confronted with having to 
decide whether to redesign our circuitry, and that often is the 
case and we run into obsolescence. Almost every one of my 
manufacturing contracts has an obsolescence contract line item 
number part of the contract that has to be redesigned primarily 
due to electronic parts no longer being manufactured.
    Senator Hagan. So how can you assure that that is in that 
scenario the original part that you, in fact, are contracting 
for?
    General O'Reilly. We have assessments from industry that 
project the life of a component, and we select parts that are 
in the early stages of their life. It is called a sunset 
clause, and they are not at the end of their operational life 
and have a tendency to change. Sometimes we are caught off 
guard, though, on those. It does require a continual amount of 
engineering work to relook at the designs that have already 
been proven because of the discontinuity in our supply chain of 
the electronic parts.
    Senator Hagan. Have you recognized any suppliers lower down 
the chain of parts that have repeatedly been found to have 
counterfeit parts being used? If so, are you taking action to 
be sure we do not contract with those suppliers?
    General O'Reilly. We are always scrutinizing our parts 
usage and our sources because of the nature of our work more 
than what I have seen in some of my other acquisition jobs in 
DOD. Because of that, we have not found a case where someone is 
willfully or repeatedly, but I must say that in the seven 
cases--in five cases, the supplier actually completed the 
repair at their own cost and did not charge the Government for 
it in five of the seven cases. So they recognize. A company 
such as Honeywell actually went out and did a complete review 
after one of our cases of their entire stockage and swept 
through and removed anything that indicated that it was a 
counterfeit part, and they also instituted new policies.
    Senator Hagan. Thank you, Mr. Chairman.
    Chairman Levin. Thank you very much, Senator Hagan.
    Thank you, General. We really would look forward to your 
being able to give us that information literally in the next 
couple days because we are going to try to formulate in 
amendment form. I think we will have broad support from this 
committee that has heard this testimony and I think a lot of 
other Senators who are following it. This is quite an amazing 
story and it has to change direction quickly.
    You have taken action in your agency, which is the right 
action. It has been strong. It has been direct. It has caught 
some real problems before they created some real problems, and 
your testimony has been extremely helpful. We are grateful for 
it. Thank you.
    General O'Reilly. Thank you, Senator.
    Chairman Levin. You are excused unless you have some other 
comment you want to make.
    General O'Reilly. No, sir. Thank you, sir.
    Chairman Levin. Okay. Your stomach is not growling there?
    General O'Reilly. Not yet. [Laughter.]
    Chairman Levin. Thank you. We are going to have a vote and 
break now for just 10 minutes. I am going to go vote. I am 
going to come back. We are going to get the opening statements 
before lunch, and then we will break probably for about an hour 
after the opening statements. But we will be able to get the 
opening statements in before lunch, and then we will come back 
after an hour break or so. So we will stand adjourned now for 
10 minutes. [Recess.]
    The committee will come back to order, and we will move to 
our third panel. Then we will receive the opening statements, 
and then as I indicated before, we will break for about an hour 
for lunch.
    Before I call on you, let me thank each of you for being 
here today and to thank you and your companies for your 
cooperation. We very much appreciate that cooperation with this 
committee and we give you credit for doing that because I know 
that some of these questions may be difficult to answer, but 
the fact that you are cooperative with us is something that 
stands in your favor.
    Is it Mr. Kamath? Am I pronouncing your name correctly? 
Kamath?
    Mr. Kamath. Yes, Mr. Chairman. Kamath is fine.
    Chairman Levin. Okay, and it is Vivek?
    Mr. Kamath. Vivek.
    Chairman Levin. Vivek Kamath. So you are the Vice President 
of Supply Chain Operations for Raytheon. So we will start with 
you.

    STATEMENT OF VIVEK KAMATH, VICE PRESIDENT, SUPPLY CHAIN 
                  OPERATIONS, RAYTHEON COMPANY

    Mr. Kamath. Thank you, Mr. Chairman. Mr. Chairman, Raytheon 
appreciates the opportunity to work with you on this important 
inquiry into counterfeit electronic parts in the DOD supply 
chain. These parts making their way into military equipment 
pose a real threat to our national security.
    Mitigating the risks posed by suspect and counterfeit 
electronic parts is an issue that Raytheon takes very 
seriously. Our business and our reputation demand this 
approach, which is why Raytheon spends a great deal of time, 
resources, and effort tackling this problem on a daily basis.
    As in any market, counterfeit electronic parts enter the 
DOD supply chain because of supply and demand. Rapid turnover 
in high technology items provides a steady source of used 
materials that can end up as counterfeit parts. In addition, 
obsolete parts pose a challenge because original equipment 
manufacturers may have stopped making these parts or left the 
industry altogether. Despite these challenges, DOD and its 
suppliers must obtain the authentic electronic parts needed to 
build, maintain, and refurbish defense systems.
    Across Raytheon, our supply chain covers thousands of 
programs and contracts involving a vast number of suppliers. We 
issue hundreds of thousands of purchase orders every year. 
Purchase orders for electronic parts where the risk of 
counterfeiting is the highest may cover multiple lots comprised 
of thousands of individual parts.
    As a company, Raytheon is committed to providing genuine 
electronic parts to our customers. Like others in the industry, 
Raytheon mandates that suppliers certify in writing that the 
electronic parts they are providing meet the standards in the 
purchase order, including requirements for authentic parts from 
authorized sources.
    In 2009, Raytheon formed a cross-business team to develop 
an enterprise-wide counterfeit parts mitigation policy. This 
policy, which builds on existing business practices, was 
introduced in July of this year and will be fully implemented 
by February 2012. Our counterfeit parts mitigation policy 
assigns specific responsibilities to Raytheon supply chain 
management, engineering, mission assurance, and other 
functions. The policy also focuses attention on aspects of our 
supply chain that are most likely to present risks, such as 
procurement of electronic parts from independent distributors.
    To further reduce the possibility that counterfeit parts 
might find their way into our products, Raytheon is developing 
a preferred supplier list for distributors and brokers and will 
mandate its usage across our company. We will also consolidate 
purchasing through a centralized procurement organization.
    In addition, Raytheon is a member of GIDEP. The GIDEP 
reporting system provides a means for manufacturers and 
suppliers to alert other GIDEP members when they identify 
potential counterfeit parts, assemblies, components, and their 
suppliers. This kind of information sharing can help stop 
suppliers of counterfeit parts in their tracks. Raytheon treats 
GIDEP reporting as mandatory. Our new enterprise policy will 
reinforce this practice.
    In conclusion, given the scope and dynamic nature of the 
threat, counterfeit items will remain a challenge. The 
policies, practices, and measures that Raytheon has put into 
place will further protect our supply chain from counterfeit 
parts and limit exposure and mitigate risks for our customers 
and our company. Effective policy responses will further refine 
industry best practices and improve information sharing while 
avoiding costly or time-consuming solutions that provide little 
additional protection for the warfighter.
    We thank the committee for focusing its attention on this 
challenging issue. I would be happy to answer questions when we 
return. I would like to ask that the entire statement be made 
part of the record. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Kamath follows:]
                   Prepared Statement by Vivek Kamath
                              introduction
    Mr. Chairman, Ranking Member McCain, and members of the committee, 
Raytheon appreciates the opportunity to work with you on this important 
inquiry into counterfeit electronic parts in the Department of Defense 
(DOD) supply chain. These parts making their way into military 
equipment pose a real threat to our national security.
    Mitigating the risks posed by suspect and counterfeit electronic 
parts is an issue that Raytheon takes very seriously. It is one of our 
top priorities. Indeed, our business and our reputation demand this 
approach, which is why Raytheon spends a great deal of time, resources, 
and effort tackling this problem on a daily basis.
    We are hopeful that the detailed information we have provided to 
you and your staff throughout the investigation has proven beneficial. 
I look forward to discussing the proactive steps that Raytheon has 
taken to combat the threat.
             the challenge of counterfeit electronic parts
    According to government and industry data, 7 to 8 percent of world 
trade every year involves counterfeit products. Each year, due to 
counterfeiting, hundreds of thousands of American jobs are lost and 
U.S. companies lose between $200 and $250 billion.
    At Raytheon, we consider an item to be ``counterfeit'' if it is 
purposely misrepresented to be genuine. Under this definition, 
counterfeits include unauthorized or illegal copies, items whose 
appearance is altered or disguised with the intent to mislead, or items 
that are refurbished or reclaimed, but advertised as new. Unauthorized 
substitution of materials or components constitutes counterfeiting 
under our policies. Raytheon also takes the view that counterfeiting 
includes falsely advertising that the testing, screening, or 
qualification of an item is complete.
    As in any market, counterfeit electronic parts enter the DOD supply 
chain because of supply and demand. Rapid turnover in high technology 
items provides a steady source of used materials that can end up as 
counterfeit parts. Also, obsolete parts pose a challenge because 
Original Equipment Manufacturers may have stopped making the parts or 
left the industry altogether. Despite these challenges, DOD and its 
suppliers must obtain the authentic electronic parts needed to build, 
maintain, and refurbish defense systems.
    Counterfeiters are innovative, and their efforts pose a dynamic 
threat to supply chains. The volume of counterfeit items and rapidly 
improving methods for concealing them require constant vigilance from 
all participants in the supply chain. Yet, even with a substantial 
investment of time and resources by the U.S. Government and its 
suppliers, counterfeit parts will likely continue to find their way 
into defense and other U.S. Government systems. We are fully committed 
to making sure they do not.
                    raytheon supply chain operations
    Across Raytheon, our supply chain covers thousands of programs and 
contracts involving a vast number of suppliers. We issue hundreds of 
thousands of purchase orders every year. Purchase orders for electronic 
parts--where the risk of counterfeiting is highest--may cover multiple 
lots comprised of thousands of individual parts.
    As a company, Raytheon is committed to providing genuine electronic 
parts to our customers. Like others in the industry, Raytheon mandates 
that suppliers certify, in writing, that the electronic parts they are 
providing meet the standards in the purchase order--including 
requirements for authentic parts from authorized sources. In Raytheon's 
experience, however, the protection afforded by this certification is 
limited in two principal ways. First, the source information available 
to suppliers must be reliable. Second, suppliers must be committed to 
practices designed to mitigate counterfeit electronic parts.
                        improving best practices
    Raytheon has been addressing the presence of counterfeit parts in 
the supply chain for years. Raytheon's business units operate under 
policies for detecting and mitigating the risk of counterfeit parts. 
These policies have protections that reflect the specific needs of each 
business.
    Building on these experiences, we worked with our partners in the 
defense industry in 2009 to develop SAE Aerospace Standard (AS) 5553--
Counterfeit Electronic Parts; Avoidance, Detection, Mitigation, and 
Disposition--an industry guideline to develop consistent policies 
regarding counterfeit parts.
    At the same time, Raytheon formed a cross-business team to develop 
an enterprise-wide counterfeit parts mitigation policy. This policy, 
which amplifies and integrates existing business practices, was 
introduced in July 2011 and will be fully implemented in February 2012. 
Based on SAE AS5553 and Raytheon's own best practices, our counterfeit 
parts mitigation policy assigns specific responsibilities to Raytheon's 
Supply Chain Management; Engineering; Mission Assurance; and other 
functions. The policy also focuses attention on the aspects of our 
supply chain that are most likely to present risks, such as the 
procurement of electronic parts from independent distributors.
    To further reduce the possibility that counterfeit parts might find 
their way into one of our products, Raytheon is developing a Preferred 
Supplier List for distributors and brokers. This list will allow us to 
reward suppliers that institute rigorous processes to secure their own 
supply chains and that have a proven history of supplying us with 
authentic parts. Limiting our relationships to these responsible 
suppliers will also allow Raytheon to devote more time to supply chain 
oversight. In turn, preferred suppliers will have a strong financial 
incentive to comply with our requirements and standards.
    We are also consolidating purchasing across Raytheon through a 
central procurement organization. All purchases of electronic parts 
through distributors will be routed through this organization, 
providing additional governance and oversight of our supply chain.
    Like many other organizations in government and industry, Raytheon 
is a member of the Government-Industry Data Exchange Program (GIDEP). 
The GIDEP reporting system provides a means for manufacturers and 
suppliers to alert other GIDEP members when they identify potential 
counterfeit parts, assemblies, components, and their respective 
suppliers. This kind of information sharing can help stop suppliers of 
counterfeit parts in their tracks. Indeed, because of its importance to 
the security of the entire industry supply chain, Raytheon treats GIDEP 
reporting as mandatory. Our new enterprise policy will reinforce this 
practice.
                               conclusion
    Given the scope and dynamic nature of the threat, counterfeit items 
will remain a challenge. The policies, practices, and measures that 
Raytheon has put in place will further protect our supply chain from 
counterfeit parts, while limiting exposure and mitigating risk for our 
customers and our company. Effective policy responses will further 
refine industry best practices and improve information sharing, while 
avoiding costly or time-consuming solutions that provide little 
additional protection for the warfighter.
    We thank the committee for focusing its attention on this 
challenging issue, and I would be happy to answer any questions you may 
have.

    Chairman Levin. Thank you. The entire statement will be 
made a part of the record and that is true of all statements 
here today.
    Mr. DeNino, you are the Vice President, Corporate 
Procurement for L-3 Communications. So thank you.

    STATEMENT OF RALPH L. DeNINO, VICE PRESIDENT, CORPORATE 
          PROCUREMENT, L-3 COMMUNICATIONS CORPORATION

    Mr. DeNino. Thank you, Chairman Levin, and good afternoon.
    On behalf of L-3 Communications, I appreciate the 
opportunity to be here today to address the important issue of 
counterfeit electronic parts in the U.S. military supply chain.
    L-3 Communications is a prime contractor in command, 
control, communications, intelligence, surveillance, and 
reconnaissance systems, aircraft modernization and maintenance, 
and Government services. L-3 is also a leading provider of a 
broad range of electronic systems used on military and 
commercial platforms. We serve a wide range of customers, most 
notably DOD and its prime contractors.
    The reality that L-3 and the entire aerospace and defense 
industry faces is that electronic components are increasingly 
susceptible to two significant risks: obsolescence and 
counterfeiting. With sophistication levels of counterfeiters 
escalating, detection and avoidance are becoming increasingly 
difficult. These issues are exacerbated by the service lives of 
fielded defense weapons systems being extended well beyond 
their original planned life cycle, furthering the challenge of 
the ever-shortening life cycles of electronic components, which 
is being driven by commercial technology changes.
    L-3 has been proactive in both managing obsolescence and 
counterfeit part risk mitigation. Procedures and processes are 
in place to manage both of these areas with improvements being 
driven to stay current with emerging counterfeit threats. 
Supply chain management techniques have been implemented to 
limit the number of independent distributors that can sell 
parts to L-3. Strict and progressive testing methodologies are 
in place. Reporting of incidents is required and training and 
education of personnel is ongoing.
    L-3 will continue to improve its obsolescence and 
counterfeit parts mitigation programs through strict adherence 
to its corporate procedures and policies across the entire 
enterprise, controlling independent distributor purchases, and 
by providing training and education to our personnel. 
Additionally, we will continue to work with our Government and 
industry partners and professional associations to develop and 
incorporate best practices throughout the supply chain.
    In any case, if any part is identified as suspect 
counterfeit, L-3 will, as it has in the past, promptly notify 
all of its affected customers and work with them to remediate 
the problem in whatever way the customer determines is needed 
at no cost to the Government.
    Finally, while L-3 has made significant efforts over 
several years to address the counterfeit parts challenge, the 
Senate Armed Services Committee's examination of the issue has 
been important in underscoring the seriousness and depth of the 
problem and the need to rapidly develop an effective solution. 
L-3 looks forward to working with other companies and the 
committee in achieving this goal and will be pleased to answer 
any questions that the committee may have.
    [The prepared statement of Mr. DeNino follows:]
                 Prepared Statement by Ralph L. DeNino
                              introduction
    My name is Ralph DeNino, and I am L-3 Communications' Vice 
President, Corporate Procurement. I've been employed at L-3 
Communications since December 2000. At L-3, I have corporate-wide 
responsibility for Supply Chain Management and Quality Management.
                  about l-3 communications corporation
    L-3 is a prime contractor in Command, Control, Communications, 
Intelligence, Surveillance, and Reconnaissance (C\3\ISR) systems, 
aircraft modernization and maintenance, and government services. L-3 is 
also a leading provider of a broad range of electronic systems used on 
military and commercial platforms. Our customers include the U.S. 
Department of Defense (DOD) and its prime contractors, U.S. Government 
intelligence agencies, the U.S. Department of Homeland Security, U.S. 
Department of State, U.S. Department of Justice, allied foreign 
governments, domestic and foreign commercial customers and select other 
U.S. Federal, State, and local government agencies.
    L-3 is composed of four business segments:
1. Command, Control, Communications, Intelligence, Surveillance, and 
        Reconnaissance (C\3\ISR)
    L-3 provides airborne and ground-based products and services for 
the global ISR market, networked communications systems and secure 
communications products for real-time situational awareness and 
response.
2. Government Services
    L-3 provides a full range of engineering, technical, enterprise 
information technology (IT) and cybersecurity, advisory, training, and 
support services to the U.S. military, government agencies, and allied 
foreign governments.
3. Aircraft Modernization and Maintenance
    L-3 provides modernization, upgrades and sustainment, maintenance, 
and logistics support services for military and government aircraft and 
other platforms.
4. Electronic Systems
    L-3 provides a broad range of products across several business 
areas that include marine and power systems, microwave and satellite 
communications products, displays, aviation products, training and 
simulation, electro-optical/infrared products and systems, warrior 
systems, precision engagement, security and detection systems, applied 
technology, telemetry and RF products, power and propulsion systems, 
and undersea warfare and ocean sciences products.
             obsolescence and the risk of counterfeit parts
    As a major aerospace and defense contractor, L-3 Communications 
provides our worldwide customers with a sophisticated array of high 
tech products. In the world of high tech products there is a common 
element: the need for and availability of quality, high reliability 
electronic components. The reality that L-3 and other aerospace/defense 
contractors face is that electronic components are increasingly 
susceptible to two significant risks: obsolescence and counterfeiting. 
Component obsolescence is a constant issue that must be considered 
early in the design and product development phases to mitigate risks to 
schedule and multi-year maintenance needs. Counterfeiting, primarily 
originating in Asia, is now a sophisticated multi-billion dollar 
industry. With sophistication levels of counterfeiters escalating, 
detection and avoidance are becoming increasingly difficult. These 
issues are exacerbated by the service lives of fielded defense weapon 
systems, which are now being extended beyond their original planned 
life cycle. It is not unusual for a fielded system to be operational 
for anywhere from 25-40 years. These problems are further complicated 
by a reduction in the industrial base dedicated to production of 
electronic components that support military products. Defense and civil 
aerospace related acquisitions now account for less than 1\1/2\ percent 
of total microelectronic semiconductor sales.
    Compounding the problem in the Aerospace and Defense industry are 
the long product design cycle inherent in military systems and the ever 
shortening life cycle of available components. Obsolescence challenges 
are especially apparent for electrical, electronic, and 
electromechanical commodities. Obsolescence in the last few years has 
been driven not only by the increasing speed of technological change 
and market consolidation, but also by new environmental regulation, 
such as restriction of hazardous substances, which affected the market 
by driving change to a ``lead free'' environment. The obsolescence and 
counterfeit parts challenge was astutely summarized by Ted J. Glum, 
director of the DOD's Defense Microelectronics Activity Unit when he 
stated, ``The defense community is critically reliant on a technology 
that obsoletes itself every 18 months, is made in unsecure locations 
and over which we have absolutely no market share influence.'' 
(``Pentagon Worries About Chinese Chips'' A.T. Gillies, 9/4/08).
    Having to find sources for obsolete electronic parts also increases 
the need to buy from nontraditional sources, because by definition the 
Original Component Manufacturer (OCM) or its authorized, franchised 
distributor no longer stocks the original part that is now obsolete. In 
turn, having to rely on non-traditional sources of supply, typically 
referred to as Independent Distributors (ID), results in increased 
risks of encountering counterfeit parts. Independent Distributors 
operate under far less regulation and control than OCMs, and are not as 
accountable as OCMs are to long-term customers. While obsolescence can 
be dealt with in other ways, such as redesign to utilize currently 
available electronic components or reproducing the original part, these 
options are normally not available due to a lack of government funding, 
a problem that would appear likely to increase in the current budget 
environment.
    L-3 recognizes the need to address these risks and obstacles to 
ensure both supply chain availability of electronic components and 
customers' confidence in our products. The creation at the corporate 
level of L-3's Diminishing Manufacturing Sources and Material Shortages 
(DMSMS) program was the first step taken to proactively work 
obsolescence issues. The DMSMS program features a system that provides 
divisions a tool for uploading their Bills of Material (BOM) to receive 
life cycle analysis and up to date obsolescence information on Military 
Standard and commercial electronic components.
    Similarly, understanding that obsolescence challenges increase the 
serious risk of exposure to counterfeit parts in the supply chain, a 
corporate level Counterfeit Parts (CP) program was established to focus 
on addressing the emerging risk and to implement a strategy that could 
be deployed by all divisions of the corporation.
             l-3 counterfeit parts risk mitigation program
    More specifically, L-3 formed a corporate-wide Counterfeit Parts 
Team (CPT) in December 2007 to share information and experiences across 
all L-3 divisions, to increase awareness of the challenges and to 
provide education and training. The CPT developed a database of 
information and lessons learned about counterfeiting techniques, which 
is shared with all divisions of the corporation. The team also set out 
to develop procedures and to define testing requirements to detect 
counterfeit parts and mitigate risks.
    This resulted, in December 2008, in L-3 implementing Material 
Quality Operating Procedure (MQOP-001): Counterfeit Parts Risk 
Mitigation Program to address the counterfeit parts issue. As 
Counterfeiting techniques evolved, the Procedure was updated in March 
2011. To further improve our process, to impose more stringent testing 
requirements and to increase the focus on avoiding the use of obsolete 
parts, we updated our Procedure again in early November 2011.
    Our CPT's efforts are closely tied with our DMSMS Team because, as 
noted above, obsolescence increases exposure to the counterfeit market 
place. In that regard, to address the risks posed by Independent 
Distributors, we began our efforts to narrow the listing of Independent 
Distributors used for sourcing obsolete devices. An assessment of our 
approved independent suppliers resulted in the corporate approved 
listing of IDs being reduced from 16 suppliers to 6 in March 2011, with 
a stated goal of further reducing the listing to 4. In May 2011, this 
goal was achieved. Correspondingly, and earlier, in March 2008, L-3 
became a member of the Electronic Retailers Association International, 
the global resource for companies involved in purchasing and selling of 
manufacturing electronic components.
    Our teams also recognized that improvements were required in 
education, training, and data sharing on counterfeit parts techniques 
and counterfeit parts occurrences taking place across the entire 
aerospace and defense industry. Accordingly, the corporation sponsored 
two series of Counterfeit Part Risk Mitigation and Component 
Obsolescence Management events. This included three regional symposia 
held in fall of 2008. More recently, five regional symposia were 
conducted in the fall of 2010, attended by over 250 professionals in 
the disciplines of Supply Chain Management, Quality Management, Program 
Management, and Engineering. These symposia were also open to and 
supported by L-3 subcontractors. In addition to presentations by L-3 
personnel at these training and education sessions, the event was 
supported with presentations by industry experts and a representative 
from the Government Industry Data Exchange Program.
    To supplement training, articles on the CPT's activities and 
industry trends in counterfeiting techniques, as well as our DMSMS/
obsolescence management program are regularly featured in our 
corporate-wide Supply Chain and Quality Management Newsletter. In 
addition to regularly scheduled teleconferences, the CPT maintains a 
robust intranet site that provides valuable information accessible to 
L-3 employees. Suspect and counterfeit part experiences at L-3, 
training materials for use with our subcontractors, industry guidance 
and other important resources are housed at this site.
    specific incidents of counterfeit parts that l-3 has experienced
    L-3 Communications Integrated Systems L.P. (L-3 IS) is the prime 
contractor for the United States Air Force Joint Cargo Aircraft C-27J 
program. This program began as a U.S. Army-led program in 2007 and 
transitioned in 2010 to the Air Force under the current C-27J System 
Program Office (SPO) within the Mobility Directorate at the 
Aeronautical Systems Center (ASC) of the Air Force Material Command 
(AFMC) at Wright-Patterson Air Force Base, Ohio. It is a program of 
record and classified as an Acquisition Category (ACAT) ID. Although 
the aircraft is based upon the C-27J transport produced by Alenia 
Aeronautica, S.p.A., its avionics elements derive heavily from the 
Lockheed Martin C-130J aircraft.
    The C-27J program experienced four instances of suspect counterfeit 
electronic components since the program started. These have involved 
the avionics systems for the Mission Computer provided by BAE Systems 
of Austin, Texas; the Color Multipurpose Display Units (CMDU) provided 
by L-3 Communications Display Systems of Alpharetta, Georgia (which has 
been affected on two separate occasions); and the Type I Bus Adapter 
Unit (BAU) provided by Goodrich of Vergennes, Vermont. One additional 
instance of suspect counterfeit electronic components involved Ground 
Support Equipment (GSE) for the ALE-47 Countermeasures Dispensing 
System (CMDS) provided by BAE Systems of Austin, TX.
    In the case of the C-27J, L-3 IS, as the prime contractor, promptly 
notified its Government customer on each occasion as soon as it became 
aware of suspect counterfeit components. L-3 Display Systems, which 
manufactures the CMDUs, also notified all of its customers in both 
cases of the suspect counterfeit part.
    In the case of the counterfeit Lattice chip used in the CDMU, L-3 
Display Systems received it from its approved (at the time) Independent 
Distributor along with a test report showing that the part was 
authentic. When parts were sent out for retinning (a normal process 
even for authentic parts), the retinning facility encountered 
difficulty and proposed an alternative method. When L-3 Display Systems 
queried the OCM about the part, the OCM informed L-3 Displays that the 
part was counterfeit. L-3 Displays notified its customer, Alenia 
Aeronautica, on February 2, 2010. By May 2010, the Lattice counterfeit 
parts had been removed from U.S. Air Force aircraft and replaced.
    In November 2010, a Samsung VRAM chip that had been previously 
tested and represented as authentic by a third party lab was identified 
as suspect counterfeit as the result of a supplemental third party 
independent test. This additional testing was performed after anomalies 
were noted during L-3 Display Systems' standard testing methodology. L-
3 Display Systems notified its customer, Alenia, of the counterfeit 
part but that notification was not passed on to the prime contractor, 
L-3 Integrated Systems, until September, 2011. When L-3 IS was 
notified, it in turn notified its customer, the Air Force C-27J Systems 
Program Office. L-3 IS will take whatever corrective action its 
customer requests, and the current remedy is to replace the VRAM chips 
during normal scheduled depot maintenance unless a failure occurs for 
any reason that would necessitate immediate repairs.
    It should be noted that there has been no discernable effect on the 
C-27J. The C-27J program tracks avionics performance and failures by 
means of a Failure Reporting And Corrective Action System (FRACAS). 
After analyzing the FRACAS history through this past summer, there have 
been no abnormal failures attributed or noticed for the affected 
Mission Computers, CMDUs, BAUs, or CMDS Test Sets. No degradation to 
performance has been observed due to these parts.
    This can be partially attributed to the mechanisms put in place for 
the assembly, test and delivery of avionics systems in nearly all DOD 
procurement programs. The process of procuring piece parts and their 
progressive assembly from wafer to integrated circuit to circuit board 
to final avionics Line Replaceable Units (LRUs) or Weapons Replaceable 
Assemblies (WRAs) is always founded on progressive verification and 
testing of the item through each stage of assembly. Even at the circuit 
board or LRU/WRA box level, the use of complex acceptance test 
processes and ``burn-in'' (or Environmental Stress Screening) at the 
manufacturing plant before delivery into the DOD supply system, adds 
confidence that the items will perform in service and that defective 
parts will be identified and removed from the delivered inventory.
    In the case of the C-27J JCA, there is also the benefit of 
contractor logistics support (CLS) for the entire maintenance of the 
aircraft fleet, whether in the continental United States or deployed. 
Whether by term of the contractual warranty provisions or by means of 
the CLS maintenance in the contract, the U.S. Government does not bear 
any cost for labor or material if the avionics systems should be 
affected by defective material. All costs would be borne entirely by 
the contractor and its suppliers.
                               conclusion
    The rise in instances of suspect and counterfeit electronic 
components results from a rapid turnover of technologies in the 
commercial and military markets, which drives critical obsolescence 
issues daily across all areas of the electronics supply base. This is 
particularly troublesome for the DOD and its need to continue to 
support deployed systems--a need further complicated by the extended 
life of these systems. These issues are constant, daily challenges not 
only for the industry that contracts with the DOD, but also for all of 
the Government service agencies throughout their various support 
systems.
    L-3 will continue to improve its obsolescence and counterfeit parts 
mitigation programs by reiterating strict adherence to its corporate 
procedures and policies across the entire enterprise, controlling 
Independent Distributor purchases, and by providing training and 
education to our personnel. Additionally, we will continue to work with 
our Government and industry partners and professional associations to 
develop and incorporate best practices throughout the supply chain. In 
any case, if any part is identified as suspect, L-3 will, as it has in 
the past, promptly notify all of its affected customers and work with 
them to remediate the problem in whatever way the customer determines 
is needed.
    Finally, while L-3 has made significant efforts over several years 
to address the counterfeit parts challenge, the Senate Armed Services 
Committee's examination of the issue has been important in underscoring 
the seriousness and depth of the problem and the need to rapidly 
develop an effective solution. L-3 looks forward to working with other 
companies and the committee in achieving this goal.

    Chairman Levin. Thank you very much, Mr. DeNino. Is it Mr. 
Dabundo or Dabundo?
    Mr. Dabundo. Dabundo.
    Chairman Levin. Dabundo. Mr. Dabundo, turn your mike on 
there, if you would. You are the Vice President and the P-8 
Poseidon Program Manager at Boeing. Please proceed.

 STATEMENT OF CHARLES DABUNDO, VICE PRESIDENT AND P-8 POSEIDON 
      PROGRAM MANAGER, BOEING DEFENSE, SPACE AND SECURITY

    Mr. Dabundo. Mr. Chairman, thank you for the opportunity to 
appear before this committee regarding counterfeit electronic 
parts in defense systems. This is a serious issue that has 
commanded the attention of Boeing, the defense industry, and 
the U.S. Government for some time. Unlike my counterparts on 
this panel, I do not have overall supply chain responsibilities 
for my company, and accordingly, Boeing requests permission to 
submit a separate letter that addresses in detail Boeing's 
policies and initiatives on counterfeit parts.
    Chairman Levin. That will be made part of the record.
    [The information referred to follows:]
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    
    
      
    Mr. Dabundo. Thank you, sir.
    Based on my experience working at Boeing for nearly 30 
years, I can say Boeing is fully committed to the safety, 
quality, and integrity of our products, and ensuring that those 
products are able to accomplish the missions required by our 
military and civilian customers. As an aircraft manufacturer, 
Boeing purchases and installs thousands of parts from 
suppliers. We require our suppliers to deliver a conforming 
product that meets our spec requirements. Addressing 
nonconforming products is essential, and Boeing and our 
suppliers have rigorous quality processes to address such 
parts.
    The P-8 program was awarded to Boeing in 2004 and has had a 
longstanding track record of successful execution. The program 
is based on an in-line production process that leverages the 
commercial 737 production system and utilizes robust 
Government-approved military and commercial processes in 
accordance with the Federal Acquisition Regulations (FAR) and 
the contract between the U.S. Navy and Boeing Defense, Space, 
and Security (BDS). These processes have been a key to enabling 
the program to meet its program or record milestones with a 
safe, quality product at a cost that has been consistently 
below cost projections at program inception.
    Boeing and our P-8 teammates have built six flight test 
aircraft and two ground test aircraft to date. Four of those 
aircraft are at the Naval Air Station in Patuxent River and 
have flown in excess of 1,200 flight hours, and 2 additional 
aircraft will be delivered to the Navy by February 2012.
    The first low-rate initial production aircraft has 
completed its maiden flight, and it is in the final stages of 
installation and check-out at the BDS facility prior to 
delivery to the U.S. Navy in February 2012.
    The program remains on track to meet IOC in 2013.
    As mentioned above, leveraging the commercial production 
system has been a key to the success demonstrated by the 
program, and separate divisions of Boeing Company, BDS, and 
Boeing Commercial Airplanes (BCA) are required by the FAR to 
have a contract in place governing the transition of the 
commercial item from BCA to BDS. The aircraft that BDS 
purchases from BCA is manufactured in accordance with BCA's 
existing Federal Aviation Administration (FAA)-approved quality 
system, and once delivered to BDS, the work is completed in 
accordance with applicable Government quality assurance 
requirements. Both sets of processes are based on many years of 
experience with a wide range of customers and a strict focus on 
safety, quality, and product integrity.
    Addressing nonconforming products is essential and we rely 
on our quality processes to identify and disposition parts that 
have been identified as such. Boeing treats all nonconformances 
with a significant level of concern to ensure that safety and 
integrity of the product is maintained, and this is 
accomplished by qualified subject-matter experts who utilize a 
comprehensive set of processes and procedures for addressing 
nonconformances encountered during the build of the aircraft. 
Suspect counterfeit parts represent a subset of the potential 
types of nonconformances and, as such, are covered within these 
processes.
    If nonconformances are encountered during the build of the 
BCA commercial deliverable, the processes utilized on the P-8 
are governed by BCA's quality and material review processes 
which are AS9100 compliant and part of an FAA-approved quality 
system under production certificate 700. PC 700 was issued to 
Boeing in 1997 for the 737NG production by the FAA after 
demonstration that Boeing has adequate facilities and quality 
control systems to ensure it meets the stringent safety and 
reliability requirements.
    If nonconformances are encountered during the installation 
and checkout portion of the build that is executed by BDS, the 
processes utilized on P-8 are governed by BDS's quality and 
material review processes which are also AS9100 compliant, 
overseen by the Defense Contract Management Agency, and part of 
our Navy Air Systems Command-approved P-8 quality system plan 
in accordance with our contract with the Navy.
    To my knowledge there have been three instances of suspect 
counterfeit parts that have been installed on P-8 aircraft. Two 
of those were assessed and dispositioned using the BCA 
commercial quality and engineering processes and the third 
using BDS quality and engineering processes. In all three 
cases, the safety of the P-8 and the people who operate it were 
not at risk and the appropriate processes were utilized by 
people qualified to assess and disposition these 
nonconformances.
    So in summary, sir, suspect counterfeit parts are a serious 
and industry-wide issue that has affected the P-8 program. 
Boeing has utilized our Government-approved quality and 
material disposition processes to address these suspect 
counterfeit parts, and while BDS and BCA have slightly 
different quality and material disposition systems, they are 
both under Government regulatory control and oversight and have 
a pedigree that ensures the safety and integrity of the P-8 and 
the people who operate it are maintained at all times. That 
pedigree is based on many years of application on Boeing 
military and commercial products which have and continue to set 
the industry standard for safety, quality, and reliability.
    That concludes my oral statement to the committee.
    [The prepared statement of Mr. Dabundo follows:]
                 Prepared Statement by Charles Dabundo
    Mr. Chairman, Senator McCain, members of the committee: Thank you 
for the opportunity to appear before this committee regarding 
counterfeit electronic parts in defense systems. This is a serious 
issue that has commanded the attention of Boeing, the defense industry, 
and the U.S. Government for some time. Unlike my counterparts on this 
panel, I do not have overall supply chain responsibilities for my 
company, and accordingly, Boeing will be submitting a separate letter 
that addresses in detail Boeing's policies and initiatives on suspect 
counterfeit parts.
    Based on my experience working at Boeing for nearly 30 years, I can 
say that Boeing is fully committed to the safety, quality, and 
integrity of our products, and ensuring that they are able to 
accomplish the missions required by our military and civilian 
customers. As an aircraft manufacturer, Boeing purchases and installs 
thousands of parts from suppliers. We require our suppliers to deliver 
a conforming product that meets our specification requirements. 
Addressing nonconforming products is essential, and Boeing and our 
suppliers have rigorous quality processes to address such parts.
    In this statement I will provide an explanation of how this 
approach was used in the three known instances of such parts being 
installed on P-8A aircraft. But first I'd like to set a foundation by 
giving a brief overview of the P-8A and our approach to execution of 
the program.
                     p-8a poseidon program overview
    Boeing was selected by the U.S. Navy in 2004 to develop the P-8A, a 
long-range anti-submarine warfare, anti-surface warfare, intelligence, 
surveillance and reconnaissance aircraft. The P-8A possesses an 
advanced mission system that enables interoperability in the future 
battle space. Capable of broad-area maritime and littoral operations, 
the P-8A will influence how the U.S. Navy's maritime patrol and 
reconnaissance forces train, operate and deploy. The P-8A is being 
developed for the Navy by a Boeing-led industry team that consists of 
CFM International, Northrop Grumman, Raytheon, GE Aviation, BAE Systems 
and Spirit AeroSystems.
    Boeing and its P-8A teammates have built six flight-test and two 
ground-test aircraft. Four P-8As are currently in flight test at NAS 
Patuxent River where they have flown in excess of 1,200 flight hours. 
Two additional aircraft will be delivered to the U.S. Navy for 
operational evaluation by February 2012. The first Low Rate Initial 
Production aircraft has completed its maiden flight, and is in the 
final stages of installation and checkout prior to delivery to the U.S. 
Navy fleet in February 2012. The program remains on track to meet 
initial operational capability in 2013.
    The P-8A program is being executed by Boeing using a first-in-
industry in-line production process that leverages the commercial 737NG 
production system. The maturity, robustness, and pedigree of this 
system has been a key enabler to production of a quality product that 
has met all program-of-record milestones, allowed the U.S. Navy to save 
in excess of $1 billion, and achieve a recurring cost reduction of 10 
percent in Initial Production aircraft. The benefits of leveraging a 
mature commercial aircraft will carry forward as the P-8A is delivered 
to the fleet and is able to leverage the 737NG support systems.
    As a testimony to the successes that the Navy-Boeing team has 
achieved, the P-8A program recently won Aviation Week's Program 
Excellence Award for System-Level Research and Development/System 
Design and Development based on a rigorous assessment of program 
practices and performance relative to peer programs. Furthermore, 
positive customer comments about the P-8A program's track record and 
successes have been numerous. At the ribbon cutting ceremony for 
Boeing's P-8A Installation and Checkout Facility, Rear Admiral Steve 
Eastburg, then Program Executive Officer for Air ASW, Assault and 
Special Missions Programs, and now Vice Commander for Naval Air Systems 
Command (NAVAIR), stated:

          ``The P-8A program is quickly becoming the DOD and industry 
        standard for how to do acquisition right. At our recent defense 
        acquisition board, at the end of the meeting, the team was 
        asked to come back with a composite set of lessons learned and 
        best practices from this program that we can feed into all the 
        other programs across the Department of Defense. That's how 
        much confidence and such a high esteem that not only Dr. Carter 
        but many others have in the program at the most senior levels 
        of the DOD.''

                        boeing production system
    As mentioned above, leveraging of the commercial production system 
has been a key to the successes demonstrated by the P-8A program. As 
separate divisions of a single company (The Boeing Company), Boeing 
Defense, Space and Security (BDS) and Boeing Commercial Airplanes (BCA) 
are required by the Federal Acquisition Regulations (FAR) to have a 
contract in place governing the transfer of the commercial item from 
BCA to BDS.\1\ The aircraft that BDS purchases from BCA is manufactured 
in accordance with BCA's existing, The Federal Aviation Administration 
(FAA)-approved quality system. Once delivered to BDS, BDS completes its 
work in accordance with the applicable government quality assurance 
requirements. Both sets of processes are based on many years of 
experience with a wide range of customers, and with a strict focus on 
safety, quality, and product integrity.
---------------------------------------------------------------------------
    \1\ FAR 12.001-Definition.
---------------------------------------------------------------------------
    Addressing nonconforming products (any product that does not meet 
its specification requirement) is essential, and Boeing and our 
suppliers have rigorous quality processes to identify and review parts 
that we or our suppliers identify as nonconforming. Boeing treats all 
nonconformances with a significant level of concern to ensure the 
safety and integrity of the product is maintained. This is accomplished 
by qualified subject matter experts who utilize a comprehensive set of 
processes and procedures for addressing nonconformances encountered 
during the build of the aircraft. Suspect counterfeit parts represent a 
subset of the potential types of nonconformances, and as such, are 
covered within these processes.
    If nonconformances are encountered during the build of the BCA 
commercial deliverable, the processes utilized on P-8A are governed by 
BCA's quality and material review processes, which are AS9100 compliant 
and part of an FAA-approved quality system under Production Certificate 
700. PC 700 was issued to Boeing in 1997 for 737NG production by the 
FAA after demonstration that Boeing has adequate facilities and 
quality-control systems to ensure it meets stringent safety and 
reliability requirements. AS9100 is a widely adopted and standardized 
quality management system for the aerospace industry.
    If nonconformances are encountered during the installation and 
checkout portion of the build that is executed by BDS, the processes 
utilized on P-8 are governed by BDS's quality and material review 
processes which are also AS9100 compliant, overseen by the Defense 
Control Management Agency, and part of our NAVAIR approved P-8 Quality 
System Plan in accordance with our contract with the U.S. Navy.
P-8A Suspect Counterfeit Parts
    I was recently interviewed by the Senate Armed Services Committee 
staff regarding the P-8A program's processes for handling nonconforming 
parts, including those that are suspect counterfeit. Parts that are 
suspect counterfeit that could potentially present a risk of harm to 
military personnel or members of the flying public are of critical 
concern to Boeing, and to me personally.
    To my knowledge, there have been three instances of suspect 
counterfeit parts that have been installed on P-8A aircraft. Each of 
these instances was addressed in a manner that complies with Boeing's 
government approved processes and procedures, and our contract with the 
U.S. Navy. A brief summary of each is included below.

    1.  Ice Detection Module--Notice Of Escape January 2010

    The first incident occurred in January 2010, when BAE Systems 
notified BCA of a nonconformance associated with the BAE Ice Detection 
Module (IDM) Assembly. The IDM is optional equipment used to detect ice 
on the exterior of the aircraft.
    In accordance with Boeing's approved processes and procedures, BCA 
Engineering evaluated the nonconformance, dispositioned it as ``No 
Action Required,'' and called for repair ``on attrition,'' meaning that 
the IDM could be replaced if it needed repair for any reason. Per 
standard BCA approved processes, this disposition does not require 
action by, nor result in a notification to its contractual customer, in 
this case BDS. Had there been a nonconformance which created a safety 
concern or a required maintenance action, BDS would have been notified 
by BCA, and appropriate action would have been taken to comply with the 
associated service bulletin instruction.
    I became aware of the IDM nonconformance and associated disposition 
in September 2011. An affected IDM was on one of the P-8A airplanes 
located at Patuxent River, MD (T-3). Although there were no inherent or 
residual safety concerns or maintenance actions associated with the 
IDM, BDS decided to remove and replace the IDM on T-3 at a convenient 
point in time that would not disrupt test activities. T-3's IDM was 
removed and replaced on 21 October 2011.

    2.  Distance Measuring Equipment--Notice Of Escape November 2010

    The second incident occurred in November 2010, when Honeywell 
notified BCA of a potentially unapproved component contained in 
Honeywell's Distance Measuring Equipment (DME). The DME measures the 
distance between an aircraft and a ground station.
    In accordance with Boeing's approved processes and procedures, BCA 
Engineering evaluated the nonconformance, and dispositioned it as ``No 
Action Required,'' ``use as is.'' Per standard BCA approved processes, 
this disposition does not require action by, nor result in a 
notification to its contractual customer, in this case BDS. Had there 
been a nonconformance which created a safety concern or a required 
maintenance action, BDS would have been notified by BCA, and 
appropriate action would have been taken to comply with the associated 
service bulletin instruction.
    I became aware of the DME nonconformance and associated disposition 
in October 2011. Affected DMEs were on P-8A airplanes T-1, T-2, T-3, T-
4, and T-5. Although there are no inherent or residual safety concerns 
or maintenance actions associated with the DME, BDS decided to remove 
and replace the DME on T-5 prior to delivery to the U.S. Navy. T-5's 
DME was removed and replaced on 3 November 2011.

    3.  Receiver-Exciter and HF Power Amplifier--Notice Of Escape July 
2010

    The third incident occurred in July 2010, when Rockwell Collins 
notified BDS of a potentially unapproved component contained in 
Rockwell Collins Receiver-Exciter and HF Power Amplifier. These parts 
were installed on two P-8As--T-2 and T-3.
    In accordance with Boeing's processes and procedures, BDS 
Engineering evaluated the nonconformance, and dispositioned it as 
``Remove and Replace at earliest convenience.'' Per standard BDS 
approved processes, the government was notified on 27 July 2010, and a 
Service Letter was issued on 11 November 2010. In accordance with the 
Service Letter, the nonconforming parts were removed from T-2 on 13 
November 2010 and T-3 on 27 February 2011.
                                summary
    The P-8A program, awarded to Boeing in 2004, has had a long-
standing track record of successful execution. The program is executed 
using a first-in-industry in-line production process that leverages the 
commercial 737NG production system, and is based on robust, government-
approved, military and commercial processes in accordance with BDS's 
contract with the U.S. Navy. These processes have been key to enabling 
the program to meet all program-of-record milestones, at a cost that 
has been consistently below cost projections at program inception.
    Suspect counterfeit parts are a serious, industry-wide issue that 
has affected the P-8A program. Boeing has utilized its government 
approved quality and material disposition processes to address suspect 
counterfeit parts in an appropriate manner. While BDS and BCA each have 
slightly different quality and material disposition systems, they are 
both under regulatory control (Defense Contract Management Agency and 
FAA, respectively) and ensure that the safety and integrity of the P-8A 
and the people who operate it are maintained at all times. They also 
represent a pedigree based on many years of application on Boeing 
Military and Commercial products which have, and continue to, set the 
industry standard for safety, quality, and reliability.
    This concludes my submitted statement to the committee. Thank you 
again for the opportunity to appear before you.

    Chairman Levin. Thank you, Mr. Dabundo.
    We will now recess until 2 o'clock, and for the convenience 
of those of you who want to take advantage of it, there is a 
cafeteria here, a public cafeteria, in the basement of this 
building that you are free to use if you so desire. So we will 
stand in recess until 2 o'clock.
    [Whereupon, at 12:57 p.m., the committee recessed, to 
reconvene at 2:00 p.m.]
    Afternoon Session - 2:00 p.m.
    Chairman Levin. Good afternoon, everybody; we will come 
back to order.
    Mr. DeNino, let me start with you. Between October 2009 and 
November 2010, L-3 identified two counterfeit parts in display 
units that it had sold to the military. When the second 
counterfeit was discovered in November 2010, L-3 learned from 
its supplier, which was Global IC in California, that both 
counterfeits, both the October 2009 one and the 2010 November 
one, had been supplied to Global IC by the same company in 
China called Hong Dark Electronic Trade. Global IC was the 
supplier to L-3.
    Global IC then identified a third part which had been sold 
to L-3 from Hong Dark, but L-3 did not test that third part 
until October 2011, which is nearly a year later after you were 
notified. You did not test that part until after our 
investigation began, and you were notified of it. Now, that 
testing identified the third Hong Dark-supplied part as suspect 
counterfeit.
    L-3 had already installed that third part on display units 
for another military aircraft.
    The question is why did it take L-3 so long to test that 
third part?
    Mr. DeNino. The third part was initially quarantined when 
L-3 found out back in November 2010. We had purchased 89 parts. 
Only three had been used. The other 86 were quarantined. The 
parts were to be tested, and they did not get tested until as 
you indicated, until recently, and we did confirm that those 
parts were suspect counterfeit.
    The parts--there is no real good answer on that other than 
the parts should have been tested and we did not. But we are 
taking the corrective action now. We have notified the 
customer, as we have with the other two incidents, and we will 
take whatever action is necessary to repair and replace those 
parts.
    We have also developed a system to avoid instances like 
that in the future.
    Chairman Levin. Now, what we learned is that Hong Dark had 
supplied parts to L-3 via Global IC on approximately 30 
occasions. There was a total of 28,000 parts that had been 
supplied to L-3 via Global IC which had originally come from 
Hong Dark. You learned about that, I think, recently from 
staff. Is that correct?
    Mr. DeNino. That is correct, Senator. We learned, with the 
help of the committee, that there were additional parts that 
Hong Dark had provided to L-3. We took action, issued a demand 
letter to Global IC Trading, received the information. We 
requested the data on October the 20th, received it on October 
21. Upon receipt of that letter, we notified the affected 
companies of L-3 the same day, October 21, that they had parts 
that were suspect just by the nature of them coming from a 
supplier that had already provided three counterfeit devices to 
L-3.
    The divisions took the action to go off and test parts. 
Many of those devices are in testing right now. We do not have 
any of the test results back yet. Where we do not have stock on 
those parts, we are looking at other data and analysis, and we 
will notify all customers upon completion of that.
    We also took a couple other actions just to be very 
conservative. We checked with the suppliers that we currently 
have today. We only have four independent distributors that 
divisions can use. We went to all four to validate that. Not 
only did they never sell anything to us from Hong Dark, but 
they never purchased parts from Global IC Trading that were 
provided to L-3. All four confirmed that.
    We then went one step deeper with another 11 suppliers that 
were formerly on our list of approved suppliers, and we found 
the exact same information.
    Chairman Levin. Why did it take so long for you guys to ask 
Global IC for the information? Why did it take a committee 
investigation before you would ask your supplier, hey, how many 
times has Hong Dark been the supplier to you, Global IC? I 
mean, this is 30 occasions, 28,000 parts and now you are 
scrambling to find out where those parts are?
    Mr. DeNino. We would much prefer not to be scrambling to 
make that determination.
    Chairman Levin. Why did it take a committee investigation 
before you would ask your supplier, hey, we have three 
occasions now where the company that supplied you parts, this 
Chinese company, Hong Dark. How many other occasions have you 
given us parts, sold us parts that originally came from Hong 
Dark? Why did that take so long?
    Mr. DeNino. Well, it happened when we found out about the 
third part, and in retrospect, it would have been better if we 
had checked earlier. It was not something that was picked up. 
We had----
    Chairman Levin. No, it did not happen, as I understand it, 
when you found out about the third part. You found out about 
the third part in November 2010, but until we told you during 
our investigation that we thought there were 30 occasions, when 
we learned that via Global IC, then you found that out. My 
question is why did you not ask Global IC how many times they 
had supplied you with Hong Dark parts?
    Mr. DeNino. We should have done that checking on our own.
    Chairman Levin. Now you are saying you have taken steps so 
that that is not going to happen again.
    Mr. DeNino. Yes, we have.
    Chairman Levin. Has L-3 determined what military systems 
those--I want to get the right number here--28,000 parts are 
on? Have you determined that yet?
    Mr. DeNino. Yes, we have. The balance of the parts, roughly 
6,500, are not on DOD systems. We have the information on the 
balance.
    Chairman Levin. How many different systems are the balance 
on?
    Mr. DeNino. Probably 12 to 15.
    Chairman Levin. Have you notified the Services which 12 to 
15 they are on?
    Mr. DeNino. We are in the process. As I stated, we are 
doing the testing and we want to provide a complete package.
    Chairman Levin. When you do that, when you provide that 
information to the Services, will you let this committee know.
    Mr. DeNino. We would be pleased to.
    Excuse me, Senator. I would just like to add one other 
comment.
    Chairman Levin. Sure.
    Mr. DeNino. Of those 28,000, roughly 14,000 have already 
been identified, and that information has been provided to the 
committee.
    Chairman Levin. Of which systems?
    Mr. DeNino. This is on the VRAM and Lattice chips on the C-
27J and the C-130J.
    Chairman Levin. Let me get to that in a minute.
    But you have identified, you believe, 12 to 15 systems that 
those parts are on?
    Mr. DeNino. As a max. We will provide detailed information.
    Chairman Levin. Can you tell us some of those systems now?
    Mr. DeNino. General Dynamics, L-3050V. There is a thermal 
imager, MK-46, sold to Kollmorgen.
    Chairman Levin. Do you know what that goes on, what weapons 
system that is a part of?
    Mr. DeNino. I do not----
    Chairman Levin. That is okay. Keep going then. We will 
figure it out.
    Mr. DeNino. There are some spares for Northrop Grumman.
    Chairman Levin. For what? What system, do you know?
    Mr. DeNino. Global Hawk Maritime Demonstration, and there 
is also Global Hawk, and Raytheon Excalibur, and Raytheon 
Missile Systems, and United Launch.
    Chairman Levin. Do you know what system for United Launch?
    Mr. DeNino. I do not, sir.
    Chairman Levin. How about the Raytheon Missile Systems? Do 
you know----
    Mr. DeNino. I do not.
    Chairman Levin. The Global Hawk has some suspect parts on 
it?
    Mr. DeNino. There is one part that was provided that is 
being tested. It is suspect only in that it came from Hong 
Dark.
    Chairman Levin. Which is a pretty good reason to be 
suspicious, would you agree, given their history?
    Mr. DeNino. That is why we are having it tested. Yes.
    Chairman Levin. Do you know if Raytheon was notified of 
that suspect part that you just told us about before today?
    Mr. DeNino. Not yet at this point. The parts are being 
tested. We have quarantined whatever stock on any of these 
parts exist in our facility.
    Chairman Levin. How long is it going to take to be tested?
    Mr. DeNino. I suspect everything will be complete within 2 
weeks.
    Chairman Levin. On September 19, just about 2 months ago, a 
month and a half ago, L-3 Integrated Systems, the prime 
contractor for the C-27J, notified that Air Force of a suspect 
part on eight 27Js, including two that are in Afghanistan. Is 
it true that you did not notify the Air Force of that because 
you were not aware of it until the committee's investigation?
    Mr. DeNino. That is correct. We had properly notified our 
customer--our Displays Division had.
    Chairman Levin. But did the Displays Division notify the 
Air Force?
    Mr. DeNino. No, they did not.
    Chairman Levin. Do you know why?
    Mr. DeNino. They did not notify the Air Force because 
Displays' customer was not the Air Force. It was Alenia, and 
Displays, upon finding out the problem, which they found out on 
their own, quarantined the parts, had them tested, confirmed 
that there was a suspect, wrote the GIDEP, provided 
notification.
    Chairman Levin. When did they find that out?
    Mr. DeNino. Can you just confirm the date of the part, 
please?
    Chairman Levin. Okay.
    Mr. DeNino. The date that you stated. Was it September?
    Chairman Levin. No. The date of the notice to Alenia.
    Mr. DeNino. Oh, I am sorry. It was December 16, 2010.
    Chairman Levin. Now, Alenia was supplying that component, 
were they not, to L-3 Integrated Systems?
    Mr. DeNino. That is correct.
    Chairman Levin. So L-3 is the prime on that. Did L-3 
Display, which found the problem, notify its sister corporation 
or sister----
    Mr. DeNino. They did not.
    Chairman Levin. Why would they not do that?
    Mr. DeNino. The responsibility was to notify the customer. 
We recognized, through the efforts of the committee, that there 
could be improvement in our own system, and this probably 
applies across the board in our industry. So we are 
implementing a revised system so that when we have a failure or 
a suspect counterfeit device, I personally will be notified 
through the system. We will know from that system--we are 
modifying an existing process that we have to add data so that 
we can make the determination on where those parts are used 
upstream and we can put in place a closed loop system.
    Chairman Levin. So everybody in your own company and its 
components will know when there is a suspect counterfeit part.
    Mr. DeNino. That is correct.
    Chairman Levin. That was not the case at that time.
    Mr. DeNino. No. We knew that there was a suspect 
counterfeit part, and notification had been issued.
    Chairman Levin. But not to your own----
    Mr. DeNino. Not to our own company. To our customer.
    Chairman Levin. I understand, but inside of your company, 
you did not notify the prime which was also a subsidiary of L-
3.
    Mr. DeNino. That is correct. There was no process in place 
to do that.
    Chairman Levin. That is another process that you put in 
place now.
    Mr. DeNino. Yes, sir.
    Chairman Levin. Now, do you know whether or not the 
reporting system, GIDEP, was notified of the counterfeit by L-3 
Displays?
    Mr. DeNino. Yes, they were. A GIDEP report was issued on 
December 20, 2010.
    Chairman Levin. So that was put into the GIDEP system.
    Mr. DeNino. Yes, it was.
    Chairman Levin. Do you use GIDEP for every counterfeit you 
find or just some of the time?
    Mr. DeNino. No. It is not used on every device.
    Chairman Levin. Why is that?
    Mr. DeNino. We will be using GIDEP going forward. As you 
have probably seen from the GAO report, there are challenges 
with the GIDEP system primarily. GIDEP is not designed for 
counterfeit parts. GIDEP handles all sorts of issues and 
nonconformances on everything across the spectrum. It is not 
specific to electronic components.
    Chairman Levin. But it includes----
    Mr. DeNino. Yes. It includes.
    Chairman Levin. Is it now your plan to utilize that system 
for every suspect counterfeit part you discover?
    Mr. DeNino. We will be using both GIDEP and ERAI.
    Chairman Levin. But GIDEP you are going to use for every 
counterfeit now?
    Mr. DeNino. Yes, we will.
    Chairman Levin. Mr. Dabundo, let me ask you a couple 
questions now about Boeing.
    Boeing found out about the suspect counterfeit part in the 
ice detection module on the P-8 in January 2010. On August 17, 
2011--that is more than a year and a half later--Boeing finally 
notified the Navy. That in that book of yours, if you need to 
look at it, is tab 28. The notification says, ``priority 
critical,'' and quote, ``it is suspected that the module may be 
a re-worked part that should not have been put on the airplane 
originally and should be replaced immediately.'' So Boeing had 
known for more than a year and a half that the ``critical,'' in 
its words, problem existed.
    Why did it take a year and a half to recommend the removal 
of that part?
    Mr. Dabundo. Sir, if I may walk you through a little bit of 
the chronology of that part. As you noted, BAE notified Boeing 
via a notice of escape in January 2010. That notice of escape 
initiates the engineering investigation between Boeing and BAE, 
in particular, the BCA engineering group. BCA in February 
initiated a suspect discrepancy report that indicated that 
there were no safety concerns identified with that part and may 
require correction during the service life. So at that point in 
time, that was the overall assessment of the part.
    Chairman Levin. So you knew it was a suspect counterfeit 
part, but you did not think there was a concern about that at 
that time.
    Mr. Dabundo. I am not aware if at that time it was a 
suspect counterfeit part or a nonconforming discrepant part.
    Chairman Levin. Why would it have been a nonconforming 
part? Was it not tested?
    Mr. Dabundo. I do not know the details. I am sure there was 
an ATP, a test that is done prior to delivery of the part to 
Boeing, but at the time they were doing the engineering 
investigation as to the cause of the failure that occurred 
initially in the BCA factory in December 2009.
    Chairman Levin. Before you go on, the notice that I think 
you referred to in January 2010 from BAE said that the parts 
show, ``signs of resurfacing.'' This is in tab 26, by the way--
signs of resurfacing, repainted metal tabs, bent leads, peeling 
coating. They said that the chips were, ``unacceptable for 
use'' and that ``BAE Systems recommends replacement of the 
suspect components.'' That is what Boeing was told by BAE. Is 
that not enough to test it to see if it is a counterfeit?
    Mr. Dabundo. Well, that was enough to initiate the 
engineering investigation that ensued by both the BCA and the 
BAE engineers.
    Chairman Levin. Boeing is BCA. Right? It is part of Boeing.
    Mr. Dabundo. Boeing Commercial.
    Chairman Levin. I would just as soon use the term 
``Boeing.''
    So Boeing then said that what? According to tab 27, it may 
have a somewhat lower reliability. Right? So you got your sub 
saying it is unacceptable for use. You have your own engineers 
believing it may be less reliable. That is tab 27. Then, 
nonetheless, you do not do anything.
    Mr. Dabundo. I think, sir, the pertinent information that 
goes with that is in June 2010 when BAE did issue the final 
service bulletin that came out of the investigation, it 
indicated that there could be a long-term reliability concern, 
that it was not a safety issue, and said to do the rework that 
was provided in that service bulletin at customer convenience 
and customer option. In coordination with BAE, the BCA final 
suspect discrepancy report, which came out in July 2010, 
indicated that there was no action required and that the part 
could be repaired on an attrition basis.
    Chairman Levin. So you are saying that in June 2010 that 
BAE said that there was no need to replace the part? They 
changed their mind from January 2010 when the notice to Boeing 
said that BAE Systems recommends replacement?
    Mr. Dabundo. Their verbiage in the draft service bulletin 
that was--or I am sorry--the final service bulletin that came 
out in June 2010 indicated it was a long-term reliability 
concern and do at customer convenience/customer option.
    Chairman Levin. ``Do'' Is that the word?
    Mr. Dabundo. Do the rework that was defined in that service 
bulletin at customer convenience/customer option.
    Chairman Levin. The customer's option was not to replace 
it.
    Mr. Dabundo. Correct.
    Chairman Levin. Then you decided apparently--in tab 28, 
Boeing decided priority critical. So you changed your mind. Is 
that correct? Take a look at tab 28.
    Mr. Dabundo. I am familiar with----
    Chairman Levin. It is suspected that the module may be a 
reworked part that should not have been put on the airplane 
originally and should be replaced immediately.
    Mr. Dabundo. Right. So that message----
    Chairman Levin. What changed between July 2011 when you 
decided that you would just go with it I guess? You were 
supposed to give the customer the option, but who is the 
customer here?
    Mr. Dabundo. In that particular case, the customer was 
Boeing Commercial Airplanes (BCA).
    Chairman Levin. Did they give their customer--did the 
Government ever have the option of replacing this part? Was the 
U.S. Government, which was also a customer--was it given the 
option of replacing this part? Were they notified of the part?
    Mr. Dabundo. They were notified in August 2011.
    Chairman Levin. The Government was notified.
    Mr. Dabundo. The Government was notified.
    Chairman Levin. By?
    Mr. Dabundo. By Boeing via the message that you were 
quoting.
    Chairman Levin. Until then--so it was a year and a half 
later now--was the Navy notified for that year and a half?
    Mr. Dabundo. Not to my knowledge, and the rationale for 
that was the final disposition that came out of BCA Engineering 
who were the qualified folks to make the disposition on that 
type of nonconformance was that there was no action required 
and the part could be repaired on an attrition basis.
    Chairman Levin. But the customer was supposed to be 
notified and they were not for a year. Right? Is that correct?
    Mr. Dabundo. No, sir. The way that the----
    Chairman Levin. Let me go through the chronology. The Navy 
was notified on August 17, 2011. Right?
    Mr. Dabundo. Correct.
    Chairman Levin. This part was discovered by Boeing in 
January 2010. Right?
    Mr. Dabundo. Yes. That is when Boeing was----
    Chairman Levin. The customer was not notified until August 
2011, and that is the Navy. Those are the facts. Right?
    Mr. Dabundo. Correct.
    Chairman Levin. How do you justify that? You got a critical 
part here which by your own notice is critical, but they were 
not notified for a year and a half after it was suspected there 
would be deficient defective, and as it turns out, a phony 
part. How do you justify the year and a half?
    Mr. Dabundo. So again, the way that our commercial 
processes work, there is notification made to the end customer, 
which in this case would be BDS and the Navy, if there is a 
safety concern or a functionality impact. In this case with the 
IDM, there was not a safety concern or a functionality impact 
associated with the nonconformance, and so the philosophy that 
they use in the commercial industry is that the notification 
occurs when there is an actionable piece of action that goes to 
the maintenance departments.
    Chairman Levin. When there was a notification in August 
2011----
    Mr. Dabundo. Right. So that notification came, I believe, 
via awareness to this that came through the Navy talking to the 
committee and then the committee talking to BDS. So that----
    Chairman Levin. However it came, your notice says that the 
part may be a reworked part that should not have been put on 
the plane originally. Is that true?
    Mr. Dabundo. That is what that document says.
    Chairman Levin. Is that a Boeing document?
    Mr. Dabundo. That is a Boeing document, and if you go 
through the details of that document, there is conflicting 
wording in the message that you are quoting. In the first 
sentence, it says replace at next available opportunity, and 
then in the second sentence, it says replace immediately. With 
that confusing language, we did go back and verify with the 
cognizant engineering group, the experts, BCA in this 
particular instance, that there were no safety concerns. It was 
a long-term reliability issue. Their recommendation was to 
repair on attrition, but because of the concerns raised by the 
customer, we decided to issue that message to drive a 
maintenance action to move forward and remove and replace that 
part.
    Chairman Levin. So you do not agree that a problem which 
has not yet appeared and may be a long-term problem represents 
a safety concern.
    Did you hear the general today tell you that just because 
there is a long-term problem, you just do not know when that 
term is going to occur? You do not know when the axe is going 
to fall. You know that it can meet a current test, but you do 
not know for how long. If it is counterfeit, it could fail at 
any time. So the fact that it meets a current test, if it is 
known to be counterfeit, which you guys knew, is not a reason 
to allow a part to stay in a plane because it may not fail. It 
may fail but it may not fail. You are kind of shooting the dice 
with the mission and the lives of our people here. So did you 
hear what the general said about your approach that long-term 
means you can do this even though it is a counterfeit with all 
the problems of counterfeit parts and the likelihood of failure 
sooner?
    Is it Boeing's position that you are just going to continue 
the way you have been going and you are not going to replace 
counterfeit parts?
    Mr. Dabundo. We evaluate every nonconformance on a case-by-
case----
    Chairman Levin. Including counterfeits.
    Mr. Dabundo. It is a subset of nonconformance. Suspect 
counterfeit parts is a subset of nonconformance.
    Chairman Levin. Right.
    Mr. Dabundo. We have processes that have been used on our 
products. We have experts who execute those processes. We rely 
on those folks to make the judgment calls with respect to these 
situations.
    Chairman Levin. The Navy told Boeing on October 31, 2011 
that, ``any counterfeit material received is nonconforming 
material and shall be immediately reported to the Government''. 
Do you believe you have a contractual obligation to report 
counterfeits to the Government immediately?
    Mr. Dabundo. If there is a safety or a functionality 
concern, we would report that to the Navy.
    Chairman Levin. Only if in your judgment there is a safety 
concern, which you do not think there is if it is long-term and 
you do not know when the axe is going to fall. So if you make a 
judgment it is not immediate, it could happen next month, it 
could happen the month after, we do not know when it is going 
to happen, but you know it is counterfeit. You do not feel you 
have an obligation to immediately report that to the 
Government.
    Mr. Dabundo. I will just again reiterate the processes that 
we use.
    Chairman Levin. No. I want you to just tell me whether 
Boeing believes that you have an obligation, as the Navy says 
in their letter to you of October 31, to immediately report to 
the Government any nonconforming material. Period. They do not 
say whether in your judgment it is a safety concern. They say 
any counterfeit material received is nonconforming and shall be 
immediately reported to the Government. You are saying, well, 
we are not going to follow that requirement if we in your 
judgment believe it is not an immediate safety concern. So that 
is my question.
    Mr. Dabundo. That statement does not flow from our 
contractual documentation.
    Chairman Levin. Until it does, you are not going to abide 
by it.
    Mr. Dabundo. No, sir.
    Chairman Levin. Pardon?
    Mr. Dabundo. We abide by that for safety-related issues.
    Chairman Levin. Only if in your judgment it is safety-
related, and if it is a future safety problem and not a current 
one, in your judgment, you are not going to do what the Navy 
says that you must do which is to report any counterfeit 
material immediately to the Government. You just disagree with 
the Navy.
    Mr. Dabundo. Sir, we received this letter a week ago, and 
we are actively looking at the statements that they have made. 
Our plan is to engage in discussions on this letter with them 
to really make sure we fully understand where they are coming 
from. Our track record on the program has been to work with the 
customer through these types of things, and I believe that we 
will do that in this particular instance.
    Chairman Levin. Well, let me tell you where we are coming 
from. There is no justification--no justification--for not 
notifying the Government when you know there is a counterfeit. 
In fact, I think by law you are required to do that, by the 
way. I think we have a system for it. In any event, you got a 
customer here, a pretty good customer. It is the Navy. The Navy 
has told you that they interpret your obligation contractually 
to notify the Government when you have reason to believe that 
material is counterfeit, and you got to report it to the 
Government. I would think just in terms of good business 
practice that you would say, okay, we are going to report that 
to the Government.
    Now, we are going to try to change the law so that it is 
not going to be up to you as to whether or not something 
represents a safety concern or not. That has to be up to the 
customer, in this case the Navy, because it cannot be your 
unilateral decision that, well, this is not necessarily an 
immediate safety problem in our judgment. The axe can fall 
months from now. We do not know, and we will replace it during 
our usual service process. It is not good enough. You have 
customers here, and the customers ultimately are the men and 
women in uniform. But the Navy and the other Services represent 
those folks, and if they say that you have an obligation to let 
them know immediately of counterfeit parts, from a pure 
business practice I would think you should do that.
    Now, the contract with the Navy includes a requirement, 
section 52.211-5, that ``used, reconditioned, or remanufactured 
supplies may be used in contract performance if the contractor 
has proposed the use of such supplies and the contracting 
officer has authorized their use''. Did you ask the contracting 
officer here to authorize the use of counterfeit or used parts?
    Mr. Dabundo. No, sir. That particular clause is something 
that is explicitly required of us as to not be flowed to 
commercial end items, and we did not.
    Chairman Levin. It does not apply you are saying? That did 
not apply?
    Mr. Dabundo. For the commercial end item, it did not apply.
    Chairman Levin. For commercial. This is military.
    Mr. Dabundo. I am sorry. What is the question?
    Chairman Levin. This is commercial? You are saying it does 
not apply in your commercial contracts?
    Mr. Dabundo. Yes, sir. As I stated in----
    Chairman Levin. But this is a military contract.
    Mr. Dabundo. The contract between BDS and the U.S. Navy is 
a military contract. We obtain the P-8 airframe from Boeing 
Commercial as a commercial end item.
    Chairman Levin. What does that have to do with what you 
supply the Navy? It says here the Navy contract with Boeing has 
a requirement that you must propose the use of used or 
reconditioned or remanufactured supplies and you must be 
authorized to do that. You were not given authority here.
    Mr. Dabundo. Yes. The way that the FARs direct us to 
implement that commercial contract, they state that we shall 
rely on the existing quality system as a substitute for 
compliance with the Government inspection requirements and the 
clause that you are referring to. So----
    Chairman Levin. You shall comply with the current 
contract--with the current what system? Read that again. You 
shall comply with the current.
    Mr. Dabundo. We shall rely on the contractor's existing 
quality system, in this case our commercial quality system, as 
a substitute for compliance with Government inspection 
requirements.
    Chairman Levin. That is unconditional. So in your contract, 
it said they are going to rely on your own quality system.
    Mr. Dabundo. The existing commercial quality system. The 
difference in the commercial quality system is they do not 
notify customers of nonconformance unless there is an explicit 
maintenance action to be taken or there is a safety concern. 
They do that. They intentionally filter out nonactionable 
messages so that it is clear when there is an action to be 
taken by the maintenance department.
    Chairman Levin. The P-8 is built in a facility of Boeing 
which is apparently been certified to aerospace standards, the 
number being 9100B, which is a widely adopted quality 
management system for the aerospace industry. I think that is 
the one you are referring to.
    The standard states that nonconforming material--that is 
surely the counterfeit parts in the P-8--shall not be used, 
``unless specifically authorized by the customer if the 
nonconformity results in a departure from the contract 
requirements.'' The contract requirements here require new 
material.
    Mr. Dabundo. In this instance----
    Chairman Levin. Therefore, you cannot rely on your 
aerospace standard 9100B.
    Mr. Dabundo. I think the PC700 is really the FAA approval 
that enables us to use the quality system.
    Chairman Levin. That quality system allows you to use used 
parts--is that what you are saying--without authority from the 
customer?
    Mr. Dabundo. It allows us to disposition all 
nonconformances, and as I mentioned, the process basically 
provides information to the end user when there is an action to 
be taken.
    Chairman Levin. You are saying that the existing commercial 
rules allow you to use used material without notice to the 
customer.
    Mr. Dabundo. They allow us to use our existing quality 
system which does not require notification.
    Chairman Levin. If that is the situation, number one, I 
think the Navy is going to be pretty shocked to hear that you 
are not going to let them know about counterfeits.
    Second, we are going to change it. I mean, if that is 
currently--despite what the Navy says, you are obligated to 
notify them of nonconformities, including counterfeits, the 
Navy is wrong in their letter to you, and if you want to ignore 
a customer like the Navy, go your own way, and argue that, we 
are going to change it by law. We have to do it.
    Now, do you know whether we paid full price for these used 
parts?
    Mr. Dabundo. BAE is covering the cost of replacing those 
parts.
    Chairman Levin. All right. But did we pay full price 
originally for these parts?
    Mr. Dabundo. I do not know.
    Chairman Levin. Let me read something that Xilinx, which is 
the part maker has to say about the part here. I think this is 
the best answer to your comment that if you decide unilaterally 
that you are going to replace the parts through attrition, that 
that is a safe way to proceed. Here is what Xilinx, who is the 
manufacturer of the real parts, has to say about these 
anomalies and about the risks of using them.
    Number one, that ``the devices are of dubious origin. These 
cases pose a significant reliability risk. There are many 
potential damage mechanisms that could have affected the 
devices. Some of these could be catastrophic. Others may create 
a damaged mechanism that is latent for an undetermined amount 
of time. The combination of these events calls into question 
the integrity of the devices. Though the devices may initially 
function, it would be next to impossible to predict what amount 
of life is remaining.'' That is the company that made the 
original parts. It is impossible to predict what amount of life 
is remaining--and then they finished--or what damage may have 
been caused to the circuitry.
    Does that trouble you to hear that?
    Mr. Dabundo. Sir, I am not a reliability expert.
    Chairman Levin. Well, just as a citizen who cares about men 
and women in uniform, does it trouble you that the original 
parts maker here says they do not know how long this part is 
going to last if it is a counterfeit part? It is impossible to 
predict what amount of life is remaining. Some of the risks 
could be catastrophic and so forth. Does that not just trouble 
you kind of as a citizen?
    Mr. Dabundo. I am a concerned citizen and I am very 
concerned about the counterfeit parts problem. In the case of 
the Ice Detection Module, there were people with expertise both 
at BAE and Boeing who evaluated that part. Also, in 
consideration, that part is not a safety-critical item on the 
P-8 or on the commercial 737.
    Chairman Levin. The Xilinx part? They are wrong about----
    Mr. Dabundo. The ice detector module.
    Chairman Levin. They are wrong about their own part?
    Mr. Dabundo. I am talking about the ice detector module as 
a unit on the P-8.
    Chairman Levin. Are you talking about what Xilinx is 
referring to, or do you not know?
    Mr. Dabundo. I am not familiar with the Xilinx----
    Chairman Levin. With that particular part that they supply 
on the P-8. You are not familiar with the Xilinx part on the P-
8.
    Mr. Dabundo. No. I believe that is provided to BAE or one 
of their sub-tiers.
    Chairman Levin. You do not think that that part got into 
the ice detection module?
    Mr. Dabundo. I do not know.
    Chairman Levin. If it did, would that trouble you what I 
just read?
    Mr. Dabundo. If it did, it would trouble me and we would 
want our engineering experts to assess that part and the 
associated module and make a disposition on it to ensure the 
safety of the aircraft was maintained.
    Chairman Levin. Double check with your engineers and get 
back to us, will you, as to whether the ice detection module is 
a safety issue or not?
    Mr. Dabundo. I have, sir.
    Chairman Levin. They do not think it is a safety issue?
    Mr. Dabundo. That is correct.
    Chairman Levin. Why do you think the Navy puts these 
modules there if it is not a safety issue? Why are we paying 
money for an ice detection module if it does not relate to the 
safety of the plane?
    Mr. Dabundo. It has a functionality that is not a direct 
safety impact. Sir, they did evaluate the reliability aspects 
of the module and its failure mode and effects and determined 
that there was not a residual safety concern and recommended 
replace on an attrition basis.
    Chairman Levin. No, I understand all that. You repeated 
that a few times. I am just asking you why are we buying the 
ice detection module if it is not a safety issue, if it is not 
for the safety of the plane and the pilot and the crew? Why are 
we laying out all this----
    Mr. Dabundo. It has a function----
    Chairman Levin.--to Boeing. Why are you taking our money?
    Mr. Dabundo. The ice detection module does have a function 
that is not safety-related.
    Chairman Levin. What is it? What is it for? Just to help 
steer the plane? I mean, what is it for?
    Mr. Dabundo. It gives the pilot an indication if there is 
ice building up on the exterior of the airplane.
    Chairman Levin. Does an ice buildup create a safety issue? 
Or do your engineers ice buildup does not create a safety 
issue?
    Mr. Dabundo. I am not an expert in that system, sir.
    Chairman Levin. You say your engineers have said that ice 
buildup is not a safety issue.
    Mr. Dabundo. They have stated that the ice detector module 
nonconformance did not create a safety issue.
    Chairman Levin. Which means in your understanding that ice 
buildup is not a safety issue.
    Mr. Dabundo. I cannot make that claim. I am not a qualified 
icing engineer.
    Chairman Levin. Are they making that claim?
    Mr. Dabundo. I do not know. I did not ask that explicit 
question.
    Chairman Levin. I would suggest you not make these 
decisions, and you are not allowed to make these decisions 
unilaterally. You have to notify the Government when you have 
counterfeit parts, and if you think you do not under existing 
contracts or under existing laws, then you are either wrong, or 
I think it is bad business to make the argument, or we are 
going to change it, because one of those three things, it seems 
to me, has to be the case.
    Mr. Dabundo. Sir, we are looking at the counterfeit parts 
issue across all the divisions of the company and implementing 
policies that will help detect and control those parts.
    I will say we read the Navy's letter to us loud and clear 
and we will engage with them, as we have done in the past, to 
have discussions and really understand where they are coming 
from and what we collectively need to do to address those 
concerns.
    Chairman Levin. It does not sound here like you got a loud 
and clear message at all, to me. I mean, you say that it is a 
loud and clear message. I thought it is a loud and clear 
message too, but I do not think it has been received, other 
than you are now saying it is received, from anything you have 
testified to earlier. It just seems to me that you are trying 
to defend something which is indefensible.
    Mr. DeNino, let me get back to you, if you would. When you 
interviewed with the committee staff, staff asked why it is 
important for L-3 to prohibit the purchase of refurbished parts 
for use in defense systems. Your answer was, ``because of the 
risk, the associated risk. Plain and simple, the risk if that 
part isn't going to function the way it is supposed to.''
    Now, then we asked L-3's chief engineer for the C-27J 
program why they had not committed immediately to removing and 
replacing the counterfeit parts on the C-27J, and he said L-3's 
acceptance testing process would show whether a part was 
functional or not.
    Now, given the risk that you cited, should L-3 not offer to 
immediately replace suspect counterfeit parts in the display 
systems that it sold to the military?
    Mr. DeNino. L-3 did offer to replace the parts. We have 
provided notification to the customer, and we are working with 
the customer to replace the parts. It is not a question of will 
we. It is a matter of when and how.
    Chairman Levin. When did you tell the military again?
    Mr. DeNino. I want to clarify that you are talking about 
the device on the C-27J.
    Chairman Levin. Right.
    Mr. DeNino. This was the notification to the customer that 
took place on or around September 19.
    Chairman Levin. You are waiting to hear back from them?
    Mr. DeNino. I just want to clarify that is the question, 
that is the device you are speaking about.
    Chairman Levin. Yes.
    Mr. DeNino. Okay. Yes. I know that our L-3 Integrated 
Systems Division is working closely with their customer to work 
those issues and to take the corrective action. But L-3 has 
been clear with the multiple people that have been interviewed 
that we will replace those parts at no cost to the Government, 
to the customer, and it is just a matter of working through 
those issues with the customer.
    Chairman Levin. Okay, thank you.
    Mr. Kamath, just a few questions for you. I mentioned in my 
opening statement that Raytheon manufactures a FLIR, an 
infrared system that is used on the Navy's SH-60B helicopter 
for missile targeting and night vision. The committee's 
investigation uncovered, as I mentioned, a suspect counterfeit 
electronic part in three FLIR's provided to the Navy. We 
tracked the counterfeit through this maze of subcontractors and 
parts suppliers all the way back to a company called Huajie 
Electronic Limited in Shenzhen, and this supply chain is in tab 
1 of the binder in front of you.
    Before this investigation, had you ever heard of Huajie 
Electronic Limited?
    Mr. Kamath. Mr. Chairman, no, I had not.
    Chairman Levin. Are you surprised that Raytheon's supply 
chain is as convoluted as this, considering that the parts are 
destined for a critical system?
    Mr. Kamath. Mr. Chairman, I think I would characterize, 
given all the testimony we have heard today, it would not 
surprise me that there was a supply chain that is convoluted, 
using your words.
    Chairman Levin. Is that something that we ought to worry 
about?
    Mr. Kamath. Absolutely, yes, sir.
    Chairman Levin. I think you testified that Raytheon 
requires all of its suppliers and subcontractors to purchase 
parts from the original equipment or component manufacturer or 
an authorized dealer or to obtain advance permission from 
Raytheon to purchase from an independent distributor. Is that 
correct? I think you testified to that.
    Mr. Kamath. That is correct, Mr. Chairman.
    Chairman Levin. So you are able then to take risk 
mitigation measures, additional testing when it knows parts 
have been purchased from a source that is not the component 
manufacturer or their authorized distributor. The subcontractor 
who sold Raytheon the subsystem containing the suspect part 
failed to seek permission from Raytheon to buy the part outside 
of authorized channels.
    I believe that you talked about your experience prior to 
being employed by Raytheon, I may say, and seeing factories, 
huge factories with 10,000 employees that were set up to 
manufacture counterfeit parts. Is that correct?
    Mr. Kamath. Mr. Chairman, as you have heard with other 
testimony today, it is my observation. It is what I recall from 
the time that I visited China, yes.
    Chairman Levin. That was before you worked for Raytheon.
    Mr. Kamath. Several years ago and before I worked for 
Raytheon, yes.
    Chairman Levin. Now, well, just tell us in your own words. 
Is it a concern to you and should it be a concern to all of us 
that counterfeit parts are used in defense systems and that 
they are coming from China?
    Mr. Kamath. Mr. Chairman, I think our larger concern is 
that we have counterfeit parts, period, in the----
    Chairman Levin. Regardless of where they come from.
    Mr. Kamath. Regardless of where it is coming from. I think 
that was made clear by all the panelists today.
    Chairman Levin. I think we would all agree with you. Most 
of it comes from China, so that is obviously our primary 
concern.
    But when you were there, did it appear to you that there 
was any concern about the counterfeiters being shut down by the 
Chinese Government, or was it open?
    Mr. Kamath. Mr. Chairman, I mean, it is the same 
recollection I think Tom Sharpe had. It appeared to be the 
same.
    Chairman Levin. Open.
    Mr. Kamath. Open.
    Chairman Levin. Raytheon identified to the committee a 
counterfeit part that was installed on a system that was sold 
by Raytheon to General Dynamics. It was intended for the 
Stryker mobile gun system vehicle. It costs Raytheon $750,000 
to remediate that counterfeit part. Raytheon has identified a 
total of 32 counterfeit parts in its supply chain since 2009. 
Is that correct?
    Mr. Kamath. 32 instances.
    Chairman Levin. 32 instances. More than 32 counterfeit 
parts. 32 instances?
    Mr. Kamath. That is correct, Mr. Chairman.
    Chairman Levin. Do you know how much money this 
counterfeiting has cost Raytheon?
    Mr. Kamath. Mr. Chairman, we have not calculated the 
number.
    Chairman Levin. It is a significant amount?
    Mr. Kamath. I have no way to know, sir.
    Chairman Levin. Now, does Raytheon report counterfeit parts 
to GIDEP?
    Mr. Kamath. It is our practice to either issue a GIDEP or 
to ensure that a supplier issues a GIDEP every time we know 
that there is a confirmed counterfeit part.
    Chairman Levin. Does the failure by other companies to 
report counterfeits into the GIDEP system increase the risk 
that Raytheon will inadvertently buy counterfeit parts?
    Mr. Kamath. Mr. Chairman, I think this is a larger issue. I 
think we talked about it today. I think the GIDEP is only as 
good as its usage by everybody that is a member. I think the 
consistent usage of GIDEP certainly makes it a better tool.
    Chairman Levin. If it is not used by some people and used 
by others, it is less valuable.
    Mr. Kamath. We do not have the value of getting more 
information through the system.
    Chairman Levin. I talked to you, Mr. DeNino, before about 
whether L-3 reports counterfeit parts that they find to GIDEP. 
I think your answer was that you do but not 100 percent of the 
time. Is that fair?
    Mr. DeNino. In the past, that is correct.
    Chairman Levin. But now you are going to do it 100 percent 
of the time?
    Mr. DeNino. We are going to use GIDEP.
    Chairman Levin. 100 percent of the time?
    Mr. DeNino. 100 percent of the time.
    Chairman Levin. What about Boeing?
    Mr. Dabundo. Sir, I am familiar with the GIDEP process very 
top level, but I do not have insight into the detailed workings 
of that process.
    Chairman Levin. Do you know whether that suspect 
counterfeit part in the detection system was put into the GIDEP 
system? Do you know?
    Mr. Dabundo. I do not.
    Chairman Levin. It did not, by the way. I mean, we have 
checked it out. Boeing did not file a GIDEP report, and I think 
the testimony of our witnesses here is that the failure to file 
a GIDEP increased the risk that another defense contractor or 
DOD may inadvertently purchase a counterfeit part. I think that 
is just a fact of life. I mean, would you agree, to the extent 
people do not use that system, it is less valuable?
    Mr. Dabundo. Yes.
    Chairman Levin. Mr. DeNino, let me ask you about something 
in your written testimony. I am not sure it was in your oral 
testimony. I think it was relative to the C-27J. You appear to 
explain the continued use of counterfeit parts by pointing to 
the screening of L-3's display units through acceptance testing 
or burn-in. I am wondering--and I asked this already of Mr. 
Dabundo--about General O'Reilly's testimony this morning. He 
told us it is just not enough to hope the parts will be 
screened out through acceptance testing. Were you here for 
that?
    Mr. DeNino. Yes, I was, sir.
    Chairman Levin. He said that some counterfeit parts that 
include the correct die but are actually used parts can pass 
acceptance tests, be fielded, and result in a reliability risk. 
Do you disagree with him?
    Mr. DeNino. I do not disagree with that statement.
    Chairman Levin. Thank you all. You have heard a discussion 
today about the problem which I think everybody recognizes as a 
major problem that jeopardizes the well-being and safety of our 
troops and the success of their mission. We are going to act, I 
hope, in the next couple weeks on the defense authorization 
bill.
    I have outlined today what my ideas are and I think there 
is a lot of support for those ideas in terms of we have to have 
a certification system in place for parts that do not come from 
the original manufacturer or their authorized dealer.
    We have to do something to inspect parts from China at the 
border because they are the predominant source of the 
counterfeiting and they are obviously not doing anything about 
it. I do not want to rely on them to do something about it.
    We also have to make it clear that where the counterfeit 
parts end up in a system, that it has to be the contractor and 
the contractor's suppliers that have to be responsible for 
making the corrections. It cannot be the taxpayers of the 
United States.
    We would welcome any comment that you have either now or, 
if you wish, you can provide to the committee later about these 
suggestions. Feel free to do so.
    I think this investigation and the great work of our staffs 
has shown that we have a problem. It is a serious problem. We 
have an obligation to act, to do something about it. We know 
that DOD has been working doing something in the counterfeiting 
area for a long time, but we are not willing to wait any 
longer. So we will be asking them to help us to put into 
amendment form and legislative form the kind of ideas which 
have been discussed here this morning.
    Again, we would welcome any comment that you might have 
either now or that you might want to submit to the committee in 
the next couple days.
    Let me close by asking any of you if you would like to 
comment on any of those suggestions at this time.
    Mr. DeNino. We will be providing a comment, and I would 
just like to thank the entire committee for their efforts. This 
is a critical issue for us, and we look forward to working with 
the committee going forward. Thank you.
    Mr. Kamath. Mr. Chairman, the same thing here. I think we 
would like to provide comments as quickly as you would like.
    Chairman Levin. Well, make it within the next week because 
this bill could come to the floor within another week.
    Mr. Kamath. That works for us. We will work with your 
committee staff on this.
    Chairman Levin. Feel free to do so.
    Mr. Dabundo?
    Mr. Dabundo. Sir, Boeing did provide some input beyond the 
statement that I made, and we do welcome participating with the 
committee to help find good solutions.
    Chairman Levin. Any comments that you might want to make on 
the legislative ways to change the status quo here we would be 
happy to look at. I think you heard a lot of determination on 
the part of this committee today that--a lot of shock, frankly. 
Some of this is stunning. It is the only word I could use. Some 
of the GAO testimony is just absolutely stunning what is 
available there on the Internet. Phony numbers will be filled. 
I mean, these counterfeiters will do anything, obviously. They 
will stoop to anything. They will do anything.
    I know you all have your hands full in trying, even if you 
put forth an adequate effort, which I do not think has been the 
case, but nonetheless, even if you do put forth an adequate 
effort to screen out the counterfeits from this flood of 
counterfeits, it is still going to be a challenge.
    So we are going to do everything we can to stymie and stop 
this at the source. It is going to be a two-track effort on our 
part, and we will welcome your cooperation with both tracks. We 
will stand adjourned with our thanks.
    [Questions for the record with answers supplied follow:]
                Question Submitted by Senator Carl Levin
    1. Senator Levin. Mr. DeNino, please provide a list of all military 
systems (including the quantity of each type of system) for which 
electronic parts that L-3 received either directly from Hong Dark 
Electronic Trade or through an intermediary supplier were intended. If 
known, identify the military systems (including the quantity of each 
type of system) into which the parts were integrated.
    Mr. DeNino. 
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                             ANNEX

    [The documents for the November 8, 2011, hearing on 
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    [Whereupon, at 3:07 p.m., the committee adjourned.]

                                 &
