[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\
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\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).
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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.
---------------------------------------------------------------------------
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.
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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.
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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
Counterfeit Electronic Parts in the Department of Defense
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[Whereupon, at 3:07 p.m., the committee adjourned.]
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