DoD Issues Electronics Counterfeit Rule

Concern about counterfeit parts in the supply chain prompted the US Department of Defense to propose new and potentially costly requirements on electronics suppliers.

The rules would require contractors to detect and avoid counterfeit electronic parts. Contractors will have to implement counterfeit electronic part detection systems and they won’t be able to pass these costs on to the government.

A 2010 report from the Department of Commerce on the defense industrial base found that “No type of company or organization has been untouched by counterfeit electronic parts. Even the most reliable of parts sources have discovered counterfeit parts within their inventories.” The International Chamber of Commerce estimates the global economic value of counterfeiting amounts to $600 billion per year.

Section 818 of National Defense Authorization Act for Fiscal Year 2012 required DoD to issue regulations on the definition, prevention, detection, and reporting of incidents actual or suspected counterfeit parts procured by or for DoD.

The proposed rule requires that DoD contractors and subcontractors at all tiers obtain electronic parts from only from “trusted suppliers” who themselves have proper anti-counterfeiting procedures in place. It also mandates that companies institute policies regarding the training of personnel, inspection and testing of electronic parts, traceability of parts, and reporting of counterfeit and suspect electronic parts.

The fact that the rule would apply to companies all the way down the supply chain means that it could impact contractors of all sizes, including many smaller companies. These policies and procedures are also subject to audit. Contracting officers are authorized to withhold payments if a contractor’s anti-counterfeit system fails to meet requirements.

The rule establishes that a contractor or subcontractor must file a report with DoD within 60 days of becoming aware, or having reason to suspect, that any component or part purchased by DoD contains counterfeit electronic parts.

Return policy
A contractor program must include “processes to abolish counterfeit parts proliferation.” That means that you can’t simply return suspect parts to your vendor where there is a risk it could be reinserted in the electronics supply chain.

The proposed rule also includes an expansive definition for the term “counterfeit electronic part.” Besides applying to unauthorized parts, it also covers “a new, used, outdated, or expired item from a legally authorized source that is misrepresented… as meeting performance requirements for the intended use,” a significant expansion of how industry now views the term.

The rule is also vague on what constitutes a misrepresentation and how “performance requirements for the intended use” would be measured.

So, it looks like the electronics industry will have another set of compliance requirements to work on. But don’t worry, the requirements aren’t yet set in stone. You might want to consider filing a comment on the rule, which DoD is accepting through July 15, 2013.