Guarding Against Counterfeit Parts

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Q. We have been doing a lot of defense work lately and are concerned about counterfeit parts. How can we protect ourselves? –K.P.

A. With sequestration, existing equipment will be used longer. This means that equipment eventually will have to be refurbished, repaired or, in some instances, upgraded. There will undoubtedly be significant contract opportunities for these types of work.

Companies performing under defense contracts should have supply-chain assurance measures in place and fully functioning. Nonetheless, there remains an increased risk of encountering counterfeit parts when refurbishing older electronic systems, in particular. Insurance for “supply-chain risk” generally has not covered risks associated with counterfeit parts for defense contractors. Those risks are substantial and have drawn the attention of the Department of Defense and Congress, as well as allied countries.

As a result, the Defense Authorization Act for FY2012 (DAA) directed the DoD to establish policies and procedures to detect counterfeit electronic parts before incorporation into DoD systems. Congress mandated that those regulations (DFARS) be in place by Sept. 26, 2012, but as of early April of this year, that regulatory effort was still under review at the administrative level, with no definite end date in sight.

Whatever form the regulations finally take, the DAA itself dictates significant penalties for both individuals and companies that intentionally and knowingly traffic in counterfeit parts: $2 million for individuals, $5 million for companies and as many as 10 years in prison for a first offense. These penalties are in addition to other steps available under existing law, including suspension and debarment, Civil False Claims, and more.

Defense contractors will have to take additional steps to ensure the integrity of their supply chains. To that end, until final regulations are issued, make sure your compliance program conforms with all applicable industry standards and is strictly followed. You should also make sure that you document your compliance steps and make adjustments as needed to your purchasing and flow-down provisions. So often we see companies go through the effort of drafting a plan and then forget about it. This is a living document; impress upon your employees the importance of following it and amending it as things change.

How do you protect yourself from counterfeit parts? There is no sure way, but the best approach is to be vigilant about your compliance plan and reduce this “supply-chain risk.”