Incidents of parts counterfeiting reported by component suppliers, including companies in the semiconductor sector, shot up "dramatically" to 9,356 in 2008, up about 142 percent, from 3,868 in 2005, according to the Bureau, which said China, Taiwan, the Philippines, Malaysia and India were identified as the primary sources of counterfeit products by suppliers surveyed recently.

"The number of counterfeit incidents original component manufacturers (OCMs) encountered shows the seriousness of the counterfeiting issue," the Bureau said in a report. "OCMS that experienced counterfeits most frequently cited parts brokers as a source of counterfeit parts, followed by independent distributors and Internet-exclusive suppliers."

In 2007, the U.S. Defense Department commissioned the Bureau of Industry and Security's Office of Technology Evaluation, part of the Commerce Department, to conduct a survey of the electronic industrial base following concerns rising incidents of component counterfeiting could endanger the military equipment supply chain.

The Bureau subsequently survey five segments of the U.S. electronic supply chain, including component vendors, distributors and brokers, circuit board assemblers, contractors and subcontractors and agencies of the DoD.

The survey of 387 companies and organizations revealed extensive problems in the electronic industry supply chain and showed counterfeiters are targeting discrete products as well as microcircuit with "fake non-working parts" or "working copies of the original designs." Some counterfeit parts were also "new products re-marked as higher grade product," the Bureau said, adding that many of the new parts would work "but not at the desired level of functionality."

"The majority of counterfeit parts are being discovered because they are returned as defective, exhibit poor performance, or have incorrect markings or physical appearance," the Bureau said in a report. "A significant number of counterfeit incidents were uncovered because the customer suspected the parts were counterfeit."

Counterfeiters are lured by the easy profit they can make from pouring fake or substandard products into the supply chain and also because it is often very easy to introduce their counterfeit products into the system.

Many manufacturers, for instance, have limited resources for testing returned parts while OEMs who buy from the secondary markets often have no way of identifying counterfeit products until customers returned finished equipment because they either failed or performed below expectations.

Furthermore, "sixty seven percent of OCMs producing discrete components and 33 percent of OCMs producing microcircuit products do not maintain databases on either the counterfeit parts encountered or the incidents reported to them," the Bureau said. 11 cracks in electronics supply chain
The U.S. Bureau of Industry and Security said its survey on the incidents of counterfeiting confirmed manufacturers of fake and substandard parts have been able to take advantage of numerous loopholes within the industry to gain access to the supply chain. The Bureau identified the following findings:

1. Lack of dialogue between organizations in the U.S. defense supply chain about counterfeits. Survey data from the five sectors shows that organizations generally only discuss counterfeit part issues within their individual organizations and, to a lesser extent, with their customers and immediate suppliers. This leads to a lack of information sharing throughout the supply chain which could be used to mitigate the risk of counterfeits.

2. There is an assumption that others in the supply chain are testing parts. Organizations within every sector rely on others in the supply chain to test and verify the authenticity of parts, and therefore conduct little testing themselves. Based on survey data, this confidence in the testing behaviors of the supply chain is unfounded.

3. There is a lack of traceability in the supply chain. Procurement organizations at times cannot trace purchased parts back to their points of origin with any degree of certainty. This is further compounded by the fact that many components are provided by offshore suppliers, making verification more difficult.

4. There is an insufficient chain of accountability within organizations. Few survey participants identified a designated person or office responsible for either addressing the risks posed by counterfeit parts or handling identified counterfeit parts. This can lead to a lack of centralized data within an organization and inconsistent counterfeit avoidance practices.

5. Recordkeeping on counterfeit incidents by organizations is very limited. Most organizations do not keep records of counterfeit incidents. Those that do keep records track limited data points. This can lead to a lack of institutionalized knowledge about an organization's encounters and problems with counterfeits.

6. Few know what authorities to contact in the federal government regarding counterfeit parts. The majority of survey participants reported having no knowledge of the federal authorities responsible for investigating counterfeit incidents, either defense- or industry related, or where to submit reports of counterfeit parts.

OTE analysts were able to pinpoint the Defense Criminal Investigative Services (DCIS) and the Federal Aviation Administration (FAA) as the federal authorities responsible for counterfeits related to defense and commercial aviation, respectively. However, OTE analysts were not able to identify a distinct federal authority responsible for counterfeits related to commercial products, including parts supporting critical infrastructure, or pinpoint legal requirements related to the handling of counterfeits in the supply chain.

7. Few are aware of legal requirements and liabilities regarding counterfeits. The majority of survey participants were not aware of any legal requirements or liabilities related to the management, distribution, storage, and disposal of counterfeit parts.

8. Stricter testing protocols and quality control practices are needed. There are wide differences in the levels and quality of testing undertaken by organizations purchasing and receiving parts. In addition, there are no existing standards for third-party testing facilities. While there are industry standards addressing testing and quality control issues, they have not been systematically embraced or enforced by the supply chain.

9. Most DoD organizations do not have policies in place to prevent counterfeit parts from infiltrating their supply chain. DoD organizations tend to rely solely on the Defense Federal Acquisition Regulations (DFAR) to guide their procurement practices. At the time the survey was conducted, few had developed additional procurement and testing protocols to address the problems caused by counterfeit parts.

10. 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.

11. Everyone must work together to solve the problem of counterfeit parts. All sectors of the U.S. electronics supply chain need to be more open to dialogue and cooperation in order to address the issue of counterfeit parts. In addition, there needs to be better interaction between federal authorities and the supply chain in order to determine legal requirements and effective counterfeit avoidance activities. 8 recommendations for fighting counterfeiters
Based on its survey, the Bureau of Industry and Security offered the following recommendations, for combating counterfeiting in the electronics industry supply chain. Some of the recommendations were directed at the U.S. government but many are also applicable for most manufacturers in the industry. The recommendations include the following:

1. Consider establishing a centralized federal reporting mechanism for collecting information on suspected/confirmed counterfeit parts for use by industry and all federal agencies;

2. Modify Federal Acquisition Regulations, including Defense Federal Acquisition Regulations, to allow for "best value" procurement, as well as require U.S. government suppliers and federal agencies to systematically report counterfeit electronic parts to the national federal reporting mechanism;

3. Issue unambiguous legal guidance to industry and U.S. federal agencies with respect to civil and criminal liabilities, reporting and handling requirements, and points of contact in the Federal Bureau of Investigation regarding suspected/confirmed counterfeit parts;

4. Establish federal guidance for the destruction, recycling, and/or disposal of electronic systems and parts sold and consumed in the United States;

5. Establish a dialogue with law enforcement agencies on the potential need to increase prosecution of counterfeiters and those entities knowingly distributing counterfeit electronic parts;

6. Consider establishing a government data repository of electronic parts information and for disseminating best practices to limit the infiltration of counterfeits into supply chains;

7. Develop international agreements covering information sharing, supply chain integrity, border inspection of electronic parts shipped to and from their countries, related law enforcement cooperation, and standards for inspecting suspected/confirmed counterfeits;

8. Address funding and parts acquisition planning issues within DOD and industries associated with the procurement of obsolete parts.