Counterfeit Materials Management | Managing Material Control & Compliance Conflicts

Material Control - Doing the right thing can cost you

Kristal Snider
ERAI, Inc.

It has been well established that fraudulent, suspect counterfeit and counterfeit parts have no value and pose a serious threat to all sectors of the supply chain. As such, these types of parts must be controlled, quarantined and ultimately eliminated. However, compliance is sometimes easier said than done despite instructions to do so coming directly from the United States Government and a leading standards development organization.

What's the basis for implementing a material control plan?

The Defense Industrial Base Assessment report titled Counterfeit Electronics prepared by the U.S. Department of Commerce, Bureau of Industry and Security, Office of Technology Evaluation states that in order to curtail the flow of counterfeit parts into the U.S., defense and industrial supply chains organizations should, "ensure physical destruction of all defective, damaged, and substandard parts."1

SAE Aerospace Standard AS5553 Revision A requires the control of "nonconforming parts to prevent them from entering the supply chain under fraudulent circumstances by physically identifying and segregating the parts from acceptable non-suspect parts and placing in quarantine".2 "Parts should not be returned to the supplier for refund, replacement, etc., except under controlled conditions which would preclude resale of the suspect fraudulent/counterfeit EEE Parts."3

SAE Aerospace Standard AS6081 requires Independent Distributors to control suspect or confirmed fraudulent/counterfeit parts by "physically segregating the [suspect or confirmed fraudulent/counterfeit] parts from acceptable non-suspect parts and placing in quarantine. Quarantine should consist of physical barriers and controlled access for a minimum of five (5) years or maintained in accordance with Customer statutory and regulatory requirements."4

The National Defense Authorization Act for Fiscal Year 2012 [H.R. 1540 Sec. 818] called for "policies and procedures to eliminate counterfeit electronic parts from the defense supply chain" and that these policies shall include "the reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts."5

Minimizing risk when controlling suspect and confirmed counterfeit parts

Most business owners I talk to support the control of suspect counterfeit, counterfeit and fraudulent material and agree if these types of parts are returned to their originator, they will find their way back into circulation. In order to protect their financial bottom line, many Independent Distributors rely on escrow service providers, if open payment terms are not an option, to ensure they receive the parts they ordered and that the goods conform to their purchase order specifications (e.g. new, unused, etc.). But caveat emptor; some escrow providers cater to the suppliers of faulty, or worse, bogus material, and will not return funds held in escrow unless the goods are returned despite their suspect/counterfeit condition. Others have required the funds remain in escrow until the material is seized by Homeland Security and the Buyer is able to produce proof of the seizure. This can be a problem considering Homeland Security is not always able or willing to pick up the suspect material. In this type of situation the Buyer is forced to either return the parts despite the legal ramifications associated with doing so (i.e. trafficking in counterfeit goods) or quarantine the goods despite funds being held indefinitely in escrow.

Organizations relying on escrow providers to protect them should carefully review the terms and conditions of the escrow agreement to identify its rights in advance of the sale.

eraiESCROW empowers Buyers to comply with industry standards and the law

ERAI has included the following written terms in its escrow agreement that must be signed by both the Buyer and Seller prior to the commencement of the transaction:

Buyer and Seller hereby agree and acknowledge that suspect/fraudulent/counterfeit components have no value and any transaction involving suspect/fraudulent/counterfeit components should be declared null and void since no consideration has passed due to the suspect/fraudulent/counterfeit nature of the components.

As a result, Buyer and Seller hereby agree that if Buyer or a testing laboratory chosen by Buyer determines that the electronic components supplied by Seller are suspect/fraudulent/counterfeit, then Seller has the right to: 1. Agree with Buyers findings and the escrow will be voided; or 2. Verify Buyer’s findings by contracting with an ERAI approved test laboratory for further authenticity verification.

If Seller chooses to immediately cancel the Escrow, the electronic components will not be returned to Seller until an ERAI approved testing laboratory determines that the electronic components are not suspect/fraudulent/counterfeit. If the ERAI approved testing laboratory verifies the Buyer’s findings that the components are suspect/fraudulent/counterfeit, then ERAI possesses the absolute right to immediately refund all of the monies deposited into escrow to Buyer. Buyer has the absolute right to destroy, confiscate or return the suspect/fraudulent/counterfeit components at its sole discretion and the Escrow shall be cancelled.

If the Seller’s approved laboratory contradicts the findings made by Buyer’s testing laboratory and determines that the electronic components are not suspect/fraudulent/counterfeit, then the following options exist for the parties to resolve their dispute:

Proceed to a mediation which shall last no less than 4 hours;
Proceed to binding arbitration;
The electronic components are returned to Seller and Buyer receives a refund for all of the electronic components except for those that have been used during the testing process.

If the Buyer and Seller cannot agree upon one of these options, then they will first proceed to mediation and if they are unable to resolve their dispute during mediation, then they shall be required to resolve their dispute through the arbitration process.

Buyer and Seller agree that if the independent testing laboratory chosen by ERAI determines that the electronic components are suspect/fraudulent/counterfeit, then the Seller shall be solely liable for all fees incurred by the independent testing laboratory for conducting the testing. Buyer and Seller further agree that if the independent testing laboratory chosen by ERAI determines that the electronic components are not suspect/fraudulent/counterfeit, then the Buyer shall be solely liable for all fees incurred by the independent testing laboratory for conducting the testing.

Do the right thing

Keep suspect/fraudulent/counterfeit parts out of the supply chain. Do allow the supplier an opportunity to verify your findings. The parts can be sent to an independent third party laboratory and/or original component manufacturer for evaluation. Once the suspect/fraudulent/counterfeit nature of the parts is confirmed, the parts should be placed into quarantine. The quarantined parts should be in an access-restricted, secure location and should be clearly marked. Labeling should be kept intact and should not be covered or altered. ERAI recommends the product be stored for a minimum of 5 years or as required by local laws. Upon the end of the quarantine period, the parts should be scrapped and a certificate of destruction should be kept on file.

ERAI is here to help

If you have questions or need assistance developing a material control plan call (239)261-6268. We understand the challenges you are facing and are available to discuss, in confidence, your concerns.

Additional Guidance

Detailed guidance is also available in SAE Aerospace Standard AS6081.

1U.S. Department of Commerce, Bureau of Industry and Security, Office of Technology Evaluation
2SAE Aerospace Standard AS5553 Revision A. Fraudulent/Counterfeit Electronic Parts; Avoidance, Detection, Mitigation, and Disposition | Requirement 4.1.8 Material Control
3SAE Aerospace Standard AS5553 Revision A. Fraudulent/Counterfeit Electronic Parts; Avoidance, Detection, Mitigation, and Disposition | Guidance Appendix F
4SAE Aerospace Standard AS6081 Fraudulent/Counterfeit Electronic Parts; Avoidance, Detection, Mitigation, and Disposition - Distributors | Requirement 4.2.6 Control of Suspect, Fraudulent, or Confirmed Counterfeit Parts
5National Defense Authorization Act for Fiscal Year 2012: H.R. 1540 Sec. 818 Detection and Avoidance of Counterfeit Electronic Parts- page.199 (2) Elements (A) (vi) the reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts

Material Control – Case Example

Superior Court of California, County of Orange finds in favor of Independent Distributor that refused to pay for or return counterfeit parts

Pure Chip Inc.
750 W 17th
Costa Mesa, CA 92627

On May 16, 2012 an Independent Distributor (hereafter referred to as “ID”) placed a purchase order with Pure Chip for 343 pieces of Xilinx part number XC3090A-7PQ160C (Date Code: 0212 | Lot Code: X45780M) totaling $8,060.50. Payment terms were Net 1 upon delivery of the goods. The ID’s purchase order terms and conditions clearly stated, "Counterfeit or re-Marked parts will be confiscated".

Immediately upon receipt, the goods were inspected and subsequently rejected. Multiple abnormalities were present indicating a high probability the parts are counterfeit. The markings are not consistent on parts. The back of parts differ in that some have barely visible markings obscured by re-marking. X-ray revealed the presence of three different lead frames within a homogeneous lot. The parts’ leads are bent and show signs of oxidation, debris, and solder re-work. Resistance to solvents screening revealed the presence of blacktop.

Based on these findings, the suspect counterfeit parts were placed in quarantine and payment was not issued. Pure Chip demanded the goods be returned and, in an effort to either regain control of the parts or obtain payment, Pure Chip sued the ID in small claims court. After a four-month continuance, the Superior Court of California, County of Orange determined Pure Chip (the Plaintiff) would not be awarded costs and that the parts shall be destroyed pursuant to Section 1952 of the Code of Civil Procedure.

Important Note: The part in question, XC3090A-7PQ160C, has been reported by ERAI on three (3) separate occasions. In each instance the parts were marked with the same date and lot code (DC: 0212 | LC: X45780M); however, each lot originated from a different supplier in the U.S.