Kristal Snider
ERAI, Inc.

From its foundation ERAI has had one goal and that is to provide a platform for our Members to openly share information for the betterment of our entire community. ERAI’s success in protecting its Members hinges on our ability to provide real-time information allowing for a quick and reliable risk assessment. Since its inception ERAI has investigated and reported thousands of incidents exposing high risk customers, suppliers, product nonconformances, scams and more. Despite the obvious benefits of information sharing, not all ERAI Members participate in the process. Why are some organizations reluctant to share their experiences?

Managing supply chain risk in a competitive world is challenging. If "information is power", is your organization's power diminished if that information is shared? In supply chains, the reverse is true. If information between supply chain members is shared, its power increases significantly. Information sharing reduces uncertainty and information-enriched supply chains perform better than those that do not have access to information beyond their corporate boundaries.ⁱ The bottom line: Information and collaboration reduce risk.

Members and non-Members alike should take the time to familiarize yourself and your organization with ERAI’s data verification and reporting processes and procedures. The data you share with ERAI and its representatives is considered privileged and confidential and is not disseminated to third parties not directly involved in a complaint. ERAI is willing to enter into a non-disclosure agreement as assurance your company’s proprietary information and/or trade secrets will be protected and kept confidential. NDA coverage can be as specific as necessary and can include customer and/or vendor identities, bill of materials, etc.

The threat that one organization is facing today may very well be one that other organizations will face tomorrow; thus, the mutual sharing of information benefits the supply chain at large. Make use of the information sharing capability ERAI provides. Protect yourself, respond more efficiently to threats and reduce risk and unnecessary financial loss.

Please do not hesitate to contact me to discuss your data sharing ideas, recommendations or concerns.

We are here to help.

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Damir Akhoundov
ERAI, Inc.

For your convenience, ERAI has provided several different ways your organization can report non-conforming or counterfeit part data.

1. The easiest method is to e-mail a copy of your internal failure report or third party test report (supplier or customer information can be removed at your discretion). Please e-mail your report to reportparts@erai.com. The ERAI staff will extract the required data and protect your anonymity. Copies of your actual report will not be posted on the ERAI website unless specifically requested by your organization.

2. You can alternately submit a part using ERAI's Reported Parts Template in Microsoft Word format. This Word document allows you to submit a part report easily on one form for email submission to reportparts@erai.com.

3. Or you can complete the online Report a Part Form with the required fields and select the "submit" button at the bottom of the form.

Once submitted, the reported part will be uploaded to the ERAI internal operations database for vetting purposes. Before making the data available in the Reported Parts Database, ERAI will examine the part data, which may include referencing various tools such as the manufacturer's website, datasheets or other available sources to ensure accuracy and relevance.

To submit a form, click on the Report a Part section under Reports. The below screen will be displayed. Fill in the information as completely as possible. Please note that those fields designated with a red corner must be filled in for the form to be accepted. Make sure to check either Yes or No where you are asked if you wish to file a formal complaint regarding this part number.



You will notice that there are three tabs for providing documentation.



Provide Test Report Tab:



Browse your computer files for the image you seek (you will be able to select up to 20files/images at a time for the upload). After that, click on Submit High Risk Part.

Write or Paste in a description of the Nonconformance:



Type in, or copy and paste, a description of the nonconformities in the provided box. If pictures and/or a test report are available, upload them as described previously and click Add More Files/Images. After filling in all of the information and selecting the applicable files/images, click on Submit High Risk Part.

Use ERAI’s Nonconformance Category Selector

If you choose this option you will be presented with an option to click on the Assign Non-Conformance Categories button:



A pop-up window will appear, from which you may choose all the nonconformances exhibited by the parts, by checking the appropriate box(es) to the left of the nonconformance and clicking Apply. Please go through the whole list and make sure to click ALL applicable boxes to make sure to provide the most details to enable other members to identify these non-conformances in the future.



After filling in all of the information, Click on Submit High Risk Part.


Image Submission Guidelines

Below are guidelines for image submission to ERAI:

1. Do not resize the image with any graphics software (MS Paint, Photoshop, Corel, etc.) prior to sending it to us. Please leave the file in its original format and size.

2. If you are inserting the image into the ERAI reported parts form, please insert the original large image and then scale it inside the Word document by clicking on the image and using the resize feature (use your mouse to "grab" the active corner of the image and drag it to resize it to fit into the space provided). If resized this way the original image can later be extracted without any quality loss.

3. If the image is too large and cumbersome to operate within the Word document, please add it as a separate attached file to the email instead.

4. If the image originated from a test report written by a third party, please, whenever possible, include the original test report along with the form. Many times it requires a special approach and software to extract the images from the report in the original size. Upon your request, the report can be also made public alongside the images after any sensitive information has been redacted from it.

5. If you choose to attach images to the email rather than insert them into the report form and the report includes multiple reported parts, please indicate which images refer to which one of the reported parts by putting the image file names into the "images" area of each of the reported parts in the form.

PLEASE NOTE: ERAI Staff is always available to assist you in any of the above tasks. Feel free to contact us any time and we will gladly provide any necessary advice or help.

Kristal Snider
ERAI, Inc.

On July 17, 2013, Peter Picone was arrested following the return of an eight-count indictment charging him with conspiracy to traffic in counterfeit goods and the substantive crime of trafficking in counterfeit goods, conspiracy to traffic in counterfeit military goods, wire fraud and wire fraud conspiracy and conspiracy to commit international money laundering.

On June 3, 2014, Picone pleaded guilty to Count Two of the indictment charging him with conspiracy to intentionally traffic in counterfeit military goods in violation of Title 18, United States Code, Section 2320(a)(1). To be guilty of trafficking in counterfeit military goods, the following essential elements must be satisfied:

1. that the defendant intentionally trafficked in goods;
2. that the defendant knew such goods were counterfeit military goods;
3. that the defendant knew the use, malfunction, or failure of the counterfeit military goods was likely to cause serious bodily injury or death, the disclosure of classified information, impairment of combat operations, or other significant harm to combat operation, a member of the Armed Forces, or to national security.ⁱ

Picone, an independent distributor, owned and operated two companies: Epic International Inc. and TyTronix Inc. He used these businesses to import integrated circuits from China and Hong Kong for resale to other independent distributors, U.S. government contractors and others. Despite receiving orders from customers that specifically stated they did not want or would not accept parts procured from China, Picone did just that and repeatedly and deliberately covered up the true origin of the goods. He also provided "materially false and fraudulent test reports".ⁱⁱ

The ramifications of the integration of counterfeit ICs into finished products far exceeds mere monetary losses derived from premature failures or replacement costs. These parts can contain malicious code or hidden back doors that may enable remote systems disablement, communication interception and computer network intrusion.ⁱⁱⁱ The integrated circuits Picone sold were intended for various applications such as for use in a radio-transmitting test set, an alarm panel and for the repair of a secondary propulsion system aboard an active-duty nuclear submarine.

According to the U.S. States Attorney’s Office, Picone acknowledged his criminal conduct spanned from at least February 2007 through April 2012. After reviewing and organizing thousands of documents, it was revealed that on at least 743 occasions Picone sold 587 different part numbers (506,008 parts in total) to 237 unique buyers which generated $2,588,919.29 in sales and, in each of those instances, the origin of the goods had been misrepresented.^iv To be clear, the aforementioned transactions only represent orders in which the Buyer stated specifically, in writing, they did not want parts from China.

The total number of parts sold throughout Picone's supply chain tenure is unknown. When his house was searched, 12,960 counterfeit ICs were seized^v and investigators estimated 70% of Picone's inventory was counterfeit.

Despite acknowledging his participation in the conspiracy was inexcusable and an apology, Picone is now asking for a non-incarceration sentence of house arrest and probation and a downward departure based upon “Diminished Capacity”. It is Picone’s claim he suffers from a severe panic/anxiety disorder, deep depression and Post Traumatic Stress Disorder (PTSD) which made it virtually impossible for him to effectively process information or differentiate between reality and fiction.^vi Picone's attorney now argues that Picone is deeply shamed by "the realization that his conduct might have adversely affected his military comrades in arms – something that his impaired, challenged cognition prevented him from earlier comprehending." ^vii

The government argues that Picone clearly understood the wrongfulness of his actions because he took extensive efforts to conceal his behavior. To demonstrate his mental awareness, U.S. Attorney Deirdre Daly cited purchases made by undercover agents during which Picone produced fraudulent test reports that he signed with the name of a fictional testing operator purporting to document the authenticity of the ICs. Picone knew these parts were destined for nuclear submarines deployed by the US Navy and none-the-less went on to make the following written statement to the undercover agents:



U.S. Attorney Daly also contends Picone’s reasoning for changing his company name from Tytronix to Epic was likely due to the fact Picone was having difficulty getting parts into the country. Between February 2007 and June 27, 2008, eleven (11) shipments from Shenzhen, Guangdong, Shantou and Hong Kong, China were stopped by Customs and Border Protection (CBP) in transit to TyTronics Inc., the first of Picone’s two companies. After changing the company name to Epic, shipments once again appeared to flow freely until 2009 when Picone found himself once more on CBP’s radar.

We may never know the full impact of Peter Picone’s actions. The government is concerned that thousands of the parts he sold may already be installed on critical equipment, including the military, or warehoused as spares or replacement parts. To mitigate this risk, the U.S. States Attorney’s office has released a list of companies that purchased parts from Picone. All of the customers named in this report placed orders which specifically prohibited parts from China. Releasing this report allows Picone’s customers and any of their customers to check their inventories for counterfeit ICs.

Attachment B: http://www.erai.com/customuploads/Attachment_B.pdf

Sentencing is scheduled for August 14, 2015.

The government is seeking a prison term of 37 to 46 months, the forfeiture of the 12,960 ICs seized from Picone’s inventory, $70,050 paid to Picone by a third party customer and to federal undercover agents that were tested and confirmed counterfeit and restitution totaling $2,360,622.80 to the (31) thirty-one identified victims (OCMs).

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Resources

Indictment: 6-25-2013 – United States v. Peter Picone
http://www.efcog.org/wg/ism_qa_scqtt/docs/minutes/Indictment.pdf

Press Release: 7-15-2013 – Department of Justice Press Release - "Massachusetts Man Charged with Selling Counterfeit Semiconductors Intended for Use on Nuclear Submarines"
http://www.justice.gov/opa/pr/2014/June/14-crm-595.html

Plea Agreement: 6-3-2014 – United States v. Peter Picone
http://www.erai.com/customuploads/GuiltyPlea.pdf

Government’s Memorandum In Aid Of Sentencing (United States of America v. Peter Picone):05-14-2015
http://www.erai.com/customuploads/Gov_Mem_in_aid_of_Sentencing.pdf

Defendant’s Memorandum In Aid Of Sentencing (United States of America v. Peter Picone): 04-30-2015
http://www.erai.com/customuploads/4166104-0--2851.pdf
http://www.erai.com/customuploads/Gov_Mem_in_aid_of_Sentencing.pdf

Title 18 – § 2320. Trafficking in counterfeit goods or services:
http://www.gpo.gov/fdsys/pkg/USCODE-2011-title18/pdf/USCODE-2011-title18-partI-chap113-sec2320.pdf

Prosecuting Peter Picone - What resellers NEED to know
http://www.erai.com/Blog/3014/Prosecuting_Peter_Picone_-_What_resellers_NEED_to_know

Fake semiconductors imported from Hong Kong sold for use in US nuclear subs
http://www.scmp.com/news/world/article/1525350/fake-semiconductors-imported-hong-kong-sold-use-us-nuclear-subs

Federal agents search Methuen home office
http://www.eagletribune.com/news/federal-agents-search-methuen-home-office/article_fecd588c-6dde-5b7b-8512-a9c663650084.html

Feds: Counterfeit submarine parts shipped to Groton base
http://www.theday.com/article/20130716/NWS09/130719772

Mary Dunham
ERAI, Inc.

You may be surprised to learn that depending on the circumstances and your state’s laws, the person who cashes or deposits the fraudulent check may be held responsible.

The Federal Trade Commission reports that not only are counterfeit check scams occurring more frequently, the counterfeit checks are becoming harder to identify. High quality printers and scanners, authentic-looking watermarks, copied facsimile signatures, authentic names and addresses of legitimate financial institutions, as well as real routing numbers and account numbers are all being used to perpetrate this fraud. These counterfeits range from cashier’s checks and money orders to corporate and personal checks.

You may be asking yourself why can you be held responsible and the bank not. Under federal law, banks are required to make funds available to you within 1-5 days. Official checks, such as US Treasury checks, government checks and bank checks [cashier’s checks, certified checks, and teller’s checks] are usually made available one day after deposit. The problem is, while the funds are available, the funds are not really yours until the check “clears”.

Processing a payment actually takes longer than 1-5 days. Your bank accepts the deposit based on your identification – they have no information about the source of the check. Your bank then sends the check to the source. Say for example that the check allegedly came from a real company (as was the case in a blog post recently made by ERAI titled: Bad check scam – ERAI Members’ identities being used to commit fraud). The real company does not become aware of these charges until they appear on their statement. In the meantime, you’re responsible because it is assumed that you are in the best position to determine the risk of accepting the check – you dealt with the person who gave it to you. Until the bank confirms that the funds were actually deposited into your account, you are responsible for any funds drawn against that check.

In addition to collecting funds from you, the bank may also charge a fee, particularly if the reversal results in NSF checks, etc. Banks may also freeze or close your account or take money from other accounts you have at that bank, bring suit against you to recover the funds, or report you to a checking account abuse database.¹ In some cases it is possible that law enforcement could bring charges against victims because it may look like they were involved in the scam and knew the check was counterfeit.² FDIC insurance does not cover losses due to theft or fraud.

What rights do you have? Ordinarily, you would seek repayment from the person who wrote the check to you. Realistically, however, if the scammer lives in a foreign country, has disguised his identity or has disappeared, your chances of recovering the money are not good.

Under the Uniform Commercial Code, a payor bank may only debit a drawer’s account for checks that are “properly payable”. Let’s define some important terms. A customer is the person with the account at the bank. A drawer or maker is the person writing the check. A drawee is a party, typically a bank, required to pay out money when the check is presented. A payee is the party entitled to receive funds from the payor bank, usually the drawee.³

In most cases, a drawee is liable for claims involving the signature on the face of the check and the depository bank is liable for claims involving the payee’s endorsement on the back of the check. A drawee’s liability for forged signatures of the drawer arises because the drawee bank keeps the drawer’s signature card on file and is held responsible for verifying the signature. This is not always the case when facsimile signatures are used, as will be discussed later in this article.

According to the National Check Fraud Center, revisions to the UCC define responsibilities for check issuers and paying banks under the term ordinary care. Under Sections 3-403(a) and 4-401(a), a bank can charge items against a customer’s account only if they are “properly payable” and the check is signed by an authorized individual. However, if a signature is forged, the corporate account may be liable if one of the following exceptions applies:

• According to UCC Section 3-103(7), ordinary care requires account holders to follow "reasonable commercial standards" prevailing in the area for their industry or business. Under §3-406, if they fail to exercise ordinary care, they may be restricted from seeking restitution from the payee bank if their own failures contributed to a forged check signature or an alteration (for example, raising a check amount from $50 to $5000).
• Section 4-406 also requires customers to reconcile their bank statements within a reasonable time to detect unauthorized checks. This typically means reconciling statements as soon as they are received. (*Note: If you have any chance of recovering the funds from the bank, you must reconcile your accounts as soon as possible, preferably within 30 days of receipt.)
• The concept of comparative fault - Sections 3-406(b) and 4-406(e) - can shift liability to the check issuer. If both the bank and corporate account holder have failed to exercise ordinary care, a loss can be allocated based upon the extent that each party's failure contributed to the loss. Since banks are not required to physically examine every check, companies may be held liable for all or a substantial portion of any given loss - even if the bank did not verify the signature on a fraudulent check.
• Liability for counterfeits that are virtually identical to originals will be examined on a case-by-case basis. The process used when issuing the check will be reviewed to determine if the company exercised ordinary care or contributed to the loss.⁴

A 2000 court case, Spear Insurance Co. v. Bank of America, N.A., 40 UCC RepServ 2nd 807 (IL 2000), ruled that a bank may escape liability for its payment of counterfeit checks bearing a customer’s forged facsimile signature if the bank and customer have agreed that the bank can honor checks purporting to bear the customer’s facsimile signature. In this particular case, a publishing company had several accounts with Bank of America (BOA). In one month, BOA paid seven (7) counterfeit checks drawn on one of the accounts bearing the forged signature of the company’s Chief Financial Officer. When this was discovered, the company demanded reimbursement from the bank. The bank refused and the company's insurance carrier paid the company for its loss and sued the bank to recover the funds.

There was an agreement between the company and BOA that expressly authorized the bank to pay checks bearing facsimile signatures resembling the authorized signatures on file with the bank. The court found that the facsimile signature on the counterfeit checks closely resembled the facsimile signature of the CFO. Thus, the court held that the bank was not responsible for the company’s losses.⁵

In order to minimize your potential losses, you should:

• Make sure your bank is kept current on who is authorized to issue and sign checks for your company.
• Limit the number of people authorized to issue and sign checks.
• Review your canceled checks and statements as soon as possible after receipt, in order to be sure they have been properly issued and paid.⁶

Further steps you can take to protect yourself:

• Know the difference between funds being available for withdrawal and a check having cleared.
• Know who you are dealing with and never wire money to strangers. Be cautious when accepting checks, even cashier’s checks, from people you don’t know, as recovery can be difficult or impossible if things go wrong.
• When selling, never accept more than the price of the goods.
• If a buyer insists on using a particular escrow service or online payment service, check it out for yourself. Go to the official website, familiarize yourself with their terms and conditions and call the customer service line. If in doubt, don’t use the service.
• If you accept checks, stipulate that it be drawn on a local bank or a bank with a local branch. Then call or visit the bank to verify the validity of the check. Be sure when doing so to get the bank’s phone number yourself and do not use the number provided by your customer.
• If a buyer insists that you wire back funds, end the transaction immediately.
• Be wary of taking action before you can be sure that the payment is good.
• Save all your documents.

What do you do if you are a victim?

The first thing to do is contact the issuing bank directly to report receipt of the check. Then contact your bank and explain that you’ve been scammed. Ask that they not take any negative action against you or if they’ve already done so, ask if they can reverse these actions. File a report with your local police. If you’ve already sent the cash and do not have enough money in your account to pay it back, try to negotiate a repayment plan with your bank. It is also recommended that you contact the Federal Trade Commission at 1-877-FTC-HELP or http://www.ftc.gov; The FBI Internet Fraud Complaint Center at http://www.ic3.gov; and if the scam involves the US mail, the U.S. Postal Inspector Service, by phone at 1-888-877-7644 or via email at http://postalinspectors.uspis.gov/forms/MailFraudComplaint.aspx.

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Howard A. Miller, CRM, CIC
Director of the Tech Secure® Division at L/B/W Insurance & Financial Services

Evolving Liability for Electronic Component Distributors and Manufacturers

In an effort to protect customers and end users, leadership in the electronic component industry has evolved from putting parts into the supply chain to determining if those components belong in the supply chain or whether they meet correct specifications. From an insurance and legal perspective this has expanded liability exposure for both distributors and manufacturers. As organizations evolve and grow, it is important to note that the risk management process is cyclical in nature. The first and most important step in the risk management process is identification. Taking the time to consider how your organizations operations have changed and where you’re headed needs to be reviewed at certain intervals. Failure to identify emerging exposures can lead to surprise lawsuits, finding out you are not covered by your insurance program and ultimately a financial loss that can destroy your organization.

Professional Exposures

Professionals are held to a higher standard and expected to have advanced knowledge beyond the general public. An error or negligence on the part of the professional in providing services or products can result in lawsuit by a third party for whom reliance upon this expertise causes actual or alleged financial damages. The standard of care involved in providing professional expertise is litigated in courts all over the country and is not limited to medical malpractice or insurance. With the reliance upon technology and the amount of money involved in maintaining continuity of operations even IT service providers and software developers can be sued. A failure to configure a network that causes a disruption of operations is an example. Failure to factor security into the software development life cycle can cause vulnerability in a software component to be used as a source of unauthorized access to confidential data from an organizations network.

Q: Can an organization be sued over an error, omission or negligence in testing electronic components or failure of their technology products perform the function or service intended?

A: Yes.

Electronic Component Distributors and Manufacturers

If an insurance agent is approached to provide ten million dollars in product liability they might provide the customer an insurance company that is recognized in the industry and a premium for the policy. Next step - do you want to buy the policy? What if the agent said something like this: I thought you should know the general liability policy does not have a duty to defend against a suit for bodily injury or property damage for which the insurance does is not apply. Product failure does not always show visible resultant physical damage and a product failure may not have caused anyone to get physically injured. The general liability policy is a named peril policy that is triggered by actual or alleged bodily injury or physical damage to tangible property. If you are concerned about a failed part causing a product recall from the company that incorporated your components or finding out materials involved in the manufacturing process did not meet specifications, you could be facing a lawsuit that is not covered under your general liability policy. Should we look at expanding your insurance program? We now are going from insurance sales to insurance consulting. Does this sound similar to your company as you provide increasingly sophisticated testing, meeting professional standards or collaboration with your clients involved in electronic manufacturing? Providing value can go beyond price and product into professional exposures.

Let's look at some examples discussed at the recent ERAI Executive Conference 2015.

Example 1 - Failure/Counterfeit Parts

Capacitors are sourced from Asia for a client in the communications industry. The parts are tested by both the distributor and in independent testing lab and the parts are delivered to the client. After the end use product is put in the field, it fails and needs to be recalled and repaired. A demand for damages includes the cost to recall, labor, replacement parts and possible loss of future orders amounting to $500,000 in damages for a $50,000 order.

How is your organization protected from a legal standpoint? How would your insurance respond? What if this demand for damages did not materialize for years after the transaction was completed? Note the exclusion on the general liability policy for damage to impaired property or property that is not physically injured.

Example 2 - Used parts sold as new

A distributor represents to a customer that the semiconductors being sold are new when they are, in fact, refurbished. The distributor also represents that it has tested these alleged new parts and they passed testing and inspection. The customer starts to incorporate the refurbished parts into the end product and the end product starts to fail.

What kind of potential liability will the distributor face? Even if the distributor holds insurance, will it be covered against these claims? Note damages could include lost business opportunity. An offshore manufacturer could cause the bulk of responsibility to fall on the domestic distributor. Specialized legal advice is required. What if this is deliberate act by fraudulent salesperson? Language in the insurance policy that provides severability can be important. The differentiation of the payment for the legal defense of a rouge employee pushing bad parts from the company and executives who had no knowledge of the deceptive sale would illustrate this.

Example 3 - Distributor acquires parts from its supplier which turn out to be mismarked

A distributor procures parts from its supplier which it claims to be new and from an authorized distributor. The parts are then sold to another distributor who then sells them to an end user who, during the process of incorporating them into their product, discovers that the parts are mismarked and causing their product to fail.

What kind of potential liability does the distributor have and what kind of claims can the distributor make against its supplier, the chip manufacture and the parties along the supply chain? Determining where you stand from a contractual basis and if you have the correct insurance to back you up financially can be critical in dealing with this type of claim. If the distributor carries insurance, how can the distributor use its insurance coverage to protect themselves from these various claims that it might be asserted against them? Some good long term advice would be to factor the cost of insurance into the cost of your goods and services. Showing a potential customer that you are serious about quality control and service is important. Showing you are backed by an insurance limit as a financial backstop to cover a potential loss described in these examples goes beyond general liability including standard product liability. I believe there are cases where a company is asked to provide a certificate of insurance naming them as additional insured on a general liability policy without realizing they will have no protection under that policy for these types of claims. Whether you are subcontracting out work or providing services and products, correct liability insurance can give piece of mind.

Example 4 - Manufacturer incorporates materials that do not meet specification

A component manufacturer provides parts for a large computer manufacturer. Despite rigorous quality control by both entities, a problem with the computers is discovered after thousands of products have been sold. The root cause of the problem is determined to be the components.

The computer manufacturer seeks payment from the electronics components manufacturer, to replace faulty components, and alleges additional financial injury from damage to their reputation, as evidenced by lost sales. Could damages include the cost incurred to rework, repair or recall product? What about damages for lost income or extra expenses incurred in implementing a work-around or in expediting repairs?

Manufacturing companies that engage in the following activities are at risk and should consider their risk control and insurance:

• Manufacturing, assembly or installation based on customer specifications
• Providing design work
• Selecting raw material for others
• Providing services, advice or instruction to others for a fee
• Subcontracting work to third parties

I hope this article helps to illustrate evolving liability risks how putting together the right insurance program and the correct team of expertise provides a significant upside when you look to minimize financial loss over the long term. I welcome any questions/comments and look forward to addressing other areas of risk such as cyber liability, supply chain exposures, trade credit and continuity exposures.

Special thanks to Keith Gregory from Snell & Wilmer for input.

Howard A. Miller, CRM, CIC
Vice President
Director of Tech Secure® Division
L/B/W Insurance & Financial Services, Inc.
howardm@lbwinsurance.com
661.702.6039

June 11, 2015

United States Department of Justice
Office of Public Affairs

Source: http://www.justice.gov

A Mountainside, New Jersey, man today admitted his role in an international procurement network that obtained and smuggled more than $65 million worth of electronics from the United States to Russia in violation of export control laws, U.S. Attorney Paul J. Fishman of the District of New Jersey announced.

Alexander Brazhnikov Jr., 36, a naturalized U.S. citizen born in Moscow, pleaded guilty before U.S. District Court Judge William J. Martini of the District of New Jersey, to an information charging him with one count of conspiracy to commit money laundering, one count of conspiracy to smuggle electronics from the United States and one count of conspiracy to violate the International Emergency Economic Powers Act (IEEPA).

“As he admitted in court, Brazhnikov was responsible for nearly 2,000 illegal shipments of regulated, sensitive electronics components, many of which wound up in the hands of Russian military and security forces,” said U.S. Attorney Fishman. “He also admitted going to extraordinary lengths to conceal the nature and destination of the shipments, as well to hide the tens of millions of dollars in illegal proceeds generated by the scheme. Shutting down schemes like this keep all of us safer.”

“Alexander Brazhnikov Jr. significantly undermined the national security of the U.S. by procuring sophisticated, high-tech electronic components and smuggling them into Russia, thereby enhancing the capabilities of the Russian Intelligence Service and contributing to the modernization of both the Russian Military Service and the Russian Nuclear Weapons Program,” said Special Agent in Charge Richard M. Frankel of the FBI’s Newark Division. “Now, Brazhnikov must face the consequences of his actions and the full power of U.S. jurisprudence.”

Brazhnikov Jr. was arrested at his home on June 26, 2014, following a joint investigation by the FBI, the U.S. Department of Commerce (DOC) and the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (ICE-HSI). From January 2008 through June 2014, he was the owner, chief executive officer and principal operator of four New Jersey microelectronics export companies, each of which were used in the various conspiracies uncovered by the investigation. Following his arrest, special agents seized $4,075,237 in proceeds related to the charged offenses, as well as real property and other assets valued at more than $600,000.

“Today's plea represents a collaborative effort among law enforcement agencies,” said Special Agent in Charge Sidney Simon of the DOC, Bureau of Industry and Security, Office of Export Enforcement’s New York Field Office. “I commend our colleagues at the FBI and Homeland Security Investigations for their efforts. The Office of Export Enforcement will continue to pursue violators of our export control laws by leveraging our unique authorities to protect national security.”

“HSI will use all the resources at its disposal to prevent sensitive and restricted technology from being exported illegally,” said Acting Special Agent in Charge Kevin Kelly of HSI’s Newark Field Office. “HSI will do all in its power as the principal enforcer of export controls to ensure that sensitive technology doesn’t fall into the wrong hands.”

According to documents filed in this case and statements made in court: Brazhnikov Jr. and his companies are part of a sophisticated procurement network that has surreptitiously acquired large quantities of license-controlled electronic components from American manufacturers and vendors and exported those items to Russia on behalf of Russian business entities that were authorized to supply them to the Ministry of Defense of the Russian Federation, the Federal Security Service of the Russian Federation (FSB) and Russian entities involved in the design of nuclear warheads, weapons and tactical platforms.

The defendant conspired with his father, Alexander Brazhnikov Sr., owner of a Moscow-based procurement firm whose agents helped initiate the purchase of electronics components from United States vendors and manufacturers on behalf of the conspirators’ clients in Russia. Brazhnikov Jr. finalized the purchase and acquisition of the requested components from the various distributors, then repackaged and shipped them to Moscow. He routinely falsified the true identity of the end-user of the components and the true value of the components in order to avoid filling out required export control forms. Brazhnikov Jr. purposefully concealed the true destination of the parts that were exported by directing that the shipments be sent to various “shell” addresses in Russia – some of which have been identified as vacant storefronts and apartments – which were established and controlled by the Moscow-based network. All shipments initially directed to the shell addresses were redirected to a central warehouse controlled by the conspirators’ Moscow-based network.

The funds for the network’s illicit transactions were obtained from the various Russian purchases and initially deposited into one of the conspirators’ primary Russia-based accounts. Disbursements for purchases were made from that primary Russian account through one or more foreign accounts held by shell corporations in the British Virgin Islands, Latvia, Marshall Islands, Panama, Ireland, England, United Arab Emirates and Belize and ultimately into one of the defendant’s U.S.-based accounts. The network’s creation and use of dozens of bank accounts and shell companies abroad was intended to conceal the true sources of funds in Russia, as well as the identities of the various Russian defense contracting firms receiving U.S. electronics components.

The money laundering conspiracy charge to which Brazhnikov Jr. pleaded guilty carries a maximum potential penalty of 20 years in prison and a $500,000 fine. The smuggling and IEEPA conspiracy charges carry a maximum potential penalty, per count, of five years in prison and a $250,000 fine. Sentencing is scheduled for Sept. 15, 2015. Brazhnikov Jr. also agreed to the entry of a forfeiture money judgment of $65 million.

U.S. Attorney Fishman credited special agents of the FBI, under the direction of Special Agent in Charge Frankel in Newark; the DOC, under the direction of Special Agent in Charge Simon, New York Field Office; special agents of ICE-HSI, under the direction of Acting Special Agent in Charge Kelly. He also thanked officers from the Union County, New Jersey, Police Department, under the direction of Captain Chris Debbie; and officers of the Mountainside Police Department, under the direction of Police Chief Allan Attanasio, for their important contributions to the investigation. The U.S. Justice Department’s Office of International Affairs provided assistance with this case.

The government is represented by Assistant U.S. Attorneys Dennis C. Carletta of the U.S. Attorney’s Office National Security Unit, and Peter Gaeta of the office’s Asset Forfeiture and Money Laundering Unit in Newark.

DSEI 2015
London, United Kingdom
September 15-18, 2015
Use promo code ER47112 for a discount & visit us at stand N5-193.

The Global E-Waste Monitor Why you should read it: While many reports have cited the impact that e-waste has on the environment, people and children who mishandle the waste and the re-introduction of waste into the supply chain many times as counterfeit parts, this report is the first to attempt to measure the volume of waste using harmonized measurement methods on a global-scale. ERAI Insight: Although the effect that e-waste has had on the industry is well-documented, the scope of the problem had not been well-defined. According to this report, in 2014 a total of 41.8 metric tons (Mt) of e-waste was generated, one-third of which originated from just two countries – USA and China. This number is expected to increase to 49.8 Mt by 2018 with an annual growth of 4-5 percent, as populations expand and technology evolves. Stronger take-back legislation is required to ensure that electronic equipment is disposed of and recycled in more efficient ways as it is estimated that less than one-sixth of the total waste was properly recycled or reused. In precious metals alone (e.g. gold, silver, palladium), an estimated $52 billion is discarded, along with sizeable amounts of toxins (e.g. CFCs, cadmium, mercury). http://www.erai.com/CustomUploads/ca/wp/2015_7_UNU1stGlobal-E-Waste-Monitor.pdf

Counterfeit Parts Persist in the Face of Arrests and Convictions
http://www.designnews.com/document.asp?doc_id=277876&dfpPParams=ind_182,kw_bearings,kw_31,aid_277876&dfpLayout=article&dfpPParams=ind_182,kw_bearings,kw_31,aid_277876&dfpLayout=article&dfpPParams=ind_182,kw_bearings,kw_31,aid_277876&dfpLayout=article

Recycling and e-Waste Export Control are the Best Ways to Curb Counterfeiting
http://www.ttiinc.com/object/me-slovick-20150618.html

The Greatest Weapon Against Counterfeiters
http://electronicspurchasingstrategies.com/2015/06/03/the-greatest-weapon-against-counterfeiters/

Detecting and reducing counterfeit chips
http://www.scmagazine.com/detecting-and-reducing-counterfeit-chips/article/414290/

How the Pentagon gets fooled into buying back its own garbage
http://www.pbs.org/newshour/updates/pentagon-getting-duped-buying-back-ewaste/

Chinese Professors Among Six Defendants Charged with Economic Espionage and Theft of Trade Secrets for Benefit of People’s Republic of China
http://www.justice.gov/opa/pr/chinese-professors-among-six-defendants-charged-economic-espionage-and-theft-trade-secrets

The 2015 Top 50 Electronics Distributors
http://globalpurchasing.com/top-50-distributors/2015-top-50-electronics-distributors

Landmark Dubai decision in border measures: recycling counterfeit goods instead of re-exporting
https://www.lexology.com/library/detail.aspx?g=f7859d1c-15bf-48bf-8421-e8fe4e549656

It’s a fake! Countering the counterfeiters
http://www.management-issues.com/interviews/7046/it’s-a-fake-countering-the-counterfeiters/

Components of risk: Counterfeit electronic parts
http://www.ecnmag.com/articles/2015/04/components-risk-counterfeit-electronic-parts