By: Anne-Liese Heinichen

Special thanks to Brett W. Johnson and Sarah Delaney of Snell & Wilmer L.L.P. (www.swlaw.com) for their assistance with this article.

At this year’s ERAI Executive Conference, Jorge Garcia, Deputy Assistant Director, Trade and Assistant Director, Enforcement, Electronics Center of Excellence and Expertise, discussed U.S. Customs and Border Protection’s Centers of Excellence and their role in detecting and seizing suspect counterfeit goods.

In 2014 CBP recorded imports to the US consisting of 11 million maritime containers, 10 million truck containers, 3 million rail containers, plus 250 million air cargo, postal and express consignment packagesⁱ; a massive volume seemingly impossible to monitor. However, CBP has had successes in stemming the flow of counterfeit electronic parts. In fiscal year 2014, CBP Operation BeatsBody focusing on consumer electronics as well as integrated circuits resulted in 234 seizures totaling $1.5 million MSRPⁱⁱ. During FY2014 as a whole, 13% of total seizures representing a MSRP of $162,209,441.00 consisted of consumer electronics/partsⁱⁱⁱ.

It is becoming apparent from reports from Members that CBP is increasing enforcement efforts and more international shipments are being detained. CBP itself reports a 5% increase in seizures of semiconductors from FY2013 to FY2014^iv.

With this apparent increase in seizure and detention activity, we polled our Members to learn more about their experiences with CBP. Our survey found that approximately 55% of polled Members have had a shipment detained with the number of detained shipments averaging about 7 per participating Member.



We were also interested in learning how efficient CBP's process is and how close CBP manages to comply with the United States Code. With regard to notices of detention, USC Title 19 Section 1499 (c)(2) requires CBP to notify the importer of record or other party having an interest of a detainment "no later than 5 days, excluding weekends and holidays, after the decision to detain the merchandise is made"^v . Of the Members who experienced a detained shipment, the majority state they never received a notice from CBP or they received a notice outside of the required 5-day timeframe. Many Members commented that they became aware of a detainment through their shipping carrier (e.g. UPS, FedEx) and thus did not receive a detainment notice.



USC Title 19 Section 1499 (c)(2) further mandates that the notice of detention should include, "(A) the initiation of the detention; (B) the specific reason for the detention; (C) the anticipated length of the detention; (D) the nature of the tests or inquiries to be conducted; and (E) the nature of any information which, if supplied to the Customs Service, may accelerate the disposition of the detention.^vi" Polled Members stated that while most of the time a reason for detention was cited, a clearly stated anticipated length of detention, nature of tests to be conducted on the detained product and a description of information which could be provided to CBP to accelerate the disposition of the detention was not included more than half of the time. One Member even commented that the notice "did not include part number" [information] and several comments stated that the information provided was vague, not specific or simply not provided.

If you received a notice from CBP, did the notice include the following:	YES	NO
Specific reason for detention	61.29%	38.71%
Anticipated length of detention	9.68%	90.32%
Nature of tests to be conducted to determine product's authenticity	6.45%	93.55%
Description of information which could be provided to CBP to accelerate the disposition of the detention	29.03%	70.97%

When questioned if they had provided CBP with documentation (e.g. test report, supply chain traceability documentation) for a detained shipment in an effort to expedite a resolution, most Members stated they had supplied documentation while a minority of the member base was not aware that they could provide documentation or never did so. Of the Members who supplied documentation, 50% believe that the documentation provided altered the outcome. Members reported providing test reports, certifications (e.g. FCC, FDA) and traceability showing parts were purchased from a franchised distributor. The other half of Members stating they supplied documentation believe that the information did not alter the outcome with several Members commenting that CBP was either unresponsive and/or Members were unable to determine an appropriate CBP contact with whom to discuss their case.



USC Title 19 Section 1499 (c)(3) testing results mandates:
Upon request by the importer or other party having an interest in detained merchandise, the Customs Service shall provide the party with copies of the results of any testing conducted by the Customs Service on the merchandise and a description of the testing procedures and methodologies (unless such procedures or methodologies are proprietary to the holder of a copyright or patent or were developed by the Customs Service for enforcement purposes). The results and test description shall be in sufficient detail to permit the duplication and analysis of the testing and the results ^vii.

In our survey, most Members were not aware that CBP could provide test results, while the one-third of Members that did request test results never received a report. Only one Member reported receiving a test report from CBP. The Member stated that the report was only provided to them after having lawyers file a Freedom of Information Act request and, "when we did, it was redacted to such an extreme degree that there was no relevant information left. No test reports, no fact, no data, no conclusions, no summary of why the parts were deemed counterfeit" .



Seventy-five (75) percent of Members polled were unaware that USC Title 19 Section 1499 (b)(3) permits the importer of record to request that CBP release to them "a representative sample of the merchandise for testing, at the expense of the importer, by a laboratory accredited under paragraph (1)".^viii Although this regulation only allows samples to be sent to either a CBP-run laboratory or a private laboratory accredited by CBP, it does give importers more power to refute allegations of counterfeit marks.

Of the 25% who were aware, nine (9) reported requesting samples; however not a single Member has received a sample from CBP.



Forty-four percent of Members report that they have had a shipment seized by CBP with an average number of seizures as two per Member. Almost half of detained shipments reported in our survey were released within 30 days. According to USC Title 19 Section 133.21, CBP may detain shipments for " a period of up to thirty days from the date on which the merchandise is presented for examination [and] may be extended for up to an additional thirty days for good cause shown by the importer ^ix." However, the survey showed that almost a quarter of reported shipments were reported as being detained for 60 days or longer.



Overall, 58% of Members surveyed feel that they have not seen a change in the number of detainment and/or seizure activity; 34% believe they are seeing increased activity and only 7% believe they are seeing decreased activity.

When asked to rate CBP’s responsiveness and helpfulness when contacted regarding a seized or detained shipment, 11% stated they were unable to speak to anyone at CBP and/or never received a response to their queries. Only 11% of respondents rated CBP’s customer service as good or excellent. Dissatisfaction with the detainment process even prompted one non-US-based Member to report that they now use a carrier whose routes specifically bypass US soil to avoid delays caused by US CBP detainments on in-transit/transfer flights.



When prompted for comments, Members had three main complaints: unresponsiveness on behalf of CBP, mishandling of goods and delays causing a hindrance of free trade. One Member stated, "when we have received parts back that were detained, they were repacked carelessly and damaged." Another Member stated, "they did not re-band the trays they opened and returned the parts out of the trays and damaged." Another Member added, "even boxes that are just inspected, come in a mess. They don't RE VACUUM SEAL MSL devices; they don't reband or retape trays, or repackage reels correctly…numerous times we have received in damaged parts and parts rattling around, loose in the box, damaged of course." With regard to delays, Members commented, "we have markedly decreased imports from ALL sources- it is simply not worth the risk anymore. CBP practices have significantly hurt our bottom line and hindered free trade" , "they are messing up our entire business model" , and "there is a deliberate attempt to keep us in the dark...the whole process is very baffling."

Steps you can take to protect yourself:

• Have the product tested prior to importation and include copies of test documentation in the shipment box.
• Have your supplier include documents showing the traceability of the parts in the shipment box, if available.
• Acknowledge and respond to CBP detention notices.
• Provide CBP with documentation such as test reports, supply chain traceability documentation, supplier risk assessments, etc. in an effort to expedite a resolution.
• If product is detained, request copies of both CBP’s test reports and any information in the shipment’s file, which is generally stored at the port of entry where the product was screened. If CBP does not provide these documents at your request, you may be able to file a Freedom of Information Act request for the information.
• If your product is detained, also request samples for further testing and provide test results to CBP. Beginning October 19, 2015, importers will have more power to request samples under revised regulation 19 C.F.R. § 133.21(d), which allows CBP to give the importers unredacted photographs, images, and samples of the suspect product at any time after it is presented for CBP inspection.

Supplemental Note:

To address concerns addressed by importers and trademark holders, on September 18, 2015, The Department of Homeland Security issued a final rule providing changes to CBP regulations pertaining to suspect counterfeit goods. This final rule becomes effective as of October 19, 2015. Please note that the final rule was issued after the conclusion of the ERAI survey.

For importers, the changes specifically require CBP to release to the importer "unredacted photographs, images, or an unredacted sample of imported merchandise suspected of bearing a counterfeit mark at any time after the merchandise is presented to CBP for examination." ^x Importers will be required to return the samples to CBP at their request or at the end of an inspection. CBP’s intention is that this will assist importers in providing a more thorough response when they are notified that a shipment has been detained. If the importer does not provide a response within the allotted seven-day time period, CBP may then disclose information to the trademark holder.

The changes also allow CBP to reveal information that appears on merchandise and packaging to the IP holder that would otherwise be protected by the Trade Secrets Act. If merchandise is seized, CBP will now also disclose the following to the trademark holder within 30 days from the date of seizure: date of importation; port of entry; merchandise description; quantity; country of origin; name and address of manufacturer; name and address of the exporter and the name and address of the importer.

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By: Anne-Liese Heinichen

When US Customs detains your shipment, not receiving your goods may be the least of your problems. As we heard at the ERAI Executive Conference from Brett W. Johnson of Snell & Wilmer, L.L.P., importing goods into the US is not a right - it’s a privilege. CBP can detain any shipment that is being imported into the United States, and will likely stop any shipment that CBP suspects contains a product with a counterfeit trademark.

Let’s start with the basics. For a shipment to enter the United States, the importer is required to file documentation at the port of entry describing the product(s) and listing a declared shipment value. According to CBP regulations, as a general rule, documentation must be maintained for a period of 5 years from the date of entryⁱ.

Per 19 U.S.C. § 1499ⁱⁱ, CBP has the authority to open and examine imported merchandise. If the CBP officer notices a discrepancy in the documentation or suspects the goods are bearing counterfeit marks, 19 C.F.R. § 133.21ⁱⁱⁱ provides the right for CBP to place the shipment in “detention” for a period of up to 30 days for further inspection. The detained shipment can be sent to a Commodities Specialist Team and/or a Center of Excellence and Expertise for further evaluation by an Import Specialist trained for a particular line of merchandise. According to CBP, “Ports and Center personnel have CBP Laboratory and Scientific Services personnel that can: X-ray Analysis; Decapsulation; Marking permanency; Enhanced Image reviews and collaboration with trademark owners^iv.” During the “detention” period, CBP may provide samples to the original component manufacturer for examination.

If any product is determined by CBP to bear a counterfeit mark, per 19 C.F.R. § 133.21, CBP can, and will, seize the product. At the time of detention, CBP has 5 business days to notify the importer of their action. After this notification, the importer has 7 business days to demonstrate that the product does not contain a counterfeit mark^v.

As the importer, your first response might be to “do nothing” and let CBP act in essence as a de facto testing house by seizing parts. Doing so, however, may send the wrong signals to CBP and can also result in financial penalties in the form of fines. Penalties include, “in accordance with 19 C.F.R § 133.27, CBP, as authorized by 19 U.S.C. § 1526(f), may impose a civil fine relative to seizures effected for merchandise bearing counterfeit marks pursuant to 19 U.S. § 1526(e). For the first seizure of such merchandise, the fine shall be no more than the domestic value the merchandise would have had if it were genuine, based upon the manufacturer’s suggested retail price (MSRP) at the time of seizure. For second and subsequent violations, the fine shall not be more than twice such value^vi.” If your company repeatedly violates these regulations, you and/or your suppliers may be flagged in the CBP system for more frequent screening of imports.

CBP offers importers the following remedies:

• Request administrative forfeiture proceedings as provided under 19 U.S.C. § 1607 and 19 C.F.R § 162.45;
• File a claim and cost bond requesting that CBP immediately refer the case to the United States Attorney for court action;
• File a petition for administrative relief with the Fines, Penalties, and Forfeitures Office at the relevant port of seizure, pursuant to 19 U.S.C. § 1618 and 19 C.F.R. §§ 171.1 and 171.2;
• Tender an offer in compromise (i.e., a settlement payment) through the Fines, Penalties, and Forfeitures Office at the relevant port of seizure, pursuant to 19 U.S.C. § 1617 and 19 C.F.R §§ 161.5 and 171.31; or
• Abandon the property – although you still may have to pay a penalty^vii.

Allowing CBP to forfeit your shipment may seem like the simplest answer, but it can also make you look complicit in the eyes of the law. Repeatedly purchasing from the same overseas supplier whose goods are continuously seized will likely send up a red flag to CBP, and can be construed as an attempt to smuggle counterfeit goods into the country. Responding to detention notices with copies of test reports, evidence of your supplier selection process, copies of order documentation, or other information related to the shipment can demonstrate to CBP that your company is performing due diligence in selecting suppliers and is not negligent or fraudulent.

As we have seen from previous criminal indictments, CBP maintains records of detentions and seizures and does appear to track suppliers’ and importers’ activities. A lack of response from an importer can be construed by CBP as the importer having some knowledge that a shipment may have contained counterfeit goods. Naturally, despite due diligence from the buyer in his/her supplier selection process, a shipment can contain a counterfeit part. It seems that unless an importer asserts his remedies, however, a "negative strike" will be made against the importer as well.

Special thanks to Brett W. Johnson and Sarah Delaney of Snell & Wilmer L.L.P. (www.swlaw.com) for their assistance with this article.

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by Kristal Snider

Actual Scenario

A US Buyer placed a purchase order for integrated circuits with an international supplier. The payment terms were Net-10 (i.e. payment was required no more than (10) ten days after delivery of the goods). A dock date (i.e. deadline by which the goods had to be delivered) was specified on the purchase order contract. While awaiting delivery, the Buyer received written notification from US Customs that the goods were being detained in accordance with 19 CFR § 133.21 - Articles suspected of bearing counterfeit marks (https://www.law.cornell.edu/cfr/text/19/133.21).

Importers are given seven business days from the date of notice to provide evidence to demonstrate the authenticity of the goods. Immediately upon receipt of CBP’s Detention Notification, the Buyer requested the Supplier provide evidence of the goods’ authenticity and supply chain traceability to an authorized source. The requested documentation was not provided, which may have contributed to a prolonged (30-day) detention. Without warning, the goods were subsequently released and delivered but the Buyer was no longer willing to accept the product due to the late delivery. The Supplier is not willing to accept the cancellation and argues the Customs detention was outside of their control and that the Buyer should accept and pay for the goods as agreed.

Is the Supplier entitled to payment or is the Buyer within its right to cancel the order and refuse payment?

In this case, the Buyer has the right to cancel and it is the responsibility of the Seller to arrange for the return of the goods at their expense for the following reasons:

1. The Buyer’s Purchase Order contained a firm delivery deadline (dock date). The goods were not delivered as required.
2. The Supplier’s Invoice did not contain any language regarding late delivery.
3. The Buyer notified the Supplier immediately of the detention and requested the Supplier’s assistance is proving the goods’ authenticity. The Buyer’s requests were ignored. The Supplier’s unresponsiveness may have contributed to the shipment’s delay.

But what if a delivery deadline (dock date) had not been specified in the purchase order contract? Would the Buyer be obligated to accept delivery and pay for the goods?

What if the delivery was late but the Supplier was responsive and willing to work with the Buyer and CBP? Should consideration be given to the Supplier if they did everything in their power to meet the delivery deadline and failure to do so was beyond their control?

I asked ERAI’s attorney, Keith Gregory of Snell & Wilmer LLP, to weigh in on today’s discussion and provide recommendations for the benefit of both importers and exporters.

KS: Keith, after reviewing the above scenarios, what advice can you offer ERAI Members and others that would prevent this type of dispute?

KG: This situation provides an example as to why a Supplier’s terms and conditions should contain what is called a Force Majeure clause which provides that a Supplier’s performance is excused for events beyond its control. If such a clause was contained in the Supplier’s terms and conditions, then the delay in performance would have been excused and it most likely could have properly demanded payment for the goods that it had obtained for its customer. Also, the Supplier should consider adding language to its terms and conditions providing that if delay in its performance is caused by events beyond its control but the Supplier is still able to perform, even if late, then the Supplier should at the very least be entitled to recover its costs for the goods it secured for its customer.

KS: What if the Buyer had wired payment in advance? What recourse does the Buyer have if the Supplier refuses to return their advanced payment?

KG: The rights of the parties are completely dependent upon the language contained in their terms and conditions. If nothing is said in the terms and conditions about a delay in performance or non-performance as a result of events beyond their control but the customer’s purchase order calls for delivery of the goods by a certain date, then the Supplier should be required to reimburse the funds to its customer since its performance was late.

KS: What terms and conditions should a Buyer include in their purchase order contract to protect them from detained and/or seized shipments?

KG: A Buyer should include language in its terms and conditions stating that under no circumstances, if performance is delayed for whatever reason, then payment to the Supplier is excused as the Supplier acknowledges and agrees that time is of the essence for the performance of all of its obligations.

KS: What terms and conditions should a Seller include in their invoice?

KG: As stated above, a Supplier should include a Force Majeure clause as well as language providing for, at the very least, reimbursement of Supplier’s costs for the goods that it acquired for the Buyer’s benefit.

KS: Keith, in closing, please offer readers one final piece of advice.

KG: Even before the possibility of the goods being seized by CBP, a Buyer should take the following precautions:

1. Utilize the services of an escrow, because by doing so, if the goods are seized by CBP and they turn out to be deemed counterfeit or suspect counterfeit, then whatever monies might have been deposited with the escrow, should be returned to it; and
2. If the Buyer chooses not to use an escrow, then no funds should be pre-paid to the Supplier and any funds should be paid only after the goods are received by the Buyer and thoroughly inspected and tested.

If the goods are seized by CBP and the Buyer has not taken the above referenced precautions, the Buyer could still claim that the Supplier is not permitted to retain the funds paid by the Buyer if CBP determines that the Goods are counterfeit or suspect counterfeit, because the Buyer did not receive the benefit of its bargain.

KS: Thank you Keith.

Know and protect your rights.

If you have a question or a comment relating to today’s blog post, please do not hesitate to contact me at ksnider@erai.com.

About Keith

Keith M. Gregor
Snell & Wilmer L.L.P.
350 S. Grand Avenue, Ste. 2600
Los Angeles, CA 90071
Phone: (213) 929-2547
Fax: (213) 929-2525
E-Mail: kgregory@swlaw.com

Keith Gregory practices in the areas of general business matters, corporate, franchise and partnership disputes, and intellectual property and commercial litigation. He is an experienced litigator, with considerable background in intellectual property issues, licensing agreements, trade secret matters and Uniform Commercial Code issues, especially within the electronic components and semi-conductor industries. Keith serves on the SAE International AS6081 Committee, established to develop standards proscribing counterfeit parts avoidance requirements for independent distributors.

By: Timothy Woodcome, Director, NQA, USA (http://www.nqa-usa.com)

ISO 9001:2015 was officially published on September 15, 2015. With this release come several significant changes that may affect organizations who also have adopted AS 5553 or AS 6081 programs.

As many may already know, the requirements around risks and opportunities, or risk-based thinking is considered by many to be one of the most significant changes in ISO 9001:2015. Simply put, risk-based thinking drives the incorporation of both risks and opportunities throughout the organization’s processes. Fortunately, this new requirement of ISO 9001:2015 aligns well with the existing intents of AS 5553 and AS 6081. Activities in Design, Procurement and Testing required by AS 5553/6081 are effectively in place to avoid the risk of counterfeit parts. ISO 9001:2015 requires organizations to 1) identify risks and 2) take on actions on said risks. AS 5553/AS 6081 compliant organizations should assure that risks within their counterfeit avoidance programs have been suitably identified and actioned.

Several other changes within ISO 9001 may pose considerations for the AS 5553 and AS 6081 requirements which were based on these ISO requirements:

• Design – While the verbiage within the ISO 9001 requirements for Design have changed somewhat, the overall intent has not. Generally speaking the requirements have been re-organized a bit, nothing in the Design requirements of ISO 9001:2015 necessitate any specific changes to AS 5553 or AS 6081 systems.
• Purchasing – Technically the term “Purchasing” does not appear in ISO 9001:2015, instead replaced by “Externally Provided Goods and Services”. Under this definition, external providers would include providers of outsourced goods and services. As such, providers of AS 5553 or AS 6081 test and inspection services would fall under these ISO 9001:2015 requirements. Similarly, ‘non-traditional’ suppliers such as divisions of the organization would also be included in the expanded scope of external providers.
• Inspection and Test – While neither AS 5553 nor AS 6081 call out specific calibration requirements, ISO 9001:2015 introduces the concept of “Fit for Purpose” as a pre-cursor or perhaps alternative to full calibration traceability. This may allow some flexibility for AS 5553/AS 6081 systems to employ a fitness for purpose verification of test and inspection equipment.

Finally, a few other changes to ISO 9001 requirements should be noted, including some that may benefit from input coming from an AS 5553/AS 6081 program:

• Context of the Organization – ISO 9001:2015 requires organizations to consider the larger context, or business environment, which include both internal and external issues that can have an effect on the organization. Issues surrounding potential counterfeit electronic parts and the unique business environment in which some organizations may operate are excellent opportunities to incorporate into these new ISO 9001: 2015 requirements.
• Interested Parties – Another new requirement in ISO 9001:2015 is the consideration of relevant interested parties within the organization’s context and strategic direction. In addition to the usual suspects such as customers and employees, AS 5553/As 6081 compliant organizations may have additional interested parties to bring to the table such as industry groups (e.g. ERAI) and regulatory bodies (e.g. GIDEP).
• Leadership – ISO 9001:2015 ups the ante a bit on leadership responsibilities and accountabilities. This aspect should not be lost on AS 5553/AS 6081 organizations in light anything from ACEPMS effectiveness and customer satisfaction to the ever-present litigation potential.

To be certain, there are other changes within ISO 9001:2015 that will affect organizations, but these pointers may give organizations a good place to start when considering interactions with AS 5553/AS 6081. ISO 9001 certified organizations have up to three years to transition to the new standard, but most certification bodies will encourage an early start. The new ISO 9001 requirements are complementary to AS 5553 and AS 6081 programs and should not present any show-stopping issues that would hinder the adoption of ISO 9001:2015.

On Tuesday July 28, 2015 the Department of Justice announced that Jeff Krantz, the former CEO of Harry Krantz LLC, entered a guilty plea to supplying customers with falsely remarked microprocessor chips.

A copy of the DOJ press release and a response from The Harry Krantz Company are included below.

Deirdre M. Daly, United States Attorney for the District of Connecticut, announced that JEFFREY KRANTZ, 50, of New York, N.Y., waived his right to indictment and pleaded guilty today in Hartford federal court to supplying customers with falsely remarked microprocessor chips, many of which were used in U.S. Military and commercial helicopters.

“The distribution of unapproved microprocessor chips and other electronic components for use by the U.S. Military poses a serious threat to the safety of the men and women of our armed services,” said U.S. Attorney Daly. “Individuals who choose profit over public health and safety will be prosecuted. We thank the Defense Criminal Investigative Service and the U.S. Department of Transportation, Office of Inspector General, for their excellent work on this complex investigation.”

“The charge today is demonstrative of the continued dedication of the Defense Criminal Investigative Service (DCIS) and our fellow law enforcement partners to protect the integrity of the Department of Defense’s supply chain,” said Craig W. Rupert, Special Agent in Charge, DCIS, Northeast Field Office. “Distributors who opt for financial gain by introducing inferior products into mission critical equipment create an environment ripe for product failures. Such disregard puts the warfighter at an unnecessary risk, ultimately impacting the mission readiness of our military that the nation depends on. DCIS will continue to engage with prosecutors to address all who attempt to disrupt the reliability of our military’s critical infrastructure.”

“The actions taken today demonstrate the commitment of the Department of Transportation Inspector General's Office to preventing and detecting fraud in the aerospace manufacturing industry,” said Todd Damiani, regional Special Agent-in-Charge of the U.S. Department of Transportation Office of Inspector General. “Working with our law enforcement and prosecutorial colleagues, we will continue our efforts to uncover suspect unapproved parts, prevent their use, and punish those who seek to compromise the integrity of DOT’s safety programs.”

According to court documents and statements made in court, KRANTZ is the CEO and an owner of Harry Krantz, LLC, a New York-based company that bought and sold, among other things, obsolete electronic parts for use by the U.S. Military and commercial buyers. In 2005, KRANTZ entered into a business relationship with Jeffrey Warga, the president and owner of Rhode Island-based Bay Components, LLC, to sell military microprocessor chips to Bay Components, which would in turn sell them to a Connecticut company. KRANTZ knew that the Connecticut company wanted new and original chips, not falsely remarked chips.

Between 2005 and 2008, KRANTZ purchased and sold, and caused to be purchased and sold, over a thousand chips to Bay Components, which, in turn sold them to the Connecticut company. The chips were marked with certain information, including a certain manufacturer’s name and trademark, a date code, and a military part number. In approximately December 2005, the first shipments of about 330 chips that KRANTZ had sold to Bay Components were rejected by the Connecticut company for being the wrong part because the chip contained the wrong die inside. In 2006, KRANTZ replaced those chips with at least some of the replacement chips bearing the date code 9832. Between 2006 and 2008, KRANTZ sold and caused to be sold at least 900 chips with date code 9832 to Bay Components, the majority of which were sold to the Connecticut company. KRANTZ knew that the chips had originated from a parts supplier in China, and there was a high probability that the chips were falsely remarked not the original chips of the certain manufacturer as represented by the markings on the chip. He also avoided engaging in common practices in the industry, including those which Harry Krantz LLC routinely engaged in for other military parts, to avoid confirming that the chips were likely remarked.

The investigation revealed that many of the chips were used in the assembly of U.S. Military and commercial helicopters. The chips have been examined and determined not to be the root cause of any mechanical problems experienced by the helicopters to date.

KRANTZ pleaded guilty to one count of wire fraud, a charge that carries a maximum term of imprisonment of 20 years and a fine of up to approximately $800,000. He is scheduled to be sentenced on December 10, 2015.

KRANTZ has agreed to pay restitution in the amount of $402,650. He also has agreed not to be directly or indirectly involved in the buying or selling of electronic parts, for a period of up to two years, and to give up all control either directly or indirectly over Harry Krantz LLC, and all beneficial and/or financial interest, including ownership interest, in Harry Krantz, LLC and will not reacquire such an interest.

On December 12, 2014, Warga pleaded guilty to one count of conspiracy to commit wire fraud. He awaits sentencing.

This matter is being investigated by the Defense Criminal Investigative Service and the U.S. Department of Transportation, Office of Inspector General. The case is being prosecuted by Assistant U.S. Attorney Felice Duffy and Special Assistant U.S. Attorney Carol Sipperly.

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DOJ Press Release: http://www.justice.gov/usao-ct/pr/new-york-man-admits-supplying-falsely-remarked-computer-chips-used-us-military

Harry Krantz Company Response: http://www.erai.com/customuploads/HKStatement072815Final.pdf

Originally charged in October 2012 along with 10 accomplices, Alexander Fishenko pleaded guilty on September 9, 2015 in New York to conspiring and illegally exporting controlled microelectronics to Russia, conspiring to launder money and obstruction of justice.

In a statement released by Assistant Attorney General Carlin, “Alexander Fishenko illegally acted as an agent of the Russian government in the United States and evaded export laws by sending microelectronics and other technology with military applications to Russia. By purposefully circumventing U.S. law, including the International Emergency Economic Powers Act and the Arms Export Control Act, the defendant jeopardized our national security.”

Fishenko, operating as ARC Electronics, Inc. out of Houston, Texas, was also the part owner and Marketing Manager of APEX System, L.L.C, with a principal place of business in Moscow, Russia. The indictment alleges that Fishenko, “acted as an unregistered agent of the Russian Government by illegally procuring controlled Microelectronics for the Russian government, including Russian military and intelligence agenciesⁱ.” From October 2008 through September 2012, Fishenko and his co-conspirators purchased controlled converters, amplifiers, processors memory chips and programmable gate arrays which were then sold to APEX System and its affiliates, MIG Engineering Corporation, Saransk Electronic Corporation and JSC Arsenal Corporation, for re-sale to Russian government agencies. In order to do so, Fishenko provided falsified end user information to suppliers, false ECCN codes and licensing information to evade ITAR and EAR regulations. ARC even “claimed to be a light traffic manufacturer on its website” while APEX deleted information and certificates from their website revealing their certified supplier relationship with the Russian militaryⁱⁱ.

Fishenko faces up to 20 years in prison for each violation of the International Emergency Economic Powers Act (IEEPA) and the Arms Export Control Act (AECA), money laundering conspiracy, obstruction of justice and up to 10 years for acting as a Russian agent.

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ⁱIndictment - United States of America v. Fishenko et. al.

ⁱⁱIndictment - United States of America v. Fishenko et. al.

Additional Reading

http://www.bloomberg.com/news/articles/2015-09-25/texas-instruments-xilinx-duped-by-russia-export-ring-u-s-says

http://www.cnn.com/2015/09/09/us/russia-military-alexander-fishenko-guilty-plea/index.html

http://www.dispatchtimes.com/alexander-fishenko-pleads-guilty-to-acting-as-agent-of-russian-government/82870/

https://www.fbi.gov/newyork/press-releases/2015/russian-agent-pleads-guilty-to-leading-scheme-to-illegally-export-controlled-technology-to-the-russian-military

http://www.dailymail.co.uk/news/article-2212524/Alexander-Fishenko-Texas-businessman-accused-Russian-agent.html

Department of Justice, Office of Public Affairs

FOR IMMEDIATE RELEASE
Tuesday, October 6, 2015

Source: http://www.justice.gov/opa/pr/massachusetts-man-sentenced-37-months-prison-trafficking-counterfeit-military-goods-0

A Massachusetts man was sentenced today to 37 months in prison for importing thousands of counterfeit integrated circuits (ICs) from China and Hong Kong and reselling them to U.S. customers, including contractors supplying them to the U.S. Navy for use in nuclear submarines.

Assistant Attorney General Leslie R. Caldwell of the Justice Department’s Criminal Division, U.S. Attorney Deirdre M. Daly of the District of Connecticut, Special Agent in Charge Matthew J. Etre of U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (ICE-HSI) in New England, Special Agent in Charge Craig W. Rupert of the Defense Criminal Investigative Service (DCIS) Northeast Field Office and Special Agent in Charge Leo Lamont of the Naval Criminal Investigative Service (NCIS) Northeast Field Office made the announcement.

Peter Picone, 42, of Methuen, Massachusetts, pleaded guilty on June 3, 2014, to conspiracy to traffic in counterfeit military goods. In addition to imposing the prison term, U.S. District Judge Alvin W. Thompson of the District of Connecticut ordered Picone to pay $352,076 in restitution to the 31 companies whose ICs he counterfeited, and to forfeit $70,050 and 35,870 counterfeit ICs.

“Picone risked undermining our national security so that he could turn a profit,” said Assistant Attorney General Caldwell. “He sold counterfeit integrated circuits knowing that the parts were intended for use in nuclear submarines by the U.S. Navy, and that malfunction or failure of the parts could have catastrophic consequences.”

“Supplying counterfeit electronic components to the U.S. Military is a serious crime,” said U.S. Attorney Daly. “Individuals who choose profit over the health and safety of the men and women of our armed services will be prosecuted.”

“Counterfeit electrical components intended for use in U.S. military equipment put our service members in harm’s way, and our national security at great risk,” said Special Agent in Charge Etre. “HSI will continue to aggressively target individuals and companies engaged in this type of criminal act.”

“The sentencing today demonstrates the continued efforts of the Defense Criminal Investigative Service and our fellow law enforcement partners to protect the integrity of the Department of Defense's infrastructure,” said Special Agent in Charge Rupert. “Distributors who opt for financial gain by introducing counterfeit circuitry into the supply chain of mission critical equipment create an environment ripe for potential failures. Such disregard puts the warfighter at an unnecessary risk, ultimately impacting the mission readiness of our military that the nation depends on. DCIS will continue to shield America's investment in Defense by addressing all attempts to disrupt the reliability of our military's equipment and processes.”

“The U.S. Navy submarine force is a critical component of our national security,” said Special Agent in Charge Lamont. “Protecting the Sailors who make up that force and their supply lines are top priorities for NCIS, to ensure our strategic deterrent remains effective.”

In April 2015, Picone founded Tytronix Inc., and served as its president and director until August 2010, when the company was dissolved. In addition, from August 2009 through December 2012, Picone owned and operated Epic International Electronics (Epic) and served as its president and director.

In connection with his guilty plea, Picone admitted that, from February 2007 through April 2012, first through Tytronix and later through Epic, he purchased millions of dollars’ worth of ICs bearing the counterfeit marks of approximately 35 major electronics manufacturers, including Motorola, Xilinx and National Semiconductor, from suppliers in China and Hong Kong. Picone admitted that he resold the counterfeit ICs to customers both in the United States and abroad, including to defense contractors that Picone knew intended to supply the counterfeit ICs to the U.S. Navy for use in nuclear submarines, among other things. Picone further admitted that he knew that malfunction or failure of the ICs likely would cause impairment of combat operations and other significant harm to national security.

On April 24, 2012, federal agents searched Picone’s business and residence, and recovered 12,960 counterfeit ICs. In connection with his guilty plea, Picone admitted that he intended to sell the seized counterfeit ICs to defense contractors doing business with the Navy for use in military applications.

The case was investigated by the Defense Criminal Investigative Service, the NCIS and ICE-HSI. The case is being prosecuted by Senior Counsel Kendra Ervin and Evan Williams of the Criminal Division’s Computer Crime and Intellectual Property Section (CCIPS), Assistant U.S. Attorney Sarala Nagala and Special Assistant U.S. Attorney Carol Sipperly of the District of Connecticut, Trial Attorney Anna Kaminska of the Criminal Division’s Fraud Section and Trial Attorney Kristen Warden of the Criminal Division’s Asset Forfeiture and Money Laundering Section. The CCIPS Cybercrime Lab provided significant assistance.

The enforcement action announced today is related to the many efforts being undertaken by the Department of Justice Task Force on Intellectual Property (IP Task Force). The IP Task Force supports prosecution priorities, promotes innovation through heightened civil enforcement, enhances coordination among federal, state, and local law enforcement partners, and focuses on international enforcement efforts, including reinforcing relationships with key foreign partners and U.S. industry leaders. To learn more about the IP Task Force, go to http://www.justice.gov/dag/iptaskforce.

By: Damir Akhoundov

Reporting Trend

The number of parts reported during Q3 of 2014 (297) was consistent with a slight increase over Q2 of 2014 (279). The second and third quarters of 2015 indicate a steady increased trend in number of parts reported (292 suspect counterfeit and nonconforming parts reported by ERAI in Q1 of 2015).



As previously observed, the majority of the parts reported to ERAI underwent three or fewer tests to detect non-conformance(s). Very few parts reported had been subjected to 4 or more testing methods. These findings are consistent with numbers from previous quarters of both 2015 and 2014.



The majority of components reported consisted of programmable logic ICs, memory ICs and microprocessor IC devices, again consistent with previous reports.



This quarter we examined the listed manufacturers of the parts reported to ERAI. When comparing Q2 and Q3 2015 data to the cumulative data over the last 12 months, a trend is observed whereby a common group of manufacturers was repeatedly observed with Xilinx occupying the top spot.







We also looked at the ratio of newly reported parts to parts that have been previously reported by ERAI and found the trend to show a slight increase from Q1 (17%) to Q2 (24%) and Q3 (27%).



This chart illustrates how many previously reported part numbers are first-time reoccurrences versus those that are repeatedly reported by ERAI. The majority of these repeat offenders are re-reported only 1 or 2 more times. There is however a small percentage of parts that have been reported multiple times in the past.



We continue to accumulate and examine reported parts data in our database. If you have any questions or would like to see a specific report based on a different set of criteria, please do not hesitate to contact me directly at damir@erai.com.

Videos can be accessed in ERAI by clicking on Toolbox, Counterfeit Awareness, Videos.

	Getting Real – Defending Your Supply Chain from Counterfeit Components Why you should read it: Traveler’s provides a concise and informative summary regarding counterfeit components and includes five steps to defend your supply chain. ERAI Insight: An excellent and quick primer on counterfeit electronic parts, this paper discusses different forms of counterfeiting, uses multiple sources to provide an idea as to the scope of the problem and provides basic steps companies can implement to mitigate the risk posed by counterfeit parts. An additional section lists standards that provide industry-recognized guidelines for the detection and mitigation of counterfeit parts including relevant DLA standards. The report concludes that an effective quality control system and supplier auditing system are crucial elements in a company’s risk mitigation plan. http://www.erai.com/CustomUploads/ca/wp/CP-7658_Getting Real Trav 072012 secure.pdf
	Operation Iron Tiger: Exploring Chinese Cyber-Espionage Attacks on United States Defense Contractors Why you should read it: The Trend Micro Cybersafety Solutions Team uncovered an unprecedented cyber espionage attack dubbed “Iron Tiger” aimed specifically at government defense contractors and related companies. ERAI Insight: This comprehensive and technical report describes how suspected Chinese actors have stolen emails, documents and intellectual property from defense and technology companies specifically targeted in the aerospace, energy, intelligence, nuclear engineering, and telecommunications arenas. Through the constant monitoring of technology assets, these actors are believed to have downloaded terabytes of data which could be used to sabotage a company or government. The report concludes by recommending companies employ multilayer protection and custom defense solutions for sensitive data. All organizations should assume that their network has already been compromised and should not rely solely on conventional anti-malware solutions. http://www.erai.com/CustomUploads/ca/wp/2015_12_wp_operation_iron_tiger.pdf

In the last few years there has been a flurry of legislative activity relative to counterfeit electronic parts in the DoD supply chain. In 2007 concerns were raised by the U.S. Department of the Navy, Naval Air Systems Command (NAVAIR) who asked the Bureau of Industry and Security’s (BIS) Office of Technology Evaluation (OTE) to conduct a defense industrial base assessment of counterfeit electronics. NAVAIR had reason to suspect an increasing number of counterfeit and defective electronics were entering the DoD supply chain, which would adversely impact weapon system reliability. NAVAIR’s suspicions were confirmed. The BIS study titled “Defense Industrial Base Assessment: Counterfeit Electronics” was published in January 2010. The report’s findings prompted a swift response from Senators Carl Levin and John McCain in March 2011 when they launched a deeper investigation into counterfeit electronics part activity via the Senate Armed Service Committee (SASC). In November 2011, the SASC held a hearing with DoD contractors, industry associations and others in Washington D.C. to explore the problem of counterfeit electronic parts infiltrating critical defense systems and the risk those parts pose to such systems.

Shortly thereafter, on November 17, 2011, an amendment was made to Section 818 of the Fiscal Year 2012 National Defense Authorization Act (NDAA FY 12). At its core, NDAA FY 12 seeks to stop the importation of counterfeit electronic parts into the United States, address weaknesses in the defense supply chain and promote the adoption of aggressive counterfeit avoidance practices by the DoD and the defense industry.

On September 7, 2012 a Defense Federal Acquisition Regulation Supplement (DFARS) case addressing portions NDAA FY 12 was opened DFARS Case 2012-D055: Detection and Avoidance of Counterfeit Electronic Parts).

On May 15, 2013 DoD published its first set of proposed regulations that would impose specific obligations on defense contractors representing a partial implementation of the counterfeit electronic parts prevention requirements described in NDAA FY 12.

After obtaining comments from industry experts, interested parties, and the private sector, a revised draft notice was published on September 21, 2015 in the Federal Register. DFARS Case 2012-D055: Detection and Avoidance of Counterfeit Electronic Parts

ERAI encourages its Members, including those in the commercial sectors, to follow closely the government’s rule making activity as these regulations may have far-reaching implications for the supply chain. Small businesses, lower tiered suppliers and commercial contractors are now within the government’s widely cast net. The earlier proposed regulations only applied when the contractor was subject to the Cost Accounting Standards (“CAS”). DoD wants to change that which means these regulations will flow deeper into the supply chain.

Once again DOD is seeking public comment and is encouraging input from “all tiers” including but not limited to subcontractors, small businesses, and suppliers of commercial-off-the-shelf (COTS) items. DOD estimates that this rule change may affect more than 30,000 small businesses alone.  

Comments on the proposed rule are due by November 21, 2015.

Resources:

For regular updates on the FAR/DFAR and much more we recommend you follow Henry Livingston’s Counterfeit Parts Blog.

The State of Anti-Counterfeiting in the Electronics Supply Chain
http://vericalconnect.electronicspurchasingstrategies.com/2015/09/08/the-state-of-anti-counterfeiting-in-the-electronics-supply-chain/

A Customs Checklist: Must-Knows for Importers & Exporters
http://www.ebnonline.com/author.asp?doc_id=278560§ion_id=3813

Purchasing and the New ISO9001 Revision
http://globalpurchasing.com/blog/purchasing-and-new-iso9001-revision?NL=ESB-01&Issue=ESB-01_20150902_ESB-01_408&sfvc4enews=42&cl=right_4_1&utm_rid=CPG05000002121502&utm_campaign=3283&utm_medium=email&elq2=6ad537fc63344905a017066c10175227

Supply chain protection is imperative
http://evertiq.com/design/37501#.VeR7GH2HyEg.linkedin

Industry: Pentagon Moved Too Fast on Cyber Rules
http://www.defenseone.com/news/2015/08/industry-pentagon-moved-fast-cyber-rules/119597/

Maine delegates decry sale of defense servers to China
http://bangordailynews.com/2015/08/10/politics/maine-delegates-decry-sale-of-defense-servers-to-china/

Supply Chain Risk Mitigation Application for the Grey Market
http://iconnect007.uberflip.com/i/550232-smt-aug2015/94

With Micron a Chinese Takeover Target, is Trade War Brewing?
http://www.ebnonline.com/author.asp?section_id=3788&doc_id=278318

Buyer Beware Is a Bad Sourcing Strategy
http://www.sdcexec.com/article/12096483/buyer-beware-is-a-bad-sourcing-strategy

History of Pre-Infected Electronics Will Block China’s Bid to Purchase Micron Technology
http://www.theepochtimes.com/n3/1463955-history-of-pre-infected-electronics-will-block-chinas-bid-to-purchase-micron-technology/

US would just say no to China on Micron bid
http://www.cnbc.com/2015/07/14/us-would-just-say-no-to-china-on-micron-bid-.html