Why do most contractors avoid reporting counterfeit part findings?

In the Spring of 2008, the Aerospace Industries Association (AIA) Counterfeit Parts IPT completed a survey of U.S. Government and industry organizations to identify the primary benefits from sharing information on counterfeit components, and to identify obstacles and encumbrances to information sharing. Survey results showed that defense and aerospace industries and the Government benefit from sharing information on counterfeit components. The predominant benefits identified were:

(1) Avoiding and intercepting counterfeits discovered by others,

(2) Identifying suppliers associated with sales of counterfeit electronic components, and

(3) Learning about ways those organizations reporting suspect counterfeit electronic components discovered the problem.

The recent Senate Armed Services Committee (SASC) investigation revealed a benefit consistent with the early AIA study…

The failure of a company to report a counterfeit part finding via the Government-Industry Data Exchange Program (GIDEP) increases the risk that other companies will inadvertently buy counterfeit parts (see the transcript of the SASC Hearing Testimony, page 66).

If the sharing of information aids both the US Government and the Aerospace & Defense Industry in combatting the counterfeit parts threat, why do most contractors avoid reporting counterfeit part findings?

According to many contractors, the primary obstacle to reporting has been the fear of third party law suits; Independent Distributors and brokers suing contractors for associating them with the sale of counterfeit parts. To test this claim, the Government-Industry Data Exchange Program (GIDEP) conducted an experiment in late 2010 to see whether or not contractors fearful of being sued would report their counterfeit part findings if GIDEP would remove the requirement to name the supplier(s) involved in the sale of the suspect counterfeit parts. This experiment, however, did not yield an increase in reporting by contractors (see SASC Report page 19).

The FY2012 National Defense Authorization Act has eliminated the alleged barrier to reporting; a contractor is no longer subject to civil liability because it reports a suspect counterfeit part finding [HR1540 Sec 818(c)(5)]. This change, however, has yet to stimulate the increase in reporting we have been lead to expect. A close study of GIDEP reports and case studies described in the SASC report indicates that the recent increase in reporting seems to have been stimulated by the SASC investigation and not by the shield against litigious suppliers provided by Congress.

Now that the FY2012 NDAA has removed what contractors have claimed to be the major barrier, why do most contractors continue to avoid reporting counterfeit part findings?

Many contractors have established business processes to review reports published through GIDEP to determine whether or not the incident may impact them. Many contractors, however, have not established business processes necessary to share its own discoveries with others through GIDEP. Section 818 of the FY2012 NDAA has established an expectation for DoD and its contractors to report counterfeit part findings through GIDEP. Congress requires DoD to “implement a program to enhance contractors detection and avoidance of counterfeit electronic parts”; one of the elements of this program is the reporting of counterfeit and suspect counterfeit electronic parts. Though many contractors may not voluntarily report counterfeit and suspect counterfeit electronic parts today, we can expect this to change once DoD begins to implement Section 818 of the FY2012 NDAA through policy and regulation changes. An example of this is the 16 March DoD memorandum on “Overarching DoD Counterfeit Prevention Guidance”.

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One thought on “Why do most contractors avoid reporting counterfeit part findings?

  1. Anonymous says:

    I am struggling with how beneficial is it to report every time someone buys from an unauthorized source and gets a counterfeit. Now a GIDEP on buying a counterfeit from the manufacturer or their authorized distributors would be meaningful. Reviewing tons of GIDEPS about purchases from authorized sources consumes valuable time and money with little benefit in my opinion.

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