The proliferation of counterfeit electronic parts into the manufacturing supply chain costs the U.S. government and its contractors billions each year.

But the problem is not just limited to those who supply government agencies. Recent reports show consumer and industrial businesses are losing approximately $250 billion each year because of counterfeit components.

One report notes the automotive industry alone lost $3 billion in sales, while another shows the semiconductor industry takes a $75 billion annual hit.

In addition, these counterfeit parts frequently create the potential for product malfunction, leading to personal injury and even death — a situation that has created unnecessary danger for military and everyday consumers, plus immense new levels of liability and risk for manufacturers in a wide range of industries.

But there are a number of proactive steps companies in various industries may take to protect themselves from the escalating dangers posed by counterfeit electronic parts. The U.S. government and the industrial community have taken measures to combat this growing problem, and understanding the applicable regulations and industry-certified best practices is the first step to avoiding risk.

Counterfeit Protection in the Defense Sector

On November 8, 2011, the United States Committee on Armed Services held a hearing regarding an investigation of counterfeit electronic parts in the defense supply chain. The investigation had revealed alarming facts: Materials used to make counterfeit electronic parts, known as e-waste, are shipped from the United States and other countries.

The e-waste is sent to cities like Shantou, China, where it is disassembled by hand, washed in dirty river water, and dried on the city sidewalk. Parts are then sanded down to remove the existing part number or other markings that indicate its quality or performance. Subsequently, false markings are placed on the parts that lead the average person to believe they are new or high-quality parts. One industry leader testifying at this hearing called the problem a “ticking time bomb.”

Less than two months later, on December 31, President Barack Obama signed The National Defense Authorization Act for Fiscal Year 2012 into law. Section 818 of this act requires all DOD contractors and subcontractors to obtain electronic parts from original equipment manufacturers (OEMs), their authorized dealers, or from “trusted suppliers” that obtain parts exclusively from OEMs or their authorized dealers.

Section 818 covers all contractors who supply electronic parts or products that include electronic parts. DOD contractors are required, whenever possible, to obtain electronic parts that are in production or currently available in stock from the original manufacturers of the parts or their authorized dealers. In addition, electronic parts that are not in production or are out of stock must be purchased from trusted suppliers certified by an accredited certification body.

Under Section 818, contractors who know or “have reason to suspect” that they have received counterfeit electronic parts are required within 60 days to report to the appropriate government authority, the Government Industry Data Exchange Program (GIDEP). Being proactive and complying with this reporting requirement can significantly help minimize potential liability, because Section 818 bars lawsuits by the supplier of a part reported as counterfeit in situations where a reporting contractor makes a “reasonable effort” to determine whether the item contained counterfeit electronic parts.

And, surely, no contractor wants to be hit with Section 818’s strict discipline for distributing counterfeit parts. The legislation imposes monetary penalties up to $15 million — and even imprisonment — for individuals who intentionally or recklessly facilitate the availability of counterfeit goods in the supply chain.