The recently enacted National Defense Authorization Act of 2012 (NDAA) is taking aim at defense contractors who fail to screen their equipment for counterfeit parts, creating the potential for civil and criminal liability for contractors who don’t detect or avoid counterfeit electronic parts in military equipment. These provisions come on the heels of a Senate report that found counterfeit parts –mostly from China— are finding their way into military equipment ranging from helicopter night vision systems to Air Force cockpit displays.
According to the report, the Department of Defense (DoD) is particularly vulnerable because:
many defense systems rely on military and commercial-grade “obsolete parts,” i.e., electronic parts that are no longer produced by the original manufacturer (e.g., Intel, Micron, Xilinx) or sold by their authorized distributors. That reliance is based, in part, on the long life cycles of defense systems. An electronic part may be manufactured for two years, while a defense system it is used on may be in service for more than two decades. Compounding the problem, from a manufacturer’s perspective, is that DOD demand for parts is often not strong enough to warrant a part’s continued production. The director of the DOD’s Microelectronics Activity Unit put it this way: “The defense community is critically reliant on a technology that obsoletes itself every 18 months, is made in unsecure locations and over which we have absolutely no market share influence.”
The NDAA, which was passed earlier this year, shifts the burden to contractors to screen their equipment for counterfeit parts. This regulatory approach is similar to the burden shifting approach being debated for cyber security legislation. However, unlike the proposed cyber security legislation, the provisions of the NDAA include civil and criminal penalties with the possibility of life in prison for those whose recklessness with regard to counterfeit parts results in death.
The NDAA addresses counterfeit parts in Section 818, specifically requiring DoD “conduct an assessment of Department of Defense acquisition policies and systems for the detection and avoidance of counterfeit electronic parts.” Following that assessment, DoD must:
- establish Department wide definitions for the terms “counterfeit electronic part” and “suspect counterfeit electronic part”
- implement a risk-based approach to minimize the impact of counterfeit electronic parts
- establish a process for analyzing, assessing, and acting on reports of counterfeit electronic parts and suspect counterfeit electronic parts
The legislation’s provisions require DoD to promulgate regulations that:
- make contractors “responsible for detecting and avoiding the use or inclusion of counterfeit electronic parts or suspect counterfeit electronic parts in such products and for any rework or corrective action that may be required to remedy the use or inclusion of such parts”
- prohibit contractors from passing those costs off to DoD as allowable costs under their contracts
- creates a safe harbor provision for contractors to avoid civil liability if they take reasonable efforts to avoid counterfeit parts or if they become aware of counterfeit parts report such parts to DoD within 60 days of detection
However, the legislation goes beyond regulations to amend 18 USC 2320 making it a crime, punishable by a fine of up to $2,000,000 for individuals and $5,000,000 for companies involved in their first offense, and up to life in prison for an individual whose conduct in violation of the statute results in a death. Those are serious consequences not to be ignored by any contractor.
The heavy financial penalties associated with these provisions are likely to place a squeeze on smaller defense contractors who are less capable of quickly responding to this legal and regulatory burden. This is especially the case for contractors who use multiple suppliers in their supply chain or contractors who are unable to supervise the procedures of their suppliers (two scenarios highlighted by the Senate report as causes of counterfeit parts). The costs for contractors now include testing and inspecting equipment to prevent violations of these new regulations, the cost of replacing counterfeit equipment when detected, and the ever present threat of civil and criminal penalties for violations. In light of these difficult and complex compliance obligations, contractors who have not sought the advice of legal counsel to reevaluate their manufacturing and inspection procedures are putting their company, its personnel and their investors at risk.
Greg McNeal is a professor and specialist in law and public policy. You can follow him on Twitter @GregoryMcNeal.
Article source: http://www.forbes.com/sites/gregorymcneal/2012/02/14/ndaa-may-put-contractors-in-prison-for-counterfeit-parts/?feed=rss_home
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