Opening Statement at SASC Hearing on Counterfeit Electronic Parts in DOD Supply Chain

Tuesday, November 8, 2011

See hearing exhibits at end of statement.

Today’s hearing is a product of the Armed Services Committee’s ongoing investigation into counterfeit electronic parts in the Department of Defense’s (DOD) supply chain.  We will probably hold at least one additional hearing to discuss what DOD is doing to keep counterfeit electronic parts out of defense systems.  We have three panels of witnesses today so I expect the hearing to continue into the afternoon, and I also expect that we will break for lunch. I want to thank Sen. McCain for his efforts in this investigation, and to recognize the hard work of our investigative staff.

The systems we rely on for national security and the protection of our military men and women depend on the performance and reliability of small, highly sophisticated electronic components.  Our fighter pilots rely on night vision systems, enabled by transistors the size of paper clips, to identify targets.  Our troops depend on radios and GPS devices, and the microelectronics that make them work, to stay in contact with their units and get advance warning of threats that may be just around the next corner.  The failure of a single electronic part can leave a soldier, sailor, airman, or Marine vulnerable at the worst possible time.  A flood of counterfeit electronic parts has made it a lot harder to have confidence that won’t happen.

In some industries, the term “counterfeit” suggests an unauthorized fake, a knock-off of an original product.  The definition of counterfeit, as it relates to electronic parts, which has been endorsed by the Department of Defense and defense contractors alike includes both fakes and previously used parts that are made to look new, and are sold as new.  Previously used parts sold as new parts present a significant risk because, while they may pass initial screening, they are far more likely than new parts to exhibit reliability and performance problems later on when deployed in the field.

In January 2010, the Department of Commerce Bureau of Industry and Security published a report entitled “Defense Industrial Base Assessment: Counterfeit Electronics.”  The report was the result of a survey of 387 companies and organizations in the Department of Defense’s supply chain, including electronic parts manufacturers, distributors, assemblers, defense contractors, and the Department itself.  The report highlighted “an “increasing number of counterfeit incidents being detected, rising from 3,868 incidents in 2005 to 9,356 incidents in 2008.”  The Commerce survey asked respondents to identify particular countries suspected or confirmed to be sources of counterfeits.  China was identified nearly five times more often than any other country. 

In March of this year, we announced an Armed Services Committee investigation into counterfeit parts in the DOD supply chain.  During the course of the Committee’s investigation, virtually every one of the dozens of people our investigators have spoken with – from defense contractors to semiconductor manufacturers to electronic component brokers – has pointed to China, specifically the city of Shenzhen in Guangdong Province, as the primary source of counterfeit electronic parts. 

U.S. government reports also identify Shenzhen as the epicenter of the global trade in counterfeit electronic parts.  In April 2011 the United States Trade Representative (USTR) issued its “Notorious Markets List,” which identified the worst of the worst markets that sell counterfeit goods.  The report stated that Shenzhen and Guangzhou, in Guangdong province, are “reportedly home to dozens of markets offering counterfeit or pirated goods.”  Also in April USTR issued its “Special 301” report reviewing the global state of intellectual property rights.  In it, USTR said that China’s manufacturing “extends to all phases of the production and global distribution of counterfeit goods.”  USTR stated point blank: “Many of these activities can be traced back to Guangdong Province.” 

While this hearing is focused mainly on the national security implications of counterfeit electronic parts, the rampant theft of U.S. intellectual property by Chinese counterfeiters also severely impacts our economic security.  According to the Semiconductor Industry Association (SIA), U.S. semiconductor manufacturers employ nearly 200,000 American workers.  Counterfeiting puts those jobs at risk and robs us of American jobs yet to be created.  SIA estimates that counterfeiting costs U.S. semiconductor manufacturers $7.5 billion a year in lost revenue and costs U.S. workers nearly 11,000 jobs.  But the Chinese government is obviously unwilling to take the necessary steps to shut the counterfeiters down.  Raytheon’s Vice President of Supply Chain Operations Vivek Kamath, one of our witnesses today, told us about his experience in China stating: “the amazing thing about [counterfeiting] is it’s very open.  There is nothing discreet about it.  And it’s just almost as if it’s just accepted as another business model in the country.” 

This spring, we attempted to send Armed Services Committee staff to mainland China to get a first-hand look at the counterfeiting industry. I wrote the Chinese Ambassador to the United States, informing him that that the trip was part of the Committee’s official duties.   Shortly after my letter, an official at the Chinese Embassy told Committee staff that the issues we were investigating were “sensitive” and that if the results of the investigation were not positive, it could be “damaging” to the U.S.-China relationship.   That’s exactly backwards. What is damaging to U.S.-China relations is China’s refusal to act against brazen counterfeiting that is openly carried out in that country.

In June, we sent our staff to Hong Kong, where a visa is not required, and the staff again sought entry into mainland China.  But appeals on our behalf, through our most senior diplomats in Hong Kong and Beijing, fell on deaf ears and our staff was refused entry.  That refusal only highlighted the Chinese government’s total lack of transparency and unwillingness to act to stem the tide of dangerous counterfeits produced in China that is swamping the market.

In the course of the investigation, the Committee staff scoured more than 100,000 pages of documents, including purchase orders and invoices, test reports and failure analyses identifying counterfeit parts.  Staff met with and interviewed dozens of individuals, from defense officials, to manufacturers of electronic parts, to defense contractors and subcontractors, independent testing laboratories, and electronic parts distributors.   

Looking at just a slice of the defense contracting universe, committee staff asked a number of large defense contractors and some of their testing companies to identify cases in which they had found suspected counterfeit parts over a two-year period. They reported 1,800 cases, covering a total of 1 million individual parts. Of those 1,800 or so cases, we selected about 100 to track backwards through the supply chain.  In some instances, the trail was a short one.  In others, we chased parts across the country and around the world, as they changed hands from one parts broker to another.  So where did those trails ultimately lead?  The overwhelming majority – more than 70 percent – led to China.  With few exceptions, the rest came from known resale points for parts from China, in Canada and the U.K. 

Counterfeit parts from China all too often end up in critical defense systems in the United States.  To cite a few examples, the investigation uncovered suspected counterfeit parts on thermal weapons sights delivered to the Army, on mission computers for the Missile Defense Agency’s THAAD (Terminal High Altitude Area Defense) missile, and on military airplanes including the C-17, C-130J, C-27J, and P-8A as well as on AH-64, SH-60B, and CH-46 helicopters.  Today’s hearing will explore three cases where suspect counterfeit parts from China were installed on military systems manufactured by Raytheon, L-3 Communications, and Boeing, respectively.  They and other contractors have been cooperative with the Committee’s investigation.  They recognize the threat that counterfeit electronic parts pose to national security and to their businesses.  While they need to do a better job knowing where their parts come from and notifying the military when there’s a problem, the source of the counterfeit problem is China.  China must shut down the counterfeiters that operate with impunity in their country.  If China will not act promptly, then we should treat all electronic parts from China as suspected counterfeits. That would mean requiring inspections at our ports of all shipments of Chinese electronic parts to ensure that they are legitimate. The costs of these inspections would be borne by shippers, as is the case with other types of border inspections.

Before I talk about those three cases, I want to describe how these counterfeits are made and why they are so dangerous.

From the Scrap Heap to the Internet – the Making and Selling of Counterfeits

Much of the material used to make counterfeit electronic parts is electronic waste (e-waste) shipped from the U.S. and the rest of the world to China.  In its January 2010 study, the Department of Commerce’s said that e-waste has “turned into an abundance of discrete electronic components and microcircuits for counterfeit parts.” 

In fact, e-waste is shipped into Chinese cities like Shantou in Guangdong Province where it is disassembled by hand.  Tom Sharpe, who is one of our witnesses today, visited Shantou’s counterfeiting district, where he saw first-hand electronic debris stacked in huge mounds and piles of components that had been burned off of old circuit boards.  He witnessed electronic parts being washed in a dirty river and dried on city sidewalks in Shantou. 

Once they have been washed, parts may be sanded down to remove the existing part number, the date code (which tells you when a part was made), and other marks on the part that indicate its quality or performance.  In a process known as “black topping,” the tops of the parts may be recoated to hide sanding marks.  State of the art printing equipment is used to put false markings on the parts, showing them to be new, of higher quality, faster speed, or able to withstand more extreme temperatures than those for which they were originally manufactured.  When the process is complete, the parts are made to look brand new to the naked eye. 

Once they have been through the counterfeiting process, the parts are packaged and shipped to Shenzhen or other cities to be sold in the markets or on the Internet.

While the counterfeiting process for electronic parts is shocking to us, it is no secret in China.  Mr. Kamath of Raytheon described “whole factories… set up [in China] just for counterfeiting” and counterfeit electronic parts are sold openly from shops in Chinese markets.  But the counterfeiters’ target is much bigger than a Shenzhen bazaar.  The internet puts the entire world at their doorstep.  In fact, there are dozens of internet sites that specialize in the trade of electronic parts, with a large number of China-based distributors posting parts for sale.  While some of them may be legitimate businesses, many others are nothing more than fronts for counterfeiters.  This morning we will hear from Mr. Richard Hillman, the Managing Director, Forensic Audits and Investigative Service at the U.S. Government Accountability Office (GAO) about some of those front companies and just how pervasive the presence of China-based counterfeiters is online.   Mr. Hillman will share the preliminary results of the investigative work that we asked him to undertake.  GAO’s stunning results not only point directly to China as the source of the counterfeiting problem, but show just how far the counterfeiters are willing to go for money. GAO investigators went out to buy electronic parts that go into defense systems, and found that not only would companies supply counterfeit parts when GAO sought legitimate parts. Suppliers also sold GAO investigators parts with nonexistent part numbers. And all of those sellers are in China.

I would now like to move to three cases where counterfeit electronic parts that the Committee traced back to Chinese suppliers made their way into defense systems sold to the U.S. military.

Suspect Counterfeit Parts in the U.S. Navy SH-60B Helicopter

I am now going to run through a presentation of how one of these counterfeit parts made its way through the defense supply chain.  The SH-60B is a Navy helicopter that conducts anti-submarine and anti-surface warfare, surveillance and targeting support.  The SH-60B deploys on Navy cruisers, destroyers, and frigates and has a Forward Looking InfraRed or “FLIR” System which provides night vision capability.  The FLIR also contains a laser used for targeting the SH-60B’s hellfire missiles. 

On September 8, 2011, the Raytheon Company sent a letter to the U.S. Naval Supply Systems Command alerting the Navy that electronic parts suspected to be counterfeit had been installed on three Electromagnetic Interference Filters (EIF) installed on FLIR units delivered by Raytheon.  Raytheon only became aware of the suspect counterfeit after being alerted by the Committee’s investigation.  According to the Navy, the failure of an EIF could cause the FLIR to fail.  The Navy also told the Committee that an SH-60B could not conduct surface warfare missions involving hellfire missiles without a reliable, functioning FLIR.  A FLIR failure would also compromise the pilot’s ability to avoid hazards and identify targets at night, limiting the SH-60Bs ability to be deployed in night missions.  One of the FLIRs was sent to the USS Gridley in the Pacific Fleet.  

So, how did a suspect counterfeit part end up in a night vision and targeting system intended for a Navy helicopter in the Pacific Fleet? 

The Electromagnetic Interference Filters were sold to Raytheon by a company called Texas Spectrum Electronics, a defense subcontractor in Texas.    Those three FLIRs contained transistors that Texas Spectrum bought in July 2010 from a company called Technology Conservation Group or TCG.   

TCG, it turns out, is both an electronics recycling company and an electronics distributor.  The transistors at issue were mixed in among 72 pounds of miscellaneous excess inventory that a Massachusetts company called Thomson Broadcast sent to TCG as “E-scrap.”  According to TCG, the parts arrived in what appeared to be the original packaging so TCG sold the transistors as “new” and unused parts.  Incidentally, after TCG sold the parts to Texas Spectrum, it tried to sell other parts from the same lot to two other customers.  Both prospective customers rejected the parts because of concerns about their condition.  An independent testing laboratory hired by one of the two companies identified the parts as suspect counterfeits and notified TCG.  TCG did not share that information with Texas Spectrum.  In an October 25, 2011 letter, Fairchild Semiconductor, the manufacturer identified on the parts, informed the Committee that it believes the TCG parts are “not Fairchild Semiconductor devices.”

Where did Thompson Broadcasting get the parts?  They bought them in April 2008 from a company called E-Warehouse in California.  And E-Warehouse?  They bought them from Pivotal Electronics, an electronics distributor in the UK.  We asked Pivotal where they bought them.  Their answer?  Huajie Electronics Ltd. in Shenzhen, China. 

Suspect Counterfeit Parts in the U.S. Air Force C-27J

The C-27J is military aircraft used for tactical transport and to support combat operations.  The U.S. Air Force has ordered 38 C-27Js, 11 of which have been delivered.  Two C27Js are currently deployed in Afghanistan.  The C-27J is equipped with display units that provide the pilot with information on the health of the airplane, including engine status, fuel use, location, and warning messages. The display units are manufactured by L-3 Display Systems, a division of L-3 Communications, for Alenia Aeronautica.  Alenia is a subcontractor to L-3 Integrated Systems, another division of L-3 Communications and the military’s prime contractor for the C-27J.

In November 2010, L-3 Display Systems detected that their failure rate for a chip installed on display units had more than tripled, from 8.5% to 27%.  L-3 Display Systems also noticed that the same part, which was failing in house, had also failed on a fielded military airplane in June 2010.  The company sent the chip that failed on the plane and other samples from the lot for testing.  That testing identified “multiple abnormalities” with the chips, including a blacktopped surface.   The tester concluded they were “suspect counterfeit.”  Unfortunately, L-3 Display Systems had already installed parts from the suspect lot on more than 500 of its display units, including those intended for the C-27J, as well as the Air Force’s C-130J and C-17 aircraft, and the CH-46, a helicopter used by the Marine Corps for assault support.  Failure of the memory chip could cause a display unit to show a degraded image, lose data, or even go blank altogether – again, these displays provide the pilot with warning messages and other information on the health of the airplane.

L-3 Display Systems had learned of the counterfeit chip in November 2010 and informed their customer, Alenia, shortly thereafter.  Despite being a division of the same company as L-3 Display Systems, which identified the counterfeit part, L-3 Integrated Systems, the prime contractor to the Air Force, told the Committee that it only learned of the problem as a result of the Committee’s investigation.  As a result, L-3 Integrated Systems did not notify the Air Force that the C-27Js were affected by the part until September 19, 2011 – nearly a year after it had been discovered and just one day before Committee staff was scheduled to meet with the Air Force’s C-27J program office on the issue. 

We will ask Ralph DeNino, L-3’s Vice President for Corporate Procurement, who is a witness on our third panel, about breakdowns that led to the company’s failure to provide timely notification to the government. 

Where did the counterfeit chips come from?  The supply chain is somewhat shorter in this case, but it started off the same place.  L-3 Display Systems bought the parts from Global IC Trading Group, an electronics distributor in California, which in turn, bought the chips from Hong Dark Electronic Trade, a company in Shenzhen, China.  

It turns out that the chips destined for the C27J, C130J and other aircraft was not the only lot of counterfeit parts that divisions of L-3 received from Hong Dark through Global IC.  Hong Dark was also the source of another lot of counterfeit parts discovered by L-3 Display Systems in October 2009. 

Moreover, a year ago, Global IC notified L-3 Display Systems that they had also supplied the company with a third lot of parts from Hong Dark, some of which were installed on display units intended for EA-6B military aircraft.  L-3 submitted them for testing only a few weeks ago, after Committee staff asked about them.  The testing has since identified them as “suspect counterfeit.”  

But that’s not even the end of it.  In total, the Committee discovered that Hong Dark made nearly 30 shipments in 2009 and 2010, totaling more than 28,000 electronic parts, to Global IC Trading Group, that were then sold divisions within L-3.  At least 14,000 of those parts have already been identified as suspect counterfeit.  Neither the Committee nor L-3 knows whether the remaining 14,000 parts are authentic and L-3 has not yet identified what military systems they might be in. 

Suspect Counterfeit Parts in the Navy P-8A Poseidon

The P-8A Poseidon is a Boeing 737 airplane modified to incorporate antisubmarine and anti-surface warfare capabilities.  Three P-8A flight test aircraft currently are in test at the Naval Air Station at Patuxent River, Maryland and the Navy intends to purchase 108 of the aircraft from Boeing.

On August 17, 2011, Boeing sent a message marked “Priority:  Critical” to the P-8 program office.  The message said that an ice detection module installed on one of the P-8 test aircraft contained a “reworked part that should not have been put on the airplane originally and should be replaced immediately.”  The part at issue is critical to the functioning of the P-8’s ice detection module. 

Boeing first identified a problem with the part in December 2009 when an ice detection module failed on the company’s flight line.  In that case, the part had literally fallen out of its socket and was found rattling around inside the module on the airplane. 

BAE Systems, which manufactures the ice detection system for Boeing, investigated the failure.  They discovered that the part that had fallen out of the socket, and dozens of other parts from the same lot, were not new parts at all.  Rather, they were previously used parts counterfeited to make them appear new.  On closer inspection, BAE discovered that the parts had likely been sanded down and remarked.  The leads on many parts were bent and markings on the parts were inconsistent.  Parts that should have been virtually identical to one another were actually found to be of different sizes.  In January 2010, BAE notified Boeing of their findings, calling the counterfeit parts “unacceptable for use” and recommending they be replaced.  BAE engineers believed their use created a long-term reliability risk.

It took Boeing more than a year and a half to notify the Navy or its other customers about the suspect counterfeit parts.  Those notifications only came after the Committee asked about them.  Why it took so long for Boeing to notify its customers is something we will discuss with Mr. Dabundo, the Program Manager for Boeing Defense and Security Systems’ P-8 Program office, who is a witness on our third panel.  The Navy recently wrote Boeing that “The Government’s position is that any ‘counterfeit’ material received … is nonconforming material and shall be immediately reported.”

So where did the counterfeit parts come from?  Over a period of several months from the fall of 2008 until the spring of 2009, BAE purchased around 300 of the parts from a company called Tandex Test Labs in California.  BAE hired Tandex to source the parts and screen them for signs of counterfeiting.  Tandex, it turns out, only screened the first 50.  The company sent the remainder – around 250 parts – to BAE without inspecting them at all. 

Tandex bought the parts from a company called Abacus Technologies in Florida.  Abacus, in turn, purchased the parts from an affiliate of A Access Electronics in Shenzhen, China and wired payment for the parts to A Access’s account at the Chartered Bank Shenzhen, China. 

Counterfeit Parts are Costing DOD and the Defense Industry Millions

The three cases I just described are a drop in the bucket.  There is a flood of counterfeits and it is putting our military men and women at risk and costing us a fortune. 

To cite just one example, in September 2010, the Missile Defense Agency learned that mission computers for THAAD missiles contained suspect counterfeit memory devices.  According to MDA, if the devices had failed, the THAAD missile itself would likely have failed.  The memory devices were purchased by Honeywell, a MDA subcontractor, from an independent distributor.  Honeywell installed them on mission computers which it sold to Lockheed Martin.  Lockheed, in turn, supplied them to MDA.  To their credit, Honeywell and Lockheed notified MDA when they figured out the parts were suspect and put together a plan to fix the problem.  But the cost of that fix was nearly $2.7 million.  And who do you think paid for it?  The American taxpayer.  That’s an area where we need reform.  There is no reason on earth that the replacement of a counterfeit part should be paid for by American taxpayers, instead of by the contractor who put it in a military system.  We must clarify our acquisition rules to ensure that the cost of replacing suspect counterfeit parts is paid by the contractor, not the taxpayer – no ifs, ands, or buts.

How Counterfeits Find their Way into Defense Systems

One might ask, how do all these counterfeit parts make it through the system?  The answer, in part, is that counterfeiters are shrewd, and they are getting shrewder.  That is not only true about how they produce counterfeits but how they package and sell them.  Sophisticated counterfeiters may mix counterfeit parts with authentic parts, in a method called “sprinkling,” to increase the chance that the counterfeits will avoid detection.  For example, some electronic components are purchased in reels.  A counterfeiter might buy a reel of good parts, cut that reel up, and splice authentic parts into the beginning, middle, and end of several reels of counterfeit parts.  The counterfeiters know that companies often test components from the beginning, middle and end of a reel to validate the authenticity of the entire reel.  

In the case of L-3’s counterfeit memory chip, the suppliers in China selected and sent the distributor a sample of 18 parts to test.  Once those few parts were tested and validated as authentic, the supplier sold another 10,000 of those memory chips for use by L-3.  L-3’s process at the time allowed the company to accept the chips without additional testing.  

It is a constant battle to stay ahead of the counterfeiters.  Mr. Sharpe, the Vice President of an independent test laboratory and one of our witnesses today, is confronted every day with new counterfeiting techniques.  Mr. Kamath of Raytheon, another one of our witnesses, told the Committee that “what keeps us up at night is the dynamic nature of this threat because by the time we’ve figured out how to test for these counterfeits, they’ve figured out how to get around it.  And it’s literally on almost a daily basis they change and the sophistication of the counterfeiting is amazing to us.  We’re finding that you have to go down to the microns to be able to figure out that [a part is] actually a counterfeit.” 

Some have argued that, even if a counterfeit is not identified right away, a contractor’s testing process – where systems may be subjected to heat, vibration and other stresses – will weed out counterfeit parts.  If a system containing a counterfeit part passes that testing, they argue, then the counterfeit part should work just like a new part.

The Boeing Service Engineer responsible for determining the company’s handling of counterfeit parts on the P-8 told the Committee that “[m]any used parts tend to have the same reliability as a new part.”  And the Chief Engineer for L-3 Integrated Systems’ C-27J program stated that L-3’s process for testing its systems “would show whether [a part in an L-3 system] was functional or not.”

But that’s not what the manufacturers of these parts tell us.  And it is also not what our military experts say either.

We wrote to Samsung, the manufacturer of the original parts that were counterfeited on the L-3 display units, to ask them about the reliability and performance risks associated with using parts with the identified anomalies.  Samsung said simply, “one cannot expect such parts to function properly, or at all.”

We wrote to Xilinx, a large semiconductor manufacturer, about the anomalies that BAE had identified on the counterfeit parts that were intended for the ice detection modules in the P-8A.  (The parts were counterfeits of original Xilinx devices.)  Listen to what Xilinx told us:

The devices may have been reclaimed and potentially exposed to excessive heat in order to dismount them from a circuit board. These cases pose a significant reliability risk…there are many potential damage mechanisms that could have affected the devices. Some of these could be catastrophic; others may create a damage mechanism that is latent for an undetermined amount of time… Though the devices may initially function, it would be next to impossible to predict what amount of life is remaining, or what damage may have been caused to the circuitry.

As to the belief that parts in a system which pass a contractor’s acceptance testing should work just fine, here’s what the Director of the Missile Defense Agency, General Patrick O’Reilly told the Committee:

A counterfeit part may pass all production testing.  However, it is possible that the part was damaged during unauthorized processing (e.g., removing the part from a previous assembly, or sanding the surface in order to place a new part number) causing the deployed system to fail. Similarly, reliability may be affected because a counterfeit part may be near the end of its useful life when it is installed. Should any mission critical component fail, that system fails and national security is impacted. 

That is a risk we cannot tolerate.  General O’Reilly will be testifying today.

Why DOD is Vulnerable to Counterfeits

Given the risk, one might ask, why are we buying parts for defense systems from Hong Dark Electronic Trade, Huajie Electronics and other Chinese companies?  Why don’t we buy our parts from Intel and Freescale and Texas Instruments?  

Part of the reason is that when an electronic part is no longer economical to produce due to declining demand, manufacturers stop making it.  In many cases, the demand from the defense industry just is not enough to keep a manufacturing line up and running.  Ted Glum, who is the director of the Department of Defense’s Microelectronics Activity Unit, the government’s official authority on this issue, 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.”  An electronic part may be manufactured for eighteen months, while the defense systems it is used on may be in service for eighteen years – or longer.   

In those cases when DOD or a contractor in the defense industry needs a spare electronic part to fix a ten or twenty-year-old system, there is a good chance that part may be obsolete and there may be little choice but to go to the open market to find the replacement part.  But the parts we buy are still supposed to be new, they are just obsolete.  The open market is where the risk is the highest.  That is also where DOD and its contractors must be most vigilant.  Defense contractors and DOD simply have to do a better job finding out where their parts come from and in validating the authenticity of parts not sourced from the original manufacturer or a franchised distributor.  But we must also confront the issue of counterfeit parts from China head-on.  As I stated earlier, if China does not act against the counterfeiters then we will have no choice but to treat all electronic parts from China as suspect.

The Importance of Transparency

Another place where the defense industry is coming up short is in reporting cases of counterfeit parts.  Our investigation uncovered approximately 1,800 cases where parts suspected to be counterfeits have been identified by companies in the defense supply chain.  However, the vast majority of those cases appear to have gone unreported to the Department of Defense or criminal authorities.  In addition, too few contractors and distributors consistently file reports with the Government Industry Data Exchange Program (GIDEP), a DOD-run system that provides a forum for industry and government to report suspect counterfeit parts and the suppliers who sold them.  That has to change.  Failing to report suspect counterfeits and suspect suppliers puts everyone at risk.  We need to make sure our regulations require contractors who discover suspected counterfeit parts in a military system to report that discovery to the military right away. We should also require DOD and contractors to report cases of suspected counterfeits found in the supply chain into GIDEP, so that others are alerted.

On September 30, 2011, the U.S. Attorney for the District of Columbia submitted a filing to the U.S. District Court relating to the sentencing of the former Administrative Manager of VisionTech Components.  Between 2006 and 2010, VisionTech sold counterfeit electronic components, imported from China, to more than 1,000 buyers in the U.S. and abroad.  Among those customers were several major defense contractors.   There are other VisionTechs out there and we cannot afford to let them operate with impunity. 

Witnesses

We will hear from three panels of witnesses today.  Our first panel has three witnesses:  Mr. Brian Toohey is the President of the Semiconductor Industry Association; Mr. Tom Sharpe is the Vice President of SMT Corporation, an independent distributor of electronic components, and its affiliated test lab, Liberty Component Services; and Mr. Richard Hillman, the Managing Director, Forensic Audits and Investigative Service at the U.S. Government Accountability Office (GAO).  Mr. Hillman is accompanied by the Chief Scientist for GAO, Mr. Timothy Persons.  The witness on our second panel is Lieutenant General Patrick O’Reilly.  General O’Reilly is the Director of the Missile Defense Agency.   Our final panel has three witnesses:  Mr. Vivek Kamath, the Vice President for Supply Chain Operations at Raytheon Company; Mr. Ralph DeNino, Vice President of Corporate Procurement at L-3 Communications; and Mr. Charles Dabundo, Vice President and P-8 Poseidon Program Manager for Boeing Defense, Space & Security Systems.

We appreciate the attendance of our witnesses this morning.  All of the companies and agencies represented here today have cooperated with the Committee’s investigation.  Last week, we wrote the Chinese Ambassador and invited him to send a representative to testify today, but he declined. 

###

Hearing Exhibits