http://electronicspurchasingstrategies.com/2014/03/06/anatomy-counterfeiter/
If the supply chain could cobble together a worst-case scenario in counterfeit components, it would read a lot like the
case of Hao Yang.
Yang, a Chinese national, was prosecuted earlier this year as a
co-conspirator in a scheme to sell counterfeit ICs to the U.S. military.
Details of the case,
outlined on the Immigration and Customs Enforcement (ICE) home page, are familiar:
1. An individual sets up a U.S.-based import and distribution firm
under one or several phony identities. According to ICE: “Yang and his
co-conspirators created and operated several companies in Maryland,
Pennsylvania, and elsewhere, to facilitate the conspiracy, including MS
Technologies and A-One Electronics in Baltimore; A-Best Technologies in
China; and ARRCORD Group, SMC Group and Smooth LLC.”
2. The principals then procure counterfeit ICs from China and try to
sell them as authentic mil-spec components: “The defendant imported
counterfeit goods from China and fraudulently sold them as legitimate
merchandise,” said U.S. Attorney Rod J. Rosenstein. “Counterfeit
integrated circuits from China were falsely represented to be legitimate
American-made parts.”
The counterfeit circuits received by Yang, a number of which were
military-grade, were supplied by one specific co-conspirator located in
China.
3. Operate as a distributor: The ICE press release doesn’t divulge
how the scheme was uncovered, but from the language of the release it
appears that some, if not all, the counterfeits were headed to different
secondary handlers before they got into the military supply chain.
“This co-conspirator sold, or attempted to sell, the circuits to various
individuals, companies and government agencies in the United States,”
ICE said in its report. The U.S. government organ outlined the following
steps taken by the counterfeiters:
- Yang used his residence to warehouse the counterfeit goods,
including counterfeit military goods, sent to him by his co-conspirators
in China. He then shipped specific items to buyers in the United States
based on the order information provided by his co-conspirators. Yang
maintained numerous bank accounts to deposit his illegal commissions and
make payments associated with his counterfeit activities. He also used
the commissions he received from his co-conspirators to pay for living
expenses and other purchases, including his 2010 Acura TSX sedan.
- The counterfeit circuits received by Yang, a number of which
were military-grade, were supplied by one specific co-conspirator
located in China. This co-conspirator sold, or attempted to sell, the
circuits to various individuals, companies and government agencies in
the United States. Yang then distributed the counterfeit circuits, via
his domestic businesses, to the buyers in the United States sometimes in
repackaged form.
- The co-conspirator paid Yang a commission of $500 per month for
his distribution services. To conceal the fact that the counterfeit
circuits were being imported from China, Yang and his co-conspirator
formed ARRCORD Group to create the appearance that the co-conspirator’s
company in China (from which the counterfeit circuits were being
distributed) was actually based in the United States. By using
counterfeit circuits, their malfunction or failure could likely have
caused serious bodily injury or impaired military operations, personnel
or national security.
- Throughout the course of the conspiracy, Yang also obtained
other counterfeit goods, including computer software, DVDs, and sports
jerseys, from other co-conspirators in China and Hong Kong, which he
then distributed in the United States. As was the case with the
counterfeit circuits, Yang and these other co-conspirators concealed the
fact that the goods they sold were counterfeit and produced in China
and Hong Kong. Yang received commissions from these co-conspirators of
$1,000 to $2,000 per month for his distribution services.
- Between March 2011 and April 2013, Yang received hundreds of
shipments from China and Hong Kong, including shipments involving
integrated circuits. For example, in June 2012, Yang received two
shipments of counterfeit military-grade integrated circuits sent to
ARRCORD Group at his residence and also received three shipments of
other counterfeit goods, including DVDs and counterfeit computer
software, sent to SMC Group at Yang’s residence. The Manufacturers
Suggested Retail Price of the counterfeit DVDs and computer software was
over $58,000.
False-front distribution operations have been around forever and
have proliferated with adoption of the Internet. These companies
frequently change names and maintain multiple bank accounts. They are
often one- or two-person operations. The military market is targeted by
counterfeiters because of the high value of military components and
because devices that have reached their end of life (EOL) are often sold
into the open market; Military equipment has a longer lifespan than
commercial products so EOL components are frequently in demand.
After discovering counterfeit electronics components in its supply
chain, the U.S. Department of Defense (DoD) stepped up its
anti-counterfeit efforts. In December 2011, revisions to the National
Defense Authorization Act (NDAA) were signed by President
Obama. Among its provisions, the NDAA calls for DoD contractors and
subcontractors to report counterfeit electronic parts or suspect
counterfeit electronic parts via the Government Industry Data Exchange
Program (GIDEP). It also specifies the need to source electronic
components from “trusted suppliers” if the devices are not available
directly from component manufacturers or through authorized
distributors. According to ICE, Yang was selling goods as late as 2013.
The GIDEP requirements and the term “trusted supplier” have spurred
controversy in the electronics supply chain. Individuals familiar with
GIDEP, for example, point to a possible shortcoming in the requirement.
Both buyers and sellers of suspected counterfeit parts are identified in
GIDEP reports. Experts posit that companies avoid GIDEP for fear of
legal repercussions and the stigma associated with counterfeiting. The
ICE release doesn’t say if GIDEP played a role in the Yang case. (
EPS has a call into ICE to see if that information is available).
“Trusted supplier” is also a hot button in the industry. Advocates of
the authorized supply chain object to the term because it includes
independent distributors. Independents differ from authorized
distributors in that they are not franchised directly by component
suppliers. Also, because independents buy and sell excess inventory in
the open market, there’s a higher risk of sourcing
counterfeits. Top-tier independents have invested in processes and
equipment to minimize the risk of counterfeits and have distanced
themselves from brokers – companies that speculate in electronic
commodities and fly-by-night companies such as Yang’s.
The government has embarked on other efforts to stem counterfeiting such as the
use of plant DNA
to track components through the supply chain. Separately, the
electronics industry is working on its own counterfeit-mitigation
standards. Under the auspices of SAE International, an association of
engineers and related technical experts in the aerospace, automotive and
commercial-vehicle industries, the G-19CI committee released its first
standard, AS5553. The committee is working on a revision. In 2013,
SAE released the standard (AS6081) for independent distributors.
Clearly, anti-counterfeiting has become a priority. “
Counterfeit
military goods pose a threat to our national security as they could end
up in the wrong hands and legitimate manufacturing and high technology
businesses may believe they are receiving authentic goods,” the ICE
report noted, adding Homeland Security and ICE ”… will continue to
protect the American public and America’s warfighters from the
introduction of counterfeit, non-conforming, and substandard materials
and goods from entering the United States.”
However, the electronics industry remains divided on
anti-counterfeiting efforts. The authorized channel in general opposes
measures that include independent distributors. Military contractors say
independents are sometimes their only choice. It’s also difficult to
tell just how bad the problem is. GIDEP data, which shows a
decline
in counterfeiting reports during 2013, is only part of the picture. The
commercial supply chain collects data from industry consortia
and organizations that accept and investigate anonymous tips.
Yang stopped short of being a worst-case scenario because the scheme
was uncovered. As a standalone example, the Yang case counts as an
anti-counterfeiting victory. In the grand scheme of things, it’s
difficult to determine if it also represents progress in any of the
government’s anti-counterfeiting efforts. Yang offered a plea agreement
and faces a maximum of 10 years in prison, according to ICE.
