FAR Council's broad reading of counterfeit parts law causes concerns

Monday - 7/21/2014, 4:13am EDT

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By Ariel Levin-Waldman
Special to Federal News Radio

The Federal Acquisition Regulatory Council is taking a liberal view of a law designed to protect the federal supply chain against counterfeit parts.

Joe Petrillo, a partner with Petrillo & Powell, said on the Federal Drive with Tom Temin and Emily Kopp that the council's June 10 proposed rule would impact all federal contractors at the prime and sub levels, as well as require reports for actual counterfeit and suspected counterfeit parts.

"This will have enormous consequences throughout industry," Petrillo said. "They define those terms [counterfeit and suspected counterfeit] in the same way [the Defense Department] does in their proposed regulations on counterfeit regulations, and then parts with a critical or major non-conformance — so these are parts that may be perfectly valid, fine parts, but they have a problem with them. And a major non- conformance is defined as one that is likely to result in failure or simply materially reduce the usability of the item for its intended purpose."

Petrillo said the FAR Council's liberal reading of the law means that every vendor providing any product, commercial or otherwise, would have to report back to the government.

"The entire supply chain is going to have this obligation to report these parts that will have a problem," he said.

The FAR Council estimated that could mean vendors would have to submit about a half a million extra reports each year if a proposed change becomes final.

Originally, Congress passed a provision focusing only on a means of reporting counterfeit electronics by the DoD.

But under this new, broad proposed rule, the council said 15,800 industries would collectively spend more than 1.4 million hours each year developing the reports.

Since 2012, companies manufacturing parts for DoD under Cost Accounting Standards, a series of regulations applied to larger contractors, were mandated to improve reporting of counterfeit and out-of-regulation parts. But the FAR Council has become more concerned with counterfeiting.

"Multiple credible sources of information demonstrate that counterfeit electronic parts are a severe and growing problem across the supply chain," said the council in a report in the Federal Register.

Should a contractor find a problem part, it would have 30 days to conduct a review and report it. This forces contractors to come up with an infrastructure to handle all of the reports, Petrillo said.

The council would develop a list of problem parts using the Government-Industry Data Exchange Program, and contractors would have to check their lists before obtaining parts to use in final products.

"I could certainly see a chain reaction happening where one contractor reports an item of supply or a component as being defective, and that triggers many, many reports by other contractors that use the same item of supply," Petrillo said.

The Pentagon has been plagued for years with counterfeit parts, the majority of which are traced back to China. In 2011, the Senate Armed Services Committee found 1,800 counts of false or counterfeit parts in government equipment.

"While it is estimated that our nation's industries and government lose millions of dollars each year to counterfeiters, the trade in counterfeit IT products also presents serious threats to our national security and consumer safety," the FAR Council said in a 2008 statement.

In 2012, the Defense Logistics Agency went so far as a pilot program to mark and authenticate electronics with plant DNA to stop the flood of fake parts.

"There's a lot of concern about parts that aren't working properly and suspect counterfeit parts, and there may very well be a desire to purge the entire supply chain," Petrillo said.

The proposed rule also leaves Petrillo with unanswered questions about implementation.

"There are also some serious issues about liability, incorrect reports, what happens if you do report, what are the consequences there?" Petrillo said.

Ariel Levin-Waldman is an intern with Federal News Radio

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