understanding h.r. 1540 the national defense authorization act for fy2012 section 818

Understanding H.R.1540: The National Defense Authorization Act for FY2012 Section 818

Kristal SniderVice President, ERAI

April 2012

Copyright © 2011 ERAI Inc. All Rights Reserved.

Who is ERAI?


What is the ERAI Executive Conference?


What is H.R.1540: The National Defense Authorization Act for Fiscal Year 2012?

“Counterfeit parts pose an increasing risk to our national security, to the reliability of our weapons systems and to the safety of our men and women in uniform.”

Arizona Senator John McCainNov 8th 2011


What is NDAA Sec. 818. “Detection and Avoidance of Counterfeit Electronic Parts”?


What are “Trusted Supplier” requirements to assess potential sources of supply?

• (e) IMPROVEMENT OF CONTRACTOR SYSTEMS FOR DETECTION AND AVOIDANCE OF COUNTERFEIT ELECTRONIC PARTS

• IN GENERAL.—Not later than 270 days after the date of the enactment of this Act, the Secretary of Defense shall implement a program to enhance contractor detection and avoidance of counterfeit electronic parts.

• ELEMENTS.—The program implemented pursuant to paragraph (1) shall— • require covered contractors that supply electronic parts or systems that contain electronic parts to establish policies and

procedures to eliminate counterfeit electronic parts from the defense supply chain, which policies and procedures shall address—

• the training of personnel; • the inspection and testing of electronic parts; • processes to abolish counterfeit parts proliferation; • mechanisms to enable traceability of parts; • use of trusted suppliers; • the reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts; • methodologies to identify suspect counterfeit parts and to rapidly determine if a suspect counterfeit part

is, in fact, counterfeit; • the design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and

suspect counterfeit electronic parts; and • the flow down of counterfeit avoidance and detection requirements to subcontractors; and (B) establish

processes for the review and approval of contractor systems for the detection and avoidance of counterfeit electronic parts and suspect counterfeit electronic parts, which processes shall be comparable to the processes established for contractor business systems under section 893 of the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 (Public Law 111–383; 124 Stat. 4311; 10 U.S.C. 2302 note).


How does NDAA address a risk-based approach to purchasing electronic parts?


What are the “flow down” requirements in the supply chain? What will this mean?

• (e) IMPROVEMENT OF CONTRACTOR SYSTEMS FOR DETECTION AND AVOIDANCE OF COUNTERFEIT ELECTRONIC PARTS

• IN GENERAL.—Not later than 270 days after the date of the enactment of this Act, the Secretary of Defense shall implement a program to enhance contractor detection and avoidance of counterfeit electronic parts.

• ELEMENTS.—The program implemented pursuant to paragraph (1) shall— • require covered contractors that supply electronic parts or systems that contain electronic parts to establish policies and

procedures to eliminate counterfeit electronic parts from the defense supply chain, which policies and procedures shall address—

• the training of personnel; • the inspection and testing of electronic parts; • processes to abolish counterfeit parts proliferation; • mechanisms to enable traceability of parts; • use of trusted suppliers; • the reporting and quarantining of counterfeit electronic parts and suspect counterfeit electronic parts; • methodologies to identify suspect counterfeit parts and to rapidly determine if a suspect counterfeit part

is, in fact, counterfeit; • the design, operation, and maintenance of systems to detect and avoid counterfeit electronic parts and

suspect counterfeit electronic parts; and • the flow down of counterfeit avoidance and detection requirements to subcontractors; and (B)

establish processes for the review and approval of contractor systems for the detection and avoidance of counterfeit electronic parts and suspect counterfeit electronic parts, which processes shall be comparable to the processes established for contractor business systems under section 893 of the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 (Public Law 111–383; 124 Stat. 4311; 10 U.S.C. 2302 note).


What does NDAA discuss regarding the definition of “counterfeit electronic part”?


How is industry reacting from to legal and contractual matters?


What are the penalties of non-compliance?

Contractorsmust…

• Detect and Avoid Counterfeits

• Establish policies and procedures to eliminate counterfeits

• Report counterfeits to govt. within 60 days

• Perform and bear cost of rework or corrective action

Suppliers must…

• Obtain parts from original manufacturers or authorized dealers when possible

• Obtain obsolete parts from “trusted” suppliers when necessary

• For other sources:• inspect, test and

authenticate electronic parts

• Notify DoD

Penalties for non-compliance

• Jeopardize ability to sell to gov’t if fail to detect counterfeits or exercise adequate due diligence

• Criminal penalties for intentional trafficking

• Individual: $2M + up to 10 years jail

• Company: $5M

• Additional offenses escalate penalties


What are Supply Chain implications for..

• International Companies…

Are We In Scope?

• Ignorance…

If We Ignore Counterfeits, Will All This Eventually Go Away?

• Systems Integrators…

Why Should I Assess “black box” Items?

• Contract Manufacturers and Suppliers…

Can’t I pass all responsibility to them?


What does ERAI offer to assist with NDAA?

• Part Sourcing• Company Search and AVL Management / Enforcement• Detailed Information Regarding Reported Suppliers• Reported Companies Database & Supplier Screening Tools• Detailed Information Regarding Reported Parts• Reported Parts Database and Part Screening Tools• Images and Test/Nonconformance Reports• ERAI Member Search• BOM Analysis, Monitoring, and Incident Alerting• Complaint Filing & Incident Resolution

Copyright © 2012 IHS Inc. All Rights Reserved.

Your Action Item: Join us May 17-18!www.ERAI.com | ERAI Executive Conference

Featured Speakers Include:

• Director Legal Affairs and Tax, AIA• Procurement Quality Assurance, NASA• Executive Director, IDEA• G-19 Committee Chairman, SAE International • Director of Advanced Technical Operations, IEC Electronics• Senior Semiconductors/CPT Analyst, IHS iSuppli

Presentation topics include:

• New reporting requirements• The term “counterfeit” as it is currently defined• Processes to abolish counterfeit part proliferation• New personnel training requirements• Sourcing and procurement • Obsolescence, compliance and counterfeit risks• Component pricing forecasts, analysis, and benchmarking capabilities• Health status and outlook of the overall supply and demand for

electronic components• Supply chain traceability • Identifying “trusted sources”• Debarring sources who have failed to exercise due diligence • More…

http://www.erai.com/

understanding h.r. 1540 the national defense authorization act for fy2012 section 818

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