1. Understanding H.R.1540:
The National Defense Authorization
Act for FY2012 Section 818
Kristal Snider
Vice President, ERAI
April 2012

2. Copyright © 2011 ERAI Inc. All Rights Reserved.
Who is ERAI?

3. Copyright © 2011 ERAI Inc. All Rights Reserved.
What is the ERAI Executive Conference?

4. Copyright © 2011 ERAI Inc. All Rights Reserved.
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 McCain
Nov 8th 2011

5. Copyright © 2011 ERAI Inc. All Rights Reserved.
What is NDAA Sec. 818. “Detection and
Avoidance of Counterfeit Electronic Parts”?

6. Copyright © 2011 ERAI Inc. All Rights Reserved.
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).

7. Copyright © 2011 ERAI Inc. All Rights Reserved.
How does NDAA address a risk-based
approach to purchasing electronic parts?

8. Copyright © 2011 ERAI Inc. All Rights Reserved.
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).

9. Copyright © 2011 ERAI Inc. All Rights Reserved.
What does NDAA discuss regarding the
definition of “counterfeit electronic part”?

10. Copyright © 2011 ERAI Inc. All Rights Reserved.
How is industry reacting from to legal and
contractual matters?

11. Copyright © 2011 ERAI Inc. All Rights Reserved.
What are the penalties of non-compliance?
Contractors
must…
• 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

12. Copyright © 2011 ERAI Inc. All Rights Reserved.
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?

13. Copyright © 2011 ERAI Inc. All Rights Reserved.
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

14. 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…