2012 Defense Authorization Act has Supply Chain Implications

President Obama signed the 2012 National Defense Authorization Act (NDAA) into law on December 31, and with it comes a requirement that suppliers to the Department of Defense and the Department of Homeland Security "detect and avoid counterfeit parts in the military supply chain." Section 818 of the law also requires:

• the Secretary of Homeland Security to establish a program of enhanced inspection of electronic parts imported from any country that is determined by the Secretary of Defense to be a significant source of counterfeit parts in the DOD supply chain;

• information sharing with original component manufacturers, to the extent needed to determine whether an item is counterfeit (HR. 1540, SEC. 818);

• 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 (HR. 1540, SEC. 81);

• DOD to adopt policies and procedures for detecting and avoiding counterfeit parts in its own direct purchases, and for assessing and acting upon reports of counterfeit parts from DOD officials and DOD contractors (HR. 1540, SEC. 818);

• debarment of contractors who fail to detect and avoid counterfeit parts, or do not exercise adequate due diligence.

Contractors are now prohibited from charging the DoD for the costs of rework or corrective work to remove and replace counterfeit parts. Moreover, defense contractors are now responsible for the remedies required after the use or inclusion of counterfeit components they may have accidentally supplied, regardless of where the counterfeit entered the supply chain.

Technology vendors are preparing to aid in the detection of counterfeit components. For example, Applied DNA Sciences, Inc. is engaged in piloting anti-counterfeiting technology funded by the Defense Logistics Agency (DLA). The technology involves applying botanical DNA to authenticate products in a unique manner that essentially cannot be copied. APDN's work was done with a manufacturer of microchips at full commercial scale, and with a global electronics distributor.

The bipartisan amendment is a result of a Senate Armed Services Committee (SASC) hearing on November 8, 2011 that exposed upwards of a million counterfeit parts in U.S. military supply chain. At the hearing, SASC Chairman Carl Levin (D-Mich) vowed to work with Senator John McCain (R-Ariz) in a bipartisan effort to legislate a solution to this "clear and present danger."

“[The benefits] should extend beyond military supply chains, to unrelated industries such as medical devices and the automotive industry,” said Dr. James Hayward, president and CEO of APDN. “Ultimately the benefits will be counted in billions of dollars and thousands of lives saved each year. This is one American problem that can be solved."

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