The Senate Armed Services Committee (SASC) released a report this week revealing that Chinese companies have been supplying counterfeit electronic parts to the U.S. military--and they're being used in everything from helicopters to missile interceptors. Unsurprisingly, U.S. taxpayers are outraged at the Chinese government, which not only failed to stop the problem, but occasionally stonewalled U.S. investigators.
But here's what taxpayers should also be outraged about: before this investigation, U.S. defense contractors used to bill taxpayers for replacing these counterfeit parts.
According to the Senate report—which represents the culmination of a SASC investigation that began in March 2011—investigators found 1,800 cases of suspect counterfeit parts in the defense supply chain. In these cases, more than one million parts were supplied by more than 650 companies and their own networks of suppliers. As Bloomberg pointed out, suspect and questionable parts went into equipment or aircrafts produced by contractor giants Lockheed Martin, Boeing, General Dynamics, Raytheon, and L-3 Communications.
“DoD and defense contractors [were] frequently unaware of the ultimate source of electronic parts used in defense systems,” the Committee wrote, adding that “the defense industry routinely failed to report cases of suspect counterfeit parts.”
Up until last year—when Sens. Carl Levin (D-MI) and John McCain (R-AZ) introduced an amendment to the National Defense Authorization Act of fiscal year 2012 after their investigation—taxpayers were on the hook for replacing these counterfeit parts.
Here’s one example from the investigation that Sen. Levin highlighted in a floor statement:
In September 2010, the Missile Defense Agency learned that mission computers for THAAD missiles contained suspect counterfeit memory devices. According to MDA, if the devices had failed, the THAAD missile itself would likely have failed. The cost to fix the problem was nearly $2.7 million. And who do you think paid for it? The American taxpayer. We must clarify acquisition rules to ensure that the cost of replacing suspect counterfeit parts is paid by the contractor, not the taxpayer – no ifs, ands, or buts.
The Senators’ amendment in Section 818 of the FY 2012 NDAA, which the President signed into law last year, specifically addressed this problem: firstly, by making defense contractors remedy counterfeit parts on their own dime, but also by requiring contractors and subcontractors to report potential counterfeit items within 60 days. The amendment gave the government new monitoring procedures and included criminal and civil penalties—like fines, jail time, and suspending or debarring a supplier until the issues are addressed. According to POGO National Security Investigator Ben Freeman, suspending, or even debarring primary or subcontractors who repeatedly use counterfeit parts is an important step towards preventing the problem from occurring.
“Both the big dogs and the small contractors are to blame,” Freeman said. “Dealing in counterfeit parts is like dealing in stolen goods. Just because you didn’t steal something doesn’t mean you are free to make money off of it.”
As this story continues to unfold, we should thank the SASC for taking an active role in protecting the U.S. taxpayer—but we should also ask the Committee to continue strengthening regulations and laws that hold U.S. defense contractors fully accountable for their actions.
As the Committee wrote in the report’s press release: “Permitting contractors to recover costs incurred as a result of their own failure to detect counterfeit electronic parts does not encourage the adoption of aggressive counterfeit avoidance and detection programs.”
Dana Liebelson is POGO’s Beth Daley Impact Fellow.
Image via EvelynGiggles.