That’s because last September, the feds shut the component broker down, arrested owner Shannon Wren and administrative manager Stephanie McCloskey, and charged the pair with conspiracy, trafficking in counterfeit goods and mail fraud for knowingly importing more than 3, 200 shipments of suspected or confirmed counterfeit semiconductors into the United States, marketing some of the products as “military grade” and selling them to customers that included the U.S. Navy and defense contractors.
McCloskey pleaded guilty to the conspiracy charge last November in U.S. District Court for the District of Columbia and cooperated with the government. Wren died of an apparent drug overdose in May.
Last month, details of the case against McCloskey were revealed in the 78-page “memorandum in aid of sentencing” that the government filed with the district court . The memorandum offers a rare glimpse into how a rogue broker operating out of a house on a quiet residential street in Clearwater, Fla., was able to dupe the system, put countless innocents at risk and compromise national security for nearly five years.
’Poison in the veins’
“Due to the type of counterfeit goods sold, the industries to which sales were made, and the multitude of military, commercial and industrial applications into which these devices may be placed, defendant McCloskey did her part to set a ticking time bomb of incalculable damage and harm to the U.S. military, U.S. servicemen and -women, the government, all of the industries to which VisionTech sold goods, and consumers. She has effectively helped to release a poison into the veins of interstate and international commerce,” U.S. Attorney Ronald Machen wrote in the memorandum.
The memorandum recommended McCloskey serve a four-and-a-half-year prison sentence and pay restitution to the trademark owners for damages estimated at close to $600,000. The trademark owners named in the memorandum are a veritable who’s who of the semiconductor industry.
Of the estimated 3,263 shipments of semiconductors imported by VisionTech between December 2006 and September 2010, only 35 were confirmed as containing counterfeits and seized at the border by U.S. Customs agents. Those 35 shipments contained a total of nearly 60, 000 counterfeit ICs, according to the government’s memorandum.
The 3,228 shipments that were not seized made their way into the U.S. electronics supply chain through sales VisionTech made to more than 1, 100 buyers in virtually every industry sector. Many of VisionTech’s customers were other brokers, who resold the parts. While some of the counterfeits were caught during manufacturer testing, hundreds of thousands, if not millions, of counterfeit parts are potentially still floating around in the supply chain or, worse yet, inside equipment that’s being used today.
One of the counterfeit shipments contained fake parts sold to BAE Systems, which makes identification friend-or-foe (IFF) systems for the Naval Air Warfare Center’s Aircraft Division. BAE purchased 75 devices from a broker who had bought the parts from VisionTech. The con tractor had the chips tested at a third-party testing facility, which identified them as counterfeits. If those chips had found their way into an IFF system on board a Navy vessel and the system had failed, the ship’s defenses would have been seriously compromised.
Another case involved the sale of 1, 500 counterfeit Intel flash memory devices to Raytheon Missile Systems for incorporation in the Harm Targeting System (HTS), which is installed on F-16 fighter planes to identify and track enemy radar systems. Raytheon installed the flash chips on 28 circuit boards destined for HTS modules. The boards immediately failed. After testing nine of the flash devices, Raytheon concluded the parts were all counterfeit.
Click on image to enlarge. Flaw in the system
But this story is not about VisionTech. It’s about how the VisionTech case exposed a flaw in the U.S. government’s tactics for catching counterfeit com ponents at the border. Specifically, it’s about an interpretation of the U.S. Trade Secrets Act by U.S. Customs and Border Protection (CBP) that prevents the agency from sharing detailed information about a counterfeit part with the semiconductor company whose name is on the component. CBP is one of the Department of Homeland Security’s (DHS’) largest agencies.
Customs agents at U.S. borders are allowed to hold a shipment of suspected counterfeit parts for 30 days—the so-called detention phase—to determine whe ther they are indeed counterfeits. After 30 days, agents either have to “seize” the shipment formally or release it to the intended recipient. During the detention phase, CBP must disclose “to the owner of a trademark the following information, if available: (1) the date of importation; (2) the port of entry; (3) a description of the merchandise; (4) the quantity involved; and (5) the country of origin of the merchandise,” according to a written statement that CBP provided to EE Times on Oct. 5.
The problem is that CBP’s so-called redaction policy limits the information that can be shared with trademark owners. In accordance with that policy, Customs agents since mid-2008 have been taking photos of chips, blacking out the markings on the package and sending the touched-up images to chip manufacturers, according to the Semiconductor Industry Association.
The CBP statement explains that its position is “founded on the view that information protected by the Trade Secrets Act cannot be provided to a third party until after seizure.
In furtherance of CBP’s position that no Trade Secrets Act-protected information is to be released until after seizure, CBP … determined that any indicators, such as bar codes and serial numbers, that might inadvertently disclose such information were to be removed or obliterated before providing a sample to a trademark owner.”
Of course, it’s the very bar codes and serial numbers obliterated by CBP agents that chip companies would normally use to determine whether a detained chip is re al or fake. Before 2008, when CBP was still providing unaltered photos, chip companies estimate they were able to resolve almost 85 percent of CBP requests for confirmation of whether a detained chip was legit or counterfeit.
So how are chip makers expected to help CBP agents catch counterfeit parts if they can’t see the markings on the chips? And how does CBP reconcile its requirement to provide “a description of the merchandise” to the trademark holder with its policy of obliterating information on a photo?
“I don’t understand what’s behind this,” said Jim Burger, a longtime Washington-based intellectual property attorney who represents semiconductor companies. “There’s zero threat to CBP in disclosing the infor mation on the surface of a chip to the trademark owner. The information is not confidential and is not covered under the Trade Secrets Act. They are just hands-down wrong.”
Click on image to enlarge. Unique interpretation
Indeed, CBP is unique in its interpretation of the Trade Secrets Act. The Federal Bureau of Investigation and U.S. Immigration and Customs Enforcement (ICE), among others, disclose detailed information to semiconductor manufacturers as part of their investigations of counterfeit cases.
“It’s one of the most perplexing issues I’ve ever dealt with,” said SIA president Brian Toohey. “It’s a national security issue, and a clear and present danger.”
The VisionTech case confirms just how clear and present. CBP began sending semiconductor companies sanitized images of devices starting in June 2008, when VisionTech’s counterfeit operations were in full swing, according to the government’s memorandum. “The government does not know how many shipments destined for VisionTech may have been detained at U.S. port s but were released when an authenticity determination could not be made by the trademark holder,” U.S. Attorney Machen wrote in the government memorandum on McCloskey’s recommended sentencing.
Given that CBP seized just 35 of the 3,263 shipments VisionTech made between 2007 and 2010, the number that CBP could have detained and subsequently released because of a lack of authentication could have been anywhere from zero to 3, 228. Just one counterfeit VisionTech shipment released into the supply chain as a result of CBP’s redaction policy would have been one too many, several sources said.
SIA’s Toohey has made the argument publicly. On July 7, testifying at a hearing before the House Committee on Homeland Security’s Subcommittee on Oversight, Investigations and Management, he made the case for CBP to revert to its pre-2008 practice of sharing unredacted photos of detained parts.
Click on image to enlarge.
Over the summer, letters on the topic were exchanged between members of Congress, the Homeland Security and Treasury secretaries, and CBP Commissioner Alan Bersin, who was pressed to explain and possibly amend the redaction policy. The latest salvo was fired on Oct. 4 by Chairman Jason Chaffetz and Ranking Member John Tierney of the National Security, Homeland Defense and Foreign Operations Subcommittee of the House Committee on Oversight and Government Reform. The committee has opened a formal inves tigation into the CBP’s policies and procedures regarding importation of counterfeit semiconductors.
“We are concerned actions taken by CBP may serve to seriously undermine its ability to prevent the importation of counterfeit semiconductors, ” Chaffetz and Tierney wrote. Bersin was given until today, Oct. 24, to provide all documents related to DHS’ and CBP’s legal interpretation of the Trade Secrets Act as it pertains to CBP’s redaction policy.
“We need to solve this problem, period, and soon, ” said SIA’s Toohey. “The only way to do that is if industry and government work together to quickly and accurately identify suspected chips before the y enter the country. The industry stands ready, as we always have, to stop suspect ICs at our borders by working collaboratively with CBP.”
The conflict will likely play out in one of two ways. In the first scenario, if Bersin refuses to budge on CBP’s redaction policy, the only recourse would be for Congress to legislate a change in CBP’s policy. It would have an ally in the Obama administration, which in March released a report on IP enforcement legislative recommendations that calls for Congress to give DHS authority to share information on s uspect parts with rights holders during the detention phase. Rights holders “know their products better than anyone else and, thus, obtaining their assistance allows DHS, particularly its component CBP, to more effectively identify and combat infringing products,” the report states.
CBP, meanwhile, told EE Times it had already submitted proposed legislative language to Congress that would give CBP the authority recommended by the administration’s report.
The other scenario would be for Bersin to get over his concern about violating the Trade Secrets Act, pick up his pen and write a new directive that permits CBP to share unaltered photos and samples of detained products with chip companies.
Legislation would likely take some time. A CBP policy shift could be accomplished overnight. In light of the clear and present danger, logic would dictate the latter.
Sidebar: How bad is the counterfeiting problem?
In a word, bad. And it’s getting worse.
Counterfeit computer hardware, including chips, was one of the top commodities seized in 2010 by U.S. Immigration and Customs Enforcement. Seizures in the category were up fivefold last year over 2009, ICE reported.
Between 2007 and 2010, ICE collaborated with U.S. Customs and Border Patrol (CBP) on more than 1, 300 seizures that collectively involved 5.6 million counterfeit semiconductor devices. The fakes bore the trademarks of 87 Asian, European and North American chip companies. More than 50 seized counterfeit shipments were falsely marked as military- or aerospace-grade devices.
A 2010 U.S. Department of Commerce report on counterfeit electronics in the defense industry corroborated the trend. Based on responses from component manufacturers, the Commerce study reported an increase of more than 150 percent in the number of counterfeit parts showing up in military and government applications between 2005 and 2008.
Counterfeiters range from negligent brokers who don’t test the parts they import to criminals intent on deceiving their customers. As the VisionTech ca se shows, counterfeiters can make a lot of money by buying cheap fakes and reselling them for 10, 100 or even 1,000 times more than they paid for them.
And the counterfeiters are getting bolder. In June, $852, 000 worth of counterfeit SanDisk portable memory chips were discovered and seized by federal agents at the Port of Long Beach/Los Angeles, according to the Los Angeles Times. CBP agents found the chips hidden inside 1,932 karaoke machines shipped from China.
Source: Testimony of SIA president Brian Toohey before the House Committee on Homeland Security Subcommittee on Oversight, Investigations and Management
For manufacturers, it’s essential to have a formal and rigorous process for inspecting and testing suspect components. The components themselves, shipping documentation and packing labels must be inspected as the boxes come off the receiving dock. Suspicious parts should be tested with X-ray ins pection systems and high-powered microscopes. Companies should have the chips decapped either mechanically or chemically to check the die markings if they believe it might be warranted. — Bruce Rayner