By: Kristal Snider

For more than a year, beginning in January 2014, a distributor in the U.S. placed eleven (11) orders for more than 16,000 pieces of Texas Instruments part number TMS320VC5416ZGU160 from an Israeli distributor and subcontractor servicing the defense, medical and communications industries in Israel. No nonconformities were ever detected during the inspection of these shipments. No complaints or concerns were raised by the U.S. distributor’s end user and sole recipient of all prior shipments. For all intents and purposes, the Israeli and American companies enjoyed a mutually beneficial relationship and no one, including the end user, had reason to suspect the goods in question were anything other than genuine Texas Instruments parts. That is, until May 4, 2015, when one of the final three scheduled deliveries containing 4,000 pieces of the aforementioned part worth $46,435.00 was detained and subsequently seized by CBP under Title 19, United States Code, Section (USC) 1595a(C) for bearing a counterfeit trademark. The initial detention notice triggered a flurry of activity that would slow to a crawl, then drag on for ten costly, labor-intensive months and ultimately conclude with the release of the goods. This distributor’s experience captures the significance of goods being correctly classified as authentic or counterfeit, highlights the importance of an open line of communication between CBP and industry, and personifies the struggles business owners are facing that could result in substantial financial loss.

The Initial Detention Notice

It was while checking the delivery status of the shipment using Federal Express’ online tracking system that the U.S. distributor first learned the parts they had paid for wire transfer in advance had been held by U.S. Customs and Border Protection (CBP) and, shortly thereafter, on May 5, 2015, the standard “Detention Notice and Custody Receipt for Detained Property” was received. The distributor was given seven days to provide evidence to demonstrate the authenticity of the parts. The Israeli supplier was asked to provide supply chain traceability to assist in this process but subsequently refused to cooperate. A representative of the Israeli supplier later revealed the reason they were not able to provide this documentation is that doing so would have jeopardized their relationship with their supplier and supplier’s relationship with Texas Instruments due to the fact these parts were allegedly sold in violation of the supplier’s distribution agreement with Texas Instruments.

Sans the necessary supply chain traceability, the U.S. distributor then contacted its customer, the recipient of all prior shipments, to make them aware of the situation and to see if they could return samples from past shipments for reevaluation and comparison to a known good sample. This effort was successful; the U.S. distributor was confident they could produce the evidence necessary to prove the parts being detained were authentic.

Part Comparison and Findings

The U.S. distributor purchased three (3) golden samples from an authorized TI distributor in the U.S. and compared these parts to samples they were able to retrieve from their customer that were representative of prior shipments. Using various inspection methods, the parts were examined both externally and internally and no evidence of tampering was observed. The general appearance, physical construction, and die markings are consistent. The results of the comparison analysis were presented to CBP but did not result in the release of the goods.

Photo Comparison of Known Golden Sample vs Samples Representative of Prior Shipments























Notice of Seizure

On August 25, 2015, after receiving the above noted findings twenty days earlier, the U.S. distributor received formal notification from CBP that the goods in question had been seized for bearing a counterfeit trademark. The appraised domestic value of the property was assessed at $99,000.00. The U.S. distributor immediately exercised its right to “petition” the seizure and sought remission of the forfeiture in accordance with CBP’s “Election of Proceedings”.

The Petition Process

The U.S. distributor’s attorney initiated contact with CBP on September 22, 2015 and again on October 12, 2015 in an effort to obtain two (2) samples of the seized parts for inspection and comparison to the known golden sample and representative sample previously analyzed. The release of the samples was finally granted on or about October 27, 2015.

On November 4, 2015 the U.S. distributor received a cease and desist letter from Texas Instruments which included, but is not limited to, the following statements:



The U.S. distributor was given five (5) business days to confirm they agreed to discontinue the purchase and sale of counterfeit TI products; they responded to TI, as they had responded to CBP, asserting that the parts are original and not counterfeit.

On November 17, 2015, more than six months after receiving the original notice of detention, the U.S. distributor was finally able to compare the inspection results of the seized parts against the previous comparison involving the known golden sample and representative sample provided by the U.S. distributor’s customer: the seized parts were consistent with the other two lots.

Photo Comparison of Known Gold Sample vs Samples Seized by CBP















In addition to the results of the part comparison and after tremendous pressure, on December 31, 2015, the Israeli supplier provided a copy of a packing list as evidence the goods in question were purchased from Arrow Seed (Hong Kong) Limited, a division of Arrow Electronics, Inc. and an authorized Texas Instruments distributor. While the quantity and dates align with the goods purchased by the U.S. distributor, the identity of the recipient and the ship to address had been redacted. This new information, albeit not complete, was also submitted to CBP for consideration.

Notice of Release from CBP

On January 25, 2016 the U.S. distributor received written notification from CBP the goods would be released after concluding the burden of proof had been met to support its assertion that the goods are not counterfeit. Prior to initiating the return of the shipment, CBP required the U.S. distributor to sign, notarize and return a “Hold Harmless Agreement” releasing and forever discharging the United States and its officers from any and all action, suits, lawsuits, proceedings, costs, expenses, debts, dues, contracts, judgments, damages, claims and/or demands whatsoever in connection with the detention, seizure and/or release of the goods.

On March 1, 2016, the partially damaged and improperly packaged goods were delivered to the U.S. distributor’s facility marking an end to this lengthy and costly ordeal.

Financial Risks for Importers

As briefly mentioned early on, the payment terms for all orders referenced herein were wire transfer in advance. To offset their financial risk, the U.S. distributor’s purchase order contract specifically designated “FOB Destination” in its shipping terms which means the Israeli supplier was responsible for the goods until they reached the U.S. distributor’s location. Despite the fact these terms were in the agreement, the Israeli supplier refused to refund the U.S. distributor’s advanced payment totaling $46,435.00 when the goods were detained and subsequently seized. Had the U.S. distributor not been successful in meeting the burden of proof that the goods were not counterfeit and securing their release from CBP, it is unlikely they would have received reimbursement without incurring additional legal expenses.

Conversely, this exporter and all others face equal risks and must openly communicate with international trading partners relative to the availability of supply chain traceability and testing, inspection and counterfeit risk mitigation requirements prior to shipping goods. Had the parts been shipped on an open account, it is unlikely the U.S. distributor would have fought as hard as it did to secure the release of the goods and the Israeli supplier would have had no hope of retrieving the goods or receiving payment for goods that were not delivered in accordance with the purchase order contract or not at all.

Caveat Emptor

U.S. citizens and business owners have no constitutional right to import or conduct international trade. Importers must constantly measure risk and be on the lookout for emerging risks such as goods being damaged, detained or seized by CBP.

Conclusion

There is no question in my mind that CBP is doing what it can to prevent counterfeit electronic parts from entering the supply chain and is doing so while facing tremendous challenges and pressure from brand owners and others. The takeaway from this article should not be that CBP is doing a poor job; it should be that industry and CBP desperately need a more open line of communication and must work together to educate agents and policy makers.

When authentic parts are inadvertently removed from the supply chain, or are damaged due to improper handling and repackaging, an opportunity for a counterfeit part to enter in their place is created.

By Anne-Liese Heinichen, ERAI

U.S. Customs and Border Protection (CBP) is undoubtedly faced with a gargantuan task. A 2015 fiscal year summary by Homeland Security reports that each year over 11 million maritime containers, 10 million truck containers, 3 million rail containers and a quarter billion additional cargo, postal and express packages arrive through air travel in the US .ⁱ From these shipments, the number of IPR seizures increased nearly 25% to total 28,865 in 2015 resulting in 538 arrests with 339 indictments and 357 convictions.ⁱⁱ Regrettably, these seizures represent only a drop in the bucket against limiting counterfeiting activities both domestically and globally. Unfortunately, this also means that most counterfeits are seeping through.

While CBP has demonstrated an effort to improve their interaction with the industry, more changes need to be enacted. ERAI has received complaints with regards to improper handling and repackaging, trouble in obtaining samples of parts that are detained, difficulty in locating and contacting an appropriate CBP representative, delays in receipt of authentic goods and even receiving suspect counterfeit parts from a shipment that underwent a CBP inspection.

In our effort to raise awareness and provide feedback from the industry, during the first quarter of 2016, ERAI began collecting data from companies who have sent or received shipments that have been inspected by CBP and are subsequently received in a damaged condition due to mishandling and/or incorrect repackaging.

Highlighted below are three reports submitted to ERAI outlining inefficiencies with CBP’s inspection processes.

Report 1:
An authorized aftermarket manufacturer shipped eight (8) pieces of custom-manufactured programmable logic ICs to a customer located in the United States. The shipment contained a certificate of conformance. The parts cost $1,000.00 per piece.

The customer received the shipment, which had been inspected by CBP; the box and ESD bag had been opened with a sharp blade across the middle of the packaging. It appears that the trays were removed from the box and the ESD tape binding the layers was cut. Please note: the images have been modified to remove any identifying marks.



The tray may have been upside down, possibly causing the devices to fall out, resulting in damage to four (4) of the parts. Please note: the images have been modified to remove any identifying marks.



The customer noted the trays had not been resealed with tape and the shipment contained only seven (7) devices (one device was missing). Aside from sustaining a loss of $5,000.00 ($4,000.00 for 4 damaged parts plus $1,000.00 for a missing part), the aftermarket manufacturer states that very few of the devices remain as they stock what is likely the last good die required to continue to build these devices and state that, “even the loss of 8 pcs hurts”.

Report 2:
A U.S.-based organization procured 300 pieces of Freescale part number DSP56303AG100 from an international supplier. Prior to importing the goods into the United States, the parts were sent to a third party test house. The test house reported the receipt of 300 pieces properly packaged in trays with ESD protection and desiccant.



The 100 pieces were visually inspected according to SAE AS6081 and MIL-STD-883, Method 2009.9 and no anomalies were found; the report observed that “devices are in new condition”. One hundred samples underwent curve tracer electrical testing to MIL-STD-883 and manufacturer’s specifications and all 100 pieces passed. After inspection and testing were completed, the parts were packaged with a copy of the test report and shipped to the U.S.

Upon receipt, the organization noted the parts were improperly repacked in the trays with green CBP tape.



The devices that had been inspected by CBP were placed back into the trays upside down and/or incorrectly oriented resulting in damages to the leads on six (6) pieces and a loss of $98.98 to the organization.



Despite CBP’s recommendation that shipments contain as much documentation and traceability documents as possible, this organization still sustained a financial loss.

Report 3:
Another U.S.-based company sourced 200 pieces of Agilent HDMP-1024G from an overseas supplier. En route to the U.S., the parts were detained by U.S. Customs for 30 days. The vacuum-sealed bags appear to have been cut open with a box cutter, two of the bands securing the trays were cut and two pieces of the part in question were removed for inspection.



The goods were released from Customs and were delivered to the company. When the shipping box was opened, the parts fell out. The entire lot was significantly damaged due to improper repackaging.



Despite the damaged condition of the goods, the U.S. distributor began its standard counterfeit screening process and immediately determined the parts had been altered from their original condition and failed their inspection.

Documentation, Packaging & Shipping Inspection Revealed:

• Mishandled/damaged packaging materials
• Trays are warped, cracked, bent or damaged
• Tears and/or puncture holes in bag

Lead External Visual Inspection Revealed:

• Evidence of prior use present
• Missing, bent, trimmed, cracked and/or non-planar leads
• Damaged leads, threads, etc.

Mechanical Scraping (e.g. Scrape Test, Scratch Test) Revealed:

• Evidence of tampering present
• Secondary coating/blacktopping lifted during test
• Previous part markings (e.g. ghost markings) visible after test
• Difference in surface texture visible after test

The entire lot was marked with a single date code, 0737, but during a mechanical scrape test, resurfacing material was removed revealing numerous date codes including, but possibly not limited to, 0523, 0526, 0551 and 0610.





It is unclear how these goods were released by CBP. The U.S. distributor has quarantined the parts to prevent their reentry into the supply chain.

Summary:
Although CBP’s efforts are commendable, additional work is needed to properly train staff in the detection of counterfeit parts and correct handling of authentic integrated circuits. Companies that supply authentic goods are sustaining financial losses for damage caused by CBP, in some cases, despite following CBP’s recommendations to include testing and traceability documentation in shipments. U.S.-based organizations are facing long (in some cases extended) delays in receiving good parts and are subsequently unable to fill orders in their entirety or are unable to meet their customer’s specified delivery dates. Some of the authentic material being damaged is virtually irreplaceable, opening an opportunity for counterfeit goods to make their way into the supply chain. Worse yet, the last example illustrates that suspect counterfeit material, despite being inspected by CBP, is still being released.

Steps you can take:

1. File a claim with CBP
CBP provides Standard Form 95, Claim for Damage, Injury or Death, for individuals to file claims for property damage or loss. The form should be submitted to the CBP port of entry or Border Patrol station nearest to the location where the incident occurred. CBP does advise that the review process may “take several months”. More details, the form and address submission information can be found at: https://help.cbp.gov/app/answers/detail/a_id/178/~/tort-claims---claim-for-property-damage-or-loss,-or-personal-injury,-or-death

Organizations who file a claim and receive a decision from CBP are requested to contact ERAI and let us know the outcome of the claim.

2. Report customs damage to ERAI
ERAI has begun documenting these types of incidents in an effort to demonstrate to Customs the importance of proper handling and repacking. Our objective is to raise awareness and provide feedback from the industry that might lead to changes in how shipments containing sensitive devices are inspected and repackaged.

Your input is vital. If you receive a damaged shipment that is the result of improper handing or repacking by CBP, please take a moment to let us know. To access the form simply click on the "Report" tab in the web-site's top navigation bar and select "Report CBP Damage" or visit http://www.erai.com/Report_CBP_Damage_. You do not need to be a member of ERAI to submit a report. Your identity will remain confidential and will not be revealed to CBP.

3. Obtain insurance for your shipments
Ocean cargo insurance policies can provide coverage for damage to goods as the result of actions by CBP dur-ing the course of an inspection. Items not covered generally include seizures by CBP and coverages for delays as a result of a detention. For more information, please contact Howard Miller at LBW Insurance and Financial Services at HowardM@lbwinsurance.com.

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ⁱ U.S. Department of Homeland Security. (2015), Intellectual Property Rights Seizure Statistics Fiscal Year 2015. https://www.cbp.gov/sites/default/files/assets/documents/2016-Apr/FY%202015%20IPR%20Stats%20Presentation.pdf
ⁱⁱ U.S. Department of Homeland Security. (2015), Intellectual Property Rights Seizure Statistics Fiscal Year 2015. https://www.cbp.gov/sites/default/files/assets/documents/2016-Apr/FY%202015%20IPR%20Stats%20Presentation.pdf

By: Kristal Snider, ERAI

It is 2016: fifteen years since China was admitted to the WTO and the first counterfeit part was reported to ERAI; a decade since ERAI’s President made a second trip to China to see firsthand how e-waste was being used to fuel what has been referred to as a “counterfeit epidemic”; and nine years since I wrote and distributed a report titled “A Time For Change” highlighting the devastating impact e-waste converted to counterfeits was having on the supply chain. But it was less than five years ago, on November 8, 2011 when the Senate Armed Services Committee released a report titled "The Committee’s Investigation Into Counterfeit Electronic Parts In The Department Of Defense Supply Chain" in which the Committee directly identified counterfeit electronic parts as a “national security risk”, that counterfeit avoidance and awareness started to pick up steam. Government, industry, enforcement agencies and all tiers of the supply chain from independent distributors to prime contractors have united, collaborated and worked tirelessly to produce standards, studies, white papers, trainings, legislation, as well as products and services which have forever changed the way electronic parts and material are purchased, inspected, tested, sold and integrated. We can be proud of these accomplishments, but there is more to do.

E-waste dumping drives the counterfeit electronics components industry, kills small businesses, threatens national security and funds criminal organizations, all of which are taking an enormous toll on the global economy and human safety. Despite the federal government’s awareness of these risks, the United States is the only developed nation that has not ratified the Basel Convention which was designed to limit the movement of hazardous waste from developed to developing countries and, despite several attempts, no federal e-waste recycling mandate currently exists. Two previous bipartisan bills were introduced which would forbid U.S. companies from exporting e-waste: H.R.2284 - Responsible Electronics Recycling Act (introduced June 22, 2011) and H.R.2791 - Responsible Electronics Recycling Act (introduced July 23, 2013). Both versions of the bill died.

On June 24, 2016 Rep. Gene Green (D-TX), along with Rep. Paul Cook (R-CA), launched a third attempt to stop the flow of electronic waste to China and other countries known for producing counterfeit electronic parts by introducing H.R. 5579, the Secure E-waste Export and Recycling Act (SEERA).

According to the Coalition for American Electronics Recycling (CAER), the voice of the emerging e-waste recycling industry on Capitol Hill, a significant portion of U.S. e-waste ends up with sham recyclers and exporters willing to ship unprocessed and untested, used electronics overseas. I spoke with Robert Houghton, CEO of Sage Sustainable Electronics, a leading provider of IT asset retirement services, a co-founder of CAER and a CAER steering committee member to better understand why past attempts to pass similar legislation did not pass and to find out what we can do to support SEERA.

KS: E-waste is said to be the fastest growing segment of our domestic waste stream. Even though China surpassed the U.S. as the world’s largest e-waste generator, supporters of SEERA contend counterfeiters still rely on our exports since the U.S. remains one of the few countries that allows unrestricted exports of untested, nonworking e-scrap. How will this bill change that?

RH: SEERA will combat electronics counterfeiters by substantially reducing the supply of materials they use as raw materials – unprocessed e-waste exported from the United States. SEERA, which was introduced last week as H.R. 5579, will restrict exports of untested, non-working electronic scrap under the Export Administration Act of 1979 (EAA) that regulates exports for national security and foreign policy reasons.

The legislation does not apply to new devices, and will not limit the export of most used electronics, providing key exemptions for categories at low risk for use as feedstock for counterfeiters:

• Tested, working used electronics
• E-scrap that has been shredded or demanufactured may be exported for use as feedstock for smelters and other recycling processes
• Recalled electronics may be exported for repairs

This approach is consistent with CAER's long-standing support for free trade in value-added products, such as the commodities generated from the recycling process, while restricting export of untested, nonworking e-scrap that provide essential raw materials for counterfeiters. In addition to combating counterfeiting, these policies will create American jobs, promote investment in our domestic recycling and increase trade in tested, working electronics. A recent study found that this approach will create 42,000 U.S. jobs with an annual payroll of $1 billion, with more added as the demand for services continues to grow.

KS: This is CAER’s third attempt to pass legislation. Previously the coalition rallied behind H.R.2284 and H.R.2791 but neither of these bills passed. Why do you think SEERA will be successful?

RH: We think SEERA will be successful because it responds to the growing concerns on Capitol Hill about the threat of counterfeits. In advocating for previous bills, we focused primarily on the potential for job creation and business growth with security as a secondary focus. However, many lawmakers told us that while job creation was important to them, the national security implications were much more pressing. SEERA provides all the benefits of the previous bills with a stronger emphasis on security. And where previously the EPA was slated for enforcement, SEERA designates Customs and Border Protection as the enforcing agency, which we believe will be more effective. The electronics industry can play an important role by showing broad support for this legislation.

KS: We spoke about how a bill becomes a law and why timing and broad industry support is imperative in getting one passed. Can you explain the urgent need for action to support SEERA so ERAI Members and our readers understand why their immediate support is needed?

RH: We need Congress to act by the end of the year when the current session concludes. Since the start of the 113th Congress in early 2015, we have devoted extensive time and energy to educating Congressional leaders about this issue and working to refine a legislative approach. With the session concluding in a few months, we need Congress to act. The sooner we can get SEERA enacted, the faster we can begin choking off the supply of feedstock that is undermining our security.

KS: ERAI has created a new E-Waste Knowledge Center in order to help individuals and organizations better understand electronic waste and the danger it poses as a source of material for counterfeiters as well as the significance of the of the Secure E-Waste Export and Recycling Act (H.R. 5579). We want ERAI Members to be fully informed and for those individuals and companies that see the need for and value of this legislation to show their support by writing to Congress. As we have already learned, introducing legislation and getting it enacted into law are two different things. As an expert in this area I am hoping you can explain the importance of writing to Congress.

RH: Nothing is more persuasive for Congressional offices than hearing from their constituents. Right now it is especially critical that we show support to members of the House Foreign Affairs Committee. If your company or home is located in the district of a member of this committee, please contact us and we will assist you in preparing a letter. Use this easy online tool to verify in which District you are located. A list of Foreign Affairs members is available here. However, there is also value in writing to other members of Congress outside Foreign Affairs. Feel free to contact us via email if you have questions or need help.

KS: What else do you want ERAI Members and readers to know?

RH: Now is the time for everyone concerned about counterfeits to speak up – your voice can make a difference. Electronics counterfeiting is a complex, multifaceted challenge, and SEERA can be a key part of a solution that complements the good work on procurement reform and other measures.

KS: Thank you Robert for your time, your expertise and the extraordinary work done by everyone at CAER.

What You Can Do Today
Write a letter of support to Congress. We have included a sample letter of support for those interested in backing this legislation.

Join CAER
ERAI members are welcome to join CAER as Supporting Members at no cost. This category of membership is for organizations that are committed to the cause but are not part of the American electronics recycling industry. Supporting members are listed on our website and receive periodic updates on our progress along with action alerts.

CAER Membership Application
http://www.americanerecycling.org/images/CAER_Member_Form.pdf

As an industry we have already proven, despite broad differences of opinion, when we unite we can truly make a difference. Controlling the exportation of e-waste will not eliminate counterfeit risk but we do believe it will reduce the number of counterfeits entering the supply chain.

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About Robert
Robert Houghton has served as CEO of leading companies in electronics reuse and recycling for twenty years. He served as Interim Executive Director of the e-Stewards electronics recycling certification program, and is a cofounder of the Coalition for American Electronics Recycling (CAER). Robert is currently CEO of Sage Sustainable Electronics, www.sageSE.com.

About CAER
(www.americanerecycling.org)
The Coalition for American Electronics Recycling is the voice of the e-waste recycling industry on Capitol Hill. CAER represents more than 140 companies that operate a combined 300 processing facilities in 35 states, Puerto Rico and the District of Columbia. These companies share in the philosophy that electronics recycling should be performed securely to protect our nation’s security and for the benefit of the American economy. For the last several years they have been working on federal legislation to address the exportation of untested, nonworking e-waste that counterfeiters use as cheap raw material.

You can reach CAER at members@americanerecycling.org

Additional Reading

Reps. Green and Cook Introduce Bipartisan National Security Bill
https://green.house.gov/media-center/press-releases/reps-green-and-cook-introduce-bi-partisan-national-security-bill

Electronics Recycling Leaders Praise Introduction of Secure E-Waste Export and Recycling Act (SEERA)
http://www.americanerecycling.org/images/SEERAIntroduction_FINAL_6_27_16.pdf

The Secure E-Waste Export and Recycling Act (SEERA) – Overview
http://www.americanerecycling.org/images/SEERA_Summary.pdf

Unregulated E-Waste Exports Fuel Counterfeit Electronics That Undermine U.S. National Security
http://www.americanerecycling.org/images/Counterfeiting_position_paper_3_1-16.pdf

Counterfeit Electronic Parts: Manufacture of and Avoidance
http://articles.sae.org/13923/

E-Waste Export Controls Key to Battling Counterfeiters
http://www.nationaldefensemagazine.org/archive/2016/March/Pages/E-WasteExportControlsKeytoBattlingCounterfeiters.aspx

Electronic Waste Rules Could Help Thwart Flow of Counterfeit Parts
http://www.nationaldefensemagazine.org/archive/2015/February/pages/ElectronicWasteRulesCouldHelpThwartFlowofCounterfeitParts.aspx

By Anne-Liese Heinichen

In September of 2015, the president of Arc Electronics Inc., Alexander Fishenko, pleaded guilty to all charges against him, including acting as an agent of the Russian government without prior notification to the Attorney General, as well as conspiring to export, and illegally exporting, microelectronics to Russia, money laundering conspiracy and obstruction of justice. As of the date of this article, Fishenko is awaiting sentencing, which could include a maximum penalty of 20 years’ incarceration for each violation of the International Emergency Economic Powers Act (IEEPA) and the Arms Export Control Act, 20 years for money laundering, 20 years for obstruction of justice and 10 years for acting as a Russian agent.

In his sentencing memorandum, Fishenko’s lawyer references the government’s comparison of Fishenko’s case to that of Zhen Zhou Wu, the former president of Chitron Electronics, Inc., who was sentenced to 84 months’ imprisonment, a $15,000.00 fine and subsequent deportation from the United States for exporting restricted military electronics to China between 2004 and 2007. Fishenko’s lawyer claims that this comparison is not comparable since, unlike Fishenko, “Wu did not acknowledge his guilt and his business dwarfed Fishenko’s in every way”.¹

Other individuals currently awaiting trial and/or sentencing include:

• Alexander Brazhnikov Jr., who pleaded guilty to conspiracy to commit money laundering, conspiracy to smuggle goods out of the United States and conspiracy to violate the IEEPA. The maximum penalty for the charges includes 30 years’ incarceration and a fine of $1,000,000.00.
• Wenxia Man is awaiting sentencing for her conviction of violating the Arms Export Control Act.
• Jiang Yan, Xianfeng Zuo and Doafu Zhang each of whom separately pleaded guilty to charges including conspiracy to traffic in counterfeit goods (Yan, Zuo and Zhang) and attempt to violate the IEEPA (Yan). Yan faces a maximum sentence of 30 years and $3,000,000.00 fine; Zuo and Zhang each face maximum sentences of 10 years and $2,000,000.00 fines.

While the latest rounds of charges center largely on the violation of export laws, sentences handed down for trafficking in counterfeit goods and counterfeit military goods in the past have resulted in imprisonment terms ranging from 20 to 37 months:

• Mustafa Aljaff, former president of MVP Micro, pleaded guilty to conspiracy to defraud the United States and trafficking in counterfeit goods and was sentenced to 30 months’ incarceration. Neil Felahy, also of MVP Micro, was sentenced to 20 months’ incarceration and joint financial restitution along with Mr. Aljaff.
• Hao Yang, formerly of MS Technologies was sentenced in 2014 to 21 months’ incarceration and forfeiture of $59,000.00 in cash and items valued at $280,720.00 for conspiracy to traffic in counterfeit goods and counterfeit military goods.
• Peter Picone, formerly of Tytronix and Epic International, pleaded guilty to conspiracy to traffic in counterfeit military goods and was sentenced to 37 months’ incarceration and restitution of $325,088.00.

Violation of 18 U.S. Code Section 2320 – Trafficking in counterfeit goods or services under subsection (a) involving counterfeit military goods or services carries a maximum penalty of “if an individual, shall be fined not more than $5,000,000, imprisoned not more than 20 years, or both, and if other than an individual, be fined not more than $15,000,000.”2 Hao Yang received a sentence of 21 months’ incarceration; Peter Picone received a sentence of 37 months.

It is estimated that the semiconductor industry loses $75 billion annually in sales due to counterfeit parts.3 As we know, counterfeiting results in a high dollar profit margin to a counterfeiter as well as individuals who introduce them into the supply chain, but does the punishment fit the crime? Deterrence, when used in a legal context, is defined as “the use of punishment as a threat to deter people from offending.”4 However, are the sentences and fines that have been imposed on individuals deterring others from committing counterfeit or export violation crimes?

Shannon Wren and Stephanie McCloskey, operating as VisionTech Components, were charged in 2010 with conspiracy, trafficking in counterfeit goods and mail fraud. Wren passed away in May of 2011 prior to his trial, which could have resulted in a 35 year sentence. McCloskey pleaded guilty to conspiracy and aiding and abetting in October of 2011 and was sentenced to 38 months’ imprisonment, 3 years’ supervised release and restitution of $166,141.23. Per PACER, McCloskey was ordered to surrender for the service of her sentence at a designated prison after January 31, 2012 on a date to be determined. Although PACER did not list the actual date of her surrender, the Federal Bureau of Prisons inmate locator shows McCloskey was released on October 31, 2014, at most a 33 month sentenced served.

In contrast, Jeffrey Krantz and Jeffrey Warga who pleaded guilty to wire fraud and conspiracy to commit wire fraud, respectively, each received 3 years’ probation and joint restitution of $402,500.00 or a slap on the wrist. For Krantz, violation of 18 U.S.C. Section 1343, engaging in wire fraud, carries a maximum penalty of 20 years’ imprisonment and a $250,000.00 fine. According to Krantz’s plea agreement, Krantz sold over a thousand chips to Warga, which were subsequently sold to a Connecticut company, many of which were remarked parts. Krantz “acknowledges that he was aware of the increasing risk that parts from China may have been remarked in such a way as to purport to be a new and original part when they were not….[and] that sending parts out for testing by independent labs could not provide certainty that the parts were new and original products.”5 However, the charge under which he was sentenced was for causing an email to be sent from Warga to the Connecticut Company to Krantz’s email account for the purpose of executing the scheme to defraud, which is a wire transmission in interstate commerce.

Although it seems that the government attempted to start convictions of a like nature with a bang and first sentenced Zhen Zhou Wu to 84 months, subsequent sentencing judgements, with the exception of Picone, have resulted in shorter incarcerations and higher restitution amounts. Given the estimated billions of dollars in counterfeit sales and incentives behind foreign operatives and governments to obtain controlled material, stronger deterrents are required by prosecutors and the government.

Major Criminal Complaints Filed by US Prosecutors Relevant to Electronics Industry

Name (Last, First)	Company Name(s)	Complaint Date	Offense(s)	Sentence Date	Sentence
Wu, Zhen Zhou (Alex)	Chitron Electronics	12/4/08	Munitions export violation Commerce control export violation Conspiracy to violate Munitions List & Commerce Control List Conspiracy to file materially false shippers export declarations	1/26/11	84 months imprisonment $15,000.00 fine Deportation
McCloskey, Stephanie	VisionTech Components	9/14/10	Conspiracy and aiding and abetting	10/28/11	38 months imprisonment 3 years supervised release Restitution of $166,141.23 paid through forfeiture
Aljaff, Mustafa	MVP Micro	8/21/09	Conspiracy to defraud United States Trafficking in counterfeit goods	2/28/12	30 months imprisonment Restitution $177,862.22 joint w/Felahy
Felahy, Neil	MVP Micro	8/21/09	Conspiracy Trafficking in counterfeit goods	3/16/12	20 months imprisonment Restitution $184,612.57 joint w/Aljaff
Hashemi, Mohammad	Excellent PetroAlloy	8/14/12	Conspiracy to Export to Embargoed Country (Iran)	12/16/13	27 months imprisonment
Yang, Hao	MS Technologies Inc.	6/12/13	Conspiracy to traffic in counterfeit goods and counterfeit military goods	4/23/14	21 months imprisonment, deportation Forfeiture $59,000.00 cash and items valued at $280,720.00
Frediani, Steven	InstoComp	2/26/13	Conspiracy to commit aircraft parts fraud Aircraft parts fraud	4/28/14	18 months imprisonment 12 months home detention with electronic monitoring 1400 hours community service Restitution $229,494.24 joint w/Nichols
Nichols, Glenn	InstoComp	2/26/13	Conspiracy to commit aircraft parts fraud	5/13/14	15 months imprisonment Restitution $229,494.24 joint w/Frediani
Picone, Peter	Epic International Tytronix	6/25/13	Conspiracy to traffic in counterfeit military goods	10/8/15	37 months imprisonment Restitution $325,088.00
Krantz, Jeffrey	Harry Krantz	7/28/15	Wire Fraud	12/10/15	3 years probation $100,000.00 fine $402,500 restitution joint w/Warga
Warga, Jeffrey	Bay Components	12/10/14	Conspiracy to commit wire fraud	1/22/16	3 years probation $402,500 restitution joint w/Warga
Wren, Shannon	VisionTech Components	9/14/10	Conspiracy Trafficking in counterfeit goods Mail fraud	-	Died May 2011
Flider, Pavel Semenovich	Trident International	3/5/15	Smuggling goods Conspiracy to commit money laundering Money laundering	Plea sched. 7/26/16
Fishenko, Alexander	Arc Electronics	9/28/12	Acting as an agent without notifying Attorney General Conspiring to export microelectronics to Russia Illegally exporting microelectronics to Russia Money laundering conspiracy Obstruction of justice	Sched. 6/29/16
Brazhnikov Jr., Alexander	ABN Universal Zond-R	6/26/14	Conspiracy to commit money laundering Conspiracy to smuggle goods out of US Conspiracy to violate IEEPA	Sched. 6/30/16
Man, Wenxia (Wency)	AFM Microelectronics	8/21/14	Violation of Arms Export Control Act	Sched. 8/19/16
Yan, Jiang (Ben)	HK Potential Electronics	12/10/15	Conspiracy to traffic in counterfeit goods Attempt to violate IEEPA
Zuo, Xianfeng	HK Potential Electronics	12/10/15	Conspiracy to traffic in counterfeit goods
Zhang, Daofu	HK Potential Electronics	12/10/15	Conspiracy to traffic in counterfeit goods
Skiscim, Paul	Aerospace Fasteners	2/24/16	Fraud involving aircraft of space vehicles Wire Fraud False claims

---

¹United States v. Fishenko et al., 12-cr-626(SJ) Redacted Sentencing Memorandum, June 15, 2016.

²"18 U.S. Code § 2320 - Trafficking in Counterfeit Goods or Services." LII / Legal Information Institute. Cornell University Law School, n.d. Web. 20 June 2016. https://www.law.cornell.edu/uscode/text/18/2320

³Shindell, Matthew R., Todd Kramer, and Stanely H. Salot, Jr. "The 'Ticking Time Bomb' of Counterfeit Electronic Parts." The 'Ticking Time Bomb' of Counterfeit Electronic Parts. Industry Week, 22 July 2013. Web. 20 June 2016. http://www.industryweek.com/procurement/ticking-time-bomb-counterfeit-electronic-parts

⁴"Deterrence (legal)." Wikipedia, n.d. Web. https://en.wikipedia.org/wiki/Deterrence_(legal)

⁵Jeffrey Krantz Plea Agreement, July 28, 2015.

ERAI is investigating what is believed to be a crime ring operating in the Los Angeles, CA and Las Vegas, NV areas. There is evidence to suggest the individuals operating these organizations are placing purchase orders with fraudulent intent. A majority of the addresses provided herein are either residential or belong to shipping services (e.g. Postal Etc., Mail Link, and other similar services). The phone numbers are disconnected, the websites cannot be located, are parked by the registrar, or are currently for sale, and emails are either undeliverable or do not elicit responses. Most of the email accounts end in .net or yahoo.com.

The California group of companies is almost exclusively placing orders for Amphenol connectors. The Las Vegas group of companies is exclusively placing orders for switches. Both groups operate in the exact same manner and are believed to be working together.

A list of the parts the criminals have stolen and are believed to still be seeking can be also downloaded at:
http://www.erai.com/customuploads/Parts_Crime_Ring_stolen.pdf

Bill To	Ship To	Invoice Date	Part Number	Manufacturer	Qty	Price	Description
Rainbow Steel Co	Rainbow Steel Co	1/23/15	6FC54-73	Carling Technologies	240	$4.19	Switch, Toggle
Rainbow Steel Co	Rainbow Steel Co	1/23/15	6GM5S-73	Carling Technologies	1	$20.59	Switch, Toggle
Rainbow Steel Co	Rainbow Steel Co	1/26/15	6GM5S-73	Carling Technologies	7	$20.59	Switch, Toggle
Rainbow Steel Co	Rainbow Steel Co	1/26/15	6FC54-73	Carling Technologies	250	$4.19	Switch, Toggle
Rainbow Steel Co	Rainbow Steel Co	1/29/15	12TS15-7	Honeywell Micro	63	$8.39	Switch, Toggle
Rainbow Steel Co	Rainbow Steel Co	1/29/15	6GM5M-73	Carling Technologies	32	$12.39	Switch, Toggle
Rainbow Steel Co	Rainbow Steel Co	1/30/15	97-3106B-14S-9S(689)	Amphenol Industrial	12	$32.12	Connector, Metal
Rainbow Steel Co	Rainbow Steel Co	1/30/15	97-3108B-14S-9S(621)	Amphenol Industrial	50	$14.10	Connector, Metal
Rainbow Steel Co	Rainbow Steel Co	1/30/15	97-3102A-14S-9P(689)	Amphenol Industrial	50	$8.68	Connector, Metal
Rainbow Steel Co	Rainbow Steel Co	1/30/15	12TS115-7	Honeywell Micro	27	$6.80	Switch, Toggle
Rainbow Steel Co	Rainbow Steel Co	1/30/15	6GM5Y-73-XA	Carling Technologies	50	$10.53	Switch, Toggle
Rainbow Steel Co	Rainbow Steel Co	2/2/15	97-3108B-14S-9S(639)	Amphenol Industrial	50	$15.23	Connector, Metal
Rainbow Steel Co	Rainbow Steel Co	2/2/15	97-3102A-14S-9P(689)	Amphenol Industrial	50	$8.68	Connector, Metal
AG Pneumatic Co	AG Pneumatic Co	3/9/15	6FC54-73	Carling Technologies	238	$4.64	Switch, Toggle
Global Orbit Inc	Global Orbit Inc	10/27/15	6FC54-73	Carling Technologies	250	$3.87	Switch, Toggle
Global Orbit Inc	Global Orbit Inc	10/30/15	6FC54-73	Carling Technologies	220	$4.05	Switch, Toggle
Global Orbit Inc	Global Orbit Inc	11/3/15	6FC54-73	Carling Technologies	200	$4.05	Switch, Toggle
LG Trading Co	LG Trading Co	11/5/15	6GM5M-78	Carling Technologies	100	$7.94	Switch, Toggle
LG Trading Co	LG Trading Co	11/9/15	6GM5M-78	Carling Technologies	88	$8.18	Switch, Toggle
LG Trading Co	LG Trading Co	11/11/15	97-3106A-14S-9S(639)	Amphenol Industrial	50	$12.09	Connector, Metal
LG Trading Co	LG Trading Co	11/12/15	97-3108B-14S-9S(621)	Amphenol Industrial	50	$14.10	Connector, Metal
Global Orbit Inc	Global Orbit Inc	11/13/15	97-3108B-14S-9S(639)	Amphenol Industrial	51	$15.23	Connector, Metal
LG Trading Co	LG Trading Co	11/16/15	97-3108B-14S-9S(639)	Amphenol Industrial	52	$15.23	Connector, Metal
Random Sparks LLC	Random Sparks LLC	11/16/15	97-3106A-14S-9S(639)	Amphenol Industrial	60	$12.09	Connector, Metal
Random Sparks LLC	Random Sparks LLC	11/17/15	97-3108B-14S-9S(621)	Amphenol Industrial	50	$14.10	Connector, Metal
LG Trading Co	LG Trading Co	11/19/15	97-3106A-14S-9S(639)	Amphenol Industrial	50	$12.09	Connector, Metal
Global Orbit Inc	Global Orbit Inc	11/20/15	97-3108B-14S-9S(621)	Amphenol Industrial	52	$14.10	Connector, Metal
Random Sparks LLC	Random Sparks LLC	11/20/15	97-3108B-14S-9S(639)	Amphenol Industrial	53	$15.23	Connector, Metal
LG Trading Co	LG Trading Co	11/25/15	97-3106A-14S-9S(639)	Amphenol Industrial	50	$12.09	Connector, Metal
LG Trading Co	LG Trading Co	12/1/15	97-3108B-14S-9S(621)	Amphenol Industrial	62	$14.10	Connector, Metal
LG Trading Co	LG Trading Co	12/9/15	MS3102A14S-9P	Amphenol Industrial	134	$5.56	Connector, Box
LG Trading Co	LG Trading Co	12/11/15	97-3108B-14S-9S(639)	Amphenol Industrial	50	$15.23	Connector, Metal

ERAI urges your organization to contact us if you have information that might assist with this investigation. Organizations identified thus far and believed to be involved in this criminal ring are:

Dynamic Wholesale Services/Dynamic Wholesale Co.
2307 Alameda Ave
Ventura, CA 93003
Reported for six past unpaid invoices totaling $6,810.60 dating back to December 2015 and January 2016. Payment terms were Net 30.

Exchange Evolution LLC
3717 S La Brea Ave, Pmb
Los Angeles, CA 90037
Reported for six unpaid invoices totaling $4,550.00 dating back to February 2016. Payment terms were Net 30.

Global Orbit, Inc.
331 W 91st Pl
Los Angeles, CA 90003
Reported for five unpaid invoices totaling $4,709.09 dating back to October and November 2015. Payment terms were Net 30.

Prime Flux, Inc.
590 Avocet Dr, Apt. 117
Redwood City, CA 94065
Reported for four unpaid invoices totaling $3,755.88 dating back to February 2016. Payment terms were Net 30.

Random Sparks LLC
137 N Larchmont Blvd
Los Angeles, CA 90004
Reported for three unpaid invoices totaling $2,580.74 dating back to November 2015. Payment terms were Net 30.

Spark Seasons Inc.
8212 S Western Ave, Suite B
Los Angeles, CA 90047
Reported for five unpaid invoices totaling $4,375.17 dating back to March 2016. Payment terms were Net 30.

AG Pneumatic Co.
2332 S Nellis Blvd
Las Vegas, NV 89104
Reported for unpaid invoices totaling $1,133.4 dating back to March 2015. Payment terms were Net 30.

LG Trading Co.
4952 S Rainbow Blvd
Las Vegas, NV 89118-1114
Reported for eleven unpaid invoices totaling $8,404.19 dating back to November 2015. Payment terms were Net 30.

Rainbow Steel Co.
848 N Rainbow Blvd
Las Vegas, NV 89107
Reported for seven unpaid invoices totaling $6,975.77 dating back to January 2015. Payment terms were Net 30.

Report Detained/Seized Shipments

ERAI has created a new reporting tool, Report Detained/Seized Shipment. In an effort to enhance the data provided by ERAI to our Members, ERAI has begun documenting incidents of seizures and detentions made by U.S. Customs and Border Protection (CBP) reported to us by U.S.-based distributors who are placing orders with international suppliers. Our objective is to identify and report suppliers that are sending suspect counterfeit goods that are detained and subsequently seized by CBP.

We need your help - please take a moment to let us know about these suppliers. For shipments that have been seized, you can choose to permit ERAI to publish the name of the supplier in an ERAI Alert or alternately, we can keep the information confidential in our internal database for us to track – you choose. If you have only received a detention notice, ERAI will not issue an ERAI Alert against the supplier. We do ask that you consider sharing the data with other Members for seized shipments. Industry-wide cooperation is key to stemming the flow of counterfeit parts. ERAI relies on information provided by Members and non-Members alike and, in turn, it is our duty to share not just data, but lessons learned, best practices and strategies in our quest to control the flow of counterfeit products and illicit business practices throughout the electronics supply chain.

If you have received a notice of detention or seizure from the United States Customs and Border Patrol (CBP), please take a moment to let us know at http://www.erai.com/Report_CBP_Seizure_.

E-Waste Resources

A new section has been added to the "Toolbox" section of the ERAI website covering the topic of electronic waste or “e-waste” and the danger it poses as a source of material for counterfeiters. While the United States currently has no federal law requiring the recycling of e-waste and is the only developed nation that has not ratified the Basel Convention, which was designed to limit the movement of hazardous waste from developed to developing countries, there are efforts from private industry and legislative bodies taking place domestically and internationally to curb e-waste. Even though the topic isn’t new, we wanted to create a resource for Members to easily locate the latest news, legislation and e-waste initiatives.




Updated Website User Manual

Need help with using ERAI’s part sourcing tool to find a same-day shippable part from an ERAI Member? Do you have questions on how to create a customized slideshow from the ERAI Nonconformance Photo Library? We have made updates to our User Manuals - please be sure to login and download your copy to ensure you're gaining the most from your membership. The user manual can be found under the “Support” tab by clicking on the “User Manual” subtab.

	Disconnect – Goodwill and Dell, Exporting the Public’s E-Waste to Developing Countries Why you should read it: Basel Action Network (BAN), a non-profit organization that aims to end toxic trade, has drafted a report on e-waste trade and describes the likelihood that non-functional electronics are being illegally exported to developing countries. ERAI Insight: After installing 200 GPS-enabled trackers into various pieces of non-functional electronic equipment, BAN delivered the devices to electronics recyclers (74.5%), charity thrift stores (24.5%) and US-based retailers (2%). The results showed that 32.5% of the devices were exported and, by BAN’s best estimation, 31% of the exported devices were likely illegal shipments sent to countries or regions that prohibit or restrict such imports, predominantly Hong Kong and China. Not only do the findings show that e-waste export from the U.S. continues, but also demonstrate that e-waste sent to recycling programs implemented by companies such as Dell Reconnect and Avnet Services, despite their stated e-waste export policies and certifications, are somehow winding up in Asia. http://www.erai.com/CustomUploads/ca/wp/Disconnect_Goodwill_Dell_Exporting_Publics_Ewaste.pdf
	A2: Analog Malicious Hardware Why you should read it: The paper drafted by researchers at the University of Michigan demonstrates how a malicious actor can create a small and stealthy backdoor on a microprocessor during the third-party fabrication process. ERAI Insight: This nearly-impossible to detect method does not require major changes to the chip’s design and consists of the addition and use of a single logic gate whose function can be switched from off to on when an accumulated charge inside a capacitor reaches a particular threshold. This analog trigger sequence is impractical to simulate at the analog level and is missed by functional verification performed on the hardware description language as the trigger can be crafted to occur only when specific and unlikely events happen. http://www.erai.com/CustomUploads/ca/wp/A2_SP_2016.pdf
	Measuring the Magnitude of Global Counterfeiting Why you should read it: This report drafted by the Global Intellectual Property Center of the U.S. Chamber of Commerce provides a comparative analysis of counterfeiting as a whole and a breakdown of the share of the global rate of counterfeiting for 38 economies. ERAI Insight: The report demonstrates that since 2009, global counterfeiting has grown at a rate of 0.6%. While the paper does not provide breakdowns by commodity types, it does analyze the sources of counterfeit goods. China and Hong Kong together are estimated as the source for 86% of counterfeit goods estimated at a value of $396.5 billion. For China alone, counterfeit exports comprise 12.5% of the total goods exported and over 1.5% of its GDP. Additionally, the article finds that the value of counterfeit goods seized and reported by customs authorities in 38 economies represents just under 2.5% of the total estimated $461 billion in counterfeits, so although authorities are resulting in detections and confiscations, the overall success rate represents only a small amount of global counterfeit goods. http://www.erai.com/CustomUploads/ca/wp/GlobalCounterfeiting_Report.pdf

Hong Kong government accused of failing to uphold international law over import of electronic waste
http://WWW.SCMP.COM/NEWS/HONG-KONG/HEALTH-ENVIRONMENT/ARTICLE/1978082/HONG-KONG-GOVERNMENT-ACCUSED-FAILING-UPHOLD

Business E-Mail Compromise: The 3.1 Billion Dollar Scam
https://www.ic3.gov/media/2016/160614.aspx

At long last: The final rule on safeguarding of contractor information systems
http://www.federaltimes.com/story/government/solutions-ideas/2016/06/13/far-rule-federal-contractor-information/85825436/

The US is still dumping some of its toxic e-waste overseas
http://www.pri.org/stories/2016-06-02/us-still-dumping-some-its-toxic-e-waste-overseas

DOD Sees Tiny RFID Chip as a Way to Verify Electronics
http://www.rfidjournal.com/articles/view?14524

Buying Components Should Never Be a Calculated Risk
http://globalpurchasing.com/blog/buying-components-should-never-be-calculated-risk?NL=ESB-001&Issue=ESB-001_20160517_ESB-001_694&sfvc4enews=42&cl=article_1_b&utm_rid=CPG05000002135827&utm_campaign=6331&utm_medium=email&elq2=549755116f2549fbb8c70ea3ef17966e

DoD Proposes Cost Allowability Rule for Correcting Counterfeit Electronic Parts
http://www.lexology.com/library/detail.aspx?g=227d75a3-7e7e-4d19-a173-7d1c3fa7ace7

Chinese citizen pleads guilty to selling fake computer circuits
http://fox61.com/2016/04/15/chinese-citizen-pleads-guilty-to-selling-fake-computer-circuits/

New Standard Supports Ongoing Efforts to Combat Counterfeit Semiconductors
http://www.eetimes.com/author.asp?section_id=36&doc_id=1329410