Counterfeit chip a problem as global shortage increases semiconductor fraud

• The global chip shortage has inevitably expanded the playing field for criminals.
• In 2021, there were 101 wire fraud cases reported to the US-based firm, up from 70 in 2020 and 17 five years ago.
• Most of the wire fraud was by chip brokers in China, according to ERAI Inc.

In the land of counterfeits, even semiconductors have its place. While the brains of modern electronics have been hitting countless roadblocks, with a chip shortage that never seemed to end over the last two years, opportunists on the other hand, have been cashing in on counterfeiting. The influx of fake chips has been in the limelight for months now and it’s mainly heightened by demand — businesses in need of semiconductors accidentally engaging with bad actors.

Aside from counterfeits, the chip industry is also a victim of wire fraud cases, and according to ERAI Inc, the world’s leader in counterfeit electronics databases, 2021 saw a record wire fraud cases reported by desperate buyers. Unfortunately, in the same way that companies didn’t report data breaches until they were required to do so by legislation, companies that purchased counterfeit chips or were victims of frauds, don’t want to admit that they weren’t savvy enough to detect it or have sufficient control over their supply chain.

Although there is a government counterfeit parts database called Government-Industry Data Exchange Program (GIDEP), it doesn’t allow for anonymous reporting, making ERAI the main database that companies use for navigating counterfeit chip problems and reporting fraud, according to industry experts. 

In a report by Reuters yesterday, ERAI was quoted saying that in 2021 there were 101 wire fraud cases reported to the US-based firm, up from 70 in 2020 and 17 five years ago. ERAI president Mark Snider said companies looking for chips that they could not find through authorized and vetted distributors, were trying to buy them from shadier brokers. That resulted in them transferring funds for goods that never got delivered.

While reporting on it is voluntary, an interesting fact that Snider shared is that most of the wire fraud was by chip brokers in China. In hindsight, counterfeit chip incidents have dropped sharply since 2019 from 963 cases to 504 reported last year. In 2020, there were 463 reported cases.  Snider reckons China’s pandemic-related shutdowns could be making it harder for counterfeiters to operate.

He also noted that counterfeits are increasingly more sophisticated, evading detection. When the Wall Street Journal reported on the rise of frauds and counterfeits amidst the global chip shortage, the writer quoted ERAI stating that new complaints arrive almost every day, VP Kristal Snider told WSJ. Buyers from more than 40 countries have filed reports of wire fraud, she added. 

“The transgressors are generally opportunistic criminals. They lure victims through targeted ads on search engines, direct them to boastful webpages and then disappear after receiving wire payment. ERAI has flagged dozens of high-risk websites, many based in Hong Kong,” stated the article.

The problem, of course, is unlikely to affect tech giants whose reliance on semiconductors is such that they have implemented robust supply chains, and will typically only purchase components directly from chip manufacturers. Rather, those at risk include low-volume manufacturers whose supply chain for semiconductors is less established – but it could include companies in sectors that are as critical as defense, healthcare and even automotive.

Typically, those smaller companies will use the services of third-party distributors. These can be franchised distributors, which means that they have contracts in place to buy directly from the chip manufacturer; or they can be independent distributors, who buy and sell components from different places, including from equipment manufacturers who have surplus inventory.  Irrespective of that, distributors have become central to the semiconductor supply chain, whether franchised or independent, distributors have become central to the semiconductor supply chain.

As McKinsey puts it, they now handle almost a quarter of the semiconductor industry’s revenues. Overall, it is inevitable for the growth of clones and counterfeits to continue over the next few years. In fact, chips built in today’s advanced process technologies will be cloned more frequently as those nodes become more accessible and mature.

The conclusion is that the industry is still in the very early days of addressing the complex challenges of counterfeiting. As Ars Technica notes, counterfeiters are well aware of the time pressure and chip shortages that companies face, and appeal to their victims’ ultimate need to get products out the door in spite of shortages.

 

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