oversight

Nuclear Safety and Health: Counterfeit and Substandard Products Are a Governmentwide Concern

Published by the Government Accountability Office on 1990-10-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                        NUCLEAR SAFETY
                        AND HEALTH
                        Counterfeit and
                        Substandard
                        Products Are a
                        Governmentwide
                        Concern


                                          142684




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Resources, Community, and
Economic Development Division

11-240922

October 16,199O

The Honorable John D. Dingell
Chairman, Subcommittee on Oversight
  and Investigations
Committee on Energy and Commerce
House of Representatives

Dear Mr. Chairman:

At your request, we identified incidents where the Nuclear Regulatory Commission (NRC)
found that suppliers have provided nonconforming products, including counterfeit and
substandard parts, to commercial nuclear power plants and the measures NRC has taken to
reduce the number of such incidents in the future. Subsequently, we agreed to obtain a
broader perspective on the issue of nonconforming parts by contacting the Departments of
Defense, Energy, and Transportation; National Aeronautics and Space Administration; and
Federal Aviation Administration. This report presents the results of our efforts.

Unless you publicly announce its contents earlier, we plan no further distribution of this
report until 30 days from the date of this letter. At that time, we will send copies to the
appropriate congressional committees; the Chairman, NRC; the Secretaries of Defense,
Energy, and Transportation; the Administrators of the Federal Aviation Administration and
the National Aeronautics and Space Administration; and the Director, Office of Management
and Budget. We will also make copies available to others upon request.

This work was performed under the direction of Victor S. Rezendes, Director, Energy Issues,
who can be reached at (202) 275-1441. Other major contributors are listed in appendix III.

Sincerely yours,




J. Dexter Peach
Assistant Comptroller General
Executive Summary


                   Nonconforming products, such as fasteners, pipe fittings, electrical
Purpose            equipment, and valves, have been installed in nuclear power plants,
                   naval submarines, commercial and military aircraft, and the space
                   shuttle. Such products include those that are fraudulently produced
                   (counterfeit) and/or substandard because they do not conform in quality
                   to design or other specifications. Nonconforming products can fail and
                   result in death or injury to the public and workers, increase government
                   program costs significantly, and waste tax dollars.

                   The Chairman, Subcommittee on Oversight and Investigations, House
                   Committee on Energy and Commerce, asked GAO to determine the extent
                   to which nonconforming products ha.ve been supplied to nuclear power
                   plants and the measures the Nuclear Regulatory Commission (NRC) has
                   taken to reduce the number of such incidents. Subsequently, the
                   Chairman asked GAO to obtain a broader perspective on nonconforming
                   products from the Department of Defense (DOD); Department of Energy
                   (DOE); Department of Transportation (DOI'), including the Federal Avia-
                   tion Administration (FAA); and National Aeronautics and Space Adminis-
                   tration (NAM).


                   Under the Atomic Energy Act of 1954, as amended, NRC oversees the
Background         operation of nuclear power plants to ensure that they do not pose undue
                   public health and safety risks. NRC requires utilities to (1) purchase
                   products that meet standards set by industry groups or (2) upgrade
                   commercial products to meet the standards and establish programs to
                   ensure the quality of the parts that will be installed in the plants-from
                   nuts and bolts to electrical components. NRC periodically inspects the
                   utilities’ quality assurance programs, In addition, the five other agencies
                   GAO contacted purchase a variety of products; many have been found to
                   be nonconforming. (See ch. 1.)


                   Utilities have installed nonconforming products in, or are suspected of
Results in Brief   having received them for, about 64 percent of the 113 domestic nuclear
                   power plants. Also, during the past 5 years, NRC'S inspections of 13 utili-
                   ties’ quality assurance programs found problems with 12. As a result of
                   the inspections, NRC took enforcement actions against eight utilities, but
                   in April 1990 the Commission withdrew the actions against two utilities
                   and deferred quality assurance program inspections for at least 1 year.

                   Nonconforming products are a governmentwide problem, but consoli-
                   dated data do not exist to help prevent the purchase of these products


                   Page 2                         GAO/RCED-91-6   Counterfeit   and Substandard   Products
                            Executive   Summary




                            by government and utility officials. Further, the magnitude of the
                            problem, cost to the taxpayers, and potential dangers resulting from
                            using such products are not known. Incidents have occurred that illus-
                            trate the need for an information clearinghouse for these products. For
                            instance, 5 years after DOD had identified certain vendors as suspect,
                            utilities installed steel from these companies in safety systems designed
                            to prevent or mitigate an accident at a nuclear plant. NRC warned utili-
                            ties about these vendors only after they were indicted for selling non-
                            conforming products. In 1988 the Office of Management and Budget
                            (OMH), which provides management leadership to the executive branch,
                            agreed to act as a clearinghouse for information on nonconforming prod-
                            ucts. OMI3 has not fulfilled its commitment.


Principal Findings

NRC Is Deferring Its        IJtilities operating at least 72 of the 113 domestic nuclear power plants
Regulatory Responsibility   have installed or are suspected of having received nonconforming prod-
                            ucts. Substandard fasteners (nuts, bolts, and screws) have been found in
                            58 percent of the plants; 8 percent of the fasteners were installed in
                            safety systems designed to prevent or mitigate an accident and the
                            escape of radiation if an accident occurs. Utilities have also found non-
                            conforming steel, fuses, pumps, valves, and circuit breakers; some were
                            installed in safety systems. Since 1985 NRC has found numerous weak-
                            nesses in 12 of 13 utility programs designed to ensure the quality of the
                            products utilities purchase. NRC initially took enforcement actions, such
                            as imposing financial penalties, against 8 of the 12 utilities. NRC subse-
                            quently concluded that nonconforming products are an industrywide
                            problem and in March 1990 decided to give utilities time to implement
                            an industry program for improving their procurement practices. As a
                            result of this decision, in April 1990 the Commission withdrew enforce-
                            ment actions against two utilities, approved a staff request to defer
                            quality assurance inspections for 1 year, and delayed moving forward
                            with regulations to improve utilities’ quality assurance programs.
                            Although NRC has not identifed major safety problems resulting from
                            nonconforming products, it recognizes that unchecked the problem could
                            have a significant impact on safe plant operations. NRC'S actions during
                            the spring of 1990 seem to conflict with the need for continuous and
                            aggressive oversight of this problem. (See chs. 2 and 3.)




                            Page 3                        GAO/RCED-91-6   Counterfeit   and Substandard   Products
                                                                                                              -
                           Executive   Summaxy




Nonconforming Products     In July 1990 OMB'S President’s Council on Integrity and Efficiency
Are a Governmentwide       reported that substandard and counterfeit products were a serious con-
                           tern to about 11 federal agencies that it surveyed. Likewise, all six fed-
Problem                    eral agencies GAO contacted have identified an increasing number of
                           nonconforming products. In addition to NRC'S finding such parts in most
                           nuclear power plants, DOD has found nonconforming parts in radar,
                           sonar, and communication systems; guidance systems for aircraft, ships,
                           and missiles; and weapons systems. In 1989 DOD'S Inspector General esti-
                           mated that the Air Force paid over $100 million between September
                           1986 and 1988 for substandard parts. Also, DOE has found noncon-
                           forming circuit breakers in several of its nuclear weapons facilities,
                           including the Rocky Flats, Colorado, plant and the Tonopah Test Range,
                           Nevada. FAA has found defective helicopter parts, and a DOT and NASA
                           investigation resulted in guilty pleas by a company that sold noncon-
                           forming fasteners for commercial aircraft and the space shuttle. (See
                           chs. 2 and 4.)


No Governmentwide          Although nonconforming products are widespread throughout the gov-
Effort Exists to Address   ernment, consolidated data do not exist to help prevent the purchase of
                           these products. Also, the magnitude of the problem, cost to the tax-
Nonconforming Products     payers, or potential dangers resulting from using such products are not
                           known. In 1988 OMB agreed to develop a plan for distributing informa-
                           tion on nonconforming products. Except for surveying federal agencies
                           to determine the extent of the problem, OMB has not followed through on
                           its commitment. According to officials, OMB does not have the resources
                           to meet its commitment; an official noted that federal agencies should
                           collect and disseminate the information.

                           In its July 1990 survey report, OMB recommended further studies to
                           determine whether reported product substitution really is a problem.
                           GAO believes that a more aggressive approach is needed. All six agencies
                           have individually or jointly investigated vendor or product fraud allega-
                           tions; the Department of Justice has obtained convictions in some cases.
                           NRC'S Office of Investigations and NASA'S Inspector General joined forces
                           against two companies for falsely identifying reconditioned circuit
                           breakers as new. The Palo Verde, Arizona, nuclear power plant had
                           installed the circuit breakers, and the Diablo Canyon, California, plant
                           had purchased-but      not installed-them.  The court ordered the circuit
                           breaker companies to pay Palo Verde’s owner $1.3 million for, among
                           other things, costs incurred to replace the products. The investigations
                           and convictions support the need for an aggressive governmentwide



                           Page 4                        GAO/RCED-91-6   Counterfeit   and Substandard   Products
                           Executivesummary




                           approach to help resolve the problem of nonconforming parts. (See ch.
                           4.)


Centralized Information    Although OMB has been slow to take actions, the six federal agencies met
Exchange System Would      in January, April, and July 1990 to discuss and develop a mechanism to
                           exchange information on nonconforming products. Officials from the six
Eknefit Federal Agencies   agencies agree that they need consolidated information to manage their
                           programs effectively, and a nonconforming product clearinghouse would
                           allow them to share information critical to procurement decisions.
                           Without such a system, many years may elapse before information one
                           agency has about a problem company is shared with other concerned
                           agencies. GAO found, for instance, that DOD had identified two companies
                           suspected of selling nonconforming steel products for use in submarines
                           and surface ships almost 5 years before NRC warned utilities about the
                           companies. Utilities had bought from these companies products that
                           were installed in safety systems designed to prevent or mitigate a
                           nuclear plant accident or the escape of radiation if an accident occurs.

                           Centralized information could also increase the number of joint investi-
                           gations of vendors suspected of selling nonconforming products. For
                           example, a federal task force investigated a 15-year scheme by the
                           largest manufacturer of aerospace fasteners for, in part, falsifying some
                           product quality test results. In May 1990 the company pleaded guilty to
                           fraud charges and agreed to pay $18 million in penalties. (See ch. 4.)


                           To help ensure an aggressive regulatory posture concerning products
Recommendations            used in plant safety systems, GAO recommends that the Chairman, NRC,
                           reinstitute inspections of utilities’ quality assurance programs and take
                           appropriate enforcement actions when violations occur.

                           Also, GAO recommends that the Director, OMB, develop an action plan and
                           designate a lead agency to give priority to implementing the plan and
                           developing a computerized system that allows federal agencies easy
                           access to information on these products.


                           GAO discussed the facts presented in this report with officials from the
Agency Comments
          ”                six federal agencies and OMB. They generally agreed with the facts but
                           offered some clarifications, which were incorporated where appro-
                           priate. As requested, GAO did not ask these agencies to comment offi-
                           cially on this report.


                           Page 5                         GAO/RCEB91-6   Counterfeit   and Substandard   Producta
contents


Executive Summary                                                                                               2

Chapter 1                                                                                                   8
Introduction           Vendor Inspection Branch Oversees Quality Assurance
                       Objectives, Scope, and Methodology
                                                                                                            9
                                                                                                           10

Chapter 2                                                                                                  13
Nonconforming          Who Sells Nonconforming Products?
                       Nonconforming Parts Have Been Sold to Many Nuclear
                                                                                                           13
                                                                                                           13
Products: A                Power Plants
Governrnentwide        Federal Agencies Have Found Nonconforming Products                                  20
Problem                Conclusions                                                                         23


Chapter 3                                                                                                  24
NRC Is Deferring Its   NRC Has Taken Some Actions to Detect and Minimize the
                           Incidence of Nonconforming Parts
                                                                                                           24
Regulatory             Conclusions                                                                         28
Responsibility         Recommendation to the Chairman, NRC                                                 28

Chapter 4                                                                                                  29
No Governmentwide      Agencies’ Actions Concerning Nonconforming Products                                 29
                                                                                                           32
                       Other Actions to Address Nonconforming Parts
Effort Exists to       Benefits Would Be Derived From Sharing Information                                  33
Address                Federal Responsibility for Coordinating Information on                              36
Nonconforming              Nonconforming Products
                       Conclusions                                                                         38
Products               Recommendation to the Director, OMB                                                 39

Appendixes             Appendix I: List of Agencies and Officials Contacted                                40
                       Appendix II: Some NRC Communications to Utilities                                   41
                           Regarding Nonconforming Products
                       Appendix III: Major Contributors to This Report                                     42

Tables                 Table 2.1: Nonconforming Products That Nuclear Power                                15
                           Plants Have Received or Are Suspected of Having
                           Received
                       Table 2.2: Nuclear Power Plants That Received Fasteners                             18
                           Sufficiently Out of Specification to Cause Concerns



                       Page 6                        GAO/RCED-91-6   Counterfeit   and Substandard   Products
-
          Content8




          Table 3.1: Enforcement Actions Resulting From NRC’s                                 26
              Procurement Inspections
          Table 4.1: The Lag in Time Between DOD’s and NRC’s                                  33
              Alerts Identifying Nonconforming Products

Figures   Figure 2.1: Types of Surplus Parts for Aircraft                                     22
          Figure 4.1: Fasteners Tested by the Defense Industrial                              34
               Supply Center
          Figure 4.2: Counterfeit Circuit Breaker                                             35




          Abbreviations

          DOD        Department of Defense
          DOE        Department of Energy
          DOT        Department of Transportation
          FAA        Federal Aviation Administration
          GAO        General Accounting Office
          GIDEP      Government-Industry Data Exchange Program
          NASA       National Aeronautics and Space Administration
          NRC        Nuclear Regulatory Commission
          OMR        Office of Management and Budget
          PCIE       President’s Council on Integrity and Efficiency


          Page 7                         GAO/WED-91-6   Counterfeit   and Substandard   Products
Chapter 1

Introduction


               During the early 1960s and 1970s the demand for electric energy
               increased at a rate of about 7 percent a year and showed no signs of
               slowing down. Utilities ordered over 200 nuclear power plants to help
               meet this demand, and an infrastructure developed to supply the parts
               and components needed to build and operate the plants. Utilities subse-
               quently canceled more than 100 orders for new plants. As a result,
               during the 1980s many suppliers (vendors) left the market, and utilities
               began to increase their purchases of overseas and commercial products
               that could be upgraded to meet the Nuclear Regulatory Commission’s
               (NHC) requirements.


               Under the Atomic Energy Act of 1954, NRC oversees the construction
               and operation of nuclear power plants and issues regulations to protect
               public health and minimize danger to life and property. Since 1970 NRC
               has required utilities to establish programs to ensure the quality of
               structures, systems, and components designed to ensure safe plant oper-
               ations Commercial nuclear plants have primary and secondary systems.
               The primary system includes the nuclear reactor and the safety features
               that support its operation. These systems are designed to prevent and/
               or mitigate an accident and protect public health and safety from the
               escape of radiation if an accident occurs. The secondary system contains
               the turbine and generator that produce electricity. Some equipment in
               the secondary system helps ensure the integrity of the reactor and other
               plant operations. Most of NRC'S effort is directed toward the primary
               system.

               To provide guidance to the industry, the American Society of Mechan-
               ical Engineers and Institute of Electrical and Electronic Engineers have
               developed standards for products used in large industrial installations,
               including nuclear plants. NRC has incorporated pertinent sections of
               these standards into its regulations governing safety-related equipment.
               Under NRC'S regulations, utilities can purchase (1) parts and components
               that meet applicable safety standards or (2) commercial products and
               upgrade them to meet the standards. According to NRC staff, nuclear
               utilities, although not required to do so, also maintain lists of vendors
               qualified to supply nuclear-grade products.




               Page 8                        GAO/RCED-91-6   Counterfeit   and Substandard   Products
                        Chapter1
                        Introduction




                        In August 1988 the Chairman, Subcommittee on Oversight and Investi-
Objectives, Scope,and   gations, House Committee on Energy and Commerce, asked us to iden-
Methodology             tify the (1) number of incidents where vendors had supplied to nuclear
                        utilities stainless steel pipe that did not meet specifications and (2) mea-
                        sures taken to ensure that such incidents will not occur in the future.
                        Subsequently, we agreed to gather information on the extent to which
                        the Department of Defense (DOD); Department of Energy (DOE); Depart-
                        ment of Transportation (DCR); including the Federal Aviation Adminis-
                        tration (FAA); and the National Aeronautics and Space Administration
                        (NASA) have experienced problems with nonconforming products.
                        Although we gathered data from these agencies, we did not assess the
                        adequacy or implementation of their quality assurance programs.

                        To develop the information for this report, we reviewed the Atomic
                        Energy Act and NRC'S regulations pertaining to utilities’ quality assur-
                        ance procedures (10 C.F.R. part 50, app. B) and responsibilities for
                        reporting defects and product nonconformance (10 C.F.R. part 21). We
                        also reviewed NRC'S internal policies set out in (1) Regulatory Guide
                        1,123, Quality Assurance Requirements for Control of Procurement of
                        Items and Services for Nuclear Power Plants; (2) Regulatory Guide 1.28,
                        Quality Assurance Program Requirements (Design and Construction);
                        and (3) Regulatory Guide 1.33, Quality Assurance Program Require-
                        ments (Operation). We also obtained almost 40 different generic commu-
                        nications (bulletins and supplements, notices, and letters) that NRC sent
                        utilities concerning nonconforming products, and we examined NRC
                        inspection reports since 1985 of 13 utilities’ quality assurance programs
                        to determine the types of problems found and enforcement actions
                        taken.

                        Further, we interviewed NRC staff in the Offices of Investigations, Exec-
                        utive Director for Operations, Nuclear Reactor Regulation, and Nuclear
                        Regulatory Research, and, where possible, we obtained documentation
                        to support the oral evidence provided. For example, we interviewed
                        staff from the Office of Investigations to obtain information on (1) the
                        number and types of nonconforming product cases pursued since its
                        inception in 1982 and (2) those sent to the Department of Justice for
                        prosecution, We also reviewed the 64 comments that NRC received on an
                        advance notice of proposed rulemaking concerning the need for utilities
                        to improve their quality assurance programs, and we attended a March
                        1990 Commission meeting at which NRC staff presented their recom-
                        mended actions on the advance notice. In addition, we met with officials
                        from the Nuclear Management and Resources Council, which serves as
                        an interface between the nuclear industry and NRC, and from the


                        Page10                          GAO/RCED-9143   Counterfeit   and Substandard   Products
                    chapter        1
                    Introduction




                    Nuclear power is a complex and potentially hazardous technology;
Vendor Inspection   therefore, ensuring quality in the design, construction, and operation of
Branch Oversees     these plants is essential for protecting public health and safety. Since
Quality Assurance    1970 utilities building and operating nuclear plants have been required
                    to adopt quality assurance programs for structures, systems, and com-
                    ponents that prevent or mitigate an accident. Quality assurance refers to
                    the policies and procedures designed to minimize human error, equip-
                    ment malfunctions, other mistakes, and the use of products not con-
                    forming to applicable standards or specifications. In a broad sense,
                    quality assurance includes all of the utilities’ activities related to
                    building and operating a nuclear plant; in a narrower sense, it pertains
                    to utilities’ programs and activities required by NRC for designing,
                    purchasing, installing, inspecting, testing, repairing, and modifying
                    those structures, systems, and components that prevent or mitigate an
                    accident.

                    NRC’S  five regional offices have primary responsibility to inspect utili-
                    ties’ activities, including utilities’ quality assurance programs, and the
                    Vendor Inspection Branch within headquarters periodically conducts
                    inspections to support the regional efforts. The Branch inspects utilities’
                    (1) implementation of quality assurance programs required by 10 C.F.R.
                    part 50, app. B; (2) defect evaluation and reporting required by 10
                    C.F.R. part 21; and (3) conformance to national industrial standards
                    required by NRC or by the procurement specifications. The Branch
                    inspects, in addition to utilities, nuclear steam supply companies;
                    architect-engineering firms; and vendors of nuclear equipment, mater-
                    ials, and services.

                    Once NRC finds a regulatory violation, it can take one or more enforce-
                    ment actions against a utility: issue a Notice of Violation, impose a civil
                    penalty, or issue an order requiring the utility to stop plant operations.
                    NRC can alSO iSSUE! a notice of violation as well as impose a civil penalty
                    against a vendor. The Branch also provides technical support to NRC’S
                    Office of Investigations, which pursues allegations of wrongdoing by
                    utilities or vendors that supply products to them. Since its inception in
                    1982, this office has investigated 60 cases of nonconforming products1



                    ‘For the purposes of this report, nonconforming products include those that are substandard because
                    they do not conform in quality to manufacturing, design, or material specifications and/or are fraud-
                    ulently produced (counterfeit) or otherwise intentionally misrepresented by manufacturers or sun-
                    pliers. However, where appropriate, we have used the agencies’ terminology for such products.
                    Agencies we visited used various terms, including “bogus,” “suspect,” and “fraudulent.”



                    Page 9                                    GAO/RCED-91-6     Counterfeit   and Substandard   Products
Chapter 1
Iutroduction




Nuclear Procurement Issues Committee, which audits utilities’ quality
assurance programs, to discuss the actions that the industry is taking
concerning nonconforming products.

To obtain a governmentwide perspective, we met with officials from
DOD, DOE, DCT, FAA, and NASA (app. I lists the offices that we contacted).
From these officials, we obtained information on their quality assurance
programs, systems for reporting suspect vendors within their agency or
among federal agencies, and investigations conducted and cases prose-
cuted. We also reviewed notices, bulletins, alerts, data bases, and other
methods used by these agencies to notify others about nonconforming
products. Further, we compared information from DOD, DOE, DOT, FAA,
and NASA with information from NRC to determine whether any suspect
companies had done business with both the agencies and nuclear utili-
ties. Also, we contacted the district attorney’s office in Seattle, Wash-
ington, which has investigated product fraud cases with several federal
agencies. We also attended a January 1990 meeting, sponsored by NASA
and attended by six other federal agencies, on problem parts and sup-
pliers of them.

Further, we reviewed a November 1988 report by DOD'S Inspector Gen-
eral on the Government-Industry Data Exchange Program (GIDEP), a
November 1988 report on DOD’S quality assurance efforts, and a May
1989 report examining the Office of Management and Budget’s (OMR)
effectiveness in providing management leadership across the executive
branch.2 Also, we met with OMB officials to discuss their plans to act as a
clearinghouse for information on nonconforming parts. Finally, we
reviewed transcripts of (1) June 1988 hearings on counterfeit fasteners
before the Subcommittee on Oversight and Investigations, House Com-
mittee on Energy and Commerce; (2) March 1989 hearings on fastener
quality assurance before the Subcommittee on Commerce, Consumer
Protection, and Competitiveness, House Committee on Energy and Com-
merce; and (3) April 1989 hearings on counterfeit bolts and fasteners
before the House Committee on Science, Space, and Technology.

We discussed the facts in this report with officials from NRC, DOD, DOE,
ucYr,FAA, NASA, and OMB. They generally agreed with the facts but offered
some clarifications, which were incorporated where appropriate. As
requested, we did not ask the agencies to comment officially on this

2Government-Industry Data Exchange Program, Office of Inspector General, M3D (89~INS-01,Nov.
18,1988); Procurement: Department of Defense Quality Assurance Efforts (GAO/NSIAD-89-28FS,
Nov. 2,1988); and Managing the Government: Revised Approach Could Improve OMB’s Effectiveness
(GAO/GGD-89-65, May 4,1989).



Page 11                               GAO/RCED-91-6    Counterfeit   and Substandard   Products
Chapter 1
Introduction




report. Our work was conducted between May 1989 and June 1990 in
accordance with generally accepted government auditing standards.




Page 12                     GAO/RCED-91-6   Counterfeit   and Substandard   Products
Chapter 2

Nonconforming Products: A
Governmentwide Problem

                      All six of the federal agencies we contacted have found nonconforming
                      parts installed in various components and systems, Utilities have
                      installed nonconforming products in, or are suspected of having received
                      them for, at least 72 of the 113 licensed domestic nuclear power plants.
                      For example, nonconforming fasteners (nuts, bolts, and screws) were
                      found in 68 percent of the plants-8 percent of the fasteners were
                      installed in safety systems. In addition, DOD, DOE, DCYI',FAA, and NASA have
                      found nonconforming products in weapons systems, submarines, air-
                      craft, and the space shuttle. DOD'S Inspector General estimated that the
                      Air Force paid over $100 million between September 1986 and 1988 for
                      substandard spare parts and concluded that such products can
                      adversely affect the readiness of forces and safety of personnel.


                      Large and small companies, both domestic and foreign, have sold non-
Who Sells             conforming parts to the federal government, its contractors, and nuclear
Nonconforming         utilities. Most of the agency officials we contacted said distributors and
Products?             suppliers, not manufacturers of equipment, are the major sources of
                      such products. Beyond that, we found little agreement on the character-
                      istics that identify likely suppliers of nonconforming products. For
                      example, in 1988 DOD found that the typical company in product substi-
                      tution fraud schemes had fewer than 120 employees and sales of
                      between $1 million and $3 million annually. DOD data also showed that
                      several large, well-known domestic companies had sold nonconforming
                      products to the government. According to many officials we contacted,
                      companies that intentionally sell these products do so to save money.


                      Utilities have installed nonconforming parts in, or are suspected of
Nonconforming Parts   having received them for, at least 72 of the 113 licensed domestic
Have Been Sold to     nuclear power plants. The total may be higher because utilities did not
Many Nuclear Power    always delineate the number of plants affected at multi-unit sites. Utili-
                      ties reported finding nonconforming fasteners, such as nuts, bolts, and
Plants                screws, in 58 percent of the plants-some were installed in systems
                      needed to shut down the reactor or mitigate an accident. Many other
                      plants have or are suspected of having nonconforming pipe fittings and
                      flanges, pumps, fuses, valves, valve replacement parts, and electrical
                      equipment (circuit breakers)-some were installed in safety systems. A
                      reduction in the number of nuclear suppliers, vendors’ cost-cutting mea-
                      sures, and a heightened awareness of nonconforming parts have led to
                      the increased detection of such products.




                      Page 13                        GAO/RCED-91-6   Counterfeit   and Substandard   Products
                                                                                     I



Chapter 2
Nonconforming    Products: A
Governmentwide     Problem




NRC obtains information    about nonconforming products from such
sources as utilities and other federal agencies and provides this informa-
tion to utilities through information notices or bulletins that require
actions by utilities and written responses documenting the actions
taken, Appendix II lists some information notices and bulletins that NRC
has sent to utilities since 1986. Table 2.1 shows the types of noncon-
forming products that 73 plants holding operating licenses and 2 plants
under construction have received or are suspected of having received.




Page 14                        GAO/RCED-91-6   Counterfeit   and Substandard   Products
                                           Chapter 2
                                           Nonconforming        Products: A
                                           Governmentwide         Problem




Table 2.1: Nonconforming Products That Nuclear Power Plants Have Received or Are Suspected of Having Received
                                                                                    Pipe
                                                                              fittings      Circuit                                                 Other
Plant                                                    -___ Fasteners’
                                                     State                   flanges 6   breakers’    Fusesb                                     materiaP
Arkansas                                                       AR                   __.                X                  X
Beaver Valley                                                  PA ----                  X                                                                     X
Bellefonte”                                                    AL                       X                                              X                      X
Big Rock Pornt                                                 MI                  ___- X
Brardwoodd                                                     IL                                      X                  X
Browns Ferry                                                   AL                       X                                              X                      X
Brunswick                                                      NC          __--- __- X                 X                  X
Byron                                                          IL                                                                      X
Callaway                                                       MO                       X                                                                     X
Calvert Cliffs                                                 MD              -____-__ X                                                                     X
Catawba                                                        SC                       X              X                  X
Clinton                                                        IL                       X              X                  X            X
Comanche Peak                           .~-~ - ~-...--- .-~--- TX                       X
D. C. Cook                                                     MI                       X                                                                     X
Cooper                                   -......               NE
                                                      ~.--.----.-                                                                                             X
Crystal River                                                  FL                       X              X                  X            X
Davis-Besse                                                    OH                       X              X                  X
Diablo Canyon                                                  CA                       X                                 X            X                      X
Dresden                                _                       IL
                                               ~- ..-.-- ..-.--__.~                     X                                 X            X
Duane Arnold                                                   IA                       X                                                                     X
Farley                                                         AL                       X                                 X
Fermi                                                          MI .___...               X                                 X                                   x
Frtzpatrick                                                    NY      ..__      ..__-  X              X                               X                _-
Fort Calhoun                                                   NE                       X              X                  X            X
Fort St. Vrarn@                                                co     .._______         X         -.
Ginna                                                          NY                       X              X                  X
Grand Gulf                                        ___-         MS                       X              X                  X      --    X
Haddam Neck                                                    CT                                                                      X
Hatch                                                          GA
                                             ._._ ._- . .._ --.---____-__-___---___                                                                           X
Hope Creek                                                     NJ                  --                  X                               X         -~-
Indian Point                                                   NY                       X                                              X
Kewaunee                                                       WI                       X                                              X
La Salle                                                       IL                       x   -                             X            X                      -
Lrmerick
   .~ ._ .                                                     PA
                                                         ~~~~._._____                   X              X
Maine Yankee                                            .----. ME
                                                                -.~                     X                                              X
Mcguire             *                                          NC                       X              X                  X                            -___
Millstone                                                      CT
                                                                -.~~~_---.-             X              X                               X
                                                                                                                                                (continued)




                                           Page 15                                          GAO/RCED-91-6   Counterfeit       and Substandard     Producta
                                           Chapter 2
                                           Nonconforming           Products: A
                                           Govemmentwide             Problem




Plant                                                         State       Fasteners*
                                                                                            flttl~~~breakers’
                                                                                           flanges
                                                                                                       Circuit
                                                                                                                                         Fusesb
                                                                                                                                                      Other
                                                                                                                                                   materiaP
Montrcello                                                   MN                      X                                                             ____--. x
None Mole Point                                              NY                      X               X                    X                   X
North Anna                                                   VA ____-..              X                                                                         -X
Oconee                                               .--____ SC                                      X                    X
Oyster Creek                                                 NJ                      X
Palrsades                                                    MI                      X               X                    X                          ___
Palo Verde                                                   AZ
                                                          ___-.-    __--~            X               X                    X
Peach Bottom                                                 PA                      X               X                    X                        .-__--
Perry                                                          OH                    X               X                        ----
Prigrim              .~ .~     _~-     .                       MA -.---~-____        X               X                    X                   X
Point Beach                                                    WI      ___..         X
Prarne Island                                                  MN                    X                                    X                                x
Quad Cities                                                     IL                   X                                    X                        _____-- X
Ranch0 Secoe           ~~~     ,-.             .               CA                    X               X                    x          -        X         .-
Rover Bend                                                     LA                    X               X                                                --
Robtnson                                                       SC                    X
Salem                                      -         -~        NJ                    X               X                                        X
San Onofre                                                     CA                    X               X                    X
Seabrook               ~_~..   ~.~--           _               NH ____..             X               X                                        X
Sequoyah                                                       TN                    X               X                                        X
Shearon Harris                                                 NC                    X               X                    X
Shorehaml:                                                     NY                    X                                    X                   X                x
South Texas                                                    TX
                                                                -..-                 X               X                    X
St Lucie                .~     _._.__~... ._.~.                FL                    X                                    X                   X
Summer                                                         SC                    X               X
Surry                                                          VA                    X                                    x-                  x
Susquehanna .-                                                 PA~---                X-              X
Three Mile Island                                  .~~          PA
                                                          - ---..---         -- --   X
Trojan                                                         OR                    X
Turkey Point                                                   FL                    X                                                        X                X
Vermont Yankee                                                 VT ._.~__.
                                                              __~.~...               X                                               -        X
Vogtle                                                         GA                    X               X
Washington Nuclear                                             WA                    X               X
Waterford                                                      LA      ______-       X                                    X                                    x
Watts Bar                                                      TN                    X               X                                   X
                                                                                                                                  _________-.-
Wolf Creek                                                    KS                                     X .-                      --____    X
                                                                                                                                                  (continued)




                                           Page 16                                        GAO/RCED-916      Counterfeit         and Substandard     Products
                   Chapter 2
                   Noncouforming       Products: A
                   Governmentwide        Problem




                                                                                  Pipe
                                                                            fittings6       Circuit                            Other
Plant                             State       Fasteners’                   flanges-      breakers’        Fusesb            materiaF
                                                                                                                           ---
YankeeJIowe                       MA                          X                                  -~__            X
                                                                                                                 ____--~             ~~ _
                                                  ~-~- __         .-~-----__.
Zion                              IL                                                                             X
                                              ..__.       -~- __--
Total         75                                            65                     36             32            32                      18
                   aProduct received by utilities,

                   bProduct suspected of having been received by utilities
                   ‘Other material includes, among other things, couplings, rings, plugs, nozzles, lugs, valves, and
                   spacers. Products received by utilities.

                   dPlant is under construction      or indefinitely deferred

                   ePlant is permanently shut down but still holds an operating license




Fasteners          In 1986 a supplier of fasteners to the nuclear industry raised concerns
                   to NRC about the origin and quality of bolts in the supplier’s inventory.
                   Subsequently, the Industrial Fasteners Institute tested a sample of bolts
                   from across the country and found that 70 percent did not meet
                   required specifications. Because of increasing reports of counterfeit fas-
                   teners throughout the government and industry, in 1987 NRC required all
                   nuclear utilities to test samples of certain safety- and non-safety-related
                   fasteners in their inventories to determine whether they met mechanical
                   and chemical specifications.

                   NRC'S analysis of the utilities’ responses showed that 8 percent of the
                   fasteners installed in safety-related systems and 12 percent installed in
                   non-safety-related systems did not meet specifications. In all, utilities
                   operating 69 plants reported having nonconforming safety-related fas-
                   teners. However, NRC concl.uded that the products did not pose a signifi-
                   cant safety hazard because only 2 percent of the safety-related
                   fasteners were sufficiently out of specification to cause a concern about
                   their ability to perform as intended. Table 2.2 shows the plants that
                   reported such fasteners.




                   Page 17                                              GAO/RCEDBlS      Counterfeit    and Substandard          Products
                                         Chapter 2
                                         Nonconforming     Products A
                                         Governmenhvide      Problem




Table 2.2: Nuclear Power Plants That
Received Fasteners Sufficiently Out of                                                                                                          Number of
Specification to Cause Concerns                                                                                                                 fasteners
                                         Plant                                                                             State                 reported
                                         Beaver Valley                                                                PA
                                                                                                              ___~..._____                                 1
                                         Bellefonte                                                                   AL                                   1
                                         Big Rock Point                                                               MI                                   1
                                         -. ..___--. 2
                                         Brunswick                                 --       --                        NC                          -__.-- 1
                                         Calvert Cliffs 1                                                  -___       MD                                   2
                                         Clinton                                                                      IL                                   1
                                         Crystal River 3                                                              FL                                   2
                                         Davis-Besse
                                           .._...
                                              -...--.. -~--.---~ ~-.-___-                              _____--       OH                                    2
                                         Diablo Canyon 1 ---___.~                                                     CA                           -.~- 1
                                         Farley                                                                      AL                                    1
                                         Ft. Calhoun                                                                  NE                                   2
                                         Ginna                                                                        NY                                   1
                                         Harris                                                                       NC                                   2
                                         Limerick 1, 2                                                                PA                                   5
                                         -___ Yankee
                                         Maine         __--.    ~---__~.                                              ME
                                                                                                            ---_______-                           _____- 5
                                         Nine Mile Point 1, 2                                                         NY                                   3
                                         North Anna 1                                                  .-            VA                                    4
                                         Oyster Creek
                                         pal.,sades..----..-.-.-~-..                                         __...I_ NJ  ------_---
                                                                                                                      M, -_____-         .-~_..--..__ .--i 1

                                         Peach Bottom 2                                 ____--~.--.~                   PA ._                                1
                                         River Bend                ._. __--                                            LA                                   2
                                         Robinson 2                                                                    SC
                                                                                                                    _--_..-..                               1
                                         Sequoyah                                                                      TN                                   1
                                         Surry 1                                                                       VA                                   3
                                         Trojan                                                                        OR                                   1
                                         Vermont Yankee                                                                VT                                   1
                                         Watts Bar                            ___..~_..                                TN                                3
                                         Total        29                                                                                                50



Nonconforming Parts                      As shown in table 2.1, many nuclear utilities received or are suspected
Other Than Fasteners                     of having received other kinds of nonconforming products, such as pipe
                                         material, fuses, and circuit breakers. In 1988, for example, utilities
                                         reported that 38 nuclear plants had received substandard pipe fittings
                                         and flanges from two New Jersey companies. NRC determined that the
                                         companies did not provide evidence showing they had performed the
                                         required tests to certify that foreign and domestic steel could be used in
                                         plant safety systems.



                                         Page 18                                        GAO/RCED-91-6        Counterfeit      and Substandard    Products
       .


                                 Chapter 2
                                 Nonconforming   Products A
                                 Govwumenbvide     Problem




                                 Also in 1988, the utility that owns the Wolf Creek, Kansas, plant noti-
                                 fied NRC that Planned Maintenance Systems, Mt. Vernon, Illinois, deliv-
                                 ered fuses without performing required seismic, environmental, and
                                 other tests. NRC confirmed the allegation and determined that 10 other
                                 plants received the parts. Later, Planned Maintenance Systems’ presi-
                                 dent pleaded guilty to 12 counts, including making false statements and
                                 claims regarding the fuses.

                                 Furthermore, in May 1989 a federal grand jury indicted two companies
                                 on 27 counts of substituting commercial-grade for military-grade steel
                                 and fraudulently marking the substitutions as meeting DOD's specifica-
                                 tions. The steel was used in Navy submarines and surface ships. Subse-
                                 quently, Virginia Power and General Public Utilities Nuclear
                                 Corporation found that steel they purchased from the companies for the
                                 Surry and Oyster Creek plants, respectively, did not meet certain chem-
                                 ical and mechanical specifications.


Reasonsfor the Increase in       Recently, NRC and the nuclear industry have reported an increasing
Nonconforming Products           number of instances where utilities received nonconforming products.
                                 According to NRC documentation, several reasons exist for the increase:

                             l   Companies save money if they “cut corners” in engineering and manu-
                                 facturing or refurbish old components and represent them as new rather
                                 than manufacture new ones.
                             l   The reduction in the number of new plants ordered has caused suppliers
                                 to leave the nuclear market, go out of business, or reduce product lines
                                 that are subject to nuclear quality assurance production standards. As a
                                 result, NRC believes that some utilities purchase from vendors that may
                                 not be familiar with, or appreciate the need for, strict conformance with
                                 nuclear quality requirements.
                             l   Intermediate suppliers buy commercial products and upgrade them to
                                 meet NRC'S requirements for use in safety-related systems. However,
                                 these suppliers may not have the necessary specifications or engi-
                                 neering, design, and material drawings to upgrade the products. In addi-
                                 tion, intermediate suppliers may not have information to determine
                                 whether the product has been altered since originally manufactured.
                             l   An increased awareness of substandard or counterfeit parts by NRC and
                                 nuclear utilities has resulted in the more diligent examination of
                                 products.




                                 Page 19                       GAO/RCED-91-9   Countetieit   artd Substandard   Products
                                                                                                                         .
                          Chapter 2
                          Nonconforming    Products A
                          Governmentwide     Problem




                          In addition to NRC,all of the five other agencies we contacted-DOD, DOE,
Federal Agencies Have     Mn‘, FAA,and NASA-have found nonconforming products. For example,
Found Nonconforming       DODfound nonconforming products installed in military aircraft, surface
Products                  ships, and submarines. DOEfound nonconforming circuit breakers in
                          nuclear weapons production facilities. Also, FAAfound defective heli-
                          copter parts, and DOTand NASAinvestigated cases of nonconforming fas-
                          teners in commercial aircraft and the space shuttle, respectively. The
                          following briefly describes some problems that the five agencies have
                          identified.


DOD                       DOD maintains extensive information on problem vendors and suspect
                          products. Some recent conclusions by DOD officials illustrate the poten-
                          tial effects on health, safety, and finances:

                        . In 1988 the Defense Criminal Investigative Service reported that about
                          16 percent of its cases from October 1984 through September 1987
                          involved product substitution that could have an impact on the readi-
                          ness of forces or the safety of personnel. The Service found that noncon-
                          forming products were frequently installed in systems important to the
                          proper functioning of aircraft, ships, and weapons-radar,    sonar, and
                          communication systems and guidance systems for aircraft, ships, and
                          missiles.
                        . During a June 1988 conference on fastener quality, a Defense Industrial
                          Supply Center’ official estimated that between 1984 and 1987, reor-
                          dering products to replace nonconforming bolts, bulk steel, wire, and
                          cable cost the government over $13 million. This amount probably rep-
                          resents only a small portion of the total DODwill spend to replace non-
                          conforming products because, as we noted in November 1988, DOD did
                          not have enough data to estimate the total amount or value of noncon-
                          forming products in its inventory.2
                        . In 1989 DOD’SInspector General estimated that an Air Force logistics
                          center paid over $100 million between September 1986 and 1988 for
                          substandard spare parts for certain classes of guns, bearings, and hard-
                          ware. In commenting on the report, DOD officials noted that some of the
                          parts could be used.



                          ‘The Defense Industrial Supply Center purchases wholesale industrial items, such as fasteners, cable,
                          and hardware, for the military services and several federal civilian agencies.

                          ?rocurement: Department of Defense Quality Assurance Efforts (GAO/NSIAD-89-28FS, Nov. 2,
                          1988).



                          Page 20                                   GAO/RCED-918      Counterfeit   and Substandard   Products
      Chapter 2
      Noncouformhg    Product.~& A
      Govemmentwide    Problem




DOE   In 1989 DoE'S Inspector General found nonconforming fasteners,
      including two counterfeit circuit breakers at Rocky Flats, Colorado,
      where the agency recovers plutonium from retired weapons and scrap
      metal. The circuit breakers were sold as new but were actually 35 years
      old. The Inspector General found an additional 102 nonconforming cir-
      cuit breakers at the Tonopah Test Range, Nevada, where DOE conducts
      underground weapons tests, and 12 at the Idaho National Engineering
      Laboratory, where DOE conducts research for the naval propulsion pro-
      gram. All 114 circuit breakers had been refurbished but sold to DOE as
      new products. In addition, DOE has investigated cases of nonconforming
      concrete, steel, computer equipment, and valves.


FAA   Various FAA officials expressed differing opinions about the severity of
      the problem of nonconforming parts in the airline industry. According to
      FAA officials, nonconforming parts in commercial aircraft now in produc-
      tion have not been a significant problem. In contrast, FAA staff told D&S
      Inspector General in 1987 that counterfeit parts had been a growing and
      significant problem with aircraft now in service. The Inspector General
      determined that FAA leaves itself open to purchasing and using substan-
      dard products because the agency buys parts without evidence that
      they originated from M&approved sources. As of January 1990, FAA
      had received 10 reports from commercial aviation manufacturers and
      other government agencies alleging the sale of counterfeit fasteners,
      rivets, ball bearings, and helicopter tail rotor parts, but FAA had not com-
      pleted its investigations of the allegations. Figure 2.1 shows certain
      types of surplus aircraft parts, some of which were found to be
      nonconforming.




      Page 21                        GAO/RCED-916   counterfeit   and Substandard   Products
                                         Chapter 2
                                         Nonconforming    Products: A
                                         Governmentwide     Problem




Figure 2.1: Types of Surplus Parts for                                                              d
Aircraft




                                                          a                                                                 4
                                                                                                                      d-u
                                         Source: DOT.


                                         In addition, FAA'S incident and accident report since 1973 attributes hun-
                                         dreds of accidents to bogus parts. According to FAA headquarters offi-
                                         cials, they have not verified this information, which is reported by field
                                         offices. As a result of publicity about some of these parts, FAA plans to
                                         reexamine this information, clearly delineate those incidents that were
                                         caused by nonconforming products, and issue a report by October 1990.


NASA                                     Although NASA officials told us that they have an aggressive quality
                                         assurance program and routinely inspect 100 percent of the products
                                         they receive, NASA'S Inspector General found otherwise. In 1988 the
                                         Inspector General reviewed the procedures employed by NASA, its prime
                                         contractors, and suppliers to ensure product safety and compliance with
                                         fastener certification standards. The Inspector General concluded that
                                         the potential exists for unsafe fasteners to be used in flight hardware
                                         because of deficiencies in NASA’S procedures for disposing of uncertifi-
                                         able (not meeting National Aerospace Standards) fasteners.



                                         Page 22                        GAO/RCEDBlS   Counterfeit   and Substandard     Products
    .


              Chapter 2
              NonconfonningProductrxA
              Governmentwide   Problem




              According to the report, one of NASA'S prime contractors purchased fas-
              teners that had been certified for use in flight hardware. However, the
              contractor did not have the manufacturer’s certifications or information
              on the tests conducted to ensure that the fasteners met required specifi-
              cations. NASA’S Inspector General found that DOD sold the fasteners as
              surplus in 1967 and that 18 years later a supplier sold the parts to
              NASA'S prime contractor. As a result of this experience, NASA plans to
              purchase fasteners only from qualified suppliers and destroy surplus
              items.


              An accident caused by using a nonconforming part in a nuclear power
Conclusions   plant or on a commercial or military airplane, the space shuttle, or a
              naval ship could result in death or injury to the public and civilian and
              military personnel. Also, federal agencies, their contractors, and nuclear
              utilities continually order equipment, parts, and components for repairs
              and maintenance. Therefore, nonconforming products sold to federal
              agencies, their contractors, or nuclear utilities represent a health and
              safety as well as procurement issue. Finally, such products waste tax
              dollars.




              Page 23                        GAO/RCED-91-6   Counterfeit   aud Substandard   Products
Chapter 3                                                                                                      1
NRC Is Deferring Its Regulatory Respnsibility


                         During the past 6 years, NRC has taken steps to lessen the impact of non-
                         conforming parts in nuclear power plants, including conducting inspec-
                         tions of utilities’ quality assurance programs. However, at a time when
                         utilities are buying increasing numbers of commercial-grade products
                         for plants and NRC has found problems with 12 utilities’ procurement
                         and dedication programs that it reviewed, the Commission voted to
                         defer such inspections for at least 1 year. In addition, the Commission
                         agreed to withdraw enforcement actions against 2 of the 12 utilities,
                         including $50,000 in civil penalties. In the interim, NRC plans to monitor
                         utilities’ actions to meet industry-developed guidelines, after which NRC
                         will decide whether to reinstitute quality assurance program inspections
                         and/or move ahead with proposed regulations to improve utilities’
                         programs.


                         NRC has not identified major safety problems resulting from noncon-
NRC Has Taken Some       forming parts but believes that unchecked the problem could have a sig-
Actions to Detect and    nificant impact on safe plant operations. As a result, NRC has taken
Minimize the Incidence   several actions to help minimize the use of nonconforming products. In
                         1988 NRC developed an action plan that includes communicating its con-
of Nonconforming         cerns about nonconforming products to utilities, investigating allega-
Parts                    tions of misrepresented products, conducting inspections of utilities’
                         quality assurance programs, and issuing an advance notice of proposed
                         rulemaking to change its regulations concerning upgrading commercial
                         products that are used in plant safety systems.


Action Plan              By 1988 NRC and the industry had identified numerous instances of non-
                         conforming products. In addition to finding breakdowns in traditional
                         elements of utilities’ quality assurance programs, such as missed inspec-
                         tions, NRC had found an increasing number of counterfeit products. To
                         help address the issue, in 1988 NRC developed an action plan, under
                         which the agency has undertaken various tasks.

                     l   NRC issues bulletins, information notices, and generic letters to alert util-
                         ities about specific products and, in some cases, directs the utilities to
                         correct the problems identified. For example, NRC has issued bulletins
                         requiring utilities to test and report on fasteners, pipe material, and
                         molded case circuit breakers.
                     l   The agency coordinates and cooperates with other federal agencies on
                         nonconforming product issues. Since August 1988 NRC staff have estab-
                         lished contacts at WE, DOD, FAA, and   NASA  and routinely send them copies
                         of information notices and bulletins regarding such products.


                         Page 24                         GAO/RCED-918   Counterfeit   and Substandard   Products
                            Chapter3
                            NR4JIeDeferringIt.a
                            RegulatmyRespousibllity




                        l   In March 1988 NRC issued an advance notice of proposed rulemaking to
                            change utilities’ procedures to detect fraudulent products (discussed
                            later).

                            In addition, NRC'S Vendor Inspection Branch and Office of Investigations
                            have cooperated on cases involving vendors suspected of, or identified
                            as, supplying counterfeit products to utilities. During the past 2 years,
                            NRC has investigated cases involving fasteners, pipe material, valves,
                            and such electrical equipment as circuit breakers. According to Office of
                            Investigation staff, they have investigated 60 cases of nonconforming
                            products and have referred 5 cases to the Department of Justice for
                            prosecution. Four vendors were convicted. A recent NRC investigation
                            led to a conviction against Planned Maintenance Systems, which not
                            only sold substandard electrical items to nuclear utilities but also to
                            DOE'S Hanford, Washington, facility.




NRC Has Rescinded           Since 1985 NRC'S Vendor Inspection Branch has found weaknesses in 12
Penalties and Has           of the 13 utilities’ procurement and dedication programs it has
                            reviewed. Dedication is a process by which commercial-grade parts are
Postponed Inspections       certified as suitable for use in nuclear power plant safety systems.
                            According to NRC draft guidance, a utility must perform, among other
                            things, the following steps as part of an effective dedication program:

                        l identify and document the safety functions the commercial-grade item
                          will perform and the design requirements that must be met;
                        l identify and document those characteristics that are critical to per-
                          forming the safety functions and establish acceptance criteria for the
                          critical characteristics;
                        . determine the methods used to verify critical characteristics including
                          traceability, source audits, receipt inspection, receipt testing, and func-
                          tional testing; and
                        . verify and document that the critical characteristics meet the accep-
                          tance criteria.

                            In 12 inspections, NRC found that the utilities did not have effective pro-
                            cedures to upgrade commercial-grade parts for safety-related uses. Some
                            common weaknesses found were that utilities did not (1) verify that
                            parts from unapproved vendors were of sufficient quality, (2) ensure
                            that items purchased would function under all design conditions, and (3)
                            show that replacement parts were identical to the ones being replaced.
                            NRC took some form of enforcement action against 8 utilities, including
                            imposing civil penalties totalling $275,000 against the 5 that operate the


                            Page25                         GAO/RCED-OlSCounterfeitandSubstandardProducte
                                                                                                                                            ,
                                   Chapter 3
                                   NRC la Deferrlng Ita
                                   Regulatory Responsibility




                                   Crystal River, Farley, Prairie Island, Trojan, and Washington Nuclear
                                   plants. Table 3.1 shows the 13 plant sites inspected and enforcement
                                   actions that NRC took against the 8.

Table 3.1: Enforcement Actions
Resulting From NRC’s Procurement                                                       Enforcement actions
inspections                                                                      Notices of                Civil           Action
                                   Plant
                                   _.....--.
                                          ___-_I                                 violation            penalties            withdrawn
                                   Trojan           _____.-                      Yes                    $75,000            No
                                                                                                                       ____---      -
                                   Sequoyah
                                   ____-._____.-_--__--.--                       Yes                             No            No _...-
                                   San Onofre                                    No                              No            N.A.a
                                   Farley                                        Yes -___                    $75,000           No
                                   Waterford                                     Yes                             No            No         -
                                   Ranch0 Seco                                   No                              No            N.A
                                   Maine Yankee                                  Yes                             No
                                                                                                             -_____.           No               --
                                   Prairie Island                                Yes                         $25,000           No -.---
                                   Haddam Neck                           ---     No                              No            N.A.
                                   Crystal River       -~                        Yes                         $50,000           Yes          -
                                   River   Bend                                  No                              No            N.A. --- -
                                   --.-~--~--.                                  ___
                                   Washinaton Nuclear                            Yes                         $50,000           Yes
                                   Zion                                          No                              No            N.A.
                                   a”N.A.” indicates “Not applicable.”


                                   Although NRC staff recognize that additional programmatic inspections
                                   would find more and similar violations, in March 1990 the staff recom-
                                   mended to the Commission that NRC suspend quality assurance program
                                   inspections for a least 1 year to give utilities time to implement industry
                                   guidelines concerning the use of commercial-grade products in nuclear
                                   power plants. Through its regular inspections, the staff plans to assess
                                   the utilities’ progress in implementing the industry’s program. After
                                   that, the Commission will decide whether to reinstate the programmatic
                                   inspections and/or move forward with proposed regulations.

                                   In April 1990 the Commission voted to withdraw the most recent
                                   enforcement actions against some utilities because NRC staff concluded
                                   that quality assurance program deficiencies may be generic and indus-
                                   trywide. The Commission withdrew proposed $50,000 civil penalties
                                   against Florida Power and Light (Crystal River) and Washington Public
                                   Power Supply System (Washington Nuclear) and decided not to pursue
                                   the Notice of Violation that had been issued to Maine Yankee. According
                                   to NRC staff, they had also considered taking enforcement actions




                                   Page 26                                     GAO/RCED-91-6   Counterfeit   and Substandard     Producta
                           Chapter   3
                           NRCIs Deferring     Its
                           Regulatmy     Responsibility




--
                           against Sacramento Municipal Utility District (Ranch0 Seco), Common-
                           wealth Edison (Zion), and Gulf States Utilities (River Bend) but, as a
                           result of the Commission’s decision, did not do so.


NRC Is Consi.dering        As a result of the quality assurance inspections, NRC realized that utili-
Changing Its Regulations   ties had not detected many cases of counterfeit products. The utilities
                           had not done so, according to NRC staff, because the regulations focus on
                           detecting substandard and poor quality products rather than fraud. To
                           correct this, NRC has been considering a regulatory change to help ensure
                           that utilities detect fraudulent products. On March 6, 1989, NRC pub-
                           lished in the Federal Register an advance notice of proposed rulemaking
                           that focuses on utilities’ procurement and dedication programs. NRC
                           asked for public comments on, for example, the scope of utilities’ audits
                           of vendors and the need for more prescriptive criteria for upgrading,
                           testing, and tracking commercial-grade products.

                           NRC received 64 comments on the notice. Nuclear utilities; industry orga-
                           nizations, such as the Nuclear Management and Resources Council; and
                           industrial organizations, such as the American Society of Mechanical
                           Engineers, provided most of the comments. Nuclear utilities and
                           industry groups strongly opposed additional regulations; many favored
                           NRC'S endorsing industry codes, standards, and guidance to detect coun-
                           terfeit products. However, Ohio Citizens for Responsible Energy, Inc.,
                           stated that NRC should impose highly prescriptive requirements to
                           ensure that utilities detect counterfeit products before they are used in
                           plants.

                           On March 20, 1990, NRC staff briefed the Commissioners on the results
                           of the public comments and recommended that they continue to develop
                           regulations concerning the actions utilities should take to ensure the
                           quality of commercial-grade products that have been certified for use in
                           plant safety systems. However, the staff noted that regulations may not
                           be needed if utilities comply with the industry’s initiatives to improve
                           their procurement and dedication programs.

                           In this regard, the Electric Power Research Institute-an     industry-
                           funded research organization- has developed two sets of guidelines.
                           The first specifies the types of tests, inspections, and product source
                           verification that utilities can follow before accepting commercial-grade
                           products. The second set of guidelines calls for improved (1) audits of
                           vendors by utilities, (2) methods of inspecting for counterfeit parts and



                           Page 27                        GAO/RCED-91-d   Counterfeit   and Substandard   Products
                    Chapter 3
                    NRC Is Deferring Its
                    Regulatory Responsiblllty




                    replacing obsolete products, and (3) information exchange among utili-
                    ties, The Nuclear Management and Resources Council endorsed these
                    guidelines, and all nuclear utilities implemented the first set in January
                     1990 and expect to implement the second set by July 1992. NRC plans to
                    monitor the utilities’ progress in implementing the guidelines and make
                    a recommendation to the Commission concerning the need for regula-
                    tions at a later date.


                    Although utilities are buying an increasing number of commercial-grade
Conclusions         products for nuclear power plants and concern exists about the relia-
                    bility of these products, NRC is reducing its regulatory influence over the
                    nuclear industry. During the past 5 years, NRC inspectors found
                    problems with 12 utilities’ quality assurance programs that they
                    reviewed. Despite this, in April 1990 the Commission approved a staff
                    request to defer such inspections for at least 1 year, withdraw enforce-
                    ment actions against two utilities and not pursue anticipated actions
                    against another, and delay moving forward with regulations to improve
                    utilities’ quality assurance programs. Instead, NRC is giving utilities time
                    to implement an industry-developed program to improve their procure-
                    ment and dedication programs before deciding whether additional regu-
                    latory action is needed. On the other hand, NRC recognizes that
                    nonconforming products could have a significant impact on safe plant
                    operations and has taken several actions to help minimize the use of
                    such products. However, NRC'S actions during the spring of 1990 seem to
                    conflict with the need for continuous and aggressive oversight of this
                    problem.


                    To help ensure an aggressive regulatory posture concerning the
Recommendationto    upgrading of commercial products that will be used in nuclear power
the Chairman, NRC   plants, we recommend that the Chairman, NRC, reinstitute inspections of
                    utilities’ quality assurance programs and take appropriate enforcement
                    actions when violations occur.




                    Page 2H                        GAO/RCED-91-6   Counterfeit   and Substandard   Products
       .

Chanter 4

No Governmentwide Effort Exists to Address
Nonconforming Products

                    Although nonconforming products are a governmentwide problem, OMR,
                    which provides management leadership across the executive branch,
                    has not aggressively pursued actions to address this concern. For
                    example, OMI3has not convened interagency meetings or developed a
                    centralized system for agencies to exchange information on noncon-
                    forming products and problem vendors. Without such a system, many
                    years may elapse before information that one agency may have on such
                    products is shared with other concerned agencies, contractors, or
                    nuclear utilities. We found, for example, that DOD had identified two
                    vendors suspected of selling nonconforming steel products almost 5
                    years before NRC received derogatory information about the companies.

                    In addition, the full extent of the problem is not known, and consoli-
                    dated data do not exist on the magnitude of the problem. In 1988 OMR
                    agreed to develop a plan for distributing information on nonconforming
                    products. Except for asking DOD'S Inspector General to survey federal
                    agencies to determine the extent of the problem, OMB has not followed
                    through on its commitment because, according to officials, resources are
                    not available. Also, OMB'S July 1990 report concluded that product sub-
                    stitution was a concern to almost half of the 22 agencies surveyed but
                    recommended further studies to determine whether a problem really
                    exists.

                    Realizing that nonconforming parts can cause accidents or significantly
                    increase program costs, federal agencies have attempted to do what OMR
                    agreed to do. They have initiated actions to exchange information on
                    suspect products and have cooperated on investigations of vendor
                    fraud. Despite these initiatives, a better approach is needed to help solve
                    the problem of nonconforming parts. Officials from the six agencies we
                    contacted agree that having comprehensive information on noncon-
                    forming products, including counterfeit parts, is vital to carrying out
                    their responsibilities effectively.


                    All of the agencies we Contacted-DOD, DOE,DOT, FAA, NASA, and NIX-
Agencies’ Actions   have systems that allow them to, among other things, obtain informa-
Concerning          tion on nonconforming products and vendors suspected of selling them.
Nonconforming       DOD has several systems. For example, DOD’Scounterfeit material and
                    unauthorized product substitution program attempts to eliminate such
Products ”          materials by purging substandard items from inventories and expanding
                    receipt verification and inspections. Also, the Defense Logistics Agency
                    has a system that provides a monthly list of contractors and subcontrac-
                    tors having serious quality assurance problems. The Navy maintains a


                    Page 29                        GAO/RCEDBl-6   Counterfeit   and Substandard   Products
                               Chapter 4
                               No Governmentwide    J2ffort F&is@ to Address
                               Nonconf’omdng   Products




                               vendor data analysis report concerning contractors that have not com-
                               plied with contractual requirements, have received numerous unsatis-
                               factory material reports, have had an excessive number of their
                               products rejected, or have shown severe problems with quality assur-
                               ance. The following summarizes the systems used by the other agencies
                               that we contacted.

                           l A DOE official said the agency uses bulletins and notices to transmit non-
                             conforming product information among its facilities. In addition, DOE has
                             developed a centralized computer data base-one subsystem includes
                             information on suspect equipment. DOE officials told us that this system
                             could be used to identify defective equipment before accidents occur,
                             but DOE offices have shown little interest in using the system.
                           l FAA has several systems for reporting defective and nonconforming
                             products, including daily summaries of service difficulty reports, mal-
                             function or defect reports, and system analysis reports. Also, each
                             month, FAA uses airworthiness alerts to reach approximately 26,500 FAA-
                             licensed mechanics and repair facilities about suspect products. Finally,
                             FAA is drafting an advisory circular that provides information for
                             reporting and investigating allegations of the sale of counterfeit parts.
                             Such information will be included in a counterfeit parts data base that
                             FAA is developing.
                           . NASA has an internal system to report problems agencywide. According
                             to NASA officials, such information generally remains within the agency.

                               In addition to the systems that each agency has to alert its employees
                               about nonconforming products or suspect vendors, GIDEP, which has the
                               potential to provide information to government and industry users, is
                               operated by the Navy. NRC began to participate in this program in 1989.


Government-Industry Data       In 1970 DOD established GIDEP as a voluntary information exchange
Exchange Program               system between government and industry. The program seeks to reduce
                               or eliminate duplicate expenditures of time and money by maximizing
                               the use of existing information among its members. Today, GIDEP has
                               almost 1,200 members, including nine federal agencies, contractors, edu-
                               cational institutions, manufacturers, and public and private utilities.
                               According to the program manager, DOD funds about 86 percent of
                               GIDEP'S $3.7 million annual operating budget; other members contribute
                               the remaining 15 percent. GIDEP has four data bases; one-failure expe-
                               rience-has six subsystems that alert members about parts, materials,
                               manufacturing processes, test equipment, and safety problems.



                               Page 30                                 GAO/RCED-91-6   Counterf’eit   and Substandard   Products
Chapter 4
No Governmentwide    Effort   Exists to Address
Nonconforming   Products




In a 1988 report, DOD’S Inspector General concluded that GIDEP provided
beneficial information to its members. According to the Inspector Gen-
eral, GIDEP helped DOD eliminate about $40 million of defective parts
from its inventory in 1986 and possibly saved lives. In addition, the
report noted that although several DOD offices have their own alert sys-
tems, GIDEP appeared to be the only system that could notify all DOD
offices about nonconforming parts.

The Inspector General also found that despite these benefits, GIDEP was
not totally effective and was not completely meeting its objectives. The
report noted that DOD does not require the military services or their con-
tractors to participate in GIDEP and that many members did not submit
alerts because they were concerned about nuisance lawsuits and time-
consuming administrative procedures to process the alerts. Noncon-
forming parts continue to proliferate throughout DOD, the report con-
cluded, because only 20 percent to 50 percent of such parts were being
reported through GIDEP. As a result, the Inspector General recommended,
among other things, that the military services and Defense Logistics
Agency include in their contracts provisions requiring (1) monthly alerts
on suspect products or vendors and (2) in-plant representatives to track
the alerts and review the contractors’ policies and procedures to
strengthen the contractors’ quality assurance programs.

Agency officials we contacted have differing opinions about GIDEP’S use-
fulness. For example, NRC, NASA, and the Defense Criminal Investigative
Service officials advocate GIDEP and said they use the system frequently.
A NASA quality assurance official told us that GIDEP may be the best
system to exchange nonconforming parts information among agencies.
On the other hand, other agency officials said they were concerned
about using GIDEP because companies may be “blackballed” without due
process if agencies publish data on suspect vendors; such a practice,
they feared, could lead to lawsuits. Further, a DOE investigative official
said GIDEP was burdensome to use because it takes several months to
process an alert.

In this regard, we noted that GIDEP’S failure experience data base has six
subsystems to report problems with parts and materials and that alerts
must be prepared and distributed manually, a process that, according to
a NASA official, can take between 6 and 9 months because GIDEP allows
companies to refute adverse information. According to GIDEP’S manager,
the Navy recognizes these problems and is redesigning the system to
allow for more direct entry and retrieval of data.



Page 31                                   GAO/RCED-91-6   Counterfeit   and Substandard   Products
                      Chapter 4
                      No Gwernmentwide     Effort   Exists to Address
                      Nonconforming   Products




                      The federal agencies that we contacted have taken other actions to
Other Actions to      address the problem of nonconforming parts. On January 19,1990, NASA
Address               hosted a meeting attended by officials from six agencies to discuss a
Nonconforming Parts   unified approach for exchanging information and avoiding duplication
                      of efforts. The meeting confirmed the need for (1) greater exchange of
                      information on problem parts and suppliers and (2) a common system to
                      transfer such information efficiently. At the meeting, NRC staff said that
                      they had sent information to about 30 agencies as part of their efforts to
                      address this problem. The agency officials agreed to establish a working
                      group on problem parts and suppliers.

                      On April 11, 1990, the working group’ tentatively approved a charter to
                      develop a system to provide for the timely exchange of information on
                      substandard performance by government suppliers and regulated com-
                      mercial manufacturers and their suppliers. According to a NASA official,
                      the group agreed to use GIDEP as an early warning system to alert mem-
                      bers of potential problem parts and suppliers. However, recognizing the
                      problems with processing GIDEP alerts and the need to control sensitive
                      data, the group is developing its own GIDEP alert to exchange informa-
                      tion. For now, information will be exchanged only among the working
                      group members and will not be made available to private companies.
                      The working group eventually plans to encourage other federal agencies
                      to use this approach. The working group met again on July 20, 1990,
                      and reaffirmed its commitment to address the issue of nonconforming
                      parts

                      In addition to the efforts by the agencies’ technical staff, in May 1990
                      DOD’S Defense Criminal Investigative Service convened a meeting with
                      the Naval Investigative Service, NRC’S Office of Investigation, DOT’S
                      Inspector General, NASA’S Inspector General, and Customs’ Commercial
                      Fraud Division to form a federal law enforcement interagency working
                      group on product substitution fraud. The primary focus of the meeting
                      was to devise a system for exchanging criminal investigative data on a
                      governmentwide, real-time basis. Most of the attendees supported pro-
                      viding such information to the Defense Criminal Investigative Service’s
                      data base that now lists about 1,100 former and current product substi-
                      tution cases.




                      ‘The working group includes officials from DOD, DOE, FAA, NASA, NRC, and the National Institute
                      of Standards and Technology.



                      Page 32                                  GAO/RCED-91-6    Counterfeit   and Substandard   Products
          ,


                                     Chapter 4
                                     No Govemmentwide    Effort    Exists to Address
                                     Nonconfonnin~  Products




                                     Federal agencies could reap substantial benefits from sharing informa-
Benefits Would Be                    tion. Without such information, many years may elapse before agencies
Derived        From      Sharing     that identify problems with a company provide that information to
Information                          other potential purchasers. The examples discussed below illustrate the
                                     situations that can occur when federal agencies do not receive informa-
                                     tion about nonconforming products.

                                     Between November 1984 and 1987, DOD identified and disseminated
                                     information on four companies-two supplied steel and two supplied
                                     fasteners-that   had delivered counterfeit and/or substandard products
                                     for Navy submarines and surface ships or that had serious problems
                                     with their inspection and quality assurance programs. Between March
                                     and July 1989, NRC learned that the companies had been indicted for
                                     delivering nonconforming products and warned utilities that the compa-
                                     nies were suspected of delivering the products to 66 nuclear power
                                     plants. Table 4.1 shows the lag between DOD'S and NRC'S alerts about the
                                     companies’ products.

Table 4.1: The Lag in Time Between
DOD’5 and NRC’s Alerts Identifying   Type of product              Date of DOD’s alert       Date of NRC’s alert        Elapsed time
Nonconforming Products               Steel                        November 1984             Julv 1989                  4 vears. 8 mos.
                                     Steel                        February 1985             July 1989                  4 years, 6 mos.
                                     Fasteners                    November 1986             March 1989                 2 years, 3 mos.
                                     Fasteners                    November 1987             June 1989                  1 vear. 7 mos.


                                     In another instance, NASA issued a GIDEP alert in October 1987 about a
                                     company suspected of delivering nonconforming fasteners. Almost 20
                                     months later, NRC listed the company as a manufacturer of noncon-
                                     forming fasteners,

                                     Further, our comparison of the information from several alert systems
                                     showed that DOD had identified five fastener vendors with serious
                                     quality assurance problems that did not appear in NRC notices and bulle-
                                     tins, although the vendors sold to utilities. On the other hand, NRC has
                                     identified many fastener suppliers and manufacturers not appearing in
                                     non’s reporting systems.

                                     Also, without a clearinghouse, a likelihood exists that products rejected
                                     by one agency or its contractors could be purchased by other agencies or
                                     nuclear utilities. As discussed in chapter 2, a NASA contractor purchased
                                     fasteners in 1985 that DOD had sold as surplus 18 years earlier. In addi-
                                     tion, in 1987 the Defense Industrial Supply Center began testing high-



                                     Page 33                                  GAO/RCEDSlS     Counterfeit   and Substandard   Products
                                      Chapter 4
                                      No Govemmentwide    Effort   Exists to Address
                                      Nonconforming  Products




                                      strength fasteners and found that 30 percent did not meet specifica-
                                      tions. Since testing began, the center reports that the number of noncon-
                                      forming fasteners has dropped to 4 percent. According to center
                                      officials, manufacturers and suppliers who sold them substandard fas-
                                      teners are likely selling them to others who do less testing. Figure 4.1
                                      shows a type of fastener tested; one is genuine, and the other is
                                      counterfeit.

Figure 4.1: Fasteners Tested by the
Defense Industrial Supply Center




A Clearinghouse Would                 Centralized information on nonconforming products could also assist
Foster Joint Investigations           federal agencies’ investigations of suspect vendors. Some agencies have
                                      started to combine their resources to investigate vendors suspected of
                                      selling common nonconforming products, such as fasteners and circuit
                                      breakers. For example, in February 1989 a joint investigation by the
                                      Defense Criminal Investigative Service, Air Force Office of Special
                                      Investigations, NASA'S Inspector General, the Naval Investigative Service,
                                      and DOI"S Inspector General resulted in a 33-count indictment against
                                      Lawrence Engineering and Supply, Incorporated, its vice president, and
                                      its former quality control manager for delivering substandard fasteners
                                      for use in commercial aircraft, military hardware, and equipment for
                                      NAYA's manned space flight programs, including the space shuttle. Subse-
                                      quently, company officials pleaded guilty to five of the counts and were
                                      ordered to pay fines and restitution totaling $625,000.




                                      Page 34                                  GAO/RCED-91-6   Counterfeit   and Substandard   Products
                                          chapter 4
                                          No GovernmenMlde Effort Ewists to Address
                                          Nonconforming Products




                                          Also, a joint investigation by NASA'S Inspector General and NRC'S Office
                                          of Investigations resulted in guilty pleas by the owners of California Cir-
                                          cuit Breakers and ATS Circuit Breakers, Incorporated, to two felony
                                          counts of using counterfeit labels to falsely identify circuit breakers. NRC
                                          and NASA staff determined that the companies bought used circuit
                                          breakers, reconditioned them, and sold them as new products. The
                                          utility that owns the Palo Verde, Arizona, plant had installed the circuit
                                          breakers and the utility that owns the Diablo Canyon, California, plant
                                          had purchased-but       had not installed-them.  According to available
                                          documentation, the circuit breakers could have caused fires in the
                                          plants. On April 30, 1990, the U.S. District Court ordered the circuit
                                          breaker companies to pay over $1.3 million to Palo Verde’s owners to
                                          cover the costs of shutting down the plant and removing the potentially
                                          dangerous parts, Figure 4.2 shows a counterfeit circuit breaker found in
                                          Diablo Canyon’s inventory.

Figure 4.2: Counterfeit Circuit Breaker
                                                                                                  . -- _.- -




                                                                                _,,.
                                                                              .--
                                                                               ---
                                                                            ___‘. --
                                                                     r..--_--
                                                              _
                                                         . c_-, “~_
                                                                 _...-
                                                                  ..--
                                          Source: NRC.




                                          Page 36                             GAO/RCED-91-6   Counterfeit   and Substandard   Products
                         Chapter 4
                         No Governmentwide    Effort   Exists to Address
                         Nonconforming   Products




                         Finally, a federal task force investigated a 15-year scheme by the
                         world’s largest manufacturer of aerospace fasteners to sell noncon-
                         forming products to the government and industry.2 According to the
                         Department of Justice, VSI Corporation did not conduct many required
                         certification tests and falsified some test results. DOD purchased the fas-
                         teners for various military aircraft, including bombers and fighters. In
                         May 1990 VSI Corporation pleaded guilty to four fraud charges and
                         agreed to pay $18 million in damages, civil penalties, fines, and prosecu-
                         tion costs.


                              provides management leadership across the executive branch. In
Federal Responsibility   OMB
                         the early 198Os, the administration established the President’s Council
for Coordinating         on Integrity and Efficiency (PCIE) and the President’s Council on Man-
Information on           agement Improvements within OMB to coordinate governmentwide
                         improvement initiatives. OMB'S Deputy Director chairs both Councils.
Nonconforming            Previously, we found that PCIE had fostered communications about
Products                 common management issues among agencies and between the agencies
                         and OMB and had enlisted the talents and resources of the agencies to
                         address management issues and commit to needed improvements.3 We
                         also found that OMB effectively used the Councils to promote projects
                         that combat entitlement fraud.

                         Following June 1988 hearings before the Subcommittee on Oversight
                         and Investigations, House Committee on Energy and Commerce, con-
                         cerning counterfeit fasteners, NRC urged OMB to convene a meeting of
                         government agencies to coordinate and share information on noncon-
                         forming products. In August 1988 OMB hosted the interagency meeting,
                         which 18 agencies attended. At that time, OMB agreed that PCIE would
                         coordinate the governmentwide exchange of information on counterfeit
                         and fraudulent procurement practices.

                         On behalf of PCIE, in 1988 DOD’S Inspector General undertook a survey of
                         executive agencies to determine the scope of such problems in the fed-
                         eral government. PCIE issued a report in July 1990 on the questionnaire
                         results. Other than administering the questionnaire and reporting the


                         “The task force includes officials from the Federal Bureau of Investigation, Internal Revenue Service,
                         Defense Criminal Investigative Service, Air Force Office of Special Investigations, Naval Investigative
                         Service, DOT’s Inspector General, and NASA’s Inspector General.
                         ‘$Managing the Government: Revised Approach Could Improve OMB’s Effectiveness (GAO/
                         GGD-89-65,May4, 1989).



                         Page 36                                    GAO/RCED-91-6     Counterfeit   and Substandard    Products
      .

  .
                             Chapter 4
                             No Govemmentwide    Effort   Exists to Address
                             Nonconforming  Products




                             results, PCIE has done little to ensure that federal agencies receive timely
                             information on nonconforming products.

                             A senior OMB management associate told us that the agency lost direc-
                             tion on this issue because several key attendees at the August 1988
                             meeting subsequently left the agency following the change in adminis-
                             trations. In addition, OMB officials that we contacted in February 1990
                             were not aware of a draft report by DOD'S Inspector General on the
                             results of a product substitution questionnaire initiated on behalf of
                             PCIE. Further, OMB'S Nuclear Energy Branch Chief told us that OMB does
                             not have the resources to collect and distribute information on noncon-
                             forming products. The official noted that federal agencies should devise
                             a method to do so.


PCIE Concluded Problem       DOD sent questionnaires to 184 individuals  from 22 different agencies
May Be Widespread but        and received 88 responses4 In its July 1990 report on the questionnaire
                             results, PCIE made the following observations.
RecommendedFurther
Study                    . Product substitution presents a risk to many federal agencies. For
                           example, 48 percent who responded said their agency experienced
                           product substitution problems.
                         l Most said product substitution affected their agency in more than one
                           way. About 50 percent of the respondents indicated that substituted
                           products resulted in the need to pay for unexpected replacements or
                           maintenance. Almost 33 percent said that such products adversely
                           affected the agency’s missions, and 18 percent said that the products
                           affected employees’ or customers’ health or safety.
                         . Thirty-eight percent of the respondents reported product substitution
                           problems with equipment and materials, such as fasteners.
                         . About 44 percent of those responding did not know if their agency
                           developed information on product substitution problems.

                             The report also concluded that quality assurance reviews by agencies
                             detect most product substitution problems but recommended that more
                             detailed information should be developed-either      collectively or by indi-
                             vidual agencies. In addition, the report recommended that such studies
                             should (1) determine whether reported product substitution problems
                             are valid, (2) analyze the effectiveness of quality control and quality


                             *The Inspector General did not send questionnaires to DOD employees because the office had ample
                             historical evidence of product substitution problems at the agency.



                             Page 37                                  GAO/RCED-91.6    Counterfeit   and Substandard   Products
              Chapter 4
              No Governmentwide    Effort   JMsts to Address
              Nonconforming   Products




              assurance programs, and (3) assess the effectiveness of product substi-
              tution alert systems within the agencies. Despite PCIE'S effort, consoli-
              dated data do not exist on the magnitude of the problem of
              nonconforming products, cost to the taxpayers, or potential dangers
              resulting from using such products.


              Despite the potential adverse health, safety, and financial effects from
Conclusions   purchasing and using nonconforming products, the full extent of the
              problem is not known, OMB agreed that PCIE would coordinate federal
              agencies’ efforts concerning such products, but OMB has not followed
              through on its commitment, citing lim’ ed resources as a problem. Also,
              PCIE'S report recommended further sJ dy and analysis to determine if
              reported product substitution really is a problem. We believe that a
              more aggressive approach is needed. Investigations conducted by the six
              agencies and resulting convictions obtained by the Department of Jus-
              tice support the need for an aggressive governmentwide approach to
              help eliminate the problem of nonconforming products.

              Also, no comprehensive, easily accessible system exists whereby federal
              agencies can obtain up-to-date information that others may have con-
              cerning nonconforming products or vendors suspected of supplying such
              products. Although all of the agencies that we contacted have methods
              to alert their employees about suspect vendors or nonconforming prod-
              ucts, the information generally stays within each agency. However, rec-
              ognizing the significance of the issue and responding to a common need,
              the six agencies are attempting to do what OMB agreed to do. They have
              initiated meetings to exchange information and have conducted joint
              investigations of suspect vendors. Also, some agencies provide informa-
              tion to GIDEP, but the system is manual and burdensome to use. The
              Navy expects to automate the system and make it more “user friendly,”
              but some agency officials may be reluctant to use it. Most recently, the
              investigative offices of five federal agencies agreed to devise a method
              to exchange criminal investigative data.

              Even with these efforts, the potential exists that an agency can
              purchase products that have been rejected by another agency or that all
              concerned agencies do not receive critical information on companies that
              sell nonconforming products, as was the case where DOD raised concerns
              about four companies almost 5 years before NRC warned utilities about
              them. The potential also exists for suspect vendors or nonconforming
              products to “fall through the cracks” because no mechanism exists to



              Page 38                                  GAO/RCED-91-9   Counterfeit   and Substandard   Products
 .
                    Chapter 4
                    No Goverumentwide    Effort   Exists to Address
                    Nonconfonuiug   Products




                    coordinate the various agencies’ efforts and the exchange of information
                    among the agencies.

                    Therefore, we believe that a better approach is needed to help resolve
                    the problem of nonconforming products and ensure that federal agencies
                    work together effectively to receive and disseminate information about
                    this problem. A centralized information exchange system may not stop
                    the proliferation of nonconforming products throughout the federal gov-
                    ernment or nuclear utilities but would provide purchasers with informa-
                    tion to help make informed decisions about potential suppliers and
                    products.

                    Also, a system solely for the use of federal agencies would eliminate
                    some of the concerns about sensitive proprietary business information,
                    the private sector’s access to the data, and the potential for lawsuits.
                    (.)MISalready has a number of options that it can consider, including
                    GIIIW, the approach developed by the agencies’ technical staff, or a
                    totally new system. OMH currently has the authority to develop a plan of
                    action and decide on the most effective, appropriate, and cost-beneficial
                    mechanism to help resolve the problem of nonconforming products.


                    The Director, OMB, should develop an action plan and designate a lead
Recommendationto    agency to give priority to implementing the plan. The Director, OMR,
the Director, OMB   should also direct the lead agency to develop a computerized informa-
                    tion exchange system that provides on-line data entry and retrieval that
                    all federal agencies can easily access on a day-to-day basis. The system
                    should have appropriate safeguards to protect sensitive information.




                    Ynge 39                                   GAO/RCED-91-6   Counterfeit   and Substandard   Products
Ppe

Gbf   Agencies and Officials Contacted


               Offices contacted                            DOD        DOE           DOT        FAA        NASA
               Inspector General
                  Audits                                         X                       X                          X
               -1nvestiaations                                   X             X         X                          x
                  Inspections/analysis                           X             X
               Contracting/procurement                           X             X                     X
               Government-lndustrv Data Exchanae Proaram         X
               Qualitv assurance                                 X             X                                    X
               Standards                                         X                                   X
               SUPPlY                                            X
               --.
               Test/evaluation                                   X




               Page 40                           GAO/RCRD-91-6   Counterfeit       and Substandard       Products
Appendix II

SomeNRC Communications to Utilities
Regarding Nonconfcrming Products

               Subject                                           Communication Used
              Fasteners                                          Information Notice 86-25
              Fasteners                                          Bulletin 87-02, Supplements 1, 2
              Fasteners                                          Information Notice 89-22
              Fasteners
              - ..----...-__.__.-                                Information Notice 89-59, Supplement 1
              Fittings and flanges-.-.---I.-                     Bulletin 88-05, Supplements 1, 2
              Molded case circuit breakers              .__-     Bulletin 88-10. Suoolement
                                                                                    .,          1
              Circuit breakers                                   Information Notice 88-46, Supplements 1, 2, 3, 4
              Metalclad circuit breakers          _______        Information Notice 89-45, Supplements 1,~-2
              Fuses                       -~-.__.                Information Notice 88-19                -__-
              Valves                                             Information
                                                                  __--        Notice   88-48, Supplements   1, 2
              Valve replacement parts                            Information Notice 88-97, Supplement 1
              Steel                                              Information Notice 89-56. Suoolement 1




              Page 41                                       GAO/RCEDBlS    Counterfeit   and Substandard   Products



                                              ,



                                                  .,)   ,
Appendix III I

Major Contributors to This Report


  1
Resources,              Mary Ann Kruslicky, Assistant Director
Community, and          John E. Bagnulo, Evaluator-in-Charge
Economic
Development Division,
Washington, DC.




(mlR74)                 Page 42                       GAO/RCED-91-6   Counterfeit   and Substandard   Products
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