© 2015 Kilpatrick Townsend January 27, 2014

Global Sourcing in the Supply Chain:

Critical Risks & Mitigation Strategies from a

Customer’s Perspective

Presented by

Sonia Baldia and Christopher Shen

Panelist Introductions

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Christopher Shen is a Senior Counsel with Intel’s Corporate Legal Group. He provides support for

Intel Capital (the venture investing arm of Intel) in its debt and equity investments across North

America, South America and EMEA, as well as handling SEC compliance issues. Prior to joining

Intel, he spent 5 years at an international law firm (including 4 years in its Hong Kong office) where

he worked on M&A, public and private securities transactions and SEC compliance.

Sonia Baldia is a partner with Kilpatrick Townsend’s nationally and internationally recognized Global

Sourcing and Technology team. She advises clients in a broad range of U.S. and global sourcing,

technology and intellectual property transactions. More specifically, her practice focuses on global IT

and business process sourcing, supply chain arrangements, procurement, technology /IP licensing,

cloud computing, IP monetization, commercial alliances, e-commerce, and information governance

matters. Ms. Baldia is admitted to practice both in the U.S. and India and is a registered patent

attorney in both countries. Ms. Baldia has served as associate professor of corporate and IP law and

has been a visiting scholar to the Max Planck Institute on innovation in Munich, Germany, Cambridge

University in England, and the Research Center for Advanced Science and Technology in Tokyo,

Japan. She also previously was a consultant to the U.S. Agency for International Development and

the U.S. Department of Commerce in Washington, DC advising foreign governments on IT, telecom

and IP-related development projects.

• Trends in Global Sourcing

• Key Drivers

• Critical Risks

• Best Practices in Risk Mitigation

• Conflict Minerals in Your Supply Chain and SEC

Disclosure Obligations

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Agenda

1st Gen

Late 1990s

“Pioneers”

2nd Gen

Early 2000s

“Offshore”

3rd Gen

Mid 2000s

“Opex”

4th Gen

Today

“Insight”

5th Gen

Near Future

“On-Demand”

6th Gen

Future

“Community”

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Next Generation Global Sourcing

Source: Based on Accenture report titled “A New Paradigm in Supply Chain Outsourcing”

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Global Sourcing - Services

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Global Supply Chain Ecosystem – Products/Components

Source – Pearson Education, Inc.

• Cost savings

• Fixed to variable costs

• Access to world class capabilities and expertise

• Ability to focus on core competencies

• Technological flexibility

• Efficiency through business process redesign

• Increase speed to market

• Access to new markets

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Key Drivers

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Critical Third Party Risks

Loss of control Supply chain

disruption Subcontractors

Threat to IP/data

Uncertain enforcement

rights

Regulatory compliance

• Export/Import regulations

• Anti-corruption/anti-bribery laws

• Data security/privacy laws

• Labor and environmental regulations

• Labeling and country of origin issues

• Industry specific regulations

• Competition laws

• Tax/permanent establishment

• International treaties/trade agreements

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Complex Regulatory Landscape

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Transparency International’s Corruption Perceptions Index, 2014

Know your supply chain

Negotiate appropriate contractual

terms

Proactively manage supply chain

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Risk Mitigation

• Country risk assessment

• Supplier selection & viability

• Appropriate delivery model

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Due Diligence

• Strict compliance covenants

• Audit and termination rights

• Subcontracting and flow down

• Ownership and protection of IP/data

• Financial reporting requirements

• Allocation of liability

• Adequate indemnities

• Risk of loss and insurance

• Non-exclusivity

• Dispute resolution

• Detailed exit plan

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Best Practices in Contractual Protections

Audits

Business Continuity

Disaster recovery

Performance metrics

Contingency planning

Distributed supplier network

Notification & escalation process

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Prevent Supply Chain Disruption

• Information governance

• Compliance training

• Onsite audits

• Non-exclusivity

• Proactive governance and monitoring

• Appropriate legal response to non-compliance

• Balancing accountability in multi-vendor ecosystem

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Effective Vendor Management

Conflict Minerals in Your Supply Chain

and SEC Disclosure Obligations

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TANTALUM TUNGSTEN TIN GOLD

Conflict Minerals or “3TG”

Section 1502 added to Dodd-Frank in July 2010.

“Disclose annually…whether conflict minerals did originate in the

Democratic Republic of the Congo or an adjoining country and, in

cases in which such conflict minerals did originate in any such

country, submit to the Commission a report that includes:

(i) a description of the measures taken by the person to exercise

due diligence on the source and chain of custody of such minerals,

which measures shall include an independent private sector audit

of such report...and

(ii) a description of the products manufactured or contracted to be

manufactured that are not DRC conflict free[...]”.

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Dodd-Frank Act

Dodd-Frank Act: Covered Countries

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Rule applies if:

– Company files reports w/ SEC under ‘34 Act; and

– 3TG metals are “necessary to the functionality or production”

of products manufactured/contracted to be manufactured.

Must conduct “reasonable country of origin inquiry” (RCOI).

Must describe inquiry undertook and results on Form SD, due on

May 31 and covers prior calendar year.

Must make description publicly available on website and provide

internet address of website in Form SD.

Depending on RCOI findings, may also need to conduct further due

diligence on whether products are “DRC conflict free”. Include

audited Conflict Minerals Report (CMR) to Form SD.

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SEC Rule 13p-1 and Form SD

What happens if any 3TG minerals used are not found

to be “DRC conflict free”? CMR must describe:

– Products manufactured or contracted to be

manufactured not been found to be “DRC conflict

free”;

– Facilities used to process conflict minerals in such

products;

– Country of origin of conflict minerals; and

– Efforts to determine location of origin w/ greatest

possible specificity.

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SEC Rule 13p-1 and Form SD

What happens if can’t figure out if 3TG minerals are

“DRC conflict free”?

Until May 31, 2016 (May 31, 2018 for smaller co’s),

CMR must describe the same 4 issues under “not DRC

conflict free” plus:

– Steps you have taken/will take to mitigate risk that

conflict minerals benefit armed groups as well as

efforts to improve due diligence.

– No third-party audit required for products that are

“DRC conflict undeterminable.”

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SEC Rule 13p-1 and Form SD

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Intel’s Role in Driving Conflict-Free

Metals

Industries

Non-Government

Organizations

Smelters

Electronics &

“Downstream”

Industries

INTEL

LEADERSHIP

Governments

Intel’s goal in 2008: manufacture the world’s first

conflict-free microprocessor by 2013

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Supply Chain Due Diligence

2 types of bar-coded tags; tags

handled by government agents.

Mine site, weight, date/time,

buyer, price, grade, transport

route/method/security and other

information recorded.

Recording done in presence of

mine owner, miner and Division

des Mines agent.

Data sent to secure database.

Process repeated at trading

houses.

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“Bagging & Tagging”

Developed by iTSCi to conform

w/ OECD due diligence guidance

as well as the EICC and GeSI’s

Conflict-Free Smelter Program.

Helps mine companies, trading

houses and exporters undergo

risk assessment, audits by

independent party and implement

tracking system.

Field visits, document checking,

whistle-blowing process and

routine risk assessments.

All supply chain operators, mine

sites and iTSCi process audited

annually.

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“Bagging and Tagging”

Upstream

(Mines, trading

houses &

exporters)

Smelters /

Refiners

Downstream

(Manufacturers)

Conflict Free

Smelter

(CFS) Program

Raw

Mineral

s

Finished

Products

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Supply Chain Focal Point – Smelters/Refiners

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• Request info from suppliers

• EICC/GeSI Reporting Template

Ask

• Direct visits to smelters

• Create Audit program Validate

• Partner w/ industry associations and NGOs

• Incentive program for smelters Connect

Conflict-Free Smelter Program

Free, standardized reporting template (Excel

spreadsheet) and free software dashboard tool

(MRPRO).

Enables transfer of Conflict Mineral sourcing info for

downstream supply chain.

Consistent with OECD diligence framework.

Available online at

http://www.conflictfreesourcing.org/conflict-minerals-

reporting-template/

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CFSP: Reporting Template

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Reporting Company

Direct Suppliers

Sub Suppliers

Direct Supplier

Sends request

to direct

suppliers

Sends request to

sub suppliers

Sub suppliers

return

completed

template

Direct supplier

aggregates

data and

returns to

Reporting Co.

CFSP: Reporting Template

Voluntary Program designed by EICC and GeSI for

smelters/refiners.

Establishes standard protocols to evaluate procurement activities to

avoid buying Conflict Minerals from problematic sources.

Independent third-party audit of smelter.

Incentive program to reimburse 50% of audit costs for

smelters/refiners that pass audit.

Regularly updated list of compliant smelters/refiners at

http://www.conflictfreesourcing.org/conflict-free-smelter-refiner-lists/

Protocols and smelter agreements available online at

www.conflictfreesourcing.org/audit-protocols-procedures/

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CFSP: Audit Program

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Pre-Audit

- Visit by EICC or GeSI

- Pre-audit checklist

- Line item summary of responses

- Audit quote

- Funds received

- Set audit date

Audit

- 3rd party audit

- Auditor report and compliance recommendation

- Audit review committee (ARC) determination of “in compliance” or “improvement needed”

Post-Audit

(non-compliant)

- ARC develops improvement plan

- Improvement done w/in 90 days

- Re-audit as necessary

- ARC compliance determination

CFSP: Audit Program

• Nat’l Assoc. of Manufacturers, Chamber of Commerce and Business

Roundtable sued SEC, claiming:

• Rule 13p-1 “arbitrary and capricious under Administrative Procedure Act;

• SEC failed to “analyze properly cost and benefits” under ‘34 Act;

• SEC failed to implement any de minimis exemption;

• Rule 13p-1 violate First Amendment.

• U.S. District Court (DC) ruled in favor of SEC.

• April 14, 2014: U.S. Court of Appeals (DC Circuit) upheld, except for

ruling that Rule 13p-1 “violate[d] the First Amendment to the extent [it]

require[d] regulated entities to report…that any of their products have

not been found to be DRC conflict free”.

• November 18, 2014: Court of Appeals granted re-hearing of NAM v.

SEC.

• SEC Guidance: no reporting company required to describe products as

“DRC conflict free,” “not found to be DRC conflict free,” or “DRC conflict

undeterminable,” pending final outcome.

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Recent Court Developments

1. Identify internal leads for diligence.

2. Identify products that may contain conflict minerals.

3. Assess which direct suppliers to focus on.

4. Utilize resources such as CFSP Reporting Template and

MRPRO platform to gather information from suppliers.

5. Contact direct suppliers that do not respond to initial inquiry.

6. Conduct RCOI by analyzing sources of conflict minerals

(smelters/refiners) against independent list of conflict-free

sources.

7. For conflict mineral sources not on any conflict-free list, contact

source directly and document country of origin information.

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Your Supply Chain Diligence

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Where to Find More Information

• SEC Rule 13p-1:

http://www.sec.gov/rules/final/2012/34-67716.pdf

• SEC FAQ on Conflict Minerals:

http://www.sec.gov/divisions/corpfin/guidance/conflict

minerals-faq.htm

• OECD Due Diligence Guidance:

http://www.oecd.org/daf/inv/mne/mining.htm

• Conflict-Free Sourcing Initiative (sponsored by EICC

and GeSI): http://www.conflictfreesourcing.org/

• Intel’s website on Conflict Minerals:

http://www.intel.com/conflictfree

Questions

Sonia Baldia

Kilpatrick Townsend

+1 202.508.5840

sbaldia@kilpatricktownsend.com

Christopher Shen

Intel

+1 703.633.0948

christopher.shen@intel.com

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