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© 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
2
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
3
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”
4
Next Generation Global Sourcing
Source: Based on Accenture report titled “A New Paradigm in Supply Chain Outsourcing”
5
Global Sourcing - Services
6
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
7
Key Drivers
8
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
9
Complex Regulatory Landscape
10
Transparency International’s Corruption Perceptions Index, 2014
Know your supply chain
Negotiate appropriate contractual
terms
Proactively manage supply chain
11
Risk Mitigation
• Country risk assessment
• Supplier selection & viability
• Appropriate delivery model
12
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
13
Best Practices in Contractual Protections
Audits
Business Continuity
Disaster recovery
Performance metrics
Contingency planning
Distributed supplier network
Notification & escalation process
14
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
15
Effective Vendor Management
Conflict Minerals in Your Supply Chain
and SEC Disclosure Obligations
16
17
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[...]”.
18
Dodd-Frank Act
Dodd-Frank Act: Covered Countries
1
9
19
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.
20
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.
21
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.”
22
SEC Rule 13p-1 and Form SD
23
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
24
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.
25
“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.
26
“Bagging and Tagging”
Upstream
(Mines, trading
houses &
exporters)
Smelters /
Refiners
Downstream
(Manufacturers)
Conflict Free
Smelter
(CFS) Program
Raw
Mineral
s
Finished
Products
27
Supply Chain Focal Point – Smelters/Refiners
28
• 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/
29
CFSP: Reporting Template
30
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/
31
CFSP: Audit Program
32
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.
33
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.
34
Your Supply Chain Diligence
35
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
Christopher Shen
Intel
+1 703.633.0948
36