• Company committed multiple apparent violations of U.S. sanctions on North Korea
  • Penalty imposed in part because of company’s “non-existent” sanctions compliance program
  • Settlement underscores need to address supply chain risks

On January 31, 2019, U.S. Treasury Department, Office of Foreign Assets Control (OFAC)announced a $996,080 settlement agreement with e.l.f. Cosmetics, Inc. (ELF) to settle ELF’s potential civil liability for 156 violations of the North Korea Sanctions Regulations.  According to OFAC, fake eyelash kits that ELF believed to be from China were in fact supplied from North Korea.

Presumably very few Americans awake in the middle of the night worrying that North Korean fake eyelashes pose a threat to U.S. national security.  Yet in pursuing this action vigorously, OFAC made clear that it is willing to seek penalties against any U.S. business that directly or indirectly benefits the North Korean economy.  In announcing the settlement, OFAC highlighted the importance of conducting “full-spectrum supply chain due diligence when sourcing products from overseas, particularly in a region in which the DPRK, as well as other comprehensively sanctioned countries or regions, is known to export goods.”

Multiple Violations of the North Korea Sanctions Regulations

According to OFAC, ELF imported 156 shipments of fake eyelash kits that contained materials sourced from North Korea.  The shipments occurred from approximately April 2012 through January 2017.  The value of the shipments totaled more than $4.4 million.

Perhaps not surprisingly in light of the number of violations, OFAC found ELF’s OFAC compliance program to be “non-existent or inadequate” during the time of the violations.

OFAC Penalty Based on Aggravating and Mitigating Factors

In determining the settlement amount, OFAC considered numerous aggravating and mitigating circumstances, as follows:

Aggravating Factors:

  • The apparent violations may have resulted in U.S.-origin funds coming under the control of the government of North Korea, in direct conflict with the objectives of U.S. sanctions on North Korea.
  • ELF is a large and commercially sophisticated company that engages in a substantial volume of international trade (i.e., the company should have known better).
  • ELF’s OFAC compliance program was either non-existent or inadequate during the time when the apparent violations occurred.
  • ELF appears not to have exercised sufficient supply chain due diligence while sourcing products from a high-risk region.

Mitigating Factors:

  • ELF personnel apparently did not have actual knowledge of the conduct that led to the apparent violations.
  • ELF had not received a Penalty Notice or Finding of Violation from OFAC in the previous five years.
  • The apparent violations do not appear to constitute a significant part of ELF’s business activities.
  • ELF cooperated with OFAC by immediately disclosing the apparent violations, signing a tolling agreement, and submitting a complete and satisfactory response to OFAC’s request for additional information.

OFAC Highlight Steps for Minimizing Supply Chain Risk

Probably the most important takeaway from this enforcement action is what OFAC viewed as appropriate steps to minimize supply chain risk, including the following:

  • Conduct supply chain audits to verify the country of origin of goods and services used in products.
  • Maintain procedures to require suppliers to sign certificates of compliance stating that they will comply with all U.S. export controls and trade sanctions.
  • Conduct an enhanced supplier assessment, including verifying payment information related to production materials and the review of supplier bank statements.
  • Engage outside counsel to provide training for key employees in the United States and at foreign operations regarding U.S. sanctions regulations and other relevant U.S. laws and regulations.

As this matter makes clear, a seemingly innocuous business line can still lead to substantial compliance problems.  Any company conducting international business, whether selling or just buying, needs to have a good understanding of who its business partners are, and take appropriate steps to ensure those partners are aware of and committed to complying with U.S. international trade laws.  Moreover, when necessary, it is essential to conduct an audit or other review to verify compliance.

The Bass, Berry & Sims International Trade team works closely with clients to develop and conduct compliance audits and assessments, including reviews of supply chains.  Please contact us if we can help you.