U.S. imports that are produced in part or whole in North Korea risk being denied entry or seized by U.S. Customs & Border Protection (CBP) as products of forced labor. A newly revealed enforcement action by the Office of Foreign Assets Control (OFAC) highlights that the importer also may face significant penalties under U.S. economic sanctions programs.
Since 2015, when the Trade Facilitation and Trade Enforcement Act (TFTEA) was signed into law and expanded the authority of CBP to stop entries of products made with forced labor, U.S. importers have been on notice that (1) they need to monitor their supply chains to ensure that their imports are not produced with forced labor and (2) if there was any manufacturing performed in North Korea, an import would be presumed to be made with forced labor. Last summer, CBP’s parent agency, the Department of Homeland Security, along with the Department of the Treasury and the Department of State, issued an advisory to manufacturers, buyers and service providers warning of evasion tactics used by North Korea to avoid detection of North Korean content in goods destined for the U.S. market. Now, the first enforcement action of 2019 by OFAC makes clear that these risks to U.S. importers are real and substantial and require companies to implement “full spectrum” due diligence policies and procedures.
Last month, e.l.f. Cosmetics (ELF), agreed to pay OFAC a fine of almost $1 million after it voluntarily self-disclosed that it had imported $4.4 million worth of false eyelash kits from China that included inputs from North Korea. Under the North Korea Sanctions Regulations (NKSR), which are administered by OFAC, the importation into the United States, directly or indirectly, of any goods, services, or technology from North Korea is prohibited. Inputs manufactured in North Korea and then incorporated into a product manufactured in China are considered indirect goods and services when the finished product is imported into the U.S.
ELF admitted to OFAC that over almost a six-year period, from April 2012 through January 2017, it made 156 entries of the eyelash kits, which it purchased from two Chinese suppliers. The company also admitted that during that time period it either had no OFAC compliance program or its compliance program, which apparently included supplier audits, was inadequate. According to the OFAC announcement of the settlement agreement it reached with ELF, the “company’s production review efforts focused [only] on quality assurance issues pertaining to the production process, raw materials, and end-products of the goods it purchased and/or imported.”
While the penalty paid by ELF equaled a quarter of the value of the violative imports, it could have been much greater. In setting the penalty, OFAC applied its Economic Sanctions Enforcement Guidelines, which, like CBP’s penalty determinations, consider both aggravating and mitigating factors. OFAC identified three aggravating factors: (1) the apparent violations may have resulted in U.S.-origin funds coming under the control of the North Korean government (when a goal of the NKSR is to prevent that government from obtaining money from the U.S.); (2) ELF is a large and commercially sophisticated company that engages in a substantial volume of international trade; and (3) ELF’s compliance program was either non-existent or inadequate and the company “appear[ed] not to have exercised sufficient supply chain due diligence while sourcing products from a region that poses a high risk to the effectiveness of the NKSR.”
OFAC identified four mitigating factors: (1) ELF’s personnel did not appear to have had actual knowledge of the conduct that led to the apparent violations; (2) ELF had not received a penalty notice or a finding of a violation by OFAC in the five years preceding the earliest date of the transactions that gave rise to the apparent violations; (3) the apparent violations do not appear to constitute a significant part of ELF’s business activities; and (4) ELF cooperated with OFAC by immediately disclosing the apparent violations, signing a tolling agreement (to provide OFAC with more time to complete its investigation) and submitting a complete and satisfactory response to OFAC’s request for additional information.
OFAC also credited ELF for taking steps to minimize the risk of recurrence of similar conduct in the future. OFAC specifically identified those steps in its announcement of the settlement, clearly putting other companies on notice of the essentials of an OFAC compliance program:
- Implemented supply chain audits that verify the country of origin of goods and services used in ELF’s products;
- Adopted new procedures to require suppliers to sign certificates of compliance stating that they will comply with all U.S. export controls and trade sanctions;
- Conducted an enhanced supplier audit that included verification of payment information related to production materials and review of supplier bank statements;
- Engaged outside counsel to provide additional training for key employees in the United States and in China regarding U.S. sanctions regulations and other relevant U.S. laws and regulations; and
- Held mandatory training on U.S. sanctions regulations for employees and suppliers in China and implemented additional mandatory trainings for new employees, as well as regular refresher training for current employees and suppliers based in China.
As if its message was not clear enough, OFAC also instructed that “this enforcement action highlights the risks for companies that do not conduct full-spectrum supply chain due diligence when sourcing products from overseas, particularly in a region in which [North Korea], as well as other comprehensively sanctioned countries or regions, is known to export goods.” Full-spectrum supply chain due diligence means verifying the country of origin of not just the finished product, but also the inputs incorporated into a finished product, particularly when products are sourced from regions that present a high risk to the effectiveness of U.S. economic sanctions programs.
The essentials of the due diligence program laid out in the ELF settlement build on the warning and recommendations that the Departments of the Treasury, State and Homeland Security issued last July. That document also lists potential indicators of a North Korean nexus for imported goods and notes that liability may not be limited to U.S. importers. Foreign exporters also risk OFAC enforcement actions, including identification as Specially Designated Nationals (SDN), if they knowingly export to the United States goods that were sourced in North Korea or incorporate North Korean inputs. Assets of SDNs are blocked and U.S. persons are generally prohibited from dealing with them.
Supply chain oversight by U.S. consumer goods importers and retailers has long been about more than just quality assurance. Customs compliance, product safety, working conditions and environmental protections should already be well baked into assessments of vendors. But now all goods suppliers, importers and retailers are on notice of the expectation by the U.S. government of “full-spectrum supply chain due diligence” and the risk of multiple U.S. enforcement agencies scrutinizing their compliance systems and imposing costly penalties.
This information is provided for educational and informational purposes only and is not intended and should not be construed as legal advice.
 31 C.F.R. Part 510.
 The OFAC Economic Sanctions Enforcement Guidelines are available at 31 C.F.R. Appendix A to part 501. CBP’s penalty guidelines are provided at 19 C.F.R. part 171, Appendix B.
 See https://www.treasury.gov/resource-center/sanctions/Programs/Documents/dprk_supplychain_advisory_07232018.pdf