OFAC Enforcement Action Highlights Sanctions Risk in Supply Chain

On January 31, 2019, OFAC announced a $996,080 settlement with e.l.f. Cosmetics, Inc. (“ELF”) for violations of the North Korea Sanctions Regulations arising from the importation of 156 shipments of false eyelash kits that contained materials that were sourced from North Korea and that were purchased from suppliers in China. In January 2017, ELF discovered that approximately 80% of its false eyelash kits contained materials from North Korea, and ELF voluntarily disclosed the violation to OFAC. Among other aggravating factors, OFAC alleged that funds for the materials came under the control of the North Korean government and that ELF was a large and commercially sophisticated company engaged in a substantial volume of international trade with a “non-existent or inadequate” sanctions compliance program. Ultimately, OFAC found that the violations were non-egregious and provided substantial mitigation against the $2,213,510 base penalty level. OFAC credited a number of specific steps that ELF undertook to prevent the risk of future violations:

• Supply chain audits to verify country of origin
• Supplier certifications of compliance with US sanctions and export control
• Enhanced supplier audits to verify payment information and review supplier bank statements
• Training by outside counsel for key US and foreign employees regarding sanctions law
• Mandatory training for employees and suppliers in China

OFAC emphasized the need to conduct “full-spectrum supply chain due diligence,” especially in locations known to engage in trade with sanctioned countries or regions. Risk-based controls related to US sanctions and export control will reduce sanctions risk and may help mitigate the impact of inadvertent violations. Indeed, many of the controls suggested by OFAC complement other supply chain controls intended to address different risks, such as quality assurance, human rights, conflict minerals, and anti-corruption. Although small and mid-size companies may need to be selective when implementing resource-intensive internal controls, adequate due diligence, supplier certifications, contractual representations and warranties, and training are all low-cost, high-return methods to reduce sanctions risks arising from a company’s supply chain.