Majority of OFAC's 2019 Enforcement Actions Targeted Supply Chain Violations, Report Says

More than half of the sanctions-related enforcement actions issued by the Treasury Department in 2019 involved supply chain violations, signaling that supply chain compliance is one of the most important factors in avoiding violations, according to a December report released by Kharon, a sanctions advisory firm. The penalties are mostly due to deficiencies in three main areas of supply chain compliance, Kharon said: companies that operated in “heightened-risk jurisdictions,” companies that operated “existing and newly acquired” foreign subsidiaries, and companies that showed deficiencies while monitoring actors in its supply chain.

In the Treasury's January enforcement action against e.l.f. Cosmetics, in which the company imported more than 150 shipments of false eyelash kits that included North Korea-origin material, Treasury’s Office of Foreign Assets Control signaled to companies that “indirect” product supply chains may lead to violations, especially if companies do not properly identify their sanctions exposure, Kharon said. Along with the violation, which was an example of a company operating in a “heightened-risk jurisdiction,” OFAC called for companies to conduct “full-spectrum supply chain due diligence” when importing from overseas.

In an example of a newly acquired foreign subsidiary leading to a violation, OFAC announced a March settlement with Stanley Black & Decker (see 1903270070) after its subsidiary in China tried to trade in Iran. The penalty highlighted the need for companies to conduct sanctions-related due diligence both before and after acquisitions and to continue auditing and monitoring the actions of its subsidiaries, Kharon said.

OFAC’s October penalty against General Electric (see 1910010048) and November penalty against Apple (see 1911250064) stressed the importance of ongoing monitoring of all actors in a company’s supply chain, Kharon said. The violations represented failures to conduct due diligence on customers and counterparties when renewing a customer relationship and a failure to fix a faulty screening system for OFAC's Specially Designated Nationals List.

Companies should also be aware of the overlap between export control violations from the Commerce Department and sanctions violations from OFAC, the report said. In some situations, parties added to lists administered by the Commerce Department Bureau of Industry and Security, such as the Entity List, are later sanctioned or charged by OFAC. One example is Mahan Air (see 1806200071), the Iranian airline that was added to Commerce’s Denied Persons List in 2008 and sanctioned by OFAC three years later, Kharon said. That action sparked the addition of “dozens of actors to BIS screening lists who were later subject to OFAC sanctions.”

The report also contains case studies of important supply chain-related violations, sanctions guidance issued by the European Union and Britain, and an annex with a list of guidance documents released by Commerce and OFAC during 2019.