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Audits a Key Recommendation for Complying with Trade Sanctions

Monday, February 04, 2019
Sandler, Travis & Rosenberg Trade Report

A recent enforcement action by the Office of Foreign Assets Control highlights the risks for companies that do not conduct full-spectrum supply chain due diligence when sourcing products from overseas, particularly regions in which comprehensively sanctioned countries or regions are known to export goods. OFAC is therefore encouraging companies to develop, implement, and maintain a risk-based approach to sanctions compliance and to implement processes and procedures to identify and mitigate areas of risks. Examples include implementing supply chain audits with country-of-origin verification, conducting mandatory OFAC sanctions training for suppliers, and routinely and frequently performing audits of suppliers.

In the enforcement action at issue, a U.S. company has agreed to pay $996,080 to settle its potential civil liability for 156 apparent violations of the North Korea Sanctions Regulations involving the importation of products from two suppliers in China that contained materials sourced from North Korea. The statutory maximum civil monetary penalty amount for the apparent violations was $40.8 million and the base penalty was $2.21 million.

Among the aggravating factors cited by OFAC is that the company’s OFAC compliance program was either non-existent or inadequate. Instead, the company’s production review efforts focused on quality assurance issues pertaining to the production process, raw materials, and end products of the goods it purchased and/or imported. In addition, the company appears not to have exercised sufficient supply chain due diligence, as its compliance program and supplier audits failed to discover that about 80 percent of the goods supplied by two of its China-based suppliers contained materials from North Korea.

On the other hand, OFAC said the company’s cooperation and remedial measures were mitigating factors. In addition to immediately disclosing the apparent violations and terminating the conduct at issue, the company took a number of steps to prevent future violations. These include implementing supply chain audits that verify the country of origin of goods and services used in its products, newly requiring suppliers to certify that they will comply with all U.S. export controls and trade sanctions, and conducting an enhanced supplier audit that included verification of payment information related to production materials and review of supplier bank statements. The company also expanded its efforts to train employees on U.S. sanctions regulations and other relevant U.S. laws and regulations.

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