Back on the (Sub-Supplier) Chain Gang…*
(with apologies to The Pretenders)
Do you know where your product was made? Not knowing…could be costly.
Many U.S. businesses, large and small, sell merchandise that was manufactured or assembled, in whole or in part, in a foreign location. Most know about U.S. laws which prohibit buying goods, components, raw materials or services from places like North Korea and Iran. But, did you know that some products manufactured or assembled in a generally permissible location (China, for example) may be assembled in or contain parts or components from a prohibited location?
A U.S. person that imports goods containing parts, components, or services provided by sub-supplier or a sub-sub supplier in a sanctioned country is guilty of violating U.S. law. We have read that U.S. Customs annually seizes more than US$1 billion of imported goods manufactured in violation of forced labor or human trafficking law, usually without the knowledge of the importer…which in these cases is moot.
Why? Sanctions violations are a strict liability offense in the United States (quick refresher at: Sanctions FAQs), so lack of intent or knowledge, negligence, or ignorance are not defenses.
For a real-life cautionary tale, look to the recent seven-figure settlement paid by a U.S. cosmetics company for importing beauty products from China, without knowing that some of the sub-materials actually originated in North Korea. OFAC confirmed in their statement on the case that the company was unaware of the sub-components origin and that the violations were a “non-egregious case,” but nonetheless imposed a significant fine underscoring the need for companies to mitigate similar risks by conducting full-spectrum supply chain due diligence.
You may be more familiar with the Uyghur Forced Labor Prevention Act, which bans goods produced in the Xinjiang region of China from importation unless there is “clear and convincing evidence” that they were not produced with forced labor. (Note the presumption of guilt unless proven innocent.) This hits every industry sector: for example, on August 1, 2023, a battery manufacturer and a spices and extracts supplier were sanctioned with specificity.
The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) strongly advises importers to conduct detailed and comprehensive sub-supplier diligence for all imported goods. The fact that goods or assembly services are purchased from an independent supplier or that the prohibited content of the imported goods is small are not relevant considerations in terms of liability.
All importers should design and implement a detailed supply chain compliance program in order to minimize the possibility of significant liability for a violation of U.S. sanctions. How are we to do that, you might ask? Glad you asked…
We design and implement fit-for-purpose compliance programs that minimize risk and maximize efficiency. Call us today!
*Special thanks to John Hove, who performed the heavy lifting for this blog.
