On June 26, Treasury’s Office of Foreign Assets Control (OFAC) announced the settlement of an enforcement action against an Italian animation company that violated OFAC’s sanctions on North Korea. The enforcement action highlights several key propositions regarding sanctions compliance: (1) non-U.S. businesses cannot ignore U.S. sanctions if they are transacting through the U.S. or using U.S. dollars; (2) penalties for civil violations of sanctions are imposed on a strict liability basis; and (3) the U.S. government is particularly focused on North Korean sanctions evasion.
The subject of the action, an Italian business named Mondo T, S.p.a. (“Mondo”), had been working with Scientific Educational Korea Studio (“SEK”), a Government of North Korea-owned animation firm in North Korea, since the 1990s. By 2019, Mondo had apparently accumulated over $1.1 million in outstanding debts to SEK for several project. In July, 2019, SEK and Mondo agreed that Mondo would pay SEK in monthly installments for its prior work and for new projects that SEK would undertake for Mondo. Under their arrangement, SEK would issue an invoice to Mondo each month that named a third-party company and its bank account details for Mondo to remit payment. Among them, SEK identified two third-party companies in China and one U.S company, along with their respective account information at several U.S. financial institutions. Mondo made the payments consistent with SEK’s instructions.
According to OFAC’s Enforcement Release, Mondo understood throughout that it was paying a North Korean company. Mondo’s CEO, its Chief Operations Officer and its Head of Legal were all involved in the transactions with SEK. Under their agreement, between May 2019 and November 2021, Mondo initiated 18 wire transfers destined for SEK that were processed by or settled at U.S. banks – 12 payments to a U.S. company’s account at a U.S. bank; one U.S. dollar transfer that was cleared by a U.S. correspondent bank; and five transfers to a foreign company’s account at a U.S. bank.
As emphasized in a recent “Tri-Seal” Compliance Note issued by the Departments of Treasury, Commerce and Justice, foreign-based persons violate U.S. sanctions when those persons cause U.S. persons to wittingly or unwittingly violate U.S. sanctions. Here, the transactions between a private Italian business and an instrumentality of the North Korean Government breached U.S. law because payments were made through accounts at U.S. banks or using U.S. dollars. By making payments to proxies of a North Korean company at U.S. banks, Mondo caused the U.S. banks to (1) deal in the blocked property or interests in property of the Government of North Korea; and (2) export financial services to North Korea.
The transfers apparently stopped in November 2021. OFAC designated SEK on December 10, 2021, for being owned by the Government of North Korea. While Mondo knew it was dealing with a North Korean business, the Enforcement Release does not indicate whether Mondo knew at the time that its dealings through U.S. banks with the government-owned SEK violated U.S. law. But, in any event, knowledge is not a requirement for liability in these circumstances. OFAC may impose civil penalties for sanctions violations based on strict liability, meaning that a person may be held civilly liable even if the person did not know that it was engaging in a transaction that was prohibited under sanctions regulations administered by OFAC.
According to the Enforcement Release, the maximum civil penalty applicable to Mondo’s violations was $6.6 million. However, the actual penalty imposed was only $538,000. The reduction was, in part, because the violations were deemed a non-egregious case under OFAC’s Economic Sanctions Enforcement Guidelines (“Enforcement Guidelines”). While the Enforcement Guidelines identify certain factors that are to be given substantial weight in determining egregiousness, OFAC has a great deal of discretion in reaching this determination and, as is typical, did not detail in the Enforcement Release how it came to its conclusion.
OFAC’s Enforcement Release indicates that Mondo did not voluntarily disclose the apparent violations. While there is no information provided regarding how the violations were discovered, it’s hardly surprising that they came to the attention of the government. Over the last few years, the U.S. Government has focused a great deal of attention on sanctions evasion by the North Korean government. There have been advisories issued in May 2022, October 2023 and May 2024 regarding the threat posed by North Korean information technology (IT) workers who pose as non-North Korean nationals in order to obtain employment and generate revenue for the North Korean government. The U.S. Department of Justice has explained that the North Korean government dispatched thousands of skilled IT workers to live abroad with the aim of deceiving U.S. and other businesses worldwide into hiring them as freelance IT workers, to generate revenue for its weapons of mass destruction program. As part of targeting these schemes, the DOJ recently announced seizures of website domains (in October of 2023 and May of 2024) and arrests of individuals in the U.S. (in May of 2024) involved in facilitating the schemes. With all of this activity by U.S. law enforcement and intelligence agencies, it is fair to assume that the authorities have amassed a substantial trove of information concerning North Korean evasion schemes, including payments through U.S. banks to North Korea or its proxies. It’s reasonable to expect more enforcement actions of this sort in the near future.
