Italian Firm Dinged on NK Sanctions

Don’t die of surprise here, but we have yet another foreign company with a weak sanctions compliance program, conducting business with North Korea through the U.S. banking system, and yet again ending up with a sanctions enforcement action from U.S. regulators. Rinse, repeat.

The company in question is Mondo TV, an Italian animation company. It paid $538,000 this week to settle charges from the U.S. Office of Foreign Assets Control that Mondo funneled an equivalent amount of money through U.S. banks to a North Korea-owned animation studio working for Mondo as a subcontractor from 2019 to 2021.

The offenses weren’t egregious by OFAC standards, but neither did Mondo voluntarily self-disclose the misconduct. OFAC fired off a warning to others that the case “makes clear how the absence of a thorough and effective sanctions compliance program … can increase the likelihood of a potential OFAC sanctions violation.” So let’s take a look at what happened here.

As described in the OFAC settlement order, Mondo had worked with Scientific Educational Korea Studio (SEK), an animation studio owned by the North Korean government, since the 1990s. Mondo subcontracted various projects to SEK, communicated with SEK executives on a regular basis, and even met SEK employees in Europe to provide training. By 2019, Mondo had racked up $1.12 million in accounts payable to SEK.

Starting that year, and into late 2021, Mondo began paying off those debts by sending $538,000 in small monthly payments to various proxies acting on SEK’s behalf. SEK identified those proxies and their bank account information in invoices, and “Mondo appeared to believe the payments to these third-party companies were to satisfy debts SEK had to these companies,” OFAC said.

Mondo made 18 wire transfers to those SEK intermediaries from mid-2019 into late 2021. All the payments either went to U.S. companies with U.S. bank accounts, or foreign companies with U.S. bank accounts, or were cleared by U.S. correspondent banks.

Aggravating and Mitigating Factors

As usual with sanctions cases, the potential monetary penalties allowed by statute were huge ($6.6 million in this case) compared to the actual penalties imposed ($538,000). OFAC arrived at that smaller number by evaluating several factors that any sanctions compliance officer will want to note.

On the aggravating side, Mondo “acted with reckless disregard” for U.S. sanctions law by sending those payments to a business cut-out for the North Korean government. Mondo’s senior executives knew that those payments to intermediaries were ultimately making their way back to Pyongyang. 

For example, Mondo’s chief executive officer approved and signed the 2019 contract, which made explicit reference to North Korea; as did two additional contracts he signed on behalf of Mondo with SEK for additional projects. Mondo had also paused its work with SEK from 2016 to 2019 over human rights concerns, another sign that the company understood who its business partner was.

On the mitigating side, Mondo had no sanctions violations for the previous five years, and the company did provide extensive cooperation with investigators once OFAC did come knocking.

Compliance officers have a few lessons to consider here. First is that in addition to all the hacking, weapons sales, narcotics, and other illicit activities that North Korea operates, the regime in Pyongyang also operates plenty of legitimate businesses (like animation studies) to raise revenue — and those legit businesses violate U.S. sanctions law too. You need to avoid them just as much as all the other sketchy stuff North Korea does.

U.S. businesses generally know that already. Our second lesson, then, is really for foreign businesses: that they too must pay heed to U.S. sanctions law, complete with a sanctions compliance program. OFAC has published guidance about effective sanctions compliance programs, and also launched a cooperation policy to entice companies with violations to step forward. So you do have resources out there to help you get started. 

What foreign companies can’t do is delude themselves into thinking that they are beyond reach of U.S. sanctions rules, either because they aren’t domiciled in the United States, or they’re making payments to other parties not based in North Korea (or Iran, or Cuba, or other sanctioned countries). Sanctions have become a crucial tool for U.S. foreign policy, and regulators will stretch as far as they can to use it.

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