Client Alert 20 Jun. 2023

Cosmetics companies engaging in international sales land on U.S. sanctions and export controls enforcement radar

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California-based skincare and dietary supplements company Murad, LLC (“Murad”) agreed to pay $3.3 million to the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) to settle Murad’s potential civil liability for exporting goods and services to Iran in violation of U.S. sanctions. The settlement is the latest in a series of enforcement actions by OFAC against companies in the cosmetics industry, and reflects a growing focus on the luxury sector by U.S. agencies enforcing sanctions and export controls. Murad was founded by dermatologist Howard Murad in 1989 and acquired by Unilever U.S. in September 2015.

Murad’s apparent violations of U.S. sanctions

According to the settlement with OFAC, Murad entered into an agreement with an Iran-based distributor in 2009 to distribute Murad’s products throughout the Middle East, including in Iran. Murad renewed the agreement in May 2015 using a UAE-based distributor. Between 2009 and 2018, the distributors made at least 62 exports of Murad products worth approximately $11 million to Iran. Exports from the United States or by a United States person to Iran are prohibited under the Iranian Transactions and Sanctions Regulation. Murad applied to OFAC for a specific license to export products to Iran three times between 2009 and 2015. OFAC did not grant the license, but members of Murad’s management proceeded with the sales.

Murad employees assisted the UAE distributor with opening of an independently owned and operated Murad store in Tehran, Iran in late 2015 or early 2016. Murad employees provided support to ensure the design of the new store in Tehran would be consistent with other Murad stores internationally. Exports of services of U.S. persons to Iran is prohibited under the Iranian Transactions and Sanctions Regulations.

Murad made its last export to Iran in January 2018. In February 2018, Unilever submitted a voluntary self-disclosure to OFAC reporting Murad’s suspected violations of the Iranian Transactions and Sanctions Regulations.

Compliance concerns in the cosmetics industry

OFAC considered Murad’s actions egregious violations of U.S. sanctions. The settlement amount reflects OFAC’s consideration of aggravating and mitigating factors, including the company’s voluntary self-disclosure of its apparent violation. The settlement amount, $3,334,286, is about 15% of the maximum statutory penalty, which would have exceeded $22 million.

In assessing the settlement amount, OFAC noted that Murad’s compliance efforts were deficient because as primarily a cosmetics company, Murad’s compliance focused on product safety despite also selling its products internationally. OFAC noted that compliance after acquisition remained “inadequate in relation to the sanctions risks the Company faced.” In particular, Murad reported compliance issues to personnel at Unilever’s United Kingdom headquarters who lacked familiarity with U.S. sanctions. Cosmetics companies engaging in international sales are responsible for maintaining compliance with sanctions regimes across multiple jurisdictions.

Murad’s penalty was mitigated by the “benign consumer nature” of its products.

OFAC simultaneously announced a $175,000 settlement with a natural U.S. person, described as a former senior Murad executive. OFAC recommended that senior executives with managerial responsibilities should take particular care to ensure awareness of applicable prohibitions by employees and refrain from and prevent potential violations.

While the Murad settlement involved the export of U.S. cosmetics in apparent violation of sanctions, OFAC has also taken enforcement actions against cosmetics companies in relation to import and supply chain violation. In 2019, OFAC settled with e.l.f. Cosmetics, Inc. (“ELF”), a cosmetics company headquartered in California, to settle its potential civil liability for 156 apparent violations of the North Korea Sanctions Regulations. ELF had apparently violated the North Korea Sanctions regulation by importing 156 shipments of false eyelash kits from two suppliers located in the People’s Republic of China that contained materials sourced by these suppliers from the Democratic People’s Republic of Korea. Like with Murad, OFAC’s announcement highlighted deficiencies in ELF’s compliance program.

Sanctions are not the only concern for cosmetics companies

In addition to sanctions administered by OFAC, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) administers U.S. export controls. Since March 2022, BIS has prohibited the export of U.S. luxury goods to Russia and Belarus. Luxury goods identified by BIS include perfumes, makeup and makeup brushes, and skincare including sunscreen, with no minimum dollar value. Similar restrictions apply to the Democratic People’s Republic of Korea and Iran.

In 2021, U.S. prosecutors in the Southern District of New York and Department of Commerce officials charged a Long Island man with conspiracy to violate U.S. sanctions and export controls on Iran. Michael Rose, president of Forsythe Cosmetics Group LLC, was accused of arranging for the export from the United States to Iran of more than $350,000 worth of cosmetics through front companies in the United Arab Emirates.

About Curtis

Curtis, Mallet-Prevost, Colt & Mosle LLP is a leading international law firm. Headquartered in New York, Curtis has 19 offices in the United States, Latin America, Europe, the Middle East and Asia. Curtis represents a wide range of clients, including multinational corporations and financial institutions, governments and state-owned companies, money managers, sovereign wealth funds, family-owned businesses, individuals and entrepreneurs.

Curtis, Mallet-Prevost, Colt & Mosle LLP has a robust sanctions and export control practice with experience across U.S., EU and U.K. sanctions regimes. Litigation partner Jason Wright is based in New York and handles disputes, sanctions and export controls, and human-rights compliance matters for the industry. For international disputes, Jason has handled disputes for e-commerce companies against payment processors in Europe, Asia, Southeast Asia, and in the United States. Mr. Wright also chairs the Firm’s global economic sanctions and export controls practice.

Partner Daniela Della Rosa is based in Italy and advises international premium brands on their commercial operations and IP portfolio management in Italy, the U.S. and internationally.

Mr. Wright and Ms. Della Rosa are co-chairs of the Firm’s Fashion, Beauty, and Luxury practice.

Attorney advertising. The material contained in this Client Alert is only a general review of the subjects covered and does not constitute legal advice. No legal or business decision should be based on its contents.

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