Venezuela has frequently been in the news lately, not only because of domestic politics, but also because of sanctions and bribery enforcement actions brought by U.S. authorities. In this podcast, Crowell & Moring’s Cari Stinebower, Dalal Hasan, Eduardo Mathison, and Mariana Pendás provide an overview of recent political and enforcement developments in Venezuela and explain what U.S. companies need to know about how these developments could impact business and trade ties with Venezuela.

Discussed in this 23-minute podcast:

  • An overview of the political situation in Venezuela.
  • Implications of U.S. and EU current sanctions targeting Venezuela and the potential for new sanctions.
  • FinCEN guidance on identifying corruption and money laundering red flags from Venezuela transactions.
  • Legal protections and International Dispute Resolution options for companies provided in Bilateral Investment Treaties (BITs) signed by Venezuela.
  • Takeaways for companies with business ties to Venezuela.

Click below to listen via the embedded player or access from the link:

On February 20, the Secretary General of the Organization of American States (OAS), Luis Almagro, called for more and harsher sanctions on Venezuela. Almagro proposed broader sanctions on the country in addition to the current financial and individually-targeted sanctions. This includes the country’s oil industry.

In addition to Almagro, U.S. Secretary of State Rex Tillerson has said the United States is contemplating sanctioning Venezuela’s oil industry with possible import and export restrictions on state-owned Petróleos de Venezuela (PdVSA). Because many countries in Central America and the Caribbean have long benefitted from subsidized oil from Venezuela, any such sanctions would affect other governments in the region. Tillerson reportedly believes this could lead to a “new kind of relationship” that will help Caribbean nations achieve energy independence and reduce Venezuela’s political capital in the region.

On the same day the OAS Secretary called for more sanctions, the Government of Venezuela (GoV) announced the pre-sale of petro. The petro is Venezuela’s new digital cryptocurrency backed by PdVSA produced oil—one petro is the equivalent of one Venezuelan oil barrel. The new currency has generated controversy both in Venezuela and around the world. The Venezuelan opposition-led National Assembly considers the project illegal because it was not approved legislatively. Commentators also have warned that reliance on the petro is risky because of PdVSA’s current low production rate. According to recent reports, PdVSA’s oil production has fallen to its lowest level in almost 30 years.

The U.S. Treasury’s Office of Foreign Assets Control (OFAC) has already stated that purchasing petros could be seen as a credit extension to the GoV, and thus may be exposed to U.S. sanctions risk.

For more on OFAC and the petro cryptocurrency, please see Crowell’s previous blog post.

The GoV recently announced that it raised $735 million from petro cryptocurrency sales on the first day. If successful, the petro could set a precedent for other sanctioned countries, although it is likely to be closely monitored by the U.S. Government and other key stakeholders in the region.

In addition, on February 12, the Department of Justice unsealed an indictment targeting five former GoV officials relating to their scheme to process outstanding invoices PdVSA owed to its suppliers. The indictment illustrates the potential corruption exposure suppliers to PdVSA may face in trying to collect on over-due invoices. The scheme involved using front companies and promises to expedite payments for overdue invoices.

The combination of the corruption risk companies face when engaging in even pre-sanctions transactions with PdVSA and other GoV state-owned enterprises and the sanctions exposure makes doing business in Venezuela extremely risky from a sanctions, money laundering, and corruption perspective.

In December 2017, the Government of Venezuela announced the adoption of a new digital currency called Petro—backed by Venezuelan oil resources—in what it described as an attempt to avoid the impact of U.S. Financial Sanctions. On January 19, OFAC published a new Frequently Asked Question (FAQ) offering its view that the proposed currency may be exposed to U.S. sanctions.

As previously reported by Crowell, on August 24, 2017, President Trump issued Executive Order (E.O.) 13808, prohibiting U.S. persons from dealing in new debt (of certain maturities)bonds (previously issued ones other than those identified by general license), and all new securities with the Government of Venezuela, and entities it owns or controls, including Petróleos de Venezuela (PDVSA) (but generally excluding CITGO Holdings Inc.).

According to OFAC, investing in the Petro could infringe these requirements.

Specifically, while OFAC offers very little insight into the structure of the Petro, the FAQ states that the new digital currency would carry rights to receive commodities in specified quantities at a later date. The new FAQ explains that a digital currency with these characteristics “would appear to be an extension of credit” to the Venezuelan Government, and therefore, U.S. persons engaging in transactions involving the Petro “may be exposed to U.S. sanctions risk.” The E.O. defines “new debt” broadly, including extension of credit. The FAQ makes no reference to the duration of any investment, but appears to assume that any investment would be for a maturity in excess of that permitted under U.S. sanctions.

Since its announcement, the Petro has been subject to controversy. The Venezuelan Government alleges that the new currency is intended to ease the deep economic recession in the country. However, commentators have expressed concern that the new Petro not only faces risks of corruption, but also is likely to have its own challenges under Venezuelan law. For instance, Article 3 of Venezuela’s Hydrocarbons Law establishes that oil reserves are part of the public domain, and as such, are not transferable. In early January, Venezuela’s Legislature rejected the issuance of the Petro, on the argument that it is illegal and unconstitutional. President Maduro, however, recently announced that the Petro is set to launch, ignoring the Legislature’s powers.

The Petro is also being closely watched by observers in Russia. Having been subject to financial sanctions that closely resemble those in force against Venezuela since July 2014, Russia recently announced it is considering following Venezuela’s steps and adopting a cryptocurrency it has also stated is intended to limit the impact of U.S. Sanctions.

Depending on how that currency is structured, OFAC’s FAQ on the Petro may give some insight into how it would view a similar effort undertaken by Russia.

For more details on Venezuela’s Financial Sanctions, please see Crowell’s Client Alerts from September and November 2017.

On November 9, OFAC published two new Frequently Asked Questions (FAQs) with regard to Venezuela-related sanctions pursuant to Executive Order 13808 (E.O.), issued on August 24. The E.O. prohibits U.S. persons from dealing in new debt, bonds and securities with the Government of Venezuela and Petróleos de Venezuela (PDVSA).

FAQ 547 addresses whether U.S. persons can participate in meetings about restructuring outstanding debt by the Venezuelan Government or PDVSA. OFAC explains that provided that no SDNs are involved in any restructuring efforts, General License 3 of the E.O. authorizes U.S. persons to engage in transactions related to certain bonds specified in the Annex to General License 3. Notably, General License 3 does not authorize transactions involving new debt of the Government of Venezuela—for a maturity of more than 30 days—or to PDVSA—for a maturity of more than 90 days. Therefore, while OFAC appears to allow U.S. persons to participate in restructuring negotiations covered by General License 3, it appears that any restructuring agreement resulting from such negotiations would yet require specific government authorization. OFAC defines “new debt” broadly, including, for example, extensions of credit.

FAQ 548 relates to whether “PDVSA” includes all PDVSA subsidiaries for purposes of the E.O. The FAQ clarifies that the E.O. extends to all subsidiaries of PDVSA unless authorized by OFAC. In particular, General License 2 authorizes transactions with CITGO Holding, Inc., and any of its subsidiaries. CITGO Holding, Inc. is a subsidiary of PDVSA and has operations in the United States.

For more details on the E.O. issued on August 24, see Crowell’s Client Alert.

For more information, contact: Cari Stinebower, Jeff Snyder, Dj Wolff, Eduardo Mathison

FinCEN Warns Financial Institutions to Guard against Corrupt Venezuelan Money

On September 20, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an Advisory on Widespread Public Corruption in Venezuela, warning financial institutions of methods that Venezuelan government officials may be using to flow money related to corruption into the U.S.

The advisory alert provides financial red flags to assist financial institutions in identifying and reporting suspicious activities possibly related to corruption involving the Venezuelan government, Venezuelan officials, or Venezuelan state-owned enterprises (SOEs). The alert gives examples of activities which may be indicative of Venezuelan corruption, such as abusive Venezuelan government contracts, wire transfers from shell corporations, and certain real estate purchases in South Florida and Houston, Texas.

Financial Sanctions Similar to Russia Sectoral Sanctions

As previously reported, on August 25 President Trump issued an Executive Order prohibiting U.S. companies from dealing in new debt with the Government of Venezuela and Petróleos de Venezuela (PDVSA) for a maturity of more than 30 and 90 days, respectively. In a new development, on October 3, OFAC published an FAQ explaining what constitutes “profit” for the purposes of Subsection 1(a)(vi) of the E.O.

These new sanctions against Venezuela resemble the U.S. sectoral sanctions on Russian energy and finance sectors issued by OFAC in July 2014. Of particular importance, both sets of sanctions define “new debt” broadly, including, for example, extensions of credit. The new financial sanctions would also require U.S. companies to conduct further due diligence to identify Venezuelan customers that are owned 50 percent or more by either the Government of Venezuela or PDVSA.

For more details on the E.O. issued by President Trump on August 24, see Crowell & Moring’s Client Alert.

Canada Sanctions

On September 5, Canada issued Special Economic Measures Regulations on Venezuela, imposing targeted sanctions against 40 Venezuelan officials and individuals. The list includes most of the names that the U.S. Government has added as Specially Designated Nationals (SDNs).

In view of the escalated sanctions on Venezuela, companies doing business with Venezuelan government agencies or SOEs should monitor developments relating to possible future measures by the U.S. and/or other countries against Venezuela.

For more information, contact: Cari Stinebower, Jeff Snyder, Dj Wolff, Eduardo Mathison

On August 24, President Trump issued an Executive Order (E.O.) “Imposing Additional Sanctions with Respect to the Situation in Venezuela“.  Unlike previous sanctions on Venezuela targeting individuals, the new sanctions specifically target the Government of Venezuela and Petróleos de Venezuela (“PDVSA”), the state-owned Oil and Gas Company.  The E.O. also targets, for the first time in an OFAC sanctions program, government issued bonds and securities.

The new E.O. prohibits U.S. persons or persons within the United States from:

  • Dealing in new debt with PDVSA and the Government of Venezuela. These new sanctions bear a resemblance to the Sectoral Sanctions targeting Russia. In practice, no new debt can be issued to PDVSA—for a maturity of more than 90 days——or to the Government of Venezuela—for a maturity of more than 30 days. The E.O. defines “new debt” broadly.
  • Dealing in bonds issued by the Government of Venezuela prior to the E.O. This is the first time OFAC has imposed a prohibition on U.S. persons from acquiring sovereign bonds. The restriction is however limited, as General License 3 (as discussed below), authorizes the purchase of certain bonds.
  • Payment of dividend or other distributions of profits to the Government of Venezuela from entities owned or controlled by the Government of Venezuela.
  • Purchasing, directly or indirectly, securities from the Government of Venezuela, unless they can be considered as new debt and have a maturity period of less than 90 or 30 days.

OFAC also issued four General Licenses authorizing certain transaction otherwise prohibited under the E.O.:

  • General License 1 provides a wind-down period of 30 days with respect to contracts and other agreements in effect prior to the entry into force of the E.O., on August 25. Such wind-down transactions are subject to a reporting requirement to OFAC. This general license does not apply to distributions of dividends or profits to the Government of Venezuela.
  • General License 2 authorizes all transactions provided that the only Government of Venezuela entities involved in the transactions are CITGO Holding, Inc. and any of its subsidiaries. CITGO Holding, Inc. is a subsidiary of PDVSA and has operations in the U.S. This General License, however, does not authorize the payment of dividends to the Government of Venezuela or PDVSA.
  • General License 3 encloses a List of Authorized Venezuela-Related Bonds. All transactions related to the provision of financing for, and other dealings in bonds contained on list are authorized. General License 3 further authorizes all transactions related to, the provision of financing for, and other dealings in bonds issued prior to the effective date of E.O, if such bonds were issued by U.S. person entities owned or controlled, directly or indirectly, by the Government of Venezuela, such as CITGO Holding, Inc.
  • General License 4 authorizes all transactions related to the provision of financing for, and other dealings in new debt related to the exportation or reexportation of agricultural commodities, medicine, medical devices, or replacement parts and components for medical devices, to Venezuela, or to persons in third countries purchasing specifically for resale to Venezuela, provided that the exportation or reexportation is licensed or otherwise authorized by the Department of Commerce.

OFAC issued a list of Frequently Asked Questions, with some questions and interpretations which remain to be clarified.  For example, while the E.O. applies to entities fifty percent or more owned by the Government of Venezuela, the E.O. defines “Government of Venezuela” as to include the Central Bank of Venezuela and PDVSA, and any person owned or controlled by, or acting for or on behalf of, the Government of Venezuela. OFAC will need to clarify how to define “controlled by” and “acting on behalf of” the Government of Venezuela.

For details on other sanctions imposed against Venezuelan officials, see Crowell’s Client Alerts on the E.O. issued by President Obama in March 2015, and the Venezuela Sanctions Regulations issued by OFAC in July 2015.

For more information, contact: Cari Stinebower, Jeff Snyder, Dj Wolff, J.J. Saulino, Eduardo Mathison, Mariana Pendás

On July 31, OFAC designated Venezuelan President Nicolas Maduro as a Specially Designated National (SDN) under the Venezuela Sanctions Program, pursuant to Executive Order (E.O.) 13692.

Earlier, on July 26, OFAC added 13 other top Venezuelan officials to its SDN List. These newly designated individuals are linked with numerous branches and agencies of the Venezuelan government, including the ombudsman, the military and intelligence service, PDVSA (Venezuela’s state-owned oil and natural gas company), CENCOEX (Venezuela’s exchange controls agency), and the electoral council, among others. The individuals are:

  1. Rocco Albissinni Serrano – President of CENCOEX.
  2. Alejandro Fleming Cabrera – Ministry of Foreign Affairs and former President of CENCOEX.
  3. Franklin Garcia Duque – Former National Director of Venezuela’s National Police.
  4. Elias Jaua – Head of Venezuela’s Presidential Commission for the Constituent Assembly and Minister of Education.
  5. Tibisay Lucena – President of Venezuela’s National Electoral Council.
  6. Carlos Malpica Flores – Former National Treasurer of Venezuela and former Vice President of Finance for PDVSA.
  7. Carlos Pérez Ampueda –  National Director of Venezuela’s National Police.
  8. Nestor Reverol Torres – Venezuela’s Minister of Interior and Justice.
  9. Sergio Rivero Marcano –  Commander General of Venezuela’s National Guard.
  10. Tarek William Saab –  Venezuela’s Ombudsman.
  11. Jesus Suárez Chourio – General Commander of Venezuela’s Army.
  12. Iris Varela –  Member of Venezuela’s Presidential Commission for the Constituent Assembly and former Minister of the Penitentiary Service.
  13. Simon Alejandro Zerpa – Vice President of Finance for PDVSA, president of Venezuela’s Economic and Social Development Bank (BANDES), president of Venezuela’s National Development Fund (FONDEN).

Pursuant to OFAC guidance, the designation of an official of the government of Venezuela does not mean that the government itself is also blocked. However, OFAC has stressed that U.S. persons should be cautious in any dealings with the Venezuelan government—or any other entity whose leadership includes sanctioned parties—to ensure that they are not engaged in transactions or dealings, directly or indirectly, with any SDNs.

For more details on the Venezuela Sanctions Program, please see Crowell & Moring’s previous Client Alerts on the E.O. issued by President Obama in March 2015, and the Venezuela Sanctions Regulations issued by OFAC in July 2015.

For more information, contact: Cari Stinebower, Jeff Snyder, and Dj Wolff