On July 19, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued Venezuela General License 5.

General License 5 authorizes U.S. persons to engage in all transactions related to, the provision of financing for, and other dealings in the Petróleos de Venezuela SA 2020 8.5 Percent Bond that would be prohibited by Subsection 1(a)(iii) of  Executive Order 13835 of May 21, 2018 (“Prohibiting Certain Additional Transactions With Respect to Venezuela”) (E.O. 13835). In practice, General License 5 expands the previously issued General License No.3. by adding a new bond to the list of previously authorized bonds.

OFAC also published two new Frequently Asked Questions (FAQs).One explains why OFAC is issuing General License 5. The other answers the question of whether E.O. 13835 prohibits a U.S. person with a legal judgment against the Government of Venezuela from attaching and executing against Venezuelan government assets.

 

 

On May 21, President Trump issued a new Executive Order (E.O.) “Prohibiting Certain Additional Transactions with Respect to Venezuela.” The new E.O. targets the Venezuelan Government’s ability to factor receivables and liquidate equity interest in exchange for cash.

The E.O. prohibits U.S. persons or persons within the United States from all transactions related to, or providing financing for, and other dealings—including evading, avoiding or conspiracy transactions—in:

  • The purchase of any debt owed to the GoV, including accounts receivable;
  • Any debt owed to the GoV that is pledged as collateral after the effective date of the E.O. (i.e., May 21, 2018); and
  • The sale, transfer, assignment, or pledging as collateral by the GoV of any equity interest in an entity in which the GoV has at least 50% interest.

Consistent with previous sanctions, the E.O. also defines the term “Government of Venezuela” (GoV) as any political subdivision, agency, or instrumentality thereof, including the Central Bank of Venezuela, and Petróleos de Venezuela (PDVSA), as well as any person owned or controlled by, or acting for or on behalf of, the GoV.

The new measure further tightens already existing financial sanctions against the GoV in effect since August 2017. In particular, the new E.O. is expected to directly restrict PDVSA’s ability to engage in accounts receivable financing, which may accelerate the oil company’s liquidity struggles.

For more details on the E.O. issued on August 24, 2017, see Crowell & Moring’s Client Alert.

 

On April 19, Crowell & Moring’s International Trade Attorneys hosted a webinar on “Trade in 2018 – What’s Ahead?”

Please click here to register and view the webinar on demand.

Summary

From the Section 232 national security tariffs on steel and aluminum imports to the ongoing NAFTA re-negotiation, the Trump administration is seeking to implement significant changes in international trade policy and enforcement. Economic sanctions on Russia continue to expand, the future is far from clear regarding Iran, and perhaps North Korea is coming into focus. A new Asia trade agreement without the United States, and a bumpy road ahead for Brexit all make for uncertainty and the need for enhanced trade risk management. Join us as we identify the international trade risks and opportunities likely to continue and grow in 2018.

Our Crowell & Moring team discussed predictions for the remainder of the year, with cross-border insights from our practitioners in the U.S., London, and Brussels. Topics included likely trends and issues in the U.S. and EU including:

  • Trade policy developments: Section 232, NAFTA renegotiation, and trade remedies
  • Sanctions in Year Two of the Trump Administration: Russia, Iran, North Korea, and beyond
  • Anti-money laundering (AML) and beneficial ownership
  • Supply chain risk management: blockchain, forced labor, the U.K. Modern Slavery Act, and GDPR
  • Europe: Brexit, the EU’s 4th AML Directive, and the EU/U.K. AML enforcement
  • CFIUS: how significant is the new legislation?
  • Export controls: Wither reform?
  • Import and customs

The last week of March has brought new measures against Maduro’s regime from the U.S., Europe, and Latin-America. While Switzerland has aligned with European Union (EU) sanctions, Panama has included Venezuelan government officials and several companies in their Politically Exposed Persons’ (PEPs) list. The State of Florida has also enacted divestment laws targeting Venezuela.

Florida Actions: On March 29, Governor Rick Scott of Florida signed into law HB 359, stating that the State Board of Administration shall divest any funds and is prohibited from investing in any institution or company (U.S. company or its subsidiary), doing business in or with the Government of Venezuela (GoV), or with any agency or instrumentality thereof, in violation of federal law. It is unclear how Florida will assess whether a company has undertaken an activity “in violation of Federal law” and, specifically, whether it will wait for Federal indictments, or whether it will be making an independent state-level assessment.

Panama Actions: On March 27, Panama published a list of PEPs with ties to the GoV. Although the press has described this measure as “sanctions” against the Maduro regime, on its face, the measure only requires financial institutions to conduct enhanced due diligence (EDD) in certain persons considered as high risk due to its political exposure. This new resolution from the Panamanian National Anti-Money Laundering Commission (AML Commission) imposes for the first time in Panama the need to conduct EDD on specific Venezuelan government officials and related companies. Among the due diligence measures the AML Commission requires financial institutions and other regulated persons to investigate is whether any PEPs from Venezuela are directly or indirectly participating in a given transaction.

In a separate resolution, the AML Commission decided it will make the U.S., Canadian, and U.K. denied party lists available on the AML Commission’s webpage. This way financial institutions and other regulated persons can use them as a reference for enhanced due diligence when dealing with individuals on one or more of the lists.

Switzerland Actions: On March 28, Switzerland adopted restrictive measures which align with the measures adopted by the EU on November 13, 2017, and January 22, 2018, as a result of the human rights violations and the undermining of democracy in Venezuela. Swiss sanctions, which usually follow the respective EU sanctions regime, now do so in the case of Venezuela. Switzerland has also imposed an embargo on military equipment that could be used for internal repression, as well as equipment used for surveillance purposes. Swiss measures also include a travel ban, an asset freeze, and a prohibition to make funds available to certain individuals. Institutions or persons having or managing assets that are subject to the asset-freeze must report it to the State Secretariat for Economic Affairs (SECO) without delay. The list of individuals subject to the asset-freeze and the travel ban can be found here. These measures entered into force on March 28.

These new Swiss sanctions may have an outsized impact because, while less broad than U.S. sanctions, Venezuelan officials are thought to have assets in Switzerland.

Venezuelan Response: The GoV condemned both the Swiss and Panamanian measures, identifying them as illegal coercive measures against Maduro’s regime.

Further, the GoV announced the suspension of its commercial relations with several Panamanian officials and companies, including Copa Airlines. The retaliatory measure forced Copa to suspend its flights into Venezuela, despite being one of the few airlines still operating in the country after most airlines canceled or reduced their services due to currency exchange restrictions combined with security concerns in the country. By virtue of these controls, Venezuela reportedly owes foreign airlines around $ 4 billion. Depending on how their investments are structured into the country, airlines – and other companies in the same situation – may have the ability to make claims against the GoV for their stranded funds under free transfer provisions found in numerous Bilateral Investment Treaties (BITs) with Venezuela.

For more information on how BITs may aid in the recovery of monies owed by Venezuela, please click here for a short paper in English and Spanish.

On March 19, President Trump issued an Executive Order (E.O.) “Taking Additional Steps to Address the Situation in Venezuela.” This E.O. aims to take further action against the Venezuelan Government’s newly issued cryptocurrency—Petro.

Previously, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) had issued a Frequently Asked Question (FAQ) to clarify that its existing prohibitions against extensions of debt/credit to the Government of Venezuela would likely prohibit U.S. persons to transact in the petro given its structure.

In the new E.O., the United States has gone further to simply prohibit all such transactions. Specifically, the new E.O. prohibits U.S. persons (defined to include U.S. citizens and permanent residents, U.S. companies including foreign branches, and persons in the United States) from engaging in:

  1. Any transaction associated with any digital currency, digital coin, or digital token, issued by, for, or on behalf of the Government of Venezuela, on or after January 9, 2018; and
  2. Any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions set in this E.O.

The E.O. defines the term “Government of Venezuela” (GoV) as any political subdivision, agency, or instrumentality thereof, including the Central Bank of Venezuela, and Petróleos de Venezuela (PDVSA), as well as any person owned or controlled by, or acting for or on behalf of, the GoV.

In addition, OFAC released new Frequently Asked Questions (FAQs) related to this E.O., and separate new Digital Currency-related FAQs.

On March 22, President Maduro announced a redenomination of Venezuela’s fiat currency, “Bolívar Fuerte,” into a new currency called “Bolívar Soberano.” The “new” bolívar is expected to remove three zeros from the current bills once released. Notably, one of OFAC’s new FAQs clarified that the Bolívar Fuerte is not considered a digital currency for purposes of the new E.O. and therefore U.S. persons are not prohibited to transact with the Bolivar Fuerte. OFAC has not, however, specifically addressed transactions in the Bolivar Soberano. However, given that very similar—if not identical—measures were instated by the GoV in 2008 when late-president Chávez announced the redenomination of the “Bolívar” into the Bolívar Fuerte, it is likely that OFAC would take the position that the Bolívar Soberano and Bolivar Fuerte would be considered equivalent “traditional fiat currencies” pursuant to its regulations and would not be covered by the new E.O. Nevertheless, in view of the escalated sanctions on Venezuela, companies should continue to monitor closely any future measures by OFAC.

OFAC Designates Four Venezuelan Officials

OFAC also added four individuals associated with Venezuela’s Treasury and other government agencies to its Specially Designated Nationals (SDN) List pursuant to pre-existing authorities, as follows:

  • William Antonio Contreras—Vice Minister of Internal Commerce and Superintendent for the Defense of Socioeconomic Rights (SUNDDE)
  • Nelson Reinaldo Lepaje Salazar—Acting in the Capacity of the Head of the Office of the National Treasury
  • Américo Alex Mata Garcia—Alternate Director of the National Bank of Housing and Habitat
  • Carlos Alberto Rotondaro Cova—Former President of the Board of Directors of the Venezuelan Institute of Social Security (IVSS)

For the latest news, please subscribe to Venezuela Sanctions on Crowell’s International Trade Law Blog.

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:
SoundCloud

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