September 1, 2017
Continuing an active month of increased sanctions pressure on Venezuela, on August 24, 2017, President Donald J. Trump issued an executive order imposing a unique set of sanctions targeting transactions involving debt and equity of the Venezuelan government, including Venezuela’s state-owned oil company Petroleos de Venezuela, S.A. (PdVSA). The new sanctions, which appear to be modeled in part on the Russian sectoral sanctions, impose substantial restrictions on U.S. persons but do not require U.S. persons to block Venezuelan government or PdVSA assets entirely. Notably, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued four General Licenses alongside the EO, and one of these licenses effectively carves out PdVSA’s U.S. subsidiary CITGO from most of the new restrictions.
The policy basis for these sanctions also shares much with the Russian sectoral measures. As with Russia, the goal of these measures is to avoid blacklisting PdVSA entirely due to the significant collateral effects that may come from such an action. In the Russian context there was similar concern about the impact on the United States and Europe of blacklisting major energy and financial sector companies. However, while these measures are meant to allow PdVSA to continue operating, as with the Russia measures they are meant to prevent the company from receiving funds on the international markets and consequently limit its ability to grow.
Much like the Russia sectoral sanctions, these new measures are complicated, and include nuanced restrictions on dealings with complex financial instruments and significant, and equally nuanced, exceptions to the measures. More broadly, there remain significant questions regarding how OFAC will interpret various provisions.
The following activities are prohibited by the EO. As under other sanctions programs, the prohibitions apply not only to the entities specifically targeted in the EO (i.e. the Government of Venezuela and PdVSA), but also to any entity that is at least 50% owned or controlled by the targeted entities (for example, subsidiaries of PdVSA or entities owned or controlled by the Government of Venezuela).
(1) Transactions involving new debt of PdVSA with a maturity of greater than 90 days, or involving new debt of the Government of Venezuela (other than PdVSA) with a maturity of greater than 30 days.
The EO prohibits U.S. persons from engaging in transactions involving new debt of PdVSA with a maturity of greater than 90 days, or new debt of the Government of Venezuela (other than PdVSA) with a maturity of greater than 30 days.
OFAC has issued "FAQs" that clarify that "debt includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper." In addition, this prohibition is applicable to the rollover of existing debt, if the rollover results in the creation of a new debt instrument with a prohibited maturity. This prohibition applies to transactions where PdVSA or the Government of Venezuela is the "direct or indirect" borrower.
U.S. persons may transact in debt (including debt with longer maturities) in which PdVSA or the Government of Venezuela has extended credit to a non-sanctioned third party and may participate in transactions in which the Government of Venezuela acts as an "underwriter on new debt of a non-sanctioned third party." U.S. persons may also extend credit to a non-sanctioned party for the purpose of purchasing goods from PdVSA or the Government of Venezuela. Though the OFAC FAQs indicate that the Government of Venezuela (or PdVSA) must not be the "indirect borrower," they do not provide clarity on what being "the indirect borrower" would entail.
(2) Transactions involving new equity of the Government of Venezuela (including PdVSA)
U.S. persons are also prohibited from transacting in new equity of the Government of Venezuela, including PdVSA. The term "equity," as described in OFAC’s FAQs, "includes stocks, share issuances, depositary receipts, or any other evidence of title or ownership." This prohibition covers only equity "directly or indirectly" issued by the Government of Venezuela—including PdVSA—after the effective date of the sanctions, but, as described below, transactions involving equity issued by third parties may also be prohibited, if the Government of Venezuela is the seller. This limitation on purely secondary market sales of debt is new and was not implemented in the Russia program.
(3) Transactions involving bonds of the Venezuelan government, including PdVSA, that were issued before the executive order.
The EO prohibits U.S. persons from engaging in any transactions relating to Venezuelan government (or PdVSA) bonds, even if issued prior to the effective date of the sanctions, with the exception of those covered by the general license described below. OFAC explains this provision (and others in the EO) as an effort to "prevent U.S. persons from contributing to the Government of Venezuela’s corrupt and shortsighted financing schemes," including the sale of bonds and other securities "for much less than they are worth at the expense of the Venezuelan people and using proceeds from these sales to enrich supporters of the regime."
(4) Transactions involving "dividend payments or other distributions of profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the government of Venezuela," including PdVSA.
The EO also prohibits the involvement of U.S. persons in transactions relating to dividend payments to the Government of Venezuela from entities owned or controlled by the Government of Venezuela. This provision restricts the flow of dividends from subsidiaries—including CITGO—up to PdVSA and the Venezuelan government.
(5) Transactions involving the purchase of securities from the Government of Venezuela, including PdVSA.
U.S. persons are prohibited from purchasing any securities, including those issued by non-sanctioned third parties, directly or indirectly from the Government of Venezuela, except for new debt with maturities of less than 90 days (for PdVSA) or 30 days (for all other portions of the Venezuelan government).
In connection with these sanctions, OFAC issued a four general licenses, which provide important exceptions and clarifications to the sanctions.
General License 1 provides for a "wind-down" period of 30 days—until September 24, 2017—to carry out transactions that are "ordinarily incident and necessary to wind down contracts or other agreements that were in effect prior to August 25, 2017." Persons engaging in such wind-down transactions must file a detailed report with OFAC. The wind-down period does not apply to the prohibitions relating to dividends and distributions of profits.
General License 2 authorizes transactions involving the new debt or new equity issued by, or securities sold by, CITGO Holding, Inc. or its subsidiaries, provided that no other Government of Venezuela entity is involved in the transaction. This very significant general license effectively carves CITGO out of the new sanctions, provided that U.S. persons are careful not to permit any other involvement by PdVSA or the Government of Venezuela in the transaction.
General License 3 exempts certain bonds, listed in an annex, from the prohibition on transactions involving Venezuelan bonds. Several bonds issued by PdVSA are listed in the annex. General License 3 also exempts bonds issued by U.S. persons (e.g., CITGO) prior to the issuance of the EO.
General License 4 authorizes certain transactions relating to new debt involving agricultural commodities (including food), medicine, or medical devices.
The new sanctions against the Venezuelan government and PdVSA have significant structural similarities to the existing sectoral sanctions against Russia. The Russian sectoral sanctions, which were initially imposed in 2014 through four directives under Executive Order 13662 and were recently codified and tightened by the Countering America’s Adversaries Through Sanctions Act (CAATS) (August 2, 2017), impose restrictions on dealings in the new debt beyond certain maturities or new equity of particular entities in the financial services, energy, and defense sectors of the Russian economy, as well as restrictions on participation in certain kinds of activities relating to oil exploration and production. Due to the structural similarities between the restrictions on transactions relating to new debt and new equities under the new Venezuela-related sanctions and parallel restrictions in the Russian sectoral sanctions, companies can expect OFAC to approach the new Venezuela-related sanctions in a similar way.
The new Venezuela-related sanctions are, however, broader in certain respects than the Russian sectoral sanctions, and narrower in others. As noted, the prohibitions on transactions involving any bond issued by the Venezuelan government or PdVSA (and not authorized by General License 3), even those issued before sanctions were imposed, and on the purchase of securities issued by third parties from the Venezuelan government and PdVSA are unique to the new Venezuela-related sanctions and may significantly limit the possibility of finding legal funding alternatives to short-maturity debt. Unlike the Russia sectoral sanctions, however, the new Venezuela-related sanctions do not impose any restrictions on oil exploration or production-related activities, provided that the funding for the transaction does not involve prohibited transactions, and provided that the transaction does not involve participation by Specially Designated Nationals (SDNs).
Alongside these structural similarities, there is also a similarity in tack. Borrowing a page from Obama Administration and, Congress in the Ukraine Freedom Support Act of 2014 and CAATS, these sanctions target particular sectors and sources of revenue for a ruling party in the hopes of achieving certain near term political objectives. While the new EO cites a number of justifications for the new sanctions, it appears most driven by heightened concerns that the Maduro Administration’s recent efforts to pack Venezuela’s Supreme Court with supporters and to form the Constituent Assembly will enable him to make structural changes to Venezuela’s Constitution that will make it all the more difficult for anti-Maduro forces to achieve change through democratic means.
Several years out from the imposition of Russia’s sectoral sanctions, the results are mixed at best as to whether they have helped the U.S. achieve its desired outcomes in Ukraine and Russia. Even given the centrality of PdVSA’s revenue to the Venezuelan Government, it is unclear whether these new sectoral sanctions will be enough to leverage desired outcomes in Venezuela.
What is clear, however, is that new sanctions will likely have significant effects on U.S. companies in two key respects.
First, the sanctions place material limitations on transactions relating to PdVSA, particularly with respect to funding. Given the prominent role of PdVSA in the Venezuelan economy, limitations will likely have a noticeable practical, economic effects on companies that do business in Venezuela.
Second, the sanctions environment with respect to Venezuela is highly complex. Many activities, including clearing transactions in U.S. dollars, importing or exporting oil, and providing goods or services to the Venezuelan oil industry (including PdVSA), remain legal. However, companies must maintain strong compliance practices, including enhanced diligence on counterparties, in order to navigate the sanctions environment successfully. For example, companies must consider the new prohibitions, not only with respect to the Government of Venezuela and PdVSA, but also with respect to any other companies that may be covered by the "50-percent rule."
Companies must also screen carefully for involvement by SDNs, particularly in light of the designation earlier this summer of several Venezuelan officials and in light of OFAC’s guidance against negotiating with, or entering contracts signed by, an SDN official of an otherwise unlisted company. In recent months, OFAC has broken new ground by assessing penalties against an American multinational oil and gas company on this theory, in connection with contracts with a non-blocked Russian firm that were signed on behalf of the entity by an individual on the SDN list.
Although the new sanctions apply specifically to U.S. persons, non-U.S. companies should also consider their potential compliance obligations in light of OFAC’s aggressive approach toward non-U.S. companies in recent enforcement actions. For example, in July 2017, OFAC imposed penalties on two related Singaporean companies for "causing" financial institutions to violate the Iranian Transactions and Sanctions Regulations by initiating wire transfers relating to business in Iran, without identifying the transfers as relating to Iran and in contravention of representations that it had made to its bank that it would not route any transactions related to Iran through the bank. Last week, OFAC announced a settlement with a non-U.S. entity that provides oil rigs under time charter arrangements to third-party drilling companies on the basis that its supply of spare parts for the rigs had involved shipping U.S.-origin goods to oil rigs operating in Iranian waters. These recent enforcement actions suggest that OFAC will take an expansive view of what touchpoints could bring activities by non-U.S. companies within the scope of the regulations and their enforcement.
 E.O. 13808 (Aug. 24, 2017) ("EO"), available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/13808.pdf.
 OFAC FAQs at Question 513, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela.
 E.O. 13808 § 1(a)(i).
 E.O. 13808 § 1(a)(ii).
 OFAC FAQs at Question 511, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela.
 Id. at Question 516.
 Id. at Question 518.
 E.O. 13808 § 1(a)(ii).
 OFAC FAQs at Question 511, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela.
 Id. at Question 515.
 E.O. 13808 § 1(a)(iii).
 OFAC FAQs at Question 512, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela.
 E.O. 13808 § 1(a)(iv).
 E.O. 13808 § 1(b).
 General License 1, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl1.pdf.
 General License 3, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl3.pdf.
 General License 4, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/venezuela_gl4.pdf.
 OFAC, Venezuela-related Designations (July 26, 2017), available at https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20170726.aspx; OFAC FAQs at Question 505, available at https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#venezuela.
 OFAC (July 20, 2017), available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170720_exxonmobil.pdf.
 OFAC (July 27, 2017), available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170727_transtel.pdf.
 OFAC (Aug. 24, 2017), available at https://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20170824_cosl.pdf.
The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Adam Smith, Laura Cole and Christopher Timura.
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