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Understanding US Sanctions on Venezuela

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Understanding US Sanctions on Venezuela ����������� ������� ����������������������������� �������������� ������������������������������� ������������������������� ��������������������� ���������� ���������������� Judith Alison Lee is a partner, Christopher T. Timura is of counsel and Scott Toussaint is an associate at Gibson, Dunn & Crutcher LLP. Ms Lee can be contacted on +1 (202) 887 3591 or by email: [email protected]. Mr Timura can be contacted on +1 (202) 887 3690 or by email: [email protected]. ���������������� ���������������������� Mr Toussaint can be contacted on +1 (650) 849 ������������������� ������������������������������������������������� �������������������������������������������������� 5320 or by email: [email protected]. SPOTLIGHT April 2019 Understanding US sanctions on Venezuela BY JUDITH ALISON LEE, CHRISTOPHER TIMURA AND SCOTT TOUSSAINT he US sent shockwaves through example, the US has, at various points, In an effort to constrain the Maduro the international oil, gas and designated senior Venezuelan government regime’s access to capital, in August financial markets on 28 January officials, including president Maduro, as 2017 the Trump administration began 2019, when it sanctioned well as the country’s vice president, first targeting certain financial instruments TVenezuela’s state-owned oil company lady, defence minister and members of issued or sold by the government of Petroleos de Venezuela, S.A. (PdVSA). the Supreme Court of Justice. As a result, Venezuela. The ‘government of Venezuela’ This action, which represents the most US persons are generally prohibited is broadly defined to include not only stringent sanctions imposed on Venezuela from engaging in transactions with these its political subdivisions, agencies and to date, is especially noteworthy because it individuals and any assets owned or instrumentalities, but also the Central Bank targets not just the most significant actor controlled by these individuals that come of Venezuela, PdVSA and any entity that is in Venezuela’s oil-dependent economy, but within US jurisdiction are frozen. at least 50 percent owned or controlled by also an entity whose commercial operations From a policy standpoint, US sanctions these targeted entities. Absent authorisation are deeply intertwined with the US and targeting Venezuela have typically been from the US Department of the Treasury’s international petroleum markets. It is, designed to accomplish three main goals: Office of Foreign Assets Control (OFAC), therefore, imperative that compliance- (i) cutting off sources of financing for US persons are generally prohibited from: minded financial institutions involved with, the Venezuelan state; (ii) preventing (i) engaging in transactions involving new or based in, Venezuela understand both president Maduro’s inner circle from debt owed by the government of Venezuela the current scope of US sanctions and, enriching themselves at the expense of the with payment terms greater than 30 or 90 given the fluid situation on the ground in Venezuelan people; and (iii) sanctioning days, depending on the debtor; (ii) new Caracas, where US sanctions policy is likely those deemed responsible for actions or equity of the government of Venezuela; headed next. policies which undermine democratic (iii) bonds issued by the government of Prior to designating PdVSA, the US had processes or institutions and significant acts Venezuela; (iv) dividend payments or other generally taken an incremental approach of violence or other conduct that harm or distributions of profits to the government to imposing sanctions on the regime of violate human rights. of Venezuela from any entity owned or Venezuelan president Nicolás Maduro. For controlled, directly or indirectly, by the www.financierworldwide.com FINANCIER WORLDWIDE APRIL 2019 REPRINT REPRINT Global Trade government of Venezuela; and (v) the involving PdVSA remain permissible and The designation of PdVSA is also not purchase of securities from the government which activities could potentially give rise the end of the story. US sanctions on of Venezuela. to US sanctions exposure. In that respect, a Venezuela have continued to evolve in early Shortly following president Maduro’s May few key points are worth keeping in mind. 2019, albeit through a series of narrow, 2018 re-election, in a contest that critics By virtue of being added to the SDN List, incremental steps. For example, on three have described as a ‘sham’ and ‘neither all of PdVSA’s property and interests in separate occasions the US has designated free nor fair’, the US built on the existing property that are subject to US jurisdiction Venezuelan officials for their support measures by prohibiting US persons from are frozen and US persons are, except as of president Maduro and their role in engaging in certain transactions involving otherwise authorised by OFAC, generally blocking shipments of humanitarian aid. debt owed to the government of Venezuela, prohibited from engaging in transactions Among the individuals designated are the as well as certain transactions involving the with PdVSA and its majority-owned current president of PdVSA, the governors equity of Venezuelan state-owned entities. subsidiaries. of four Venezuelan states and various The logic behind those additional measures Additionally, as a general matter, US members of the intelligence and security was to prevent the Maduro regime from sanctions on Venezuela only apply to services. Given the steadily expanding using accounts receivable financing to US persons. However, non-US persons number of SDNs in the country, investors support its continued operations, and dealing with Venezuela risk US sanctions would be well advised to regularly screen also to prevent the regime from selling off exposure under four particular sets of all potential Venezuelan counterparties valuable state-owned assets in ‘fire sales’, circumstances. First, with respect to any against applicable sanctions lists and to which would deprive the Venezuelan activities they undertake that have a US exercise particular caution when dealing people of assets that will be vital to nexus. For these purposes, a US nexus with individuals closely affiliated with the rebuilding the country’s economy. might exist, for example, where a non- Venezuelan state. Other measures imposed by the US during US person is physically present in the What lies ahead? US vice president 2018 include a warning against transacting US, purchases goods or services from a Mike Pence strongly indicated in a 25 in Venezuela’s new cyber currency – known US counterparty or clears a US-dollar February speech before representatives as the petro – as well as new sanctions denominated transaction through a US of more than a dozen Latin American targeting Venezuela’s gold sector and financial institution. Second, by providing countries that additional waves of US corruption in Venezuelan government material support, financial, technical or sanctions are likely to follow for so long projects and programmes. otherwise, to a sanctioned person or entity, as president Maduro remains in power. It is against that backdrop of narrowly such as PdVSA. This is a high bar, typically While the US has already deployed one of tailored, gradually expanding sanctions that requiring some sort of intentional effort to its most powerful economic tools by adding the US, in January 2019, went significantly assist a sanctioned entity in conduct that PdVSA to the SDN List, other options further and designated PdVSA, a major, OFAC sanctions are intended to curtail, remain available, including designating multi-billion dollar company, to the for example acts of public corruption or ever larger numbers of senior Venezuelan Specially Designated Nationals and Blocked anti-democratic behaviour. Third, non- officials and conceivably designating the Persons (SDN) List, which is administered US persons can ‘cause’ a US financial entirety of the government of Venezuela. by OFAC. The announcement came just institution to violate its own sanctions In any case, investors considering doing days after the Trump administration compliance obligations by processing funds business in Venezuela should be mindful declared president Maduro’s recent re- that originated from a sanctioned person that a steadily growing number of actors election illegitimate and recognised Juan through the US financial system. While the inside the country may become subject to Guaidó, the head of Venezuela’s National sanctions-related risks of doing business in US sanctions over the weeks and months Assembly, as the country’s interim leader. Venezuela are generally relatively low for ahead. Given the company’s scale and its deep non-US persons, these sources of liability ties to the US economy, the designation of are worth at least keeping in mind for a PdVSA set US and international investors non-US investor considering engaging with scrambling to understand what activities PdVSA or one of its subsidiaries. This article first appeared in the April 2019 issue of Financier Worldwide magazine. Permission to use this reprint has been granted by the publisher. © 2019 Financier Worldwide Limited. www.financierworldwide.com FINANCIER WORLDWIDE APRIL 2019 REPRINT.
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