In recent weeks, the U.S. has imposed economic sanctions on a number of parties related to the Libyan regime that have been determined to be responsible for human rights abuses in Libya. On February 25, 2011, the President issued an Executive Order blocking the property and investments of numerous Libyan individuals and entities, including the Libyan Government and agencies under its control, the Central Bank of Libya, certain high-ranking government officials, and members of the family of Libyan ruler Muammar Qadhafi. This executive order requires the blocking of any property, including investments, that is in the U.S. or the possession of U.S. persons, as more fully described in our earlier Client Memorandum.
On April 8, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued General License No. 4 (“General License”), providing specific guidance to investment funds regarding the effect of the new Libya sanctions on the operation of the funds, describing what actions the new sanctions require, what they permit, and what they prohibit. The following is a short description of the elements of OFAC’s guidance and the activities permitted under the General License.
Investment funds in which sanctioned Libyan individuals or entities have only a non-controlling, minority interest can, for the most part, continue to operate normally. Specifically, investment funds organized or managed in the U.S. can generally continue to operate normally, even if the Government of Libya or another sanctioned Libyan individual or entity is an investor. For example, such a fund:
- can continue to purchase and sell portfolio investments;
- can continue to make payments it owes to fund managers, service providers, and government authorities;
- can make payments to its investors, except for the sanctioned Libyan investors (and other investors who may be subject to sanctions);
- and can receive funds from any party other than a sanctioned party.
However, investment funds need to take special precautions if any of their investors are subject to the new Libya sanctions. These precautions include the following:
- The fund cannot provide any immediate financial or economic benefits to sanctioned Libyan investors;
- The fund must provide to OFAC monthly reports providing an accounting of the value of sanctioned Libyan individuals’ and entities’ interest in the fund;
- Payments owed by an investment fund to a sanctioned Libyan investor may be paid only into a blocked account at a financial institution in the U.S. that is held in the name of the sanctioned Libyan investor;
- The fund cannot debit the blocked account of a sanctioned Libyan investor for repayment of loans or debts held by that investor; and
- Transfers of funds, securities, or other assets may be made between blocked accounts, so long as the transfer is made between blocked accounts in the U.S. that are held in the same name.
In light of the new OFAC sanctions on the Libyan regime and the extensive and often opaque nature of the Libyan government’s international investments, investment funds should carefully scrutinize their investors to determine if any of them are subject to these new Libya (or other) sanctions. Investment funds should take action immediately to ensure compliance should they discover an investor is subject to such sanctions.
Note that the above guidance does not apply to funds that are majority-owned or controlled by sanctioned Libyan investors. Such funds are blocked in their entirety, and U.S. persons should not engage in any transactions with such funds.