On January 28, 2019, the US Treasury Department’s Office of Foreign Assets Control (OFAC) imposed new sanctions on the Government of Venezuela by designating Petróleos de Venezuela, S.A. (PDVSA), the state-owned oil company, as a Specially Designated National (SDN). The move represents an escalation in the Trump Administration’s posture toward the Maduro government, following the recognition of Juan Guaidó as the new interim President of Venezuela on January 23, 2019.
Background: US Venezuela-related Sanctions
The United States first instituted a Venezuela sanctions program in 2015, in response to the deepening political and humanitarian crisis in the country. The initial sanctions blocked assets belonging to certain persons identified as being involved in the crisis, including, for example, those involved in the undermining of democratic processes or human rights abuses.
In 2017 and 2018, the Trump Administration issued additional economic sanctions against Venezuela that, among other things, prohibited transactions related to certain new debt, new equity, existing bonds, or dividend payments related to the Government of Venezuela or PDVSA by US persons (e.g., US citizens or permanent residents wherever located, US entities, and persons located in the United States) as well as in circumstances not directly involving US persons where there is otherwise a US nexus (including the use of the US financial system). The list of Venezuelan blocked persons (i.e., SDNs) has since expanded to include additional targets, including senior officials of the Maduro government.
Designation of PDVSA as Blocked Entity
On November 1, 2018, President Trump issued Executive Order 13850 (E.O. 13850), blocking the property of additional persons identified as contributing to the situation in Venezuela. Among other things, E.O. 13850 blocks the property of any person identified by the Secretary of the Treasury, in consultation with the Secretary of State, as operating in certain sectors of the Venezuelan economy. The Secretary of the Treasury added Venezuela’s oil sector to the sectors targeted under E.O. 13850, which paved the way yesterday for OFAC to designate PDVSA as an SDN.
As a result, effective January 28, 2019, all PDVSA assets – including cash and property – located in the United States are frozen, absent an OFAC authorization. In addition, any entity 50% or greater owned by PDVSA (or by one or more SDNs, in the aggregate) is considered a “blocked entity” under US sanctions. Unless an OFAC general or specific license applies, US persons are obligated to place any funds received from PDVSA or any blocked entity in a blocked, interest-bearing account located in the United States until the sanctions are lifted.
In coordination with yesterday’s designation of PDVSA, OFAC also issued a number of General Licenses, briefly described below:
- Bonds: Amended General License 3A authorizes all transactions related to, the provision of financing for, and other dealings in specified Venezuelan bonds or bonds that were issued (i) before August 25, 2017 by US entities owned or controlled, directly or indirectly, by the Government of Venezuela, other than Nynas AB, PDVSA Holdings (PDVH), CITGO Holding, Inc., and any of their subsidiaries.
- PDVH & CITGO: General License 7 authorizes (i) for a sixth-month period ending July 27, 2019, transactions and activities relating to PDVH, CITGO Holding, or any of their subsidiaries, as long as no other PDVSA entities are involved in the transactions or activities; and (ii) for a three-month period ending on April 28, 2019, PDVH, CITGO Holding, and any of their subsidiaries to engage in transactions relating to the purchase and importation of petroleum and petroleum products from PDVSA (or any entity in which PDVSA owns, directly or indirectly, a 50 percent or greater interest). Payments to or for the direct or indirect benefit of a blocked person other than PDVH, CITGO Holding, or their subsidiaries must be made into a blocked account.
- Petroleum operations: General License 8 authorizes, for a sixth-month period ending July 27, 2019, transactions and activities relating to operations in Venezuela involving PDVSA (or any entity in which PDVSA owns, directly or indirectly, a 50 percent or greater interest), for Chevron Corporation, Halliburton, Schlumberger Limited, Baker Hughes and Weatherford International.
- Debt & bonds: General License 9 authorizes all transactions and activities ordinarily incident and necessary to dealings in (i) any debt of PDVSA (or any entity in which PDVSA owns, directly or indirectly, a 50 percent or greater interest) issued prior to August 25, 2017 and (ii) any bonds that were issued prior to August 25, 2017 by PDVH, CITGO Holdings, Nynas AB, or their subsidiaries.
- Petroleum products: General License 10 authorizes US persons in Venezuela to purchase refined petroleum products from PDVSA (or any entity in which PDVSA owns, directly or indirectly, a 50 percent or greater interest) for personal, commercial, or humanitarian uses.
- US employees & US banks: General License 11 authorizes, for a two-month period ending on March 29, 2019, (i) US person employees and contractors of non-US entities located outside of the United States or Venezuela to engage in activities relating to the maintenance or wind down of operations or agreements involving PDVSA (or any entity in which PDVSA owns, directly or indirectly, a 50 percent or greater interest) that were in effect prior to January 28, 2019 and (ii) US financial institutions to reject (rather than block) funds transfers involving PDVSA (or any entity in which PDVSA owns, directly or indirectly, a 50 percent or greater interest) and non-US entities located in a country other than the United States or Venezuela, where the transfers are not otherwise connected to US persons.
- Imports & agreements: General License 12 authorizes, (i) for a three-month period ending April 28, 2019, transactions and activities relating to the purchase and importation into the United States of petroleum and petroleum products from PDVSA (or any entity in which PDVSA owns, directly or indirectly, a 50 percent or greater interest) and (ii) for a one-month period ending February 27, 2019, transactions and activities relating to the wind down of operations or agreements involving PDVSA (or any entity in which PDVSA owns, directly or indirectly, a 50 percent or greater interest) that were in effect prior to January 28, 2019.
- Nyans AB: General License 13 authorizes, for a six-month period ending July 27, 2019, transactions and activities where the only PDVSA entities involved are Nynas AB or any of its subsidiaries.
- US Government: General License 14 authorizes all transactions by US Government employees, grantees or contractors for the conduct of the official US Government business.
Amended Definition of the Government of Venezuela
On January 28, 2019, the US Treasury Department also published a new executive order signed three days earlier by President Trump, entitled “Taking Additional Steps to Address the National Emergency With Respect to Venezuela.” Among other things, the executive order amends the definition of “the Government of Venezuela” to specifically include (i) the Central Bank of Venezuela and PDVSA, and (ii) persons acting for or on behalf of those entities or a member of the “Maduro regime.”
Three Key Takeaways
- The designation of PDVSA as a blocked entity is a significant change to the US Venezuela sanctions program, the effects of which should be carefully considered by companies with ongoing activities related to PDVSA or the oil sector in Venezuela. Although the particular impact of the designation must be assessed on a case-by-case basis, it is significant for those involved in the export or reexport of PDVSA petroleum products and PDVSA’s creditors, including those holding PDVSA debt or bonds, as well as parties seeking to execute against assets belonging to PDVSA or the Government of Venezuela at present or in the future.
- OFAC has provided, by way of general licenses, limited wind-down periods for certain activities related to specified entities. The wind-down periods, however, range from one to six months, and it is unclear whether OFAC will extend them. Companies should therefore consider taking a proactive approach to assessing the impact of the change, in order to allow the maximum time possible for any necessary adjustments.
- The situation is still developing. OFAC has stated that it expects to issue FAQs on the designation and general licenses in the near term, which may provide additional clarity. We are following these developments closely.