As Yogi Berra once said: “It's deja vu all over again.” Certainly that’s how it felt on August 24, 2017, when President Trump signed Executive Order 13808 imposing additional sanctions on Venezuela. The new sanctions are bringing Russian sectoral sanctions like due diligence to Venezuela; US companies that sell to the Government of Venezuela and its state-owned companies will need to start checking their credit terms and make sure they do not transact in “new debt” or “new equity” of those government and state-owned companies. In addition, such US companies will also need to screen the names of potential signatories to any contract and those individuals otherwise involved in the negotiation of such contracts to ensure they do not transact with an SDN.
On September 24, Trump also issued a revised “travel ban,” which suspends the entry into the United States of certain Venezuelan government officials and their immediate family members as nonimmigrants on business (B-1), tourist (B-2), and business/tourist (B-1/B-2) visas.
The President’s action was taken in response to the “serious abuses of human rights and fundamental freedoms; responsibility for the deepening humanitarian crisis in Venezuela; establishment of an illegitimate Constituent Assembly, which has usurped the power of the democratically elected National Assembly and other branches of the Government of Venezuela; rampant public corruption; and ongoing repression and persecution of, and violence toward the political opposition…” The US government already began to address the problem of undemocratic processes and serious human rights abuses in Venezuela by issuing EO 13692 in 2015, but those sanctions were limited to designations targeting specific government officials.
The provisions of EO 13808 go a step further by imposing the following set of prohibitions intended to target the certain financial transactions with the Venezuelan government.
Section 1 of EO 13808 prohibits U.S. persons from engaging in:
- All transactions related to, provision of financing for, and other dealings:
- New debt with a maturity of greater than 90 days of Petroleos de Venezuela, S.A. (PdVSA);
- New debt with a maturity of greater than 30 days, or new equity, of the Government of Venezuela, other than debt of PdVSA;
- Bonds issued by the Government of Venezuela prior to the issuance of EO 13808; or
- 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. The Government of Venezuela is defined as “the Government of Venezuela, any political subdivision, agency, or instrumentality thereof, including the Central Bank of Venezuela and PdVSA, and any person owned or controlled by, or activing for or on behalf of, the Government of Venezuela.” OFAC has published a FAQ explaining that this means that the Executive Order prohibitions automatically apply to “entities owned 50 percent or more, individually or in the aggregate, by the Government of Venezuela.”
- The purchase, directly or indirectly, by a United States person or within the United States, of securities from the Government of Venezuela, other than securities qualifying as new debt with a maturity of less than or equal to 90 or 30 days as covered above, respectively, is prohibited.
Like other recent OFAC sanctions, the prohibitions in EO 13808 are not retroactive and generally apply only to transactions undertaken after the executive order was issued.
On the same day President Trump signed EO 13808, OFAC issued four general licenses to address some of the provisions coming out of the order.
General License 1: Authorizing Certain Activities Necessary to Wind Down Existing Contracts
- You can wind down pre-existing contracts and other agreements up until September 24, 2017.
- However, within 10 business days of conducting an authorized transaction consistent with the wind-down, US persons must file a detailed report with OFAC providing:
- Names of the parties involved;
- Value of the transactions; and
- Dates of the transactions.
General License 2: Authorizing Certain Transactions Involving CITGO Holding, Inc.
- Authorizes transactions where the only Government of Venezuela entities involved are CITGO Holding, Inc. and any of its subsidiaries.
General License 3: Authorizing Transactions Related to, Provision of Financing for, and Other Dealings in Certain Bonds
- Authorizes all transactions related to, the provision of financing for, and other dealings in bonds identified in the Annex to EO 13808.
- Authorizes all transactions related to, the provision of financing for, and other dealings in bonds that were issued both:
- Prior to August 24, 2017, and
- By U.S. person entities owned or controlled, directly or indirectly, by the Government of Venezuela.
General License 4: Authorizing New Debt Transactions Related to the Exportation or Reexportation of Agricultural Commodities, Medicine, Medical Devices, or Replacement Parts and Components
- Authorizes all transactions related to, the provision of financing for, and other dealings in new debt related to the exportation or reexportation, from the United States or by a US person, wherever located, of agricultural commodities, medicine, medical devices, or replacement parts and components for medical devices to Venezuela, provided that the exportation or reexportation is licensed or otherwise authorized by the Department of Commerce.
In conjunction with the executive order, OFAC published a number of FAQs to address common questions likely to arise in response to the newly imposed sanctions measures. Among other things, the FAQs clarify that the new sanctions are not blocking sanctions and that they target transactions specific to bonds and other securities because the Government of Venezuela “is selling assets 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. Bonds and other securities are among the assets being sold.”
The new Venezuelan sanctions are reminiscent of the Russian sanctions imposed by OFAC on certain financial, banking, and military listed entities (the “sectoral sanctions list”) under Directives 1, 2, and 3. Just as the Russian Sectoral sanctions imposed pain and suffering for banks and companies that sold to the respective Russian sectors, the new Venezuelan sanctions will do likewise for US companies that sell to Venezuelan state-owned (50% or more) companies. To comply with the sanctions, US companies must first put in place a due diligence process to identify Venezuelan customers that are state-owned. They must then determine whether those customers are owned by PdVSA, CITGO, or another entity. While this process is unlikely to be as difficult as it was in Russia due to the pronounced lack of transparency in that country, it nevertheless adds a level of complexity.
Moreover, the new Venezuelan sanctions define debt like the Russian sanctions to include extensions of credit, in addition to more traditional debt such as bonds, loans, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper. This means that a US company selling to a state-owned Venezuelan company, other than CITGO, needs to make sure that they do not offer terms of credit longer than 30 days (or 90 days for PdVSA), and that they are actually paid in no longer than 30 days (or 90 days for PdVSA). Unless your state-owned customer is willing to pay cash in advance, this means a certain degree of risk, as well as anxiety for the US exporter. Moreover other forms of trade financing, such as letters of credit, must be carefully reviewed to ensure that they do not violate the Executive Order. Exporters will also need to be checking any transactions involving state-owned Venezuelan banks and ensure that the transactions do not somehow involve prohibited debt or security transactions.
Finally, US exporters need to keep in mind that these are not the only US sanctions on Venezuela as:
- The US Government has placed a number of Venezuelan persons and entities on the Specially Designated Nationals (SDN) list, thereby blocking their assets subject to US jurisdiction;
- Venezuela is subject to a US arms embargo and appears on the ITAR section 126.1 list of proscribed countries for US exports of defense articles and services and on the Country D:5 list under the Export Administration Regulations (EAR) as a prohibited country for EAR 600 series items (including a license requirement for items under the .y subcategory); and
- Exports of certain ECCNS (listed in Supplement 2 to EAR part 744) require a license for export to a 'Military End Use' or 'Military End User' in Venezuela and Russia under Part 744.21 of the EAR.