2017 has been an eventful and significant year for the Venezuela economic sanctions programs, particularly in the aftermath of President Nicolas Maduro’s consolidation of political power in a series of contested elections and political maneuverings throughout the first half of the year.
On August 24, 2017, President Donald Trump imposed extensive sanctions against the government of Venezuela in response to its persecution of political opposition, human rights abuses and “rampant” public corruption via Executive Order 13808. This order broadly prohibits transactions related to the financing of new debts, securities and certain pre-existing bonds for the Venezuelan government and the state-owned oil company Petróleos de Venezuela S.A. (PdVSA).
In conjunction with the order, the US Treasury Department’s Office of Foreign Assets Control (OFAC) issued new guidance along with four general licenses that mitigate economic harm for certain US companies and allow for specific transactions that would otherwise be prohibited under the sanctions program.
The zenith of Venezuelan President Maduro’s power grab came in the midst of the nation’s constitutional crisis, when his government conducted an end-around the opposition-controlled parliament known as the National Assembly by creating a new governmental body with constitution drafting powers, the 545-member National Constituent Assembly. Since its creation in July, the Constituent Assembly has usurped the legislative power from the democratically elected National Assembly, ousted the sitting attorney-general and dangerously mismanaged the nation’s economy. Democratic nations around the world have declared they will not recognize the Constituent Assembly as legitimate.
The US sanctions program was “carefully calibrated” to tighten the economic screws on Maduro’s regime and restrict its access to capital. The US maintains great influence over Venezuela’s economy because it buys approximately half of the country’s oil, an industry that accounts for about 95 percent of Venezuela’s export revenue. Due to this significant petroleum trade between the nations, the US stopped short of imposing a full crude oil embargo, which would surely be crippling for the Venezuelan nation, nor do the sanctions apply to short-term financing for oil sales. OFAC also issued four general licenses to allow for certain exemptions to protect the interests of both US companies and the Venezuelan people.
The general licenses allow for a 30-day wind-down period for existing contracts; transactions only involving PdVSA’s US subsidiary Citgo; dealings in select existing Venezuelan debts; and the financing for humanitarian goods to Venezuela.
The sanctions prevent American entities from buying any new debt issued by Venezuela with maturities longer than 30 days, or 90 days for the debt of PdVSA. Sanctions have now made it difficult to raise money from international investors, and effectively prohibit refinancing or restructuring Venezuela’s existing debt, because they block financial institutions under US jurisdiction from buying new bonds.
While Citgo is protected from the sanctions through General License 2, it will be prohibited from distributing profits back to the PdVSA and the Venezuelan government.
SDN List and Individual Sanctions Update
One of the most effective tools for OFAC sanction programs is the Specially Designated Nationals and Blocked Persons List. On July 26, OFAC sanctioned 13 Venezuelan government officials ahead of the July Constituent Assembly elections; and on July 31, added President Maduro himself to the SDN List. In August, OFAC sanctioned eight more Venezuelan officials involved with the creation of the Constituent Assembly.
On November 9, the US imposed sanctions against 10 additional Venezuelan officials, including members of Venezuela’s election commission and several government ministers, for their roles in undermining the electoral process, extensive media censorship and corruption related to the government-administered food program. OFAC has now frozen US assets, banned US travel, and prohibited US persons from doing business with dozens of President Maduro’s closest regime allies.
Debt Restructuring Negotiations
On November 2, President Maduro announced that Venezuela and PdVSA will have to “refinance and restructure” its massive external debt estimated at over $60 billion in outstanding bonds. Maduro and his vice president, Tareck El Aissami, invited bondholders to a meeting in Caracas on November 13 as Venezuela prepares to restructure its overwhelming debt.
However, El Aissami was sanctioned by OFAC in February 2017 under the Foreign Narcotics Kingpin Designation Act after accusations that he “played a significant role in international narcotics trafficking.” Additionally, US persons are now prohibited from receiving such new bonds that Venezuela could give them as part of a restructuring. Although creditors are not forbidden under General License 3 from participating in talks on Venezuela’s bonds, any deal made with the sanctioned El Aissami would be problematic for US persons. Penalties for violations of the Foreign Narcotics Kingpin Designation Act can include up to 30 years in prison or fines of up to $5 million. For financial institutions, the fines can reach as high as $10 million.
International Sanctions Update
In August, 12 nations across the Americas issued a declaration refusing to recognize the “illegitimate” Venezuelan Constituent Assembly and condemning the government for undermining the nation’s democratic order. The so-called Lima Declaration was put together by Foreign Ministers and representatives of Argentina, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Honduras, Mexico, Panama, Paraguay and Peru. The Lima Group has met three times during the fall of 2017, and continues to reiterate their rejection of the Venezuelan government and its ongoing human rights abuses. Their next meeting is planned to be held in Chile in January 2018.
On November 13, the European Union also announced that it approved new economic sanctions on Venezuela, including a full arms embargo. The sanctions program will allow for a system of asset freezes and travel bans to be put into place against key Venezuelan government officials. The announcement also highlighted that EU member states would not recognize the Venezuela’s Constituent Assembly as legitimate.
The US has shown Venezuela and the Maduro regime that it will not sit idly by while the Venezuelan people suffer through political repression along with one of the worst economic collapses in modern Latin American history. Through its OFAC sanctions program and updated SDN List, the US has made it increasingly difficult for the Maduro regime to prosper, and will continue to do so until Venezuela reestablishes sustainable democratic processes and holds free and fair elections.
Even if Venezuela seeks to get around the US sanctions by restructuring outstanding bonds in other currencies, authority for that would come from the Constituent Assembly, which the EU, the US and Lima Group member-states do not recognize as legitimate. This will likely push the Maduro regime to seek financial assistance from Russia and China, who both recently boycotted a UN Security Council meeting on Venezuela. Due diligence will remain critical for compliance practitioners who deal with clients engaging in the region, particularly as the list of sanctioned government officials and government-owned entities grows.
Doreen M. Edelman is a shareholder and co-leader of the Global Business Team at Baker Donelson (Washington, DC). With more than 25 years of experience in import and export compliance, foreign investment and global expansion, she advises both US and foreign-based companies on international business matters. Julius Bodie also contributed to this article. A law clerk with Baker Donelson, he recently graduated from Loyola Law School.