United States: New Executive Order Ramps Up Sanctions Against Venezuela And Petroleos De Venezuela S.A.

Andres Fernandez is a Partner for Holland & Knight's Miami office

Gabriel Caballero is a Partner for Holland & Knight's Miami office

HIGHLIGHTS:

  • President Donald Trump has issued an Executive Order (the E.O.) imposing additional sanctions with respect to the situation in Venezuela, and the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) has published four Venezuela-related general licenses in conjunction with the E.O.
  • The E.O. expands upon Executive Order 13692, issued by former President Barack Obama on March 8, 2015, which declared a national emergency with respect to the unusual and extraordinary threat to the national security and foreign policy of the United States posed by the situation in Venezuela.
  • As a result of the E.O., financial institutions, lenders, companies and individuals that do business in the Venezuelan petroleum sector or with the Venezuelan government, as well as holders or issuers of certain types of Petroleos de Venezuela S.A. or Venezuelan sovereign debt, or equity securities from the government of Venezuela, will need to assess the impact of the E.O. and its sanctions on their operations.

President Donald Trump issued an Executive Order (the E.O.) on Aug. 25, 2017, imposing additional sanctions with respect to the situation in Venezuela. In conjunction with the E.O., the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) published four Venezuela-related general licenses (collectively, the General Licenses):

  • General License 1: "Authorizing Certain Activities Necessary to Wind Down Existing Contracts"
  • General License 2: "Authorizing Certain Transactions Involving CITGO Holding Inc."
  • General License 3: "Authorizing Transactions Related to, Provision of Financing for, and Other Dealings in Certain Bonds"
  • General License 4: "Authorizing New Debt Transactions Related to the Exportation or Reexportation of Agricultural Commodities, Medicine, Medical Devices, or Replacement Parts and Components"

Background

The E.O. expands upon Executive Order 13692, which was issued by former President Barack Obama on March 8, 2015, and declared a national emergency with respect to the unusual and extraordinary threat to the national security and foreign policy of the United States posed by the situation in Venezuela. It targeted those determined by the U.S. Department of the Treasury, in consultation with the U.S. Department of State, to be involved in:

  • actions or policies that undermine democratic processes or institutions
  • significant acts of violence or conduct that constitutes a serious abuse or violation of human rights, including against persons involved in antigovernment protests in Venezuela in or since February 2014
  • actions that prohibit, limit or penalize the exercise of freedom of expression or peaceful assembly
  • public corruption by senior officials within the government of Venezuela

The E.O. also follows several high-profile designations by OFAC, including the president of Venezuela, Nicolás Maduro Moros, and several individuals allegedly involved in organizing or otherwise supporting the creation of Venezuela's National Constituent Assembly (Asamblea Nacional Constituyente, or ANC) and participating in anti-democratic actions.

Executive Order of Aug. 25, 2017

President Trump's E.O. prohibits, among other things:

  • engaging in transactions related to, providing financing for or otherwise dealing in new debt with a maturity of longer than 90 days by, on behalf of or for the benefit of Petroleos de Venezuela S.A. (PdVSA), its property or its interests in property
  • engaging in transactions related to, providing financing for or otherwise dealing in new debt with a maturity of longer than 30 days issued by, on behalf of or for the benefit of any other segment of the government of Venezuela, its property or its interests in property; that subsection further prohibits engaging in transactions related to, providing financing for or otherwise dealing in new equity issued by, on behalf of or for the benefit of the government of Venezuela, its property or its interests in property, which includes PdVSA
  • engaging in transactions involving bonds issued by the government of Venezuela prior to the order's effective date
  • engaging in transactions involving dividend payments or other distributions of profits to the government of Venezuela by any entity owned or controlled, directly or indirectly, by the government of Venezuela
  • purchasing any securities from the government of Venezuela other than securities qualifying as new debt with a maturity of less than or equal to 90 days (for PdVSA) or 30 days (for the rest of the government of Venezuela).

These actions prohibit transactions by U.S. persons, wherever they are located, and transactions within the United States. However, the E.O. does not require U.S. persons to block the property or interests in property of the government of Venezuela, and the government of Venezuela will not be added to the List of Specially Designated Nationals and Blocked Persons. The E.O. however, requires U.S. persons to reject transactions or dealings that are prohibited by the E.O. and report to OFAC any such rejected transactions within 10 business days.

General Licenses

As noted above, OFAC has issued four general licenses (collectively, the General Licenses) related to the E.O.

  • General License 1 applies to contracts and other agreements that were in effect prior to the E.O.'s effective date. It provides 30 days as of the order's effective date in which to conduct certain transactions and activities otherwise prohibited by subsections 1(a)(i)-(iii) and (b) of the E.O. that are ordinarily incident and necessary to winding down such agreements.
  • General License 2 authorizes certain transactions otherwise prohibited by the E.O. provided that the only government of Venezuela entities involved in the transactions are CITGO Holding Inc. and any of its subsidiaries.
  • General License 3 authorizes certain transactions related to, the provision of financing for and other dealings in bonds contained on the List of Authorized Venezuela-Related Bonds that would otherwise be prohibited by the E.O. That list is appended to General License 3 and also available as a stand-alone document on the "Venezuela-related Sanctions" page of OFAC's website. General License 3 further authorizes certain transactions related to, the provision of financing for and other dealings in bonds issued prior to the effective date of the E.O., if such bonds were issued by U.S. person entities owned or controlled, directly or indirectly, by the government of Venezuela, such as CITGO Holding Inc.
  • General License 4 authorizes certain transactions related to the provision of financing for and other dealings in new debt related to the exportation or re-exportation of agricultural commodities, medicine, medical devices, or replacement parts and components for medical devices, to Venezuela or to persons in third countries purchasing specifically for resale to Venezuela, provided that the exportation or re-exportation is licensed or otherwise authorized by the U.S. Department of Commerce.

Impact of the New E.O. and Expanded Sanctions

The E.O. maintains certain similarities to the sectoral sanctions imposed on specified persons operating in sectors of the Russian economy identified by the Secretary of Treasury that were imposed under Executive Order 13662, issued by former President Obama on March 24, 2014.

It is anticipated that President Trump's E.O. will have a similar impact on the debt and equity markets for new issuances of PdVSA or Venezuelan sovereign debt or equity securities.

Moreover, as a result of the E.O., financial institutions, lenders, companies and individuals that do business in the Venezuelan petroleum sector or with the Venezuelan government (including joint ventures, or empresas mixtas), as well as holders or issuers of certain types of PdVSA or Venezuelan sovereign debt, or equity securities from the government of Venezuela, will need to assess the impact of the E.O. and its sanctions on their operations. In doing so, impacted parties should consider taking the following steps:

  • conduct a formal impact assessment to determine the exposure that the E.O. and the General Licenses may have upon your operations
  • evaluate whether the wind-down operations permitted by General License 1 are required or advisable, as well as the associated logistical and timing considerations
  • to the extent you hold, or engage in transactions directly or indirectly with, bonds issued by the government of Venezuela, consider the restrictions imposed by the E.O., as well as the authorizations granted by General License 3
  • take this opportunity to revisit, evaluate and revise, as necessary, your internal policies, procedures and controls to ensure compliance with the E.O. and the General Licenses

Holland & Knight attorneys are prepared to assist our clients with evaluating the impact associated with the E.O. and the General Licenses, as well as the actions required to ensure compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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