On January 28, 2019, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated the Venezuelan state-owned oil company Petróleos de Venezuela, S.A. (PdVSA) as a Specially Designated National (SDN). This action will have a significant impact on US persons and businesses involved in any dealings with PdVSA or its subsidiaries. The designation also applies to any entity owned 50% or more by PdVSA, including companies with a significant US presence such as CITGO Holding, Inc. (CITGO). Accordingly, as of January 28, US persons are prohibited from engaging in all transactions with or otherwise involving PdVSA or any of its majority-owned subsidiaries and are required to block the property or interests in property of PdVSA and such subsidiaries unless a general or specific license applies.
This is the latest move by the Trump Administration to use economic sanctions and other levers to increase pressure on the regime of President Nicolás Maduro as the political and economic situation in Venezuela continues to deteriorate. On January 10, 2019, Mr. Maduro was sworn in for a second term after winning an election declared illegitimate by the United States and a number of other countries and international organizations. On January 23, 2019, the Trump Administration announced that it no longer recognized Mr. Maduro as the legitimate president of Venezuela and instead viewed Juan Guaidó, the president of the Venezuelan National Assembly, as the rightful leader of the country. Several other countries have since followed suit in their recognition of Mr. Guaidó as the legitimate leader of Venezuela.
In an effort to prevent significant disruption to the US oil industry and certain US allies and to provide resources to the opposition government of Mr. Guaidó, on January 28, 2019, OFAC published eight new general licenses (GLs) authorizing the continuation of certain activity subject to a variety of conditions. It also amended one existing GL to reflect the designation of PdVSA. On February 1, 2019, and again on February 11, 2019, OFAC amended two of those GLs, presumably in response to questions from industry on the effect of the sanctions on trades in PdVSA bonds and other instruments.
President Trump also issued a new executive order (EO), EO 13857, on January 28, 2019, to clarify that the definition of "Government of Venezuela" – as contained in a variety of previously issued Venezuela sanctions EOs – includes Mr. Maduro and his regime, even if they are no longer officially recognized as such by the United States.
OFAC has also published new FAQs providing insight into the scope and application of both the EO and GLs.
Authority for the PdVSA Designation
PdVSA was designated pursuant to EO 13850 (Blocking Property of Additional Persons Contributing to the Situation in Venezuela). When initially issued, that EO applied only to persons determined to "operate in the gold sector of the Venezuelan economy." However, the order allowed for the expansion of its scope to "any other sector of the Venezuelan economy as may be determined by the Secretary of the Treasury." The web notice published by OFAC stated that Treasury Secretary Steven Mnuchin has now determined "that persons operating in Venezuela's oil sector are subject to sanctions pursuant to EO 13850," allowing for the designation of PdVSA. At this point in time, PdVSA is the only entity that has been designated under this expanded scope of EO 13850. However, it is possible that additional entities could be designated in the future.
New General Licenses
OFAC published eight new general licenses (GLs 7-14) related to the PdVSA designation. While some of the GLs facilitate the divestment or wind down of transactions or dealings with PdVSA and its subsidiaries, others create authorizations that are likely intended to be more indefinite and possibly the subject of ongoing negotiations between certain parties and OFAC. Among other things, the GLs authorize (subject to certain conditions) the importation of Venezuelan oil by US persons and the operation of CITGO – so long as payments for oil and any other funds that would normally go to PdVSA are placed into a blocked account. It is unclear whether PdVSA will continue to export oil under such conditions. In a White House press briefing, Secretary Mnuchin indicated that blocked funds may eventually be provided to the National Assembly President Juan Guaidó, who the US recognizes as the current president of Venezuela.
Each of the new GLs is discussed in further detail below.
General License 7 – Transactions with CITGO and PDV Holding
PDV Holding, Inc. (PDVH) and CITGO are large subsidiaries of PdVSA with significant operations in the United States and are blocked pursuant to the designation of PdVSA under EO 13850.
GL 7 (Authorizing Certain Activities Involving PDV Holding, Inc. and CITGO Holding, Inc.) authorizes all transactions and activities otherwise prohibited under EO 13850 with respect to PDVH, CITGO, and their subsidiaries, so long as PDVH and CITGO and their subsidiaries are the only PdVSA entities involved in the transaction or activity. Such conduct is authorized through 12:01 a.m. EST on July 27, 2019. Unlike GL 11 and GL 12, GL 7 does not use the term "wind down" to describe the authorization. Thus, it is not clear whether the July 27 expiration date is intended to allow for a winding down of activities with these entities, or whether the US government expects to extend GL 7 going forward.
GL 7 further authorizes PDVH and CITGO and their subsidiaries to engage "in all transactions and activities prohibited by EO 13850 that are ordinarily incident and necessary to the purchase and importation of petroleum and petroleum products from PdVSA and any entity in which PdVSA owns, directly or indirectly, a 50% or greater interest." Such conduct is authorized through 12:01 a.m. EST on April 28, 2019.
Payments under GL 7 for the benefit of a blocked person other than PDVH or CITGO or their subsidiaries must be placed into a blocked account.
FAQ 658 addresses the use of swaps and other non-cash transactions under GL 7 (as well as GL 12 as discussed below) and explains that prior to the April 28, 2019 deadline, "any funds or tangible proceeds of a swap or non-cash agreement owed to PdVSA or any entity in which it owns, directly or indirectly, a 50% or greater interest as a result of such purchases or exchanges must be blocked, and, in the case of blocked funds, must be placed into a blocked interest-bearing account in the United States." After the wind down period, "any transactions (including swaps and non-cash transactions) involving the purchase or exchange of petroleum or petroleum products in which PdVSA or any entity in which it owns, directly or indirectly, a 50% or greater interest has a direct or indirect interest will be prohibited for US persons absent authorization from OFAC."
General License 8 – Transactions by US Petroleum Firms in Venezuela
GL 8 (Authorizing Transactions Involving Petróleos de Venezuela, S.A. (PdVSA) Prohibited by Executive Order 13850 for Certain Entities Operating in Venezuela) permits certain specifically named entities to engage in "transactions and activities ordinarily incident and necessary to operations in Venezuela involving PdVSA" or its subsidiaries. The GL applies only to five companies: Chevron, Halliburton, Schlumberger, Baker Hughes, and Weatherford International. The GL and other available guidance do not indicate how OFAC chose those entities; however, these entities appear to be some of the most significant petroleum companies with US connections operating in Venezuela. It is not clear how this GL affects the supply chain for the licensed companies (e.g., whether US persons can supply items to these companies, either in Venezuela or in the United States, and what due diligence is needed to ensure such supplies would fall within the scope of the GL).
GL 9B (Authorizing Transactions Related to Dealings in Certain Securities) (replacing previously issued GLs 9 and 9A) permits certain dealings in securities issued by PdVSA and its subsidiaries. GL 9A, which was issued February 1, 2019, replaced GL 9, issued January 28, 2019.
Paragraph (a) permits "all transactions and activities prohibited by Section l(a)(iii) of EO 13808…or EO 13850 that are ordinarily incident and necessary to dealings in any debt…or equity" of PdVSA and its subsidiaries issued prior to August 25, 2017 (the effective date of EO 13808), so long as any "divestment or transfer" or "facilitation of divestment or transfer" of covered securities are "to a non-US person." The GL explains that "any debt" includes "the bonds listed on the Annex to this general license, promissory notes, and other receivables." (The PdVSA bonds now included in the annex to GL 9B were previously included in an annex for GL 3, but have been removed from that annex as discussed further below.)
Paragraph (b) confirms that transactions authorized by paragraph (a) include "facilitating, clearing, and settling transactions to divest to a non-US person PdVSA securities, including on behalf of US persons." FAQ 661 further provides that, "This authorization includes, for example, engaging in transactions related to the receipt and processing of interest or principal payments, and acting as a custodian for US and non-US persons' holdings in PdVSA securities, including acting as a custodian for a non-US person after that person has received PdVSA securities from a US person in a divestment transaction."
Paragraph (c) authorizes "all transactions and activities prohibited by Section l(a)(iii) of EO 13808 or EO 13850 that are ordinarily incident and necessary to facilitating, clearing, and settling trades of holdings in PdVSA securities." However, any such "trades" must have been "placed" prior to 4:00 p.m. EST on January 28, 2019. FAQ 661 adds that trades meeting the requirements of this paragraph are authorized "irrespective of whether the sale or transfer is to a non-US person." Thus, trades to a US person are authorized so long as they fit within the terms of paragraph (c).
Paragraph (d) authorizes all transactions and activities "ordinarily incident and necessary to the wind down of financial contracts or other agreements" entered into prior to the January 28, 2019, deadline "involving, or linked to, PdVSA securities." Such conduct is authorized through 12:01 a.m. EST on March 11, 2019.
With respect to PDVH, CITGO, and Nynas and their subsidiaries (all of which have US operations), paragraph (e) of GL 9B authorizes "all transactions and activities prohibited by Section 1(a)(iii) of EO 13808 or EO 13850 that are ordinarily incident and necessary to dealings in any bonds that were issued prior to August 25, 2017" by such entities.
Subparagraph (f)(2) of GL 9B contains an exclusion from the authorizations in paragraph (a) of GL 9B. The exclusion indicates that GL 9B does not authorize US persons to "purchase or invest in, or to facilitate the purchase of or investment in, directly or indirectly, PdVSA securities." Carved out from this exclusion (and therefore authorized to the extent consistent with the other terms in GL 9B) are "purchases of or investments in PdVSA securities" that are "ordinarily incident and necessary to the divestment or transfer of holdings in PdVSA securities."
As explained by OFAC in FAQ 661, "General License 9B does not generally authorize US persons to purchase or acquire new interests in PdVSA securities, and as a result, such purchases are prohibited absent authorization from OFAC. However, US persons may purchase or invest in PdVSA securities…provided that such transactions are ordinarily incident and necessary to the divestment and transfer of holdings in PdVSA securities." FAQ 661 also clarifies that, "US persons may continue to hold their interests in PdVSA securities, but are subject to certain restrictions on the sale of those interests in the secondary market."
FAQ 650 provides some guidance on the level of due diligence that OFAC expects US brokers or financial institutions to conduct to ascertain whether divestments and transfers under GL 9B (and GL 3C) are to "non-US persons." The FAQ indicates that brokers and financial institutions generally may rely upon "information ordinarily available to them" for purposes of conducting due diligence. However, they are expected to conduct due diligence on "their own direct customers" to ensure that the transfers or divestment of certain securities are consistent with the terms of GL 9B (and GL 3C). In addition, if a broker or financial institution has information "leading it to know or have reason to know that the buyer is a US person, then the US broker or financial institution will be held responsible if it does not take appropriate steps to ensure that the trade is not consummated."
General License 10 – Purchases of Petroleum for Use in Venezuela
GL 10 (Authorizing the Purchase in Venezuela of Refined Petroleum Products from Petróleos de Venezuela, S.A. (PdVSA)) appears to be aimed at US persons who are living or working in Venezuela or traveling in the country. The GL authorizes "US persons in Venezuela…to purchase refined petroleum products for personal, commercial, or humanitarian uses from PdVSA" or its subsidiaries. GL 10 does not authorize "any commercial resale, transfer, exportation or reexportation of refined petroleum products."
FAQ 656 adds that, "General License 10 authorizes, among other things, purchases of refined petroleum products by US commercial airlines providing passenger or cargo services in Venezuela for the purposes of fueling aircraft in Venezuela. GL 10 also would authorize purchase for use to power a means of conveyance or a household good (such as a generator) in Venezuela."
General License 11 – Wind Down of Dealings With PdVSA in Third Countries
GL 11 (Authorizing Certain Activities Necessary to Maintenance or Wind Down of Operations or Existing Contracts with Petróleos de Venezuela, S.A. (PdVSA)) creates a two-month wind down period for transactions between PdVSA and US persons in countries other than the US and Venezuela. Specifically, GL 11 authorizes "US person employees and contractors of non-US entities located in a country other than the United States or Venezuela…to engage in all transactions and activities prohibited by Executive Order 13850 that are ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements involving PdVSA" or its subsidiaries.
According to FAQ 648, activities that are considered "maintenance" include:
All transactions "ordinarily incident to the continuity of operations," provided that US financial institutions may not process transactions to or for the benefit of PdVSA or any entity in which PdVSA owns, directly or indirectly, a 50% or greater interest
All transactions and activities ordinarily incident to performing under a contract or agreement in effect prior to January 28, 2019, "provided that the level of performance is consistent with the terms of the general license and consistent with past practices that existed between the party and the blocked entity prior to the applicable sanctions effective date"
All transactions and activities "ordinarily incident to obtaining goods or services from or providing goods or services to a blocked entity listed in such authorization in a manner consistent with the terms of the relevant general license and consistent with past practices that existed between the party and the blocked entity prior to the applicable sanctions effective date"
The authorization for "maintenance" also generally includes "authorization to enter into contingent contracts for transactions and activities consistent with the above, where any performance after the expiration of the relevant general license is contingent on such performance either not being prohibited or being authorized by OFAC."
In addition, GL 11 permits US financial institutions to "reject," rather than block, funds transfers that involve both (1) PdVSA or a 50% or greater owned subsidiary and (2) "non-US entities located in a country other than the United States or Venezuela, provided that the funds transfers originate and terminate outside the United States and that neither the originator nor the beneficiary is a US person and the funds are not destined for a blocked account on the books of a US person." According to FAQ 654, while US financial institutions are not required to block funds transfers meeting these conditions, they are prohibited from processing such transactions.
The GL does not authorize transactions or dealings involving ALBA de Nicaragua (ALBANISA) and its 50% or greater owned subsidiaries.
Conduct authorized under GL 11 is permitted through 12:01 a.m. EST on March 29, 2019.
GL 12 (Authorizing Certain Activities Necessary to Wind Down of Operations or Existing Contracts with Petróleos de Venezuela, S.A. (PdVSA)) allows for the continued purchase and import – including, according to FAQ 655, by US persons – of petroleum and petroleum products from PdVSA and its subsidiaries. However, payments related to such transactions must be made into a blocked account (except as authorized in GLs 7, 8, 11, or 13). This provision is designed to permit the continued flow of oil from Venezuela to the US while preventing the Maduro regime from receiving the proceeds. The authority is valid through 12:01 a.m. EST on April 28, 2019. However, any funds or tangible proceeds related to swaps or non-cash agreements owed to PdVSA must be blocked and, in the case of blocked funds, placed into a blocked interest-bearing account in the US prior to April 28, 2019.
In addition, GL 12 authorizes "all transactions and activities prohibited by EO 13850 that are ordinarily incident and necessary to the wind down of operations, contracts, or other agreements, including the importation into the United States of goods, services, or technology" not otherwise authorized in the above provision. According to FAQ 659, this authorization includes "the importation into, or the exportation from, the United States of goods, services, or technology (other than the exportation of diluents) involving PdVSA or any entity in which it owns, directly or indirectly, a 50% or greater interest (other than ALBA de Nicaragua (ALBANISA) or any entity in which ALBANISA owns, directly or indirectly, a 50% or greater interest)." That authority is valid through 12:01 a.m. EST on February 27, 2019.
Importantly, the authorization related to petroleum and petroleum product imports does not appear to be limited to transactions "ordinarily incident and necessary to the wind down of operations" as is the case for other transactions authorized by GL 12.
Finally, GL 12 states that it does not authorize the export of diluents, transactions or dealings with ALBANISA, or the "divestiture or transfer of any debt, equity, or other holdings in, to, or for the benefit of" PdVSA.
General License 13 – Nynas AB
GL 13 (Authorizing Certain Activities Involving Nynas AB) permits certain activity involving Sweden-based company Nynas and its subsidiaries. Specifically, the GL allows "all transactions and activities prohibited by EO 13850" provided that Nynas and its subsidiaries are the only PdVSA entities involved in the transaction or activity. Under the GL, any payments for the direct or indirect benefit of a blocked person other than Nynas or its subsidiaries must be placed into a blocked account. The GL further clarifies that it does not authorize the export of any items to PdVSA or its subsidiaries except Nynas or a Nynas subsidiary. The license is valid through 12:01 a.m. EST on July 27, 2019.
General License 14 – US Government Activities
Finally, GL 14 (Official Business of the United States Government) permits certain transactions and activities conducted pursuant to official business of the US government.
GL 3 has been amended and superseded by GL 3C (Authorizing Transactions Related to, Provision of Financing for, and Other Dealings in Certain Bonds) (replacing previously issued GLs 3A and 3B). The previously issued GL 3 authorized certain transactions and dealings in specifically enumerated bonds contained in the GL 3 annex. GL 3C contains an annex, but all bonds issued by PdVSA and by Petrozuata Finance Inc. have been removed and placed in the annex to GL 9B (discussed above). GL 3C also clarifies that "any divestment or transfer of, or facilitation of divestment or transfer of, any holdings in such bonds must be to a non-US person."
The GL further authorizes "all transactions prohibited by Subsection l(a)(iii) of EO 13808 that are ordinarily incident and necessary to facilitating, clearing, and settling trades of holdings in GL 3C Bonds" listed in the annex, provided such trades were placed prior to 4:00 p.m. EST on February 1, 2019, as well as "all transactions and activities…ordinarily incident and necessary to the wind down of financial contracts or other agreements that were entered into prior" to the February 1 deadline. Such financial contracts and other agreements must be wound down by 12:01 a.m. EST on March 11, 2019.
FAQ 662 adds that GL 3C's authorizations include "for example, engaging in transactions related to the receipt and processing of interest or principal payments, and acting as a custodian for US and non-US persons' holdings in GL 3C Bonds, including acting as a custodian for a non-US person after that person has received GL 3C Bonds from a US person in a divestment transaction."
GL 3 also previously authorized certain dealings in bonds issued by US entities owned or controlled by the Government of Venezuela and issued prior to August 24, 2017. GL 3C contains a similar provision, but the provision no longer applies to Nynas, PDVH, CITGO, or any of their subsidiaries. Instead, certain dealings in bonds issued by such entities are authorized under GL 9B (see above).
FAQ 662 adds that, "US persons may continue to hold their interests in the GL 3C Bonds, but are subject to certain restrictions on the sale of those bonds in the secondary market" and that GL 3C "does not generally authorize US persons to purchase or acquire new interests in the GL 3C Bonds." It then clarifies that, "to the extent that divesting or transferring holdings in the GL 3C Bonds from US persons to non-US persons requires engaging in certain GL 3C Bond transactions," US persons are authorized to engage in such transactions.
Finally, FAQ 662 explains that "[w]hile non-US persons may continue to deal in the GL 3C Bonds, to the extent transactions involve US persons or the US financial system, such transactions must comply with the terms of GL 3C and may not involve sales of any interests in such bonds to US persons (other than as set forth in GL 3C and as described above) as US persons are largely prohibited from purchasing such interests."
New Executive Order and Related FAQ
In addition to the designation of PdVSA and the new and amended GLs discussed above, President Trump issued EO 13857 entitled "Executive Order on Taking Additional Steps to Address the National Emergency with Respect to Venezuela." The EO amends the definition of "Government of Venezuela" contained in EOs 13692, 13808, 13827, 13835, and 13850 to read as follows:
[T]he term "Government of Venezuela" includes the state and Government of Venezuela, any political subdivision, agency, or instrumentality thereof, including the Central Bank of Venezuela and Petróleos de Venezuela, S.A. (PDVSA), any person owned or controlled, directly or indirectly, by the foregoing, and any person who has acted or purported to act directly or indirectly for or on behalf of, any of the foregoing, including as a member of the Maduro regime.
OFAC published a new FAQ providing additional context for the EO, which explains that the order "broadens the definition of the term 'Government of Venezuela' to include persons that have acted, or have purported to act, on behalf of the Government of Venezuela, including members of the Maduro regime." It appears that this broader definition is intended to ensure that Mr. Maduro and those who are acting as part of his regime will continue to be covered by the sanctions, even though the US government no longer recognizes Mr. Maduro as the president of Venezuela.
President Trump also issued a Presidential Message to Congress regarding the new EO. The message explains that the new EO "accounts for the swearing in of a legitimate Interim President of Venezuela, and addresses actions by persons affiliated with the illegitimate Maduro regime, including human rights violations and abuses in response to anti-Maduro protests, arbitrary arrest and detention of anti-Maduro protestors, curtailment of press freedom, harassment of political opponents, and continued attempts to undermine the Interim President of Venezuela and undermine the Venezuelan National Assembly."
Application to Certain Funds, Exchange Traded Funds, and Synthetic Exchange Traded Funds
In addition to the FAQs referenced in the above discussion of the GLs, OFAC has issued a number of other FAQs providing additional guidance with respect to certain types of funds.
FAQ 652 addresses mutual funds and exchange traded funds that are US persons and transact in or hold securities in a designated entity. The FAQ explains that such funds "may not buy, sell, or otherwise engage in transactions related to debt, equity, or other holdings in blocked persons and must block such holdings, unless authorized by OFAC via general or specific license." It further notes that a fund that contains such holdings is not considered blocked and US persons may continue to invest in such funds.
FAQ 653 addresses synthetic exchange traded funds, which track "a basket of debt, equity or other holdings in order to provide a return approximating the returns on that basket, but which" do not actually hold the underlying asset. The FAQ states that such funds may continue to operate "so long as the underlying basket being tracked includes less than a predominant share by value of debt, equity, or other holdings in blocked persons." The term predominant share is not defined.
We expect additional sanctions developments in response to further changes to the political situation in Venezuela and further questions from US entities implementing these sanctions. The Treasury Department press release designating PdVSA notes that "sanctions need not be permanent. Sanctions are intended to change behavior. The United States has made it clear that we will consider lifting sanctions for those who take concrete, meaningful, and verifiable actions to support democratic order and combat corruption in Venezuela, including PdVSA." It adds, "The path to sanctions relief for PdVSA is through the expeditious transfer of control to the Interim President or a subsequent, democratically elected government."
The Trump Administration has signaled that it is continuing to consider further options to support Mr. Guaidó. Secretary of State Mike Pompeo issued a statement regarding the PdVSA designation reading in part, "The United States will continue to take concrete and forceful action against those who oppose the peaceful restoration of democracy in Venezuela, and serve their own interests rather than those of the Venezuelan people." In a White House press briefing, National Security Advisor John Bolton stressed that "all options are on the table" going forward.