OFAC Sanctions Venezuela State-owned Oil Giant PDVSA

On January 23, 2019, Juan Guaidó, the President of Venezuela’s legislative body, the National Assembly, and for whom the Trump Administration has declared its support, took the oath to serve as Venezuela’s interim president in opposition to what he and his allies view as the illegitimate presidency of Nicolás Maduro. While many nations, including the United States, have recognized and expressed support for Guaidó’s temporary ascension to power, some nations such as Russia and China have rejected it.

In a strike at Maduro and his closest supporters, the Trump Administration announced a new executive order on January 28, 2019, broadening the scope and definition of the 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. This action was likely taken with the hope of spurring defections or at least to deter support for the regime among key officials and other persons within and potentially outside Venezuela.

Although it was quite clear that the imposition of additional sanctions targeting the Maduro regime would form part of the United States response, there was much speculation about what those sanctions would look like and how far the Trump Administration would go. On January 28, 2019, OFAC also announced the designation of Petróleos de Venezuela, S.A. (PDVSA), Venezuela’s state-owned oil company, pursuant to Executive Order (EO) 13850, for operating in Venezuela’s oil sector. President Trump issued EO 13850 in November 2018 prohibiting US persons from dealing with any person designated under the EO 13850, including the blocking of property of any such person. The purpose of the EO 13850 is to target rampant corruption within the Venezuelan government, which according to the US government has exacerbated “the economic and humanitarian crises afflicting the Venezuelan people.”

As a result, US persons are now broadly prohibited from engaging in transactions with PDVSA, including its majority-owned subsidiaries. Previously, PDVSA had only been subject to limited sanctions imposing restrictions on certain debt and equity transactions.

In light of the impact the blacklisting of an entity such as PDVSA would have on the United States and beyond, OFAC rolled out a slew of general licenses (summarized below) authorizing US persons to engage in certain transactions involving PDVSA and its majority-owned subsidiaries – two of which PDV Holding, Inc. (PDVH) and CITGO Holding Inc. (CITGO) are US entities. The general licenses are particularly important as Venezuela is the United States’ third largest source of oil imports. The authorizations provided in the general licenses cross-reference one another, so it is essential to closely evaluate potential transactions to determine which authorization applies to a specific transaction.

General Licenses

General License 3A. Authorizes all transactions related to the provision of financing for, and other dealings in certain bonds prohibited by EO 13808 and listed in the GL 3A’s Annex, and all transactions related to the provision of financing for, and other dealings in bonds issued prior to August 25, 2017, by US person entities owned or controlled by the Government of Venezuela other than Nynas AB, PDVH, CITGO and any of their subsidiaries. GLs 7, 9, and 13, described below, authorize, at least on a temporary basis, certain transactions with Nynas AB, PDVH, CITGO, and their subsidiaries.

General License 7. Section (a) authorizes all transactions prohibited by EO 13850 related to PDVH and CITGO (including their subsidiaries) where the only PDVSA entities involved are PDVH and CITGO. This particular authorization expires on July 27, 2019. Section (b) further authorizes PDVH and CITGO (including their subsidiaries) to engage in all transactions prohibited by EO 13850 that are ordinarily incident and necessary to the purchase and importation of petroleum and petroleum products from PDVSA and its majority-owned subsidiaries. This particular authorization expires on April 28, 2019. Any related payments for the direct or indirect benefit of a blocked person other than PDVH and CITGO (including their subsidiaries) must be paid into an blocked, interest-bearing account in the United States.

General License 8. Authorizes all transactions and activities ordinarily incident and necessary to the operations of the following US companies in Venezuela involving PDVSA: Chevron Corporation; Halliburton; Schlumberger Limited; Baker Hughes (a GE company); and Weatherford International. However, it does not however authorize the exportation or reexportation of diluents from the United States to Venezuela. This general license expires on July 27, 2019.

General License 9. Authorizes all transactions prohibited by Section 1(a)(iii) EO 13808 and EO 13850 that are ordinarily incident and necessary to dealings in any PDVSA debt (including its majority-owned subsidiaries and certain bonds in GL 9’s Annex) issued prior to August 25, 2017, provided that any divestment or transfer of any holdings in such debt must be to a non-US person. GL 9 also authorizes all transactions prohibited by Section 1(a)(iii) EO 13808 that are ordinarily incident and necessary to dealings in any bonds issued by PDVH, CITGO or Nynas AB prior to August 25, 2017. GL 9 does not authorize US persons to sell PDVSA-related debt to, to purchase or invest in debt of, or to facilitate such transactions with, directly or indirectly, entities blocked by EO 13850, including PDVSA and its majority-owned subsidiaries, other than that ordinarily incident and necessary to the divestment or transfer of PDVSA-related debt.

General License 10. Authorizes US persons in Venezuela to purchase refined petroleum products for personal, commercial, or humanitarian uses from PDVSA and its majority-owned subsidiaries.It does not authorize any commercial resale, transfer, exportation or reexportation of refined petroleum products.

General License 11. Authorizes a wind down period for US person employees and contractors of non-US entities located in a country other than the United States or Venezuela to engage in transactions prohibited by EO 13850 that are ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements involving PDVSA and its majority-owned subsidiaries. US financial institutions are authorized to reject, rather than block, funds transfers involving PDVSA and non-US entities located outside the United States and Venezuela, provided that the funds originate and terminate outside the United States and that the originator and/or beneficiary are not US persons, and the funds are not destined for a blocked account held by a US financial institution. This GL does not extend to transactions involving Nicaragua-based PDVSA subsidiary, ALBA de Nicaragua (ALBANISA) or its majority-owned subsidiaries. GL 11expires on March 29, 2019.

General License 12. Authorizes a wind down period until April 28, 2019, for all transactions prohibited by EO 13850 that are ordinarily incident and necessary to the purchase and importation into the United States of petroleum and petroleum products from PDVSA and its majority-owned subsidiaries. Any related payments for the direct or indirect benefit of a blocked person must be paid into an blocked, interest-bearing account in the United States. GL 12 also more broadly authorizes all transactions ordinarily incident and necessary to the wind down of operations, contracts, or other agreements, in effect prior to January 28, 2019, including the importation into the United States of goods, services, or technology (beyond petroleum and petroleum products) until February 27, 2019.  Note that GL 12 does not authorize  exportation or reexportation of any diluents from the US to Venezuela, PDVSA or its subsidiaries or any transactions with ALBANISA.

General License 13. Authorizes all transactions prohibited by EO 13850 where the only PDVSA entities involved are Nynas AB (a Swedish PDVSA subsidiary) and its subsidiaries. GL 13 expires on July 27, 2019. Except as authorized by General License 11 (above), any payments for the direct or indirect benefit of a blocked person other than Nynas AB or its subsidiaries that are ordinarily incident and necessary to give effect to authorized Nynas AB-related transactions and that come into the possession of a US person must be paid into an blocked, interest-bearing account in the United States.

General License 14. Authorizes all transactions that are for the conduct of the official business of the US Government.

We continue to monitor the situation in Venezuela, as well as further information on the general licenses, PDVSA’s designation, and the new executive order. OFAC has indicated that it will be publishing additional guidance in the form of FAQs in conjunction with the designation.