Leigh Crestohl and Stephanie Limaco discuss investing in Venezuela and the sanctions and risks associated in Thomson Reuters Regulatory Intelligence

September 16 2021

This article was originally published in Thomson Reuters Regulatory Intelligence and can be accessed here

Recent interest in Venezuela by private companies

The last year has seen some renewed interest in Venezuela by certain corporate investors with high-risk appetites, hopeful that investing in the country will pay-off despite the risks. There are reports that, in the last months, two private equity funds were seeking to acquire shares in Venezuelan companies and invest in Venezuelan financial assets,[1] and that China’s top oil producer CNPC might be considering a return to the country.[2] This comes at a time when the Venezuelan Government is actively trying to attract fresh foreign investments.[3]

One of the main reasons for this incipient interest may be optimism that the Biden administration may revise US sanctions on Venezuela, or at least introduce more exceptions or licenses. The recent negotiations being held between the Venezuelan Government and the opposition, a process welcomed by the US, the EU and Canada, has reignited hope that there may be some relief from sanctions imposed against Venezuela by several countries.

Sanctions regimes on Venezuela

Venezuela is subject to several sanctions regimes from different countries, including the US, the UK, the EU, Canada, Switzerland. These different regimes vary, although the US sanctions programme is undoubtedly the strictest.

US sanctions regime[4]

The US has imposed a wide range of sanctions on Venezuela. US persons are prohibited from entering into transactions or dealings with the Government of Venezuela and other entities, and from engaging in certain activities with the country. Non-US entities may also be at risk of secondary sanctions, which would place them at risk of being excluded from the US financial system (and the US market in general).

US sanctions on Venezuela were increased during the Trump administration, which was a strong supporter of sanctions and frequently imposed them as a foreign policy tool. Among other measures, US sanctions: restrict access to US financial markets by the Venezuelan Government;[5] prohibit transactions related to the purchase of Venezuelan debt and to the transfer by the Government of Venezuela of equity interest in entities in which it has 50% or greater ownership interest;[6] allow the imposition of sanctions on persons operating in the gold or the oil sector of Venezuela (additional sectors may be established);[7] and authorise the designation of persons that assist or support the Venezuelan Government.[8]

US sanctions have been particularly harsh, and apply with extraterritorial effect, in the oil sector. For instance, non-U.S. persons can be added to the SDN list if they materially assist, sponsor or provide financial, material or technological support to PDVSA.[9] These sanctions have made it much more difficult for the state-owned oil company to complete petroleum sales and export transactions.[10] However, the US Government has started to ease sanctions and in July 2021 it authorised some exports and re-exports of LPG to Venezuela.[11]

UK sanctions regime

In contrast with US sanctions, the application of UK sanctions is subject to a more limited jurisdictional test: they are enforceable against persons carrying out activities within the UK (regardless of their nationality or place of incorporation), and against UK nationals or entities (i.e., incorporated or constituted under the law of any part of the UK) in relation to their activities anywhere in the world. The Office of Financial Sanctions Implementation (OFSI) has so far only imposed penalties for breach of financial sanctions against entities incorporated within the UK.[12]

Further, the UK’s policy is to issue much more targeted sanctions than the US - it mainly consists of some government officials and authorities and, so far, it has not included corporate entities.[13] The UK Consolidated List of Financial Sanctions identifies 36 individuals sanctioned under the UK’s Venezuela Sanctions Regime[14], whereas a quick review of the SDN list available on the US Department of the Treasury’s website shows more than 350 designations under the US regime, including both individuals and legal entities.[15]

The Venezuelan Sanctions Regulations empowers the Secretary of State to designate a person if he has reasonable grounds to suspect that  person to have been involved in serious human rights violations, the repression of civil society and opposition or other actions which undermine democracy or the rule of law in Venezuela.[16] A person may also be designated for being associated with a person who has been so involved, [17] and involvement for these purposes includes being so in whatever way, such as providing financial services or making available funds that could contribute to any such activity, or being involved in the supply to Venezuela of goods or technology which could contribute to any such activity.[18]

Potential sanctions relief

There is some hope that the Biden administration could relieve (at least partially) sanctions on Venezuela. Currently, US officials are reviewing existing sanctions, and one alternative approach may be to opt for more targeted sanctions, asset forfeitures and indictments of Maduro officials.[19]

As talks between the Venezuelan Government and the opposition are being held in Mexico with Norwegian mediation, the US, the EU and Canada have indicated that they welcome the beginning of comprehensive negotiations. Their reiterated willingness to review sanctions policies if there is meaningful progress may incentivise all parties concerned to achieve results.[20]

Sanctions relief would be welcomed by potential investors interested in the country. Investors should be aware that there may be divergent sanctions provisions between the UK, the EU, the US and other countries. Although there may be similarities in the underlying foreign policy being pursued by some countries, policies may diverge over time or evolve according to changing political circumstances. Depending on the jurisdiction in which they are operating, companies should be aware of the different sanctions regimes that might apply, while also taking into account potential extraterritorial application in some cases. Therefore, potential investors would be wise to take prior advice from sanctions, compliance and export control experts.

 

[1] Reuters, “Private equity funds eye Venezuela acquisition on hopes Biden could ease sanctions”, available at: https://www.reuters.com/article/us-venezuela-investors-idCAKBN2CO0WF; Knossos Asset Management, Products & Services, at: http://www.knossosfunds.com/en/services.html.

[2] Bloomberg, “China’s Top Oil Producer Prepares to Revive Venezuela Operations”, at: https://www.bloomberg.com/news/articles/2021-09-01/china-s-top-oil-producer-prepares-to-revive-venezuela-operations

[3] Bloomberg, “Venezuela’s Maduro Pleads for Foreign Capital, Biden Deal in Caracas Interview”, at: https://www.bloomberg.com/news/articles/2021-08-13/maduro-and-opponents-start-new-talks-to-end-venezuela-impasse

[4] Please note that this is a general overview, and that the authors are not US qualified lawyers.

[5] Congressional Research Service (“CRS”), “Venezuela: Overview of U.S. Sanctions”, updated 22 January 2021, available at:  https://sgp.fas.org/crs/row/IF10715.pdf; Executive Order 13808 of 24 August 2017.

It should be noted that the term “Government of Venezuela” is broadly defined, and includes any person owned orc controlled, directly or indirectly, by the Government of Venezuela, the Central Bank of Venezuela or Petróleos de Venezuela (PDVSA), and any person who has acted or purported to act directly or indirectly for or on behalf of them (See Executive Order 13857 of 25 January 2019).

[6] CRS, op.cit; Executive Order 13835 of 24 May 2018.

[7] CRS, op.cit; Executive Order 13850 of 1 November 2018; OFAC, “Venezuela Sanctions – Frequently Asked Questions”, available at: https://home.treasury.gov/policy-issues/financial-sanctions/faqs/topic/1581.

[8] CRS, op.cit; Executive Order 13884 of 5 August 2019.

[9] OFAC, “Venezuela Sanctions – Frequently Asked Questions”, available at: https://home.treasury.gov/policy-issues/financial-sanctions/faqs/topic/1581

[10] CRS, “Venezuela: Background and U.S. Relations”, updated 28 April 2021, available at: https://crsreports.congress.gov/product/pdf/R/R44841.

[11] OFAC, General License No. 40, Authorizing Certain Transactions Involving the Exportation or Reexportation of Liquified Petroleum Gas to Venezuela.

[12] OFSI, Collection “Enforcement of Financial Sanctions”, available at: https://www.gov.uk/government/collections/enforcement-of-financial-sanctions

[13] OFSI, Consolidated List of Financial Sanctions Targets in the UK, Regime: Venezuela, at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/973232/Venezuela.pdf

[14] OFSI, Consolidated List of Financial Sanctions Targets in the UK, at: https://ofsistorage.blob.core.windows.net/publishlive/ConList.pdf. The UK has also sanctioned a few individuals related to the Venezuelan Government under the Global Anti-Corruption Sanctions Regulations 2021 and the Global Human Rights Sanctions Regulations 2020

[15] OFAC, Sanctions List Search, available at: https://sanctionssearch.ofac.treas.gov/

[16] Venezuela (Sanctions) (EU Exit) Regulations 2019 (“Venezuelan Sanctions Regulations”), s. 6. These Regulations have been amended in the Sanctions (EU Exit) (Miscellaneous Amendments) (No. 2) Regulations 2020 and Sanctions (EU Exit) (Miscellaneous Amendments) (No. 4) Regulations 2020.

[17] Ibid, s. 6, paragraph (2)(d).

[18] Ibid, s. 6, paragraph (3)(b) and (d).

[19] Congressional Research Service (“CRS”), “Venezuela: International Efforts to Resolve the Political Crisis”, updated 26 May 2021, at: https://crsreports.congress.gov/product/pdf/IF/IF11216; CRS, “Venezuela: Background and U.S. Relations”, updated 28 April 2021, at: https://crsreports.congress.gov/product/pdf/R/R44841.

[20] US Department of State, “Joint Statement on Venezuelan Negotiations”, 14 August 2021, at: https://www.state.gov/joint-statement-on-venezuela-negotiations/

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