Leigh Crestohl and Stephanie Limaco examine foreign investment in Venezuela and sanctions challenges in WorldECR

September 13 2021

This article was originally published in WorldECR's Issue 102. 

Foreign investment in Venezuela and sanctions challenges

There has been some renewed interest in Venezuela by high-risk appetite investors in the last year. According to Reuters, at least two private equity funds (3B1 Guacamaya Funds and Knossos Asset Management) were seeking to acquire stakes in Venezuelan companies that remained alive despite the economic crisis in the country.[1] Last year, some companies acquired private companies / branches in Venezuela, including DirectTV and Cargill,[2] and an economic adviser at London’s EM Funding has said that the opportunities for profit in the first phase of economic recovery are “immensely high”.[3]

One of the main reasons for this incipient interest is the optimism that the Biden administration may ease (at least partially) sanctions on Venezuela. Although the country has vast oil and gas reserves and natural resources, any potential investor in the country would need to be concerned about navigating multiple concurrent sanctions regimes.

Potential sanctions relief

As mentioned, recent events provide hope that the Biden administration could relieve sanctions on Venezuela. Recently, the Venezuelan Government moved to house arrest a group of American Citgo executives, imprisoned on corruption charges. It reached an agreement with opposition representatives for a new formation of the Venezuela’s National Electoral Council and also attained an agreement with the World Food Programme. These acts were seen by Democratic Rep. Gregory Meeks as “important gestures of goodwill that the US government should recognize”.[4]

There are reasons for hope. A report of the Congressional Research Service (“CRS”) dated 26 May 2021 indicates that US officials are currently reviewing sanctions on Venezuela, although recognising that they have also stated that “they are in no rush to lift sanctions.”[5] Biden officials were reportedly reviewing existing sanctions, and that the Biden administration may seek alternative measures, such as more targeted sanctions, asset forfeitures and indictments of Maduro officials.[6]

On 25 June, the US, the EU and Canada released a statement indicating willingness to review sanctions policies if there is meaningful progress in a comprehensive negotiation with participation “from all stakeholders”.[7] In this regard, the Venezuelan Government and the opposition are preparing for new negotiations in Mexico, with Norwegian mediation, which have been approved by the US.[8]

Sanctions relief for Venezuela, especially with regards to oil, would be very important for foreign investors because the country is subject to several sanctions regimes. The US one undoubtedly being the most severe.

US sanctions regime[9]

The US has imposed a broad range of sanctions on Venezuela – they apply not only to US persons, but non-US entities are also at risk of secondary sanctions.[10] Through primary sanctions, US persons are prohibited from entering into certain transactions with Venezuelan Specially Designated Nationals (“SDN”). Secondary sanctions go further and affect third parties, such as EU or UK companies, which are exposed to the risk of being excluded from the US market (including the US financial system). The Trump administration was a big proponent of secondary sanctions and repeatedly imposed them as a foreign policy tool. However, the US government has started to ease sanctions on Venezuela. Recently, it authorised some exports and re-exports of liquified petroleum gas (LPG) to Venezuela,[11] which had been prohibited during the Trump administration. A quick review of the SDN list available on the website of the US Department of the Treasury shows the breadth of the sanctions programme. It includes the State oil company, Petróleos de Venezuela (PDVSA) and State financial institution Banco de Desarrollo Económico y Social de Venezuela (BANDES) [12]   As of 22 January 2021, the programme included broader sectoral sanctions, such as the gold and oil sector, and any program or project administered by the Government of Venezuela.[13]

UK sanctions regime

UK legislation relating to sanctions is primarily found in Regulations made under the Sanctions and Anti-Money Laundering Act 2018. The UK sanctions regime relating to Venezuela is contained in the Venezuela (Sanctions) (EU Exit) Regulations 2019 (“Venezuelan Sanctions Regulations”), and its amendments contained in the Sanctions (EU Exit) (Miscellaneous Amendments) (No. 2) Regulations 2020 and Sanctions (EU Exit) (Miscellaneous Amendments) (No. 4) Regulations 2020.

The Venezuelan Sanctions Regulations state that the Secretary of State may designate a person if he has reasonable grounds to suspect that the person has 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.[14] A person could also be designated, for example, for 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.[15]

Unlike US sanctions, UK sanctions are enforceable against persons within the UK, and UK persons abroad – i.e. the UK regime does not include secondary sanctions. The list of Venezuela sanctions targets is more limited in scope than the US sanctions list. It mainly consists of certain government officials and authorities and, so far, it has been limited to natural persons and not included commercial entities.[16] 

It should be noted that, although the UK sanction regime against Venezuela is more targeted than the US sanctions regime, a UK-based investor does not need to be in the US, doing business in the US, to feel the impact of US sanctions, given their extraterritorial enforcement. Many entities will be reluctant to deal with companies that have been sanctioned by the US, or which are operating in a designated economic sector, even if the transaction has no US nexus. Litigation in the English Courts shows the complexities which may arise related to the performance of contractual obligations for and by individuals or entities sanctioned by the US but not the UK. In Banco San Juan Internacional v Petróleos de Venezuela[17], the English High Court reinstated that illegality under foreign law (such as US sanctions) does not in general excuse a party from performance of an English law contract. These are the types of practical considerations that international investors may be keen to avoid.

EU sanctions regime

The EU began imposing sanctions against Venezuela in 2017, with Council Regulation (EU) 2017/2063 and Council Decision (CFSP) 2017/2074 concerning restrictive measures in view of the situation in Venezuela, both dated 13 November 2017. These restrictive measures include an arms and related material embargo, and provide the legal framework for the targeted listing of persons. The EU sanctions regime is broadly similar to the UK regime, the UK Regulations mentioned above having come into effect after Brexit on 31 December 2020.  These are of substantially the same effect as the relevant pre-existing EU legislation and related UK Regulations.[18]

Under the Council Regulation, natural or legal persons can be listed for being responsible for serious human rights violations, repression of civil society and opposition and for undermining democracy or the rule of law in Venezuela, or for being associated with people doing so.[19] Persons so designated will have their funds and assets frozen, and no funds or economic resources can be made available – directly or indirectly - to them.[20] Individuals can also be listed for the purpose of being subject to travel restrictions.[21]

Similar to the UK, the EU sanctions regime does not apply extraterritorially, but only within the territory of the European Union,  to nationals of a Member State, or to an entity incorporated or constituted under the law of a Member State.[22] The list of individuals subject to EU sanctions related to Venezuela is also limited in scope and it does not include commercial entities.[23] Further, the Court of Justice of the European Union has recently indicated that Venezuela has standing to bring a legal complaint against EU sanctions, so Venezuela's challenge against them will be reviewed on the merits.[24] Potential investors will likely be interested in the outcome of this case.

Foreign Investments in Venezuela - challenges

Beyond external factors, a possible change of approach of the Venezuelan Government, including the liberalisation of the economy in the last few years and the anti-blockade law, could also open a path to increased foreign investment in the country and in the oil industry. It is unsurprising that, given the latest developments, some investors with higher risk tolerance could be tempted to invest in the country’s companies in the hope of securing bigger wins should the political and economic situation improve.

Companies interested in investing in Venezuela will need to navigate multiple sanctions regimes at the same time, which could change depending on the political landscape at the national and international level. Potential investors should, therefore, take legal advice from experts on sanctions, compliance and export control issues. Further, investors would be wise to obtain comprehensive legal advice, including from a local counsel, as to the best way to structure their investments in order to achieve maximum legal protection. Choice of law and forum selection clauses, for instance, shall be very carefully drafted.

The approach that the Biden administration takes as consequence of its ongoing review on sanctions on Venezuela will clearly be followed with interest. A more targeted position, such as the adopted by the UK and the EU, would likely be welcomed by foreign investors that need also to consider generally the Venezuelan FDI legal framework and the extent of available investment protection.

 

[1] Reuters, “Private equity funds eye Venezuela acquisition on hopes Biden could ease sanctions”, at: https://www.reuters.com/article/us-venezuela-investors-idCAKBN2CO0WF

[2] Reuters, “Cargill says it has agreed to sell its Venezuela unit to Phoenix Global Investment and local firm Puig”, at: https://www.reuters.com/article/venezuela-carill-idLTAL1N2HW1Y8; Cámara Colombo-Venezolana, “Renace la inversion extranjera en Venezuela”, at: http://www.comvenezuela.com/actualidad-binacional/268-renace-inversion-extranjera-venezuela.

[3] Bloomberg, “Scion of Billionaire Family Hunts for Cheap Assets in Venezuela”, at: https://www.bloomberg.com/news/articles/2021-03-22/scion-of-billionaire-family-hunts-for-cheap-assets-in-venezuela

[4] U.S. House of Representatives Committee on Foreign Affairs, Press Releases, “Chairman Meeks’ Statement on Venezuela’s National Electoral Council”, 5 May 2021, at: https://foreignaffairs.house.gov/2021/5/chairman-meeks-statement-on-venezuela-s-national-electoral-council

[5] CRS, “Venezuela: International Efforts to Resolve the Political Crisis”, updated 26 May 2021, at: https://crsreports.congress.gov/product/pdf/IF/IF11216.

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

[7] US Department of State, “US–EU– Canada: Joint Statement on Venezuela”, 25 June 2021, at: https://www.state.gov/u-s-eu-canada-joint-statement-on-venezuela.

[8] Reuters, “Mexico president confirms plan to host Venezuela talks”, at: https://www.reuters.com/world/americas/mexico-host-negotiations-between-venezuelan-government-opposition-2021-08-05/

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

[10] For instance, OFAC has sanctioned CEIEC and Rosneft Trading S.A. for supporting the Venezuelan government (CEIEC) and for operating in the oil sector of the Venezuelan economy (Rosneft). See: https://home.treasury.gov/news/press-releases/sm1194, and https://home.treasury.gov/news/press-releases/sm909.   

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

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

[13] CRS, “Venezuela: Overview of U.S. Sanctions”, available at: https://crsreports.congress.gov/product/pdf/IF/IF10715; USDT, FAQS, at: https://home.treasury.gov/policy-issues/financial-sanctions/faqs/topic/1581; Executive Order No. 13850 of 1 November 2018.

[14] Venezuelan Sanctions Regulations, s. 6.

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

[16] 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

[17] [2020] EWHC 2145 (Comm).

[18] Foreign, Commonwealth & Development Office, “UK sanctions relating to Venezuela”, at: https://www.gov.uk/government/collections/uk-sanctions-on-venezuela

[19] Council Regulation (EU) 2017/2063, article 8, paragraphs 3 and 4.

[20] Council Regulation (EU) 2017/2063, article 8, paragraphs 1 and 2.

[21] Council Decision (CFSP) 2017/2074, article 6, paragraph 1.

[22] Council Regulation (EU) 2017/2063, article 20.

[23] See EU Sanctions Map, Venezuela, at: https://www.sanctionsmap.eu/api/v1/pdf/regime?id[]=44&include[]=lists&include[]=acts&include[]=guidances&lang=en

[24] Judgment of the Court (Grand Chamber), 22 June 2021, Case C-872/19 P.

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