February 1, 2019: OFAC updates Venezuela sanctions FAQs, General Licenses

On Friday, OFAC issued two Venezuela-related notices, which amended a number of Frequently Asked Questions, added a bunch of new ones, and amended 2 of the existing General Licenses…

Amended FAQs:

595. What does Venezuela-related General License 5 authorize?

The President issued Executive Order (E.O.) 13835 on May 21, 2018.  Subsection 1(a)(iii) of E.O. 13835 prohibits U.S. persons from being involved in the transfer by the Government of Venezuela (GOV) of any equity interest in any entity owned 50 percent or more by the GOV, as well as related transactions in the United States.  Subsequent to the issuance of E.O. 13835, OFAC received inquiries about how and whether subsection 1(a)(iii) of E.O. 13835 could affect the ability to enforce bondholder rights to the CITGO shares serving as collateral for the Petróleos de Venezuela, S.A. (PdVSA)  2020 8.5 percent bond.  Subsection 1(a)(iii) of E.O. 13835 hinders the Maduro regime’s ability to dispose of interests in entities owned 50 percent or more by the GOV at terms unfavorable to the Venezuelan people.  Authorizing bondholders to enforce rights related to the PdVSA 2020 8.5 percent bond prevents the Maduro regime from using the E.O. to default on its bond obligations without consequence.  In order to provide that authorization, OFAC issued General License 5, which removed E.O. 13835 as an obstacle to holders of the PdVSA 2020 8.5 percent bond gaining access to their collateral, and keeps sanctions pressure where it belongs – on the Maduro regime.  General License 5 continues in effect and remains operative despite OFAC’s designation of PdVSA on January 28, 2019.  Separately, General License 9, issued on January 28, 2019, authorizes transactions involving certain PdVSA debt, including the PdVSA 2020 8.5 percent bond.  Because transactions related to the PdVSA 2020 8.5 percent bond are authorized pursuant to General License 5 and General License 9, holders of this bond would not be limited from gaining access to their collateral.  This would include U.S. person bondholders who may be recipients of such collateral.  [01-31-2019]

648. What types of activities are considered “maintenance” as the term is used in Venezuela-related General Licenses 6 and 11?

 

As a general matter, the authorization for “maintenance” in General Licenses 6 and 11 includes all transactions ordinarily incident to the continuity of operations, provided that, in the case of General License 11, U.S. financial institutions may not process transactions to or for the benefit of Petróleos de Venezuela, S.A. (PdVSA) or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest. (See FAQ 654 for further information on this requirement). Additionally, for the purposes of General Licenses 6 and 11, the authorization for “maintenance” generally includes all transactions and activities ordinarily incident to performing under a contract or agreement in effect prior to the sanctions effective date (in the case of General License 6, January 8, 2019, and in the case of General License 11, 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. Notwithstanding the absence of a contract or agreement in effect prior to the applicable sanctions effective date, the authorization for “maintenance” also generally includes 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. OFAC will consider the transaction history between the party, or any intermediary party, and the blocked entity prior to the applicable sanctions effective date in assessing whether activity is consistent with past practices. 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.

For example, transactions and activities authorized by General Licenses 6 and 11 could include entering into or renewing contracts, paying invoices, or receiving services, consistent with the terms of the relevant general license, that were initiated after the applicable sanctions effective date involving the blocked entities if such activity is ordinarily incident and necessary to contracts in effect prior to the applicable sanctions effective date (provided the terms are consistent with past practices, as demonstrated by transaction history). Similarly, transactions and activities that are not within the framework of a preexisting agreement may be considered “maintenance” if such activity is consistent with the transaction history between the person and the blocked entity prior to the applicable sanctions effective date. Conversely, General Licenses 6 and 11 would not authorize entering into contracts, paying invoices, or receiving services involving the blocked entities where there was no preexisting relationship between a person and a blocked entity or where the contemplated activity exceeds past practices that existed between the party and the blocked entity prior to the applicable sanctions effective date as demonstrated by transaction history. [01-31-2019]

New FAQs

650. What is the expected level of due diligence associated with ensuring that transfers or divestment of debt in certain blocked persons are consistent with the terms of Venezuela-related General License 9?

General License 9 (which has been superseded by General License 9A) requires that any divestment or transfer by U.S. persons of debt of Petróleos de Venezuela, S.A. (PdVSA) (or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest), that was issued prior to August 25, 2017, be to a non-U.S. person.  General License 9 also authorizes U.S. persons to facilitate the transfer or divestment of such debt, so long as the divestment or transfer of any holdings in such debt by a U.S. person is to a non-U.S. person.  Financial institutions or registered broker-dealers in securities may rely upon the information ordinarily available to them for purposes of conducting the activities authorized under General License 9. 

Consistent with OFAC FAQ 116, if a U.S. broker or financial institution involved in a transfer or divestment of such debt has information in its possession leading it to know or have reason to know that the buyer is a U.S. person, then the U.S. broker or financial institution will be held responsible if it does not take appropriate steps to ensure that the trade is not consummated.  OFAC expects U.S. persons to conduct due diligence on their own direct customers, and OFAC will consider the totality of the circumstances surrounding the processing of the transaction to determine what, if any, enforcement action to take.  [01-31-2019]


651. What happened to the Petróleos de Venezuela, S.A. (PdVSA) bonds, or bonds issued by any entity directly or indirectly owned 50 percent or more by PdVSA, that were previously included in the Annex to General License 3?  

Bonds issued by PdVSA or any entity in which it owns, directly or indirectly, a 50 percent or greater interest that was previously listed in the Annex to General License 3 (which has been superseded by General License 3B) are now listed in the Annex to General License 9.  All Venezuela-related general licenses are provided on OFAC’s website (www.treasury.gov/ofac) on the Venezuela-related Sanctions page.  [01-31-2019]


652.  Is it permissible for mutual funds and exchange traded funds (collectively, “funds”) that are U.S. persons to buy, sell, or otherwise engage in transactions related to debt, equity, or other holdings in an entity that appears on OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List), or of an entity owned 50 percent or more, individually or in the aggregate, by an individual or entity on the SDN List?  

No.  A fund that is a U.S. person 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.  A U.S. fund that contains such blocked holdings generally is not itself considered a blocked entity, and U.S. persons may continue to invest in the fund and the fund may continue to operate.  The fund may divest itself of blocked holdings only with OFAC authorization.  [01-31-2019]


653. I am the manager of a Synthetic Exchange Traded Fund (ETF), which tracks a basket of debt, equity or other holdings in order to provide a return approximating the returns on that basket, but which does not actually hold the underlying debt, equity, or other holdings contained in the basket.  May I continue to offer such funds, and may U.S. persons trade in shares of these funds, if the underlying basket being tracked contains holdings in an entity or entities that appear on OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List), or of an entity owned 50 percent or more, individually or in the aggregate, by an individual or entity on the SDN List?  

Yes, 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.  U.S. and non-U.S. persons may continue to constitute, offer, and trade in funds that include only synthetic risk in debt, equity, or other holdings in blocked persons, provided the underlying basket being tracked includes less than a predominant share by value of debt, equity, or other holdings in blocked persons.  [01-31-2019].


654. With regard to Venezuela-related General License 11, “Authorizing Certain Activities Necessary to Maintenance or Wind Down of Operations or Existing Contracts with Petróleos de Venezuela, S.A.,” are U.S. financial institutions required to reject funds transfers involving both Petróleos de Venezuela, S.A. (PdVSA) or entities owned, directly or indirectly, 50 percent or more by PdVSA, and a non-U.S. entity located in a country other than the United States or Venezuela?

General License 11 authorizes, with certain exceptions, U.S. person employees of non-U.S. entities located in a country other than the United States or Venezuela to engage in 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 entities owned, directly or indirectly, 50 percent or more by PdVSA that were in effect prior to January 28, 2019.  The authorization is valid through 12:01 a.m. eastern daylight time on March 29, 2019.  In accordance with paragraph (b) of General License 11, and for purposes of activities authorized under General License 11 only, U.S. financial institutions are authorized to reject, rather than block, funds transfers that involve both PdVSA or any entity owned, directly or indirectly, 50 percent or more by PdVSA and a non-U.S. entity located in a country other than the United States or Venezuela, provided that: (i) the funds transfers originate and terminate outside the United States; (ii) the originator and the beneficiary are non-U.S. persons; (iii) the funds are not destined for a blocked account on the books of a U.S. person; and (iv) the funds transfers otherwise are effected in accordance with paragraph (c) of General License 11.  U.S. financial institutions are not required to block funds transfers meeting the conditions in paragraph (b) of General License 11, but they are prohibited from processing such transactions. [01-31-2019]


655. Can U.S. persons purchase petroleum and petroleum products from Petróleos de Venezuela, S.A. (PdVSA) or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest?

Until 12:01 a.m. eastern daylight time, April 28, 2019, U.S. persons are authorized to engage in all transactions and activities that are ordinarily incident and necessary to the purchase and importation of petroleum and petroleum products from PdVSA or from entities owned 50 percent or more by PdVSA, provided that any payments to PdVSA, entities in which it owns, directly or indirectly, a 50 percent or greater interest, or other blocked persons for such purchases are made into a blocked, interest-bearing account located in the United States in accordance with 31 C.F.R. § 591.203 (unless authorized by other Venezuela-related general licenses).  After the expiration of the 90-day wind-down period, as described in General License 7 and General License 12, the purchase by U.S. persons of petroleum and petroleum products from PdVSA or any entity in which it owns, directly or indirectly, a 50 percent or greater interest will be prohibited absent authorization from OFAC (see also General License 10 and FAQ 656 authorizing the purchase of refined petroleum products by U.S. persons in Venezuela, and General License 8 authorizing purchases of petroleum and petroleum products from PdVSA or any entity in which it owns, directly or indirectly, a 50 percent or greater interest for certain listed entities that are ordinarily incident and necessary to their operations in Venezuela).  [01-31-2019] 


656. Can U.S. persons in Venezuela purchase gasoline or other refined petroleum products from Petróleos de Venezuela, S.A. (PdVSA) or any entity in which it owns, directly or indirectly, a 50 percent or greater interest? 

Yes.  Venezuela-related General License 10 authorizes U.S. persons in Venezuela to purchase refined petroleum products, including gasoline, for personal, commercial, or humanitarian uses from PdVSA, or any entity in which it owns, directly or indirectly, a 50 percent or greater interest.  General License 10 authorizes, among other things, purchases of refined petroleum products by U.S. commercial airlines providing passenger or cargo services in Venezuela for the purposes of fueling aircraft in Venezuela.  General License 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 10, however, does not authorize U.S. persons to purchase refined petroleum products in Venezuela from PdVSA for purposes of executing a commercial transaction to resell, transfer, export, or reexport such refined petroleum products.  [01-31-2019]


657. I am a non-U.S. entity that purchases petroleum and petroleum products from Petróleos de Venezuela, S.A. (PdVSA) or an entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest.  Am I now prohibited from purchasing petroleum and petroleum products from these companies?

Transactions to purchase petroleum and petroleum products from PdVSA or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest, and that involve U.S. persons or any other U.S. nexus (e.g., transactions involving the U.S. financial system or U.S. commodity brokers) must be wound down by April 28, 2019 pursuant to Venezuela-related General License 12.  In addition, under General License 11, U.S. person employees and contractors of non-U.S. companies located in a country other the United States or Venezuela are authorized to engage in certain maintenance or wind-down transactions with PdVSA, or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest, through 12:01 a.m. eastern daylight time, March 29, 2019.  (See FAQ 654.)  [01-31-2019]


658. Can U.S. persons purchase, or engage in other transactions including swaps and non-cash transactions involving the purchase or exchange of, petroleum and petroleum products, if Petróleos de Venezuela, S.A. (PdVSA) or any entity in which it owns, directly or indirectly, a 50 percent or greater interest is not directly involved in the transaction?

After 12:01 a.m. eastern daylight time, April 28, 2019, as described in Venezuela-related General License 7 and General License 12, 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 percent or greater interest has a direct or indirect interest will be prohibited for U.S. persons absent authorization from OFAC (see also General License 10 and FAQ 656).  Prior to April 28, 2019, 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 percent 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.  In the case of blocked non-cash proceeds, please reach out to OFAC for further guidance. [01-31-2019]


659. Does Venezuela-related General License 12 authorize U.S. persons to export goods, services, and technology from the United States to Petróleos de Venezuela, S.A. (PdVSA) or any entity in which it owns, directly or indirectly, a 50 percent or greater interest during the wind-down period?

General License 12 authorizes, until 12:01 a.m. eastern standard time, February 27, 2019, all transactions and activities that are ordinarily incident and necessary to the wind down of operations, contracts, or other agreements that were in effect prior to January 28, 2019.  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 percent or greater interest (other than ALBA de Nicaragua (ALBANISA) or any entity in which ALBANISA owns, directly or indirectly, a 50 percent or greater interest). [01-31-2019] 


660. When will sanctions be lifted on Petróleos de Venezuela, S.A. (PdVSA) or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest?

The path to sanctions relief for PdVSA and its subsidiaries is through the expeditious transfer of control of the company to Interim President Juan Guaidó or a subsequent, democratically elected government that is committed to taking concrete and meaningful actions to combat corruption, restore democracy, and respect human rights.  A bona fide transfer of control will ensure that the assets of Venezuela are preserved for the country’s people, rather than misused and diverted by former President Nicolas Maduro.  Treasury will continue to use its economic tools to support Interim President Guaidó, the National Assembly, and the Venezuelan people’s efforts to restore their democracy. [01-31-2019] 


661. What does General License 9A authorize with respect to Petróleos de Venezuela, S.A. (PdVSA) securities and what are the implications for U.S. and non-U.S. persons?

General License 9A authorizes U.S. persons to engage in all transactions and activities that are ordinarily incident and necessary to dealings in any debt (including, but not limited to, the bonds listed in the Annex to General License 9A) of, or equity in, PdVSA, or any entity directly or indirectly owned 50 percent or more by PdVSA (together, PdVSA securities), that was issued prior to August 25, 2017, provided that if a U.S. person decides to sell or transfer any interests in such securities, it must sell or transfer the interests to a non-U.S. person. 

Paragraph (c) of General License 9A authorizes all transactions and activities that are ordinarily incident and necessary to facilitating, clearing, and settling trades of holdings in the PdVSA securities described in paragraph (a) of General License 9A, provided such trades were placed prior to 4:00 p.m. eastern standard time on January 28, 2019; this authorization aims to ensure that trades that were placed prior to the imposition of blocking sanctions on PdVSA are allowed to settle in the ordinary course, irrespective of whether the sale or transfer is to a non-U.S. person. 

Paragraph (d) of General License 9A authorizes all transactions and activities, including transactions in securities and security derivatives, that are ordinarily incident and necessary to the wind down of financial contracts or other agreements that were entered into prior to 4:00 p.m. eastern standard time on January 28, 2019, involving, or linked to, PdVSA securities issued prior to August 25, 2017, through 12:01 a.m. eastern standard time on March 3, 2019.  This authorization allows certain financial contracts and agreements that were entered into prior to the imposition of blocking sanctions on PdVSA that involve or are linked to PdVSA securities to be wound down, including resolving the purchase and sale of securities, securities lending, repurchase agreements, and swaps and derivative contracts in securities.

Paragraph (e) of General License 9A authorizes all transactions and activities prohibited by Section 1(a)(iii) of Executive Order 13808 or Executive Order 13850 that are ordinarily incident and necessary to dealings in any bonds issued by PDV Holdings, Inc., CITGO Holdings, Inc., Nynas AB, or any of their subsidiaries, prior to August 25, 2017.

U.S. persons may continue to hold their interests in PdVSA debt and equity issued prior to August 25, 2017, but are subject to certain requirements on the sale of those interests in the secondary market.  General License 9A does not generally authorize U.S. persons to purchase or acquire new interests in PdVSA bonds or other debt or equity, and as a result, such purchases are prohibited absent authorization from OFAC.  However, to the extent that divesting or transferring PdVSA-related debt or equity from U.S. persons to non-U.S. persons requires engaging in certain securities-related transactions with PdVSA and its 50 percent or more owned subsidiaries, such as purchasing or settling purchases of PdVSA debt or equity, paragraph (f)(2) of General License 9A authorizes U.S. persons to engage in such transactions.

While non-U.S. persons may continue to deal in PdVSA debt and equity, to the extent transactions involve U.S. persons or the U.S. financial system, such transactions must comply with the terms of General License 9A and may not involve sales of interests in such securities to U.S. persons (other than as described above) as U.S. persons are largely prohibited from purchasing such interests.    [02-01-2019] 


662. What does General License 3B authorize with respect to Government of Venezuela debt, and what are the implications for U.S. and non-U.S. persons?

General License 3B authorizes U.S. persons to engage in all transactions related to, the provision of financing for, and other dealings in the bonds specified in the Annex to General License 3B, provided that any divestment or transfer of, or facilitation of divestment or transfer of, any holdings in such bonds be to a non-U.S. person. 

Paragraph (b) of General License 3B authorizes all transactions and activities that are ordinarily incident and necessary to facilitating, clearing, and settling trades of holdings in the bonds specified in the Annex to General License 3B, provided such trades were placed prior to 4:00 p.m. eastern standard time on February 1, 2019; this authorization aims to ensure that trades that were placed prior to the issuance of General License 3B are allowed to settle in the ordinary course, irrespective of whether the sale or transfer is to a non-U.S. person.  

Paragraph (c) of General License 3B authorizes all transactions and activities, including transactions in securities and security derivatives, that are ordinarily incident and necessary to the wind down of financial contracts or other agreements that were entered into prior to 4:00 p.m. eastern standard time on February 1, 2019, involving, or linked to, the bonds specified in the Annex to General License 3B, through 12:01 a.m. eastern standard time on March 3, 2019.  This authorization allows certain financial contracts and agreements that were entered into prior to the issuance of General License 3B that involve or are linked to the bonds specified in the Annex to General License 3B to be wound down, including resolving the purchase and sale of securities, securities lending, repurchase agreements, and swaps and derivative contracts in securities.

Paragraph (d) of General License 3B authorizes all transactions related to, the provision of financing for, and other dealings in bonds that were issued both (i) prior to August 25, 2017 (the effective date of E.O. 13808), and (ii) by U.S. person entities owned or controlled, directly or indirectly, by the Government of Venezuela, other than Nynas AB, PDV Holding, Inc., CITGO Holding, Inc., and any of their subsidiaries.

While non-U.S. persons may continue to deal in the bonds specified in the Annex to General License 3B, to the extent transactions involve U.S. persons or the U.S. financial system, such transactions must comply with the terms of General License 3B and may not involve sales of any interests in such bonds to U.S. persons (other than as described above) as U.S. persons are largely prohibited from purchasing such interests.   [02-01-2019] 

The amended General Licenses will be posted in separate posts.

Links:

OFAC Notice #1, #2

Amended FAQs: 595, 648

New FAQs – PdVSA-related (11), OFAC Notice #2 FAQs (2)

General License 3B, 9A

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s