Increased US Sanctions Against Venezuela

February 2019

Venezuela   iStock 583795412 resized

On 28 January 2019 OFAC published a new Executive Order and amendments to Executive Order 13850, the effect of which is to widen US sanctions against Venezuela. Of particular note for Members is the designation of PdVSA on OFAC’s SDN List, and the imposition of winding down provisions for certain activities involving petroleum trade with Venezuela. These developments have implications for US and non-US persons conducting petroleum trades with Venezuela, with corresponding impact on the provision of P&I insurance.

The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated Petroleos de Venezuela, S.A. (PdVSA) pursuant to Executive Order (E.O.) 13850 – “Blocking Property of Additional Persons Contributing to the Situation in Venezuela” which was originally issued on 1 November 2018 (“the EO”).

Concurrently, OFAC issued eight General Licenses, and issued a new Executive Order - “Taking Additional Steps to Address the National Emergency with Respect to Venezuela”. This new Executive Order amends the definition of the term “Government of Venezuela” in EO 13850 to include PdVSA and “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 Nicolas Maduro’s regime."

The general licenses authorise US Persons (individuals and entities) to wind down or continue certain commercial activities, although in some cases the authorisation requires that payments must be made to blocked accounts which PdVSA would not be able to access or use.

Of particular note are the following:

General License 7 – authorises (a) up to 27 July 2019, transactions and activities involving PDV Holding Inc (PDVH), CITGO Holding Inc. and their subsidiaries; (b) up to 28 April 2019, PDVH, CITGO Holding Inc. and their subsidiaries to engage in transactions and activities ordinarily incident and necessary to the purchase and importation of petroleum and petroleum products from PdVSA.

General License 8 – authorises up to 28 July 2019, all transactions and activities ordinarily incident and necessary to the operations in Venezuela involving PdVSA or its subsidiaries for: Chevron Corporation, Halliburton, Schlumberger Limited, Baker Hughes, and Weatherford International.

General License 11 – authorises up to 29 March 2019 (a) US person employees and contractors of non-US entities located outside of the US and Venezuela to engage in all transactions and activities that are ordinarily incident and necessary to the maintenance or wind down of operations, contracts, or other agreements involving PdVSA and its subsidiaries, and (b) U.S. Financial institutions to reject funds transfers involving PdVSA and non-U.S. entities located outside of the U.S. or Venezuela. The GL expressly prohibits dealings with ALBA de Nicaragua (ALBANISA).

General License 12 – authorises (a) up to 28 April 2019, all transactions and activities ordinarily incident and necessary to the purchase and import into the United States of petroleum and petroleum products from PdVSA or its subsidiaries, and (b) up to 28 February 2019, all transactions ordinarily incidental 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 authorised under (a) involving PdVSA or its subsidiaries.

General License 13 – authorises up to 27 July 2019, all transactions where the only PdVSA entities involved are Nynas AB or any of its subsidiaries.

On 31 January 2019 the US released a series of FAQs, which should be read in conjunction with the full terms of the General Licenses.

The impact of the above on non-US persons is not made clear in EO 13850 or the associated general licenses, nor in the FAQs.

On the face of it, FAQ 657 appears to deal with non-US entities:

657. I am a non-US 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, US 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]

On one view, the answer seems to suggest that:

(a) non-US entities may continue to purchase petroleum and petroleum products from PdVSA and its subsidiaries:

(i) without restriction if all related transactions do not involve US persons have a US nexus, and otherwise

(ii) up to 29 March 2019 insofar as the activities involve winding-down of business entered into before 28 January 2019, and transactions do involve US persons or have a US nexus (under General License 11), and

(b) up to 29 March 2019 US persons working for non-US companies located neither in the US or Venezuela can engage in maintenance or winding-down of such business entered into before 28 January 2019 (under General License 12).

However, the position is not straightforward. The FAQs do not address the effect of Section 1 (a) (iii) of EO 13850 which provides for the blocking of all property in the U.S. of “any person” (i.e. including a non-U.S. persons who is determined –

“to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of … any person whose property and interests in property are blocked pursuant to this order.”

The designation of PdVSA under Section 1 of EO 13850, with effect from 28 January, means that the U.S. Secretary of the Treasury, in consultation with the Secretary of State, now has authority to designate persons (including non-US persons and entities) who are involved in certain prohibited activities (material assistance, sponsorship, provision of financial, material or technological support, or goods or services to or in support of a person whose property has been blocked pursuant to EO 13850 (e.g. PdVSA).

Since PdVSA’s property is now blocked pursuant to EO 13850, the question arises as to whether a non-U.S. shipowner / charterer who provides ocean transportation for PdVSA would fall within the ambit of Section 1 (a) (iii) of EO 13850. There is no explicit prohibition on PdVSA shipments to third countries and no wind-down period specifically established for such shipments. However, it is possible that the U.S. authorities may consider ocean transportation provided to PdVSA under a charter party to fall within the activities described in Section 1 (a) (iii) of EO 13850. It is conceivable that ocean transportation could be viewed as a service in support of PdVSA, in which case Section 1 (a) (iii) of EO 13850 may apply.

Whilst unsatisfactory, the position seems to be that:

  • US persons are authorised to transact with PdVSA in accordance with the general licenses, subject to certain wind-down deadlines, which variously apply up to 27 February, 29 March, 28 April, and 27 July 2019 respectively, depending on the specific activity concerned.
  • Non-US persons are not expressly authorised to transact with PdVSA, and although the U.S. may not have intended the new sanctions to apply more restrictively to non-U.S. persons than to U.S. persons, non-U.S. persons could be exposed to sanctions risks under Section 1(a) (iii) of EO 13850 if they conduct prohibited activities which benefit PdVSA.

The Club’s US lawyers have opined that it is unlikely that the OFAC meant to target non-U.S. entities in this way. However this cannot be ruled out with certainty. Therefore, non-U.S. entity members who may potentially be affected by these sanctions are advised to proceed with caution and seek specific legal advice as appropriate.

Insofar as Club cover is concerned, EO 13850 does not include any express restrictions against the provision of P&I insurance for targeted trades and activities. However, Members should note that cover is always subject to the terms of entry and the Rules of the Club, including Rule 47 which provides for automatic termination of cover if a member, by the employment of its entered vessels is exposed to the risk of sanctions, or such employment thereby exposes the Club to the risk of sanctions

The Club, through its lawyers, will seek to engage with OFAC for further clarity on the applicability of EO 13850 to non-US entities.