Venezuela Sanctions Update

February 2019

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Executive Summary

1. There is a potential ambiguity in U.S. Executive Order 13850. Whilst the better view may be that the US does not intend to sanction purchase and carriage of Venezuelan oil cargoes by non-US parties at present, it may be argued that such activities could constitute provision of “material assistance” to PdVSA.

2. Despite attempts at clarification, it is not possible to state categorically that such trade carries no risk of sanctions exposure at present. Caution therefore remains necessary.

The Club’s article published on 5 February 2019 outlined the Club’s preliminary advice on the effect of new sanctions imposed by the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) against Venezuela on 28 January 2019, targeting PdVSA and exports of Venezuelan petroleum products. The article commented on the potential sanctions risks to non-US persons carrying petroleum products out of Venezuela involving PdVSA or its subsidiaries, in light of particular language used in Section 1 (a) (iii) of Executive Order 13850, which provides for the blocking of the property in the U.S. of any person determined to have materially assisted PdDVSA, or provided goods and services in support of PdVSA. The Club cautioned that OFAC could take the position that the supply of ocean transportation to PdVSA could constitute such material assistance or support, and thereby expose non-US persons providing such services to the risk of U.S. sanctions.

The Club has now received further legal advice from US lawyers. In essence, they consider it unlikely that EO 13850 would be used by OFAC to target non-US persons providing such services. Several factors suggest that OFAC does not intend to target non-US persons at this time. However, the possibility that OFAC may target non-US persons cannot be ruled out given that EO 13850 appears to confer discretion on the US Secretary of the Treasury to use it in such a manner.

EO 13850 does not include any specific restrictions on dealings by non-U.S. persons with PdVSA as long as they do not involve the importation of PdVSA petroleum or petroleum products into the United States after April 28 2019.

It might also be argued that if OFAC had intended to target non-US persons, then it could have included more explicit provisions in its executive order, such as by making sanctionable the purchase, acquisition or transport of any petroleum or petroleum products from PdVSA. The fact that it has not done so may suggest that OFAC does not intend to use the discretion set out in Section 1 (iii) (a) of EO 13850 to target such activities.

As previously reported on January 31 OFAC issued FAQs, one of which directly addresses whether non-U.S. entities can continue to purchase oil from PdVSA. (Authorization to purchase the oil would necessarily include authorization to transport the oil). FAQ 657 reads as follows:

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]

The question is clear but the answer less so. It could be read that there is no restriction on non-US persons purchasing and transporting PdVSA petroleum and petroleum products, but that interpretation is not easy to reconcile with the language used in Section 1 (iii) (a) of EO 13850.

It is therefore feasible that the discretion to designate additional persons to the SDN List could be used to apply sanctions against non-US persons purchasing and transporting PdVSA petroleum and petroleum products.

Until such time as the position becomes clearer, the Club’s advice remains that conducting such activities could expose non-US persons to US sanctions. In the circumstances, Members are advised to exercise caution in their dealings with PdVSA and/or its subsidiaries, and to take legal advice in relation to any current or proposed trade with Venezuelan entities.

Members are also advised to note that other difficulties could arise in respect of trades involving Venezuela. Payments made in US dollars could bring the transactions and underlying trade within US jurisdiction, and such payments could be rejected or blocked. It is possible that bank transactions, even in non-US dollar currency, could be delayed or rejected, given that even non-US banks are increasingly averse to providing services involving an entity or a country that is subject to U.S. sanctions. There is also a risk that vessels carrying PdVSA cargoes could be subject to delays as a result of difficulties effecting payments under cargo sale contracts.

The Managers will endeavour to provide further updates as and when new information becomes available.