On January 28, 2019, the US Treasury Department's Office of Foreign Assets Control ("OFAC") designated Petróleos de Venezuela, S.A. ("PdVSA") as a Specially Designated National ("SDN") under Executive Order 13850 of November 1, 2018. As a result, US Persons are prohibited from dealing with PdVSA as of January 28, unless authorized by OFAC. (For these purposes, US Persons are entities organized under US laws and their non-US branches; individuals and entities physically located in the United States; US citizens and permanent resident aliens ("Green Card" holders) wherever located or employed.)
PdVSA's SDN designation added to an already complex sanctions compliance landscape where entities owned by the Government of Venezuela ("GOV") or by PdVSA are concerned. Although entities 50% or more owned by PdVSA would normally be subject to the same SDN restrictions as PdVSA itself, the current US restrictions on dealings with direct and indirect PdVSA subsidiaries ("PdVSA Subs") are not so straightforward due to the various executive orders ("EOs"), authorizations, general licenses ("GLs"), and published guidance from OFAC. (Baker McKenzie's "Sanctions & Export Controls Update" blog has tracked these Venezuela sanctions developments here.)
This alert clarifies and summarizes the US sanctions that apply to (i) CITGO Holding, Inc. and its subsidiaries ("CITGO"), (ii) PDV Holding Inc. and its subsidiaries ("PDVH"), (iii) Nynas AB and its subsidiaries ("Nynas"), and (iv) all other PdVSA Subs.
SDN Designation: CITGO is an SDN by virtue of being wholly owned by PdVSA. However, concurrent with PdVSA's SDN designation, OFAC issued GL 7 that authorizes US Persons to engage in most transactions with CITGO through 26 July 2019. Accordingly, US Persons may deal with CITGO, except, under most circumstances, to the extent PdVSA/PdVSA Subs are involved. (GL 7 also authorizes CITGO to purchase and import petroleum or petroleum products from PdVSA/PdVSA Subs through 27 April 2019.) Although OFAC has not issued guidance on a potential extension of GL 7, it is possible that OFAC will adopt an approach of renewing this GL's authorization to deal with CITGO every six months, as it has with GL 2F for SDN entities under US sanctions targeting Belarus.
Financial Restrictions: Under GL 2, issued when OFAC first imposed financial sanctions targeting the GOV in August 2017, CITGO is exempt from virtually all sectoral/financial sanctions targeting the GOV under EO 13808. For example, CITGO is not subject to the 90-day "new debt" restrictions imposed on other PdVSA Subs. GL 2 has no expiration date.
However, GL 2 does not cover the financial sanctions under EO 13835. US Persons remain prohibited from:
- purchasing any debt (e.g., accounts receivable) owed to CITGO,
- dealing in any debt owed to CITGO that is pledged as collateral after May 21, 2018, and
- selling, transferring, assigning, or pledging collateral by the GOV of any equity interest in CITGO.
SDN Designation: PDVH is an SDN by virtue of being wholly owned by PdVSA. However, most transactions by US Persons with PDVH are authorized under GL 7 to the same extent as CITGO.
Financial Restrictions: Unlike CITGO, PDVH is not covered by GL 2 and thus is subject to the financial sanctions under EO 13808 and 13835. The EO 13808 sanctions mean that US Persons are prohibited from:
- dealing in
- "new debt" (e.g., extensions of credit, loans, payment terms) with a maturity of greater than 90 days of PDVH;
- dividend payments or other distribution of profits to the GOV from PDVH; and
- purchasing securities from PDVH, other than securities qualifying as "new debt" with a maturity of less than or equal to 90 days.
SDN Designation: Nynas is an SDN like CITGO and PDVH because Nynas is 50% owned by PdVSA. Under GL 13, Nynas however benefits from authorizations similar to those for CITGO and PDVH under GL 7. GL 13 authorizes US Persons to engage in most transactions with Nynas (i.e., except to the extent PdVSA/PdVSA Subs are involved) through 26 July 2019. Thus, US Persons may generally deal with Nynas (e.g., supply and receive products, make and receive payments). This GL 13 authorization covers banks processing US-dollar payments related to Nynas. As with GL 7, OFAC has not issued guidance regarding a potential extension of GL 13 beyond July 26, but this GL may also benefit from OFAC's six-month renewal practice for these types of GLs.
Non-US parties dealing with Nynas are not subject to US sanctions jurisdiction so long as no US nexus (e.g., US Persons, US dollar payments) is involved. However, even where there is a US nexus to a transaction involving Nynas and a non-US party, such transactions are authorized pursuant to GL 13.
Financial Restrictions: Like PDVH, Nynas remains subject to US financial restrictions under EO 13808 and EO 13835, as described above. Such restrictions will be relevant primarily where: (a) a US Person receives payment from or extends credit to Nynas, which must be paid/repaid within 90 days (regardless of currency), or (b) a non-US party receives payment from or extends credit to Nynas involving US dollars, which must also be paid/repaid within 90 days.
IV. Potential Secondary Sanctions Issues Related to CITGO, PDVH, and Nynas
EO 13850 includes language under which parties deemed by OFAC to have "materially assisted, sponsored, or provided financial, material, or technological support for" an SDN could be targeted by US sanctions. If OFAC adopts its usual approach to non-US persons dealing with SDNs with which US Persons are broadly permitted to deal by virtue of GLs or otherwise, US secondary sanctions risk should not apply to CITGO, PDVH, or Nynas. In this respect, OFAC has advised in the context of other US sanctions programs that SDN-related transactions will not be subject to US secondary sanctions if US Persons would not require a specific license from OFAC to engage in such activity (see OFAC FAQs 574, 579, and 589 for certain Russian SDN entities designated in April 2018 and ultimately delisted by OFAC).
V. Other PdVSA Subs
Other PdVSA Subs are considered to be SDNs, and US Persons are broadly prohibited from dealing with them without an OFAC authorization. That said, OFAC has issued a number of additional GLs authorizing certain activities involving other PdVSA Subs. Most relevant for parties dealing with other PdVSA Subs, GL 12 authorizes:
- through 26 February 2019 transactions ordinarily incident 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 otherwise authorized in GL 12, involving PdVSA/PdVSA Subs that were in effect prior to January 28, 2019; and
- through 27 April 2019 transactions ordinarily incident and necessary to the purchase and importation into the United States of petroleum or petroleum products from PdVSA/PdVSA Subs.
We discussed other GLs related to PdVSA in our previous blog post, available here. In our view, it is unlikely that the PdVSA-related GLs with expiration dates (other than GL 7 and GL 13 as discussed above) will be extended.This insight was updated on February 22, 2019.