August 30, 2017
By: Anna Sayre, Legal Content Writer, SanctionsAlert.com

On August 24, 2017, the U.S. government announced new Venezuelan sanctions, impacting oil company Petroleos de Venezuela(PdVSA), and other Venezuelan government entities.

As they were not “list-based” the latest Venezuela sanctions place heavy burdens on compliance and due diligence programs for companies and financial institutions doing business with the Venezuelan government and related entities.

The U.S.carefully carved out exemptions for Citgo, a subsidiary of PdVSA with large U.S. presence: A general license authorizes all transactions “where the only government of Venezuela entities are Citgo Holding Inc. and any of its subsidiaries.”

However, sanctions implications may potentially trouble Citgo and U.S. persons doing business with the company, as the result of a deal involving Rosneft. The Russian state oil corporation sanctioned by the U.S. Treasury’s Office of Foreign Assets Control (OFAC) under “Sectoral sanctions”, may have the right to claim an ownership stake in Citgo if PdVSA defaults on billions in loans. If Rosneft were to acquire a 50 percent or more ownership stake, this could potentially trigger sanctions against Citgo under OFAC’s 50 percent rule.

Citgo as collateral

Houston-based Citgo is an indirect wholly owned subsidiary of PdVSA and operates three oil refineries and three pipelines in the U.S., along with a Citgo-branded network of nationwide gas stations. In order to obtain a loan from Rosneft, PdVSA used Citgo as collateral.

If PdVSA defaults on its Russian loan, it would result in a 49.9 percent stake in U.S. oil company, Citgo, being transferred from Venezuelan PdVSA to Russian Rosneft. If Rosneft’s ownership in Citgo’s parent PdVSA is bumped to 50 percent, due to default or other reasons discussed below, sanctions on Citgo would automatically be triggered under OFAC’s 50 percent rule.

As a result, any U.S. person would no longer be allowed to engage in certain transactions applicable under the narrow SSI List restrictions with the Houston-based oil company, unless authorized by OFAC.

Rosneft and Sanctions

In 2014, the U.S. and other countries implemented sanctions against Rosneft following Russia’s intervention in Ukraine. The oil company was placed on the Sectoral Sanctions Identifications (SSI) List as subject to Directives 2 and 4 under Executive Order 13662 of March 20, 2014 – “Blocking Property of Additional Persons Contributing to the Situation in Ukraine.”

As opposed to those entities found on OFAC’s SDN List, entities on the SSI List do not face asset freezes, and U.S. persons are not strictly prohibited from dealing with them. Rather, they are subject to restrictions regarding access to certain types of financing and, in some cases, access to U.S. exports.Entities of which 50 percent or more is owned by a SSI listed entity are also subject to “sectoral” sanctions pursuant to OFAC’s 50 percent rule.

Rosneft is not currently on OFAC’s SDN list and is not subject to asset freeze.

OFAC’s 50 percent Rule and Applicability to the SSI List

Under OFAC’s 50 percent rule: any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons, is itself considered to be a blocked person. Accordingly, a U.S. person may not engage in any transactions with such an entity, unless authorized by OFAC.

As already mentioned, OFAC’s 50 percent rule applies to entities on both the SDN List and SSI List. The former are considered blocked entities and subject to asset freezes. With regard to SSI List restrictions, OFAC’s FAQs provide some guidance:

The property and interests in property of persons on the SSI List (and entities owned 50 percent or more in the aggregate by one or more persons subject to the SSI List restrictions) are not required to be blocked; instead a more limited set of transaction restrictions applies to them.

“Indirectly,” as used in OFAC’s 50 percent Rule, refers to one or more blocked persons’ ownership of shares of an entity through another entity or entities that are 50 percent or more owned in the aggregate by the blocked person(s).”

Therefore, the same 50 percent rule applies to entities on the SSI List as applies to those on the SDN List. However, OFAC does not ‘block’the property of entities on the SSI List, but rather imposes certain narrow prohibitions on dealings by U.S. persons.

As such, if Rosneft is regarded as owning 50 percent or more of Citgo, indirectly, through PdVSA, any U.S. person, including financial institutions, may be restricted in conducting ‘certain narrow’ transactions with Citgo.

U.S. Sanctions on Venezuela and Effect on PdVSA

On March 8, 2015, former-President Obama issued targeted sanctions against Venezuelan officials by Executive Order (E.O.) 13692, which blocks property and suspends entry of “certain persons contributing to the situation in Venezuela.” The E.O. specifically names 7 Venezuelan government and military officials.

Since the Trump administration took office in January, Venezuela’s President, Nicolas Maduro, Vice President, Tareck El Aissami, and several judges, were placed on OFAC’s SDN list. They have been accused of international drug trafficking or anti-democratic practices.

On July 26, 2017, PdVSA’s Vice President for Finance, Simon Zerpa Delgado was placed on the SDN list. A former PdVSA executive, Carlos Malpica Flores was also placed on the SDN list.

PdVSA was not placed on the SDN list.

However, the August 24, 2017 Venezuelan sanctions issued by the U.S do have an impact on PdVSA as a company. They virtually ban trade in Venezuelan debt and block PdVSA from selling bonds in the U.S.

Section 1. 

(a) All transactions related to, provision of financing for, and other dealings in the following are prohibited:

(i) new debt with a maturity of greater than 90 days of PdVSA;

(ii) new debt with a maturity of greater than 30 days, or new equity, of the Government of Venezuela, other than debt of PdVSA covered by subsection (a)(i) of this section;

(iii) bonds issued by the Government of Venezuela prior to the effective date of this order;

(iv) dividend payments or other distributions of profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the Government of Venezuela.

(b) The purchase, directly or indirectly of securities from the Government of Venezuela, other than securities qualifying as new debt with a maturity of less than or equal to 90 or 30 days as covered by subsections (a) (i) or (a) (ii) of this section, respectively, is prohibited.

(c) The prohibitions in subsections (a) and (b) of this section apply except to the extent provided by statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order, and notwithstanding any contract entered into or any license or permit granted before the effective date of this order.

Sec. 2. 

(a) Any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions set forth in this order is prohibited.

(b) Any conspiracy formed to violate any of the prohibitions set forth in this order is prohibited.

This latest round of Venezuelan sanctions, are applicable to U.S persons or upon transactions in the U.S.

Basically, the August Venezuelan sanctions impose restrictions on limited transactions on certain entities, mostly the government of Venezuela, and entities it controls, such as PdVDA.

As mentioned earlier in this article, the U.S. granted specific exemptions to Citgo.

Not Quite Sectoral Sanctions

The new Venezuelan sanctions are somewhat similar to “sectoral sanctions,” because they do not impose broad prohibitions to do any business with targeted entities, but yet, they are different in some respects.

First of all, unlike some other sectoral sanctions, the Venezuelan sanctions do not target specific sectors.

Second, they are not “list-based,”. With other “sectoral sanctions” the prohibitions are limited to the entities contained on the SSI list (such as Rosneft), including unlisted companies under OFAC’s 50 percent rule.

Compliance Implications

As the latest Venezuelan sanctions are not “list-based,” compliance officers need to keep in mind compliance goes beyond mere list-matching and resolution of alerts. Instead, Venezuela sanctions now require due diligence in order to determine whether transactions involve prohibited dealings with the Venezuelan government.

Further,if Rosneft were to obtain 50% ownership in Citgo, as a result of the above mentioned oil deal, and despite the Citgo license, the applicability of OFAC’s 50 percent rule on SSI listed entities, may cause compliance complications.

Persons, financial institutions and corporations considering a potential transaction with Rosneft (on the SSI list, but not on the SDN list), PdVSA (not on any list, but restricted for limited transactions), and affiliated companies or individuals, such as Citgo (not on any list, but may become 50% owned by SSI listed entity), and Mr. Zerpa (SDN), an executive of PdVSA, would be well advised to conduct appropriate due diligence on all entities that are party to or connected with the transaction.

This would include entities and individuals with whom account relationships are maintained in order to determine relevant ownership stakes, or even who signs contracts.

A recent case involving Rosneft demonstrates an aggressive approach by OFAC.

On July 20, 2017, OFAC assessed a $2 million civil monetary penalty against ExxonMobil for violations of the Ukraine-Related Sanctions Regulations imposed against Russia.

OFAC states that ExxonMobil violated sanctions when the presidents of its U.S. subsidiaries dealt in services of an individual whose property and interests in property were blocked, namely, by signing legal documents related to oil and gas projects in Russia with Rosneft’s Igor Sechin. At the time of signing, Sechin was on OFAC’s SDN list. Sechin did not own a majority of Rosneft’s equity.

In response, Exxon Mobil has filed a lawsuit against OFAC claiming that the scope of the sanctions imposed by the Treasury are too broad – specifically, that the sanctions pertain to Sechin exclusively in his personal capacity, and do not extend to his professional interests at Rosneft.

OFAC maintains that, “ExxonMobil demonstrated reckless disregard for U.S. sanctions” and that top executives did business with Sechin knowing full well that he was a designated individual.

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