Holders of the PDVSA 8.5% Bond Need OFAC’s License
On April 10, 2020, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued General License 5C delaying the effectiveness of General License 5B “Authorizing Certain Transactions Related to the Petroleos de Venezuela, S.A. 2020 8.5. Percent Bond on or After April 22, 2020” until July 22, 2020. Accordingly, all transactions related to, the provision of financing for, and other dealings in the Petroleos de Venezuela S.A. (“PDVSA”) 2020 8.5% Bond (the “8.5% Bond”) otherwise prohibited under the Executive Order (“E.O.”) 13835 are authorized under OFAC’s General Licenses on or after July 22, 2020.
E.O. 13835 issued by President Donald J. Trump on May 21, 2018 prohibits engaging in transactions related to the sale, transfer, assignment, or pledging as collateral of, any equity interest of an entity owned 50% or more by the Government of Venezuela.
Accordingly, U.S. persons and foreign persons conducting business in or with the U.S., with U.S. persons, or using U.S. origin goods or services, should obtain OFAC’s specific license before entering into any transactions involving the 8.5% Bond that need to be conducted before July 22, 2020.
The Reasons Behind OFAC’s General License 5C
In 2019, the Government of Venezuela defaulted on the 8.5% Bond, and bondholders sought to enforce their rights to the collateral used to back this bond: a number of shares in CITGO Petroleum Corporation (“CITGO”), the U.S. refiner that originally was owned and controlled by PDVSA and now is under the purview of the acting president of Venezuela, Juan Guaidó.
While E.O. 13835 was an obstacle to holders of the 8.5% Bond gaining access to their collateral, OFAC’s regulations had a loophole potentially allowing claims against CITGO to move forward. Specifically, OFAC’s General License 5 authorized all transactions and dealings related to the 8.5. Percent Bond with no limitations as to the effectiveness of OFAC’s authorization.
However, reasons of foreign policy moved OFAC to delay the effectiveness of General License 5, initially until April 22, 2020, and now until July 22, 2020. Notably, Juan Guaidó has advised the U.S. Government that a number of 8.5% Bonds were issued by the Maduro regime in violation of the constitution of Venezuela; and that the U.S. Government should not allow bondholders of the 8.5 Percent Bonds to take control of CITGO by enforcing their collateral on CITGO’s shares.
Who Should Comply with OFAC Sanctions?
U.S. persons must comply with OFAC Sanctions regardless of where they are located. Foreign persons conducting business in or with the U.S., with U.S. persons, or using U.S. origin goods or services must also comply, because foreign persons that conspire to violate, or cause a violation of, OFAC Sanctions, may face civil or criminal penalties.
In fact, OFAC has imposed civil penalties upon foreign persons for, among other activities: (i) purchasing U.S. origin goods with the specific intent of reexporting, transferring, or selling these goods to a person, country, or region subject to OFAC sanctions; (ii) utilizing the U.S. financial system, or processing payments to or through U.S. financial institutions, for commercial transactions involving OFAC sanctioned persons or countries; (iii) using U.S. origin software, or technology and telecommunications hardware located in the U.S. Additionally, foreign persons violating OFAC sanctions can be added to OFAC’s List of Specially Designated Nationals as secondary sanction.
Engaging in transactions that are otherwise prohibited under OFAC Sanctions is only possible when there is an applicable regulatory exception, or upon the issuance of a general or specific license by OFAC. General Licenses authorize a particular type of transaction for a class of persons without the need to separately apply for a license. Specific licenses are written documents issued by OFAC to a particular person or entity, authorizing a particular transaction in response to a license application.
To obtain a specific license, the interested party must submit a request to OFAC providing a detailed description of the proposed transaction, and explaining to OFAC that, based on the regulations and guidelines pertaining to the particular program of sanctions, the transaction is in the foreign policy interests of the U.S. OFAC will let the interested party know that OFAC has received the request for specific license and advise if OFAC requires additional information. In the event that OFAC denies the request for a specific license, OFAC’s decision is final and the interested party can subsequently file a civil action with a U.S. District Court seeking judicial review of OFAC’s decision under the Administrative Procedure Act.