On May 1, 2023, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC“) issued General License No. 42 (“GL 42“) under the Venezuela Sanctions Regulations (“VSR“), three new Venezuela-related Frequently Asked Questions (“FAQs“), and also amended one Venezuela-related FAQ. These developments occurred in the context of efforts by creditors to enforce judgments against Venezuela and appear to have been in response to a request from the Special Master for the US District Court for the District of Delaware to allow a court-ordered sale of shares in the US parent company of Citgo Petroleum Corp. to proceed in order to resolve a long-running legal dispute between a Canadian mining company and the Government of Venezuela (“GoV“). The guidance provides helpful reminders of OFAC’s position on negotiation of and entry into settlement agreements with blocked parties. OFAC’s Recent Actions page summarizing these developments is available here.
Background
GL 42 was issued against the backdrop of a long-fought dispute between Crystallex International Corporation (“Crystallex“), a Canadian mining company, and the GoV. Crystallex had been running a gold mining operation in Las Cristinas, Venezuela since 2002, which was nationalized by the GoV in 2011. In response, Crystallex initiated arbitration proceedings against Venezuela and in 2016 ultimately won an award of $1.202 billion against the GoV. Crystallex subsequently confirmed this arbitral award in a federal district court in Washington, D.C. and brought enforcement proceedings in Delaware to collect on its judgment against the GoV.
In 2022, the District Court of Delaware issued a Sale Procedures Order setting forth the proposed procedures for the sale of certain shares in PDV Holding, Inc. (“PDVH“) as necessary to satisfy the outstanding judgment against the GoV by Crystallex and the judgment of similarly situated creditors. One legal obstacle to the satisfaction of the judgment against the GoV was, however, OFAC sanctions under the VSR that prohibit transactions involving PDVH, a Specially Designated National (“SDN“) by virtue of being wholly-owned by Petróleos de Venezuela, S.A. (“PdVSA“), also an SDN, unless permitted by authorization such as General License No. 7C.
GL 42
In summary, GL 42 opens a door for Crystallex and other similarly situated creditors of the GoV and PdVSA to negotiate in an attempt to resolve their disputes through settlement without violating the VSR. GL 42 does not extend to actual entry into settlement agreements. GL 42 also does not authorize any transaction involving other blocked persons pursuant to the VSR or other transactions otherwise prohibited by the VSR.
More specifically, GL 42 generally authorizes transactions prohibited by the VSR that are ordinarily incident and necessary to the negotiation of settlement agreements with Venezuelan opposition embodied by the IV National Assembly, its Delegated Commission, an IV National Assembly Entity, or a person appointed or designated by, or whose appointment or designation is retained by, an IV National Assembly Entity relating to any debt of the GoV, PdVSA, or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest (a “PdVSA Subsidiary“).
For the purposes of GL 42, the term “IV National Assembly” means the IV Venezuelan National Assembly seated on January 5, 2016, and does not include the Venezuelan National Constituent Assembly convened by Nicolas Maduro or the National Assembly seated on January 5, 2021. The term “IV National Assembly Entity” includes any entity established by, or under the direction of, the IV National Assembly to exercise its mandate, including persons appointed or designated by, or whose appointment or designation is retained by, an IV National Assembly Entity to the board of directors (including any ad hoc boards of directors), or as an executive officer of a GoV entity (including entities owned or controlled, directly or indirectly, by the GoV).
New and Amended FAQs
New FAQ 1123 states that OFAC will not bring an enforcement action against any person for participating in, facilitating, or complying with the preliminary steps (i.e., steps before the actual execution of a sale) set out in the Sale Procedures Order or for engaging in transactions that are ordinarily incident and necessary to the participation in, facilitation of, or compliance with such steps. Interestingly, OFAC did not concede in this FAQ that such activities were authorized but instead is taking the position that it will not pursue enforcement actions against parties involved in the Crystallex case that have taken such steps. The execution of a sale according to the Sale Procedures Order, however, will need to be separately approved by OFAC in the form of a specific license. Such a specific OFAC license will only be issued after a potential purchaser has been identified, and applications for such a specific OFAC license will be reviewed under a favorable licensing policy, subject to material changes to US foreign policy and national security interests.
New FAQ 1124 states that OFAC will also apply its non-enforcement posture to cases where parties take steps to preserve the ability to enforce bondholder rights to the CITGO shares serving as collateral for the PdVSA 2020 8.5 percent bond.
New FAQ 1125 clarifies that, for purposes of GL 42, debt that can be the subject of permissible settlement agreements include bonds, promissory notes, and other receivables of the GoV, PdVSA, or a PdVSA Subsidiary. GL 42 only authorizes activities related to the negotiation of settlement agreements, and parties will need a separate specific OFAC license to enter into settlement agreements. OFAC intends to review license applications in connection with the negotiation of a settlement agreement under a favorable licensing policy, subject to material changes to US foreign policy and national security interests.
FAQ 808 has been amended to clarify that a specific OFAC license is not required (previously, this FAQ said “not ordinarily required”) to initiate or continue US legal proceedings against a person designed or blocked under the VSR. Similarly, a US court or its personnel does not need a specific OFAC license to deal with such proceedings and this also means that creditors may file for writs of attachment without the need for OFAC authorization for matters involving property blocked under the VSR. However, as indicated in FAQ 1125, a specific OFAC license is required for entry into a settlement agreement, or for the enforcement of any lien, judgment, or other order that would affect property or interests in property blocked pursuant to the VSR. This FAQ now refers to GL 42 for negotiation of eligible settlement agreements.
