Europe: EU / UK regulatory roundup
A round up of recent regulatory developments in the EU and UK.
On January 28, 2019, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) added Petróleos de Venezuela, S.A. (PdVSA), Venezuela’s state-owned oil company and a primary source of the country’s income and foreign currency, to its list of Specially Designated Nationals and Blocked Persons (SDN List) pursuant to Executive Order (E.O.) 13850.1 This designation comes as Venezuela is mired in political upheaval, with Nicolás Maduro, who was reelected in a contested election in May 2018, and opposition leader Juan Guaidó claiming to be the legitimate president of Venezuela. The United States and many European countries, including the United Kingdom, Spain, France, Germany, Sweden and Denmark, have officially recognized Guaidó as Venezuela’s interim president, with the United States calling Maduro’s claim to the presidency “illegitimate.”2
As a result of PdVSA’s designation, US persons are generally prohibited from engaging in any transactions with any property or interests in property held by PdVSA as well as those working on behalf of PdVSA or entities owned 50 percent or more by PdVSA.3 The prohibitions of E.O. 13850 extend to transactions that are processed through a US financial institution or the US financial system. Transactions that are denominated in US dollars would normally be expected to flow through the US financial system. In addition, under E.O. 13850, PdVSA’s designation creates increased risk for non-US entities that continue to do business with PdVSA, even where the non-US entity’s activities or transactions with PdVSA have no US nexus. As explained in further detail below, OFAC has issued an assortment of general licenses and guidance in conjunction with PdVSA’s designation, which allow for certain wind-down operations and create carve-outs for variously-situated entities and individuals engaged in business with PdVSA and its various subsidiaries. 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 US persons or any other US nexus (e.g., transactions involving the US financial system or US commodity brokers) must be wound down by April 28, 2019.4 These include swap and non-cash transactions.5 US person employees and contractors of non-US companies located in a country other than the United States or Venezuela are authorized to engage in certain maintenance or wind-down transactions6 with PdVSA, or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest, until March 29, 2019.7 In designating PdVSA for sanctions, Secretary of the Treasury Steven Mnuchin and Secretary of State Mike Pompeo determined that “persons operating in Venezuela’s oil sector are subject to sanctions pursuant to E.O. 13850.”8 E.O. 13850, signed in November 2018, blocks all property and interests in property of any person that is within the United States or that comes within the possession or control of any US person from being transferred, purchased, exported, withdrawn or otherwise dealt in if the Secretary of the Treasury, in consultation with the Secretary of State, determines that the individual:
PdVSA’s designation under E.O. 13850 creates particular risks even for non-US entities that continue to do business with PdVSA. Specifically, with PdVSA’s designation, a non-US entity continuing to do business with PdVSA may as a result of those activities fall into category 3 under E.O. 13850. This risk is discussed in further detail below.
As noted above, alongside PdVSA’s designation, OFAC has announced the amendment of two general licenses and the issuance of eight new general licenses that create various exceptions to these new sanctions for certain types of activities and transactions so long as those activities and transactions do not otherwise violate US sanctions.10 On January 31, 2019, several days after announcing PdVSA’s designation, OFAC released further guidance to clarify the effect of PdVSA’s designation and the scope of authorized activities under the general licenses associated with the Venezuela-related sanctions.11 In addition, OFAC amended two other general licenses on February 1, 2019, and amended them again on February 11, 2019.12
OFAC issued the following new and amended licenses:
Further guidance issued by OFAC emphasizes that mutual funds and exchange traded funds (“ETFs”) are prohibited from engaging or transacting with any blocked persons and must block such holdings unless authorized by OFAC through a general or specific license. Mutual funds and ETFs that hold blocked holdings are not themselves blocked, but cannot divest themselves of blocked holdings without OFAC authorization.26 In addition, OFAC has noted that ETFs that track but do not actually hold any interest in an entity or entities that appear on OFAC’s SDN List or an entity owned 50 percent or more, individually or in the aggregate, by an entity or individual on the SDN List, may continue to offer such funds, and US persons may trade in shares of these funds.27
All non-US entities or individuals conducting business activities or transactions that involve PdVSA, in circumstances where such activities or transactions have any US nexus, including US dollar payments, should review their position immediately to ensure such they are not breaching US sanctions. Depending on the nature of their business activities or transactions, some of the general licenses and guidance issued by OFAC may be of assistance. Non-US businesses and individuals should note, however, that there is no “general” wind down period, and they will need to ensure their activities or transactions are covered by a general license and is otherwise consistent with OFAC’s guidance.
Importantly, even for non-US entities or individuals conducting ongoing business activities or transactions involving PdVSA that do not have a US nexus, possible designation as an SDN under E.O. 13850 still raises a potentially significant sanctions risk. The individuals or entities that can be designated under E.O. 13850, as described above, are not limited to Venezuelan entities or individuals. There is, therefore, a risk to non-US entities and individuals that the US Secretary of the Treasury, in consultation with the US Secretary of State, could designate them as SDNs if the US agencies determine that their activities with PdVSA (or its targeted subsidiaries) amount to the activities in outlined E.O. 13850, including, under category 3, materially assisting, sponsoring or providing financial, material or technological support for, or goods or services to or in support of, PdVSA or its targeted subsidiaries.
The term “financial, material, or technological support” has been defined broadly by OFAC to mean “any property, tangible or intangible, including but not limited to currency, financial instruments, securities, or any other transmission of value…”28 Determining the magnitude of this risk to non-US entities is very difficult, especially given the volatile political situation, however it is a concern for many non-US businesses. The nature of the business activities or relationship with PdVSA, among other factors, may impact the likelihood of being designated as an SDN and any concerned non-US businesses should seek advice in this respect.
In its announcement of the designation, OFAC indicated that the goal of the sanctions is to “hold accountable” PdVSA, the state-owned oil company, and to pressure Maduro to “transfer control to the Interim President or a subsequent, democratically-elected government.”29 In subsequent guidance issued several days after PdVSA’s designation, OFAC indicated that the PdVSA sanctions may be lifted upon transfer of control of the company to Interim President Juan Guaidó or a subsequent, democraticallyelected government that is “committed to taking concrete and meaningful actions to combat corruption, restore democracy, and respect human rights.”30 This designation is another major signal in recent weeks that the Trump Administration is intent on ramping up sanctions on Venezuela. On January 25, 2019, in an effort to specifically target those working on behalf of Maduro and PdVSA, the administration issued an executive order titled “Taking Additional Steps To Address The National Emergency With Respect To Venezuela,” which expanded the definition of “Government of Venezuela” as it is used in the executive orders imposing sanctions on Venezuela31 to include the Central Bank of Venezuela and PdVSA, as well as “any person owned or controlled, directly or indirectly, by the foregoing, and any person who has acted or purported to act directly or indirectly for or on behalf of, any of the foregoing, including as a member of the Maduro regime.”32 In guidance issued on January 31, 2019, following PdVSA’s designation, OFAC stated that the US Treasury “will continue to use its economic tools to support Interim President Guaidó, the National Assembly, and the Venezuelan people’s efforts to restore their democracy.”33
Individuals and entities conducting business involving PdVSA and its many subsidiaries, representatives, and related entities will need to examine whether any of their planned business activities are covered by the newly issued general licenses and prepare to comply with the new sanctions in accordance with the wind-down periods. It is important to note that this is all individuals and entities conducting business involving PdVSA and its many subsidiaries, representatives, and related entities, not just US businesses, or those conducting business with a US nexus.
As always, we will continue to monitor these developments and issue additional updates as warranted.
On July 16, 2020, the Court of Justice of the European Union (CJEU) published its decision in the landmark case Data Protection Commissioner v Facebook Ireland Ltd, Maximilian Schrems and intervening parties, Case C-311/18 (known as the Schrems II case).
On July 7, 2020, the Commission de Surveillance du Secteur Financier (CSSF) issued an FAQ document on Circular 02/77 concerning the protection of investors in case of NAV calculation errors and the correction of the consequences resulting from non-compliance with the investment rules applicable to undertakings for collective investment (the FAQ).