OFAC Publishes New Venezuelan Sanctions Regulations

Aug 18, 2015   

Tuesday, August 18th, 2015

On July 10, 2015, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) published the new Venezuela Sanctions Regulations that expand the reach of existing sanctions against that country. As a result of these new regulations, both individuals and companies doing business in Venezuela are now required to conduct enhanced diligence of their Venezuelan counterparties to ensure compliance with the sanctions.

The new Venezuela Sanctions Regulations, which are codified in 31 CFR Part 591, implement the Venezuela Defense of Human Rights and Civil Society Act of 2014 (Pub. L. 113-278) (the “Act”) andExecutive Order 13692, Blocking Property and Suspending Entry of Certain Persons Contributing to the Situation in Venezuela, which was signed by President Obama on March 8, 2015. The Venezuela Sanctions Regulations were published by OFAC in abbreviated form with the intention of supplementing 31 C.F.R. Part 591 with a more comprehensive set of regulations at a later date. When finalized, supplemental regulations may include additional interpretive and definitional guidance and additional general licenses and statements of licensing policy with respect to Venezuelan sanctions.

Pursuant to the Act, the President is required:

to impose targeted sanctions on persons he determines to be responsible for significant acts of violence or serious human rights abuses against antigovernment protesters in Venezuela and to have ordered or otherwise directed the arrest or prosecution of persons in Venezuela primarily because of the person’s legitimate exercise of freedom of expression or assembly.

As a result, the President identified designated individuals in the Annex to the Executive Order whose property and interests in property are effectively blocked pursuant to 31 C.F.R. § 591.201, and who are now blocked from entry into the United States. The list of such blocked parties currently includes several officers of the Venezuelan military, national guard, national police, and intelligence service as well as one “national level” prosecutor. In addition to blocking transfers by individuals or companies with these blocked parties, the Venezuela Sanctions Regulations also block transfers to the property and interests of any entity owned 50% or more by any of the blocked parties (alone or in the aggregate).

Transfers to Blocked Parties

The “Effective Date” of the applicable sanctions is March 9, 2015, for the blocked parties listed in the Annex to the Executive Order and the earlier of the date of actual or constructive notice that property and interests in property are blocked for persons whose property and interests are otherwise blocked. 31 C.F.R. § 591.302. Under the Venezuela Sanctions Regulations, all transfers after the Effective Date in violation of the sanctions, or of any regulation, order, directive, ruling, instruction, or license issued pursuant to the Venezuela Sanctions Regulations, involving any property or interest in property blocked under the new regulations, are null and void and shall not serve as the basis for the assertion or recognition of any interest or right, remedy, power, or privilege in the blocked property. 31 C.F.R. § 591.202 (a). In effect, the Venezuela Sanctions Regulations create a ban on transfers to blocked parties. Attempts to transfer property to blocked parties shall not be recognized.

Despite this apparent absolute ban on transactions with blocked parties, the Venezuela Sanctions Regulations carve out exemptions for transfers with blocked parties in limited circumstances which establish to the satisfaction of OFAC each the following:

1. Such transfer did not represent a willful violation of the Venezuela Sanctions Regulations; and

2. The individual who held or maintained the property transferred to the blocked party did not have reasonable cause to know or suspect that the transfer required a license or authorization (from OFAC), or if they acquired a license or authorization from OFAC for the transfer, that the individual was the victim of lies, deceit or fraud by a third party (so the individual was unaware of the true nature of the transfer; and

3. The individual who held or maintained the property transferred to the blocked party files a report with OFAC setting forth in full the circumstances relating to the transfer as soon as such individual discovers that the transfer is in violation of the Venezuela Sanctions Regulations.

31 C.F.R. § 591.202 (d).

In addition to the above-mentioned transfer exemptions, OFAC regulations also provide that individuals who believe that funds have been blocked due to mistaken identity may request a release of funds. Such individuals should mail a written request addressed to the Office of Foreign Assets Control, Compliance Programs Division, 1500 Pennsylvania Avenue, NW.–Annex, Washington, DC 20220, or send a facsimile transmission to the Compliance Programs Division at (202) 622’1657. 31 C.F.R. § 501.806.

Financial Institutions

The Venezuela Sanctions Regulations affect not only individuals and companies making transfers to Venezuela, but U.S. financial institutions as well. For instance, under the new regulations, U.S. financial institutions are restricted from transferring funds to accounts belonging to the blocked parties or accounts of entities that are owned 50% or more by a blocked party. U.S. financial institutions are only authorized to transfer funds or credit between blocked accounts in its branches or offices; provided that no transfer is made from an account in the United States to an account held outside the United States, and further provided that a transfer from a blocked account may be made only to another blocked account held in the same name. 31 C.F.R. § 591.504. The only exceptions to these strict transfer restrictions are for legal services and emergency medical services so long as such professional fees and reimbursements are specifically licensed in advance by OFAC. Additionally, payments for legal services from funds originating outside the United States are authorized.

Reporting Requirements

In addition to expanding compliance requirements, the Reports on Blocked Property found in Part 501 of Title 31 of the Code of Federal Regulations are also applicable to the Venezuela Sanctions Regulations. 31 C.F.R. § 501.606. As a consequence, any person, including a financial institution, holding property blocked pursuant to the Venezuela Sanctions Regulations must file initial, ongoing, and annual reports with OFAC as follows:

1) Initial reports are required to be filed such property holders within 10 business days from the date that the property becomes blocked. Initial reports shall describe the owner or account party, the property, its location, and any references necessary to identify the property and its actual or estimated value.

2) Reports of Blocked Transactions are required to be filed on an ongoing basis for all payments or transfers that are received and blocked by financial institutions. Such reports shall include a photocopy of the payment or transfer instructions received and shall confirm that the payment has been deposited into a new or existing blocked account.

3) Annual comprehensive reports on all blocked property held as of June 30 of the current year shall be filed annually by September 30. Annual reports shall be filed using Form TD-F 90-22.50, Annual Report of Blocked Property.

31 C.F.R. § 501.603.

The requirements to furnish information or maintain records are enforced by OFAC by imposing the following civil penalties for non-compliance:

1) The failure to comply with a requirement to furnish information pursuant to 31 CFR 501.602 may result in a penalty in an amount up to $20,000, or up to $50,000 where a transaction(s) is valued at greater than $500,000 in addition to judicial enforcement of the requirement to furnish information.

2) Failure to timely file a required report, whether set forth in regulations or in a specific license, may result in a penalty up to $2,500, if filed within the first 30 days after the report is due, and a penalty up to $5,000 if filed more than 30 days after the report is due. If the report relates to blocked assets, the penalty may include an additional $1,000 for every 30 days that the report is overdue, up to five years.

3) Failure to maintain records in conformance with the requirements of OFAC’s regulations or of a specific license may result in a penalty in an amount up to $50,000.

31 C.F.R. § 501, Appendix A (IV).

Given that civil penalties for violations and failure to maintain and report information can be very severe, individuals, business entities and financial institutions who have recently entered or facilitated business transactions involving Venezuela should have their records reviewed to ensure compliance with the new regulations.

Penalties

Penalties for transfers in violation of the rules and failure to report can be severe. While willfulness and awareness are factors used in determining and mitigating the amount of the penalty, failure to self-disclose upon realization of a violation of the regulations can result in an increased penalty. OFAC’s civil penalty determination is based on an analysis of the “egregiousness” of a violation, giving substantial weight to the following factors: “willful or reckless violation of law,” “awareness of conduct at issue,” “harm to sanctions program objectives” and “individual characteristics.” As demonstrated below, egregious violations coupled with failure to self-disclose are penalized most harshly.

1) Non-egregious violations disclosed through voluntary self-disclosure will be assessed a proposed civil penalty of one-half of the transaction value, capped at a maximum base amount of $125,000 per violation.

2) Non-egregious violations which come to OFAC’s attention by means other than a voluntary self-disclosure shall be assessed a proposed civil penalty based on the applicable schedule amount found in Appendix A to Part 501 of Title 31 of the Code of Federal Regulations (capped at a maximum base amount of $250,000 per violation).

3) Egregious violations disclosed through voluntary self-disclosure shall be assessed a proposed civil penalty of one-half of the applicable statutory maximum penalty applicable to the violation.

4) Egregious violations which come to OFAC’s attention by means other than a voluntary self-disclosure shall be assessed a proposed civil penalty equal to the applicable statutory maximum penalty amount applicable to the violation.

31 C.F.R. § 501, Appendix A (V)(B)(a).

In addition to the above penalties, OFAC may also refer matters to law enforcement agencies for criminal investigation and/or prosecution. 31 C.F.R. § 501, Appendix A (II)(F).

Conclusion

The Venezuela Sanctions Regulations add a significant new layer of controls onto import and export transactions involving Venezuela. The new regulations create additional compliance and due diligence responsibilities for individuals and/or entities doing business in Venezuela. Prior to entering into any business transaction, the Venezuela Sanctions Regulations require due diligence to be conducted to confirm that participating parties are not owned or controlled by any person that is subject to sanctions under said regulations. Unfortunately, this due diligence may be complicated by the fact that many corporate ownership documents which could establish a lack of nexus between the Venezuelan company or customer and the blocked parties are either unavailable or very difficult to obtain by the U.S. individual or company seeking to do business in Venezuela.

The attorneys at Fuerst Ittleman David & Joseph have made it a priority to assist individuals navigate the complex world of administrative law and regulatory compliance, including trade sanctions such as the Venezuela Sanctions Regulations. If your business or personal affairs requires you to make transfers to Venezuela, we encourage you to contact us by email atcontact@fidjlaw.com or telephone at (305) 350-5690 so that we might provide you with effective legal assistance.