On February 12, 2018, the Office of Foreign Assets Control (OFAC) issued two new Venezuela-related frequently asked questions (FAQs) providing additional guidance on how late payments will be treated for purposes of the prohibitions on dealing in “new debt” of the Government of Venezuela and of state-owned entities. Most notably, the new guidance prohibits acceptance of late payments on post-sanctions debt of Government of Venezuela entities if those payments are received outside the applicable 30- or 90-day limit under Executive Order 13808, even if the failure to pay was not consented to by the lender and violates the underlying agreement. This guidance likely also has implications for the similar prohibitions on dealings in “new debt” under Russian sectoral sanctions.
The new FAQs provide more explicit (but somewhat inconsistent) guidance than has been available to date about the effect of late payments on otherwise permissible debt.
With respect to “old debt” incurred prior to the imposition of sanctions, FAQ 553 repeats guidance that debt incurred prior to the imposition of sanctions is not considered “new debt” for purposes of the Venezuelan sanctions unless the terms of the debt—explicitly including the repayment period—are changed after the date sanctions were imposed. Nevertheless, OFAC takes the position that collection of payment on “old debt” is permissible even if the Government of Venezuela entity does not pay during the agreed-upon repayment period. Presumably the logic is that the lender has not agreed to any alteration in terms, and therefore the original terms of the debt remain in force.
However, FAQ 554 provides different treatment for debt incurred after the imposition of sanctions. OFAC’s question and response state unequivocally and categorically that for debt created on or after August 25, 2017, U.S. persons may not accept payment from a Government of Venezuela entity that is not received within the prescribed period without a specific license from OFAC. For such “new debt,” limited to a maximum maturity of 90 days for PdVSA and its subsidiaries and 30 days for other Government of Venezuela entities, OFAC states that merely “receiving payments outside of these specified maturity periods generally constitutes a prohibited dealing in debt.” Consistent with prior guidance, this applies broadly to extensions of credit, including payment terms for goods and services, as well as to formal loan arrangements.
Note that there is no exception for circumstances in which the Government of Venezuela entity is in breach of the contractual terms of the debt, nor any requirement that the creditor agree to the late payment. This prohibition applies to any creditor that is a U.S. person; as a practical matter, the prohibition on U.S. persons’ “engaging in transactions related to, providing financing for, or otherwise dealing in new debt” will also prevent clearing of U.S. dollar payments to non-U.S. creditors receiving payment outside the permitted period.
OFAC has also set forth a licensing policy for such late payments. A specific license may be granted to U.S. persons to deal in the collection or receipt of late payments, if the following conditions are met:
- the Venezuelan entity is indebted under an agreement that complies with the applicable sanctions restrictions (reinforcing the point that a license is required even if the late payment is in violation of the loan agreement);
- the debt was created before March 14, 2018 (leaving open the question of what the policy will be toward lenders who lend to Venezuelan entities under compliant agreements but then suffer a breach after that date);
- the late payment was in breach of an agreed payment deadline that complies with Executive Order 13808; and
- the transaction does not otherwise violate U.S. sanctions.
All other applications to accept late payments will be reviewed under a presumption of denial, unless they further U.S. national security or foreign policy interests (including humanitarian-related transactions, legal services, or personal communications services).
Thus, any new lending by U.S. persons or in U.S. dollars to the Government of Venezuela or any entity it owns or controls, regardless of the agreed contractual terms, now carries a risk that repayment will not be permitted if the relevant entity breaches its obligations and pays late. A license may be available, with uncertain timing, if the payment is in breach of the relevant agreement, but even the availability of that relief is in question after March 14. Although this update is styled as a mere clarification of existing sanctions, it is likely to have a substantial chilling effect on the ongoing availability of even short-term credit to Government of Venezuela entities.
Finally, we note that similar restrictions on “new debt” exist under Directives 1 (financial institutions), 2 (energy companies), and 3 (defense companies) imposing sectoral sanctions on Russian entities pursuant to Executive Order 13662. The FAQs by their terms are directed at the Venezuelan sanctions, but typically OFAC has applied guidance across programs to parallel provisions. It would be prudent to assume that OFAC will take a comparable position with respect to payments from Russian entities under sectoral sanctions that are not received before the applicable maximum maturity date.
 We will refer to payments received outside the timeframe permitted by Executive Order 13808—i.e., more than 90 days for Petroleos de Venezuela S.A. (“PdVSA”) and its subsidiaries and more than 30 days for other entities owned or controlled by the Government of Venezuela—as “late payments.”
 See FAQ 553.trade