The situation in Venezuela continues to deteriorate, with the country's myriad problems exacerbated by and fundamentally linked to rampant political corruption and self-enrichment within the Maduro regime. In recent years, the U.S. government has sought to pressure Venezuela's government to change its behaviors, viewed as threatening to U.S. security interests, through the imposition of economic sanctions. The political corruption in Venezuela, as well as the sanctions with which the U.S. has responded, have created legal and compliance risks for U.S. businesses. While these challenges related to Venezuela predate the Trump administration (for instance, Congress passed the Venezuela Defense of Human Rights and Civil Society Act in 2014), there are new challenges to which U.S. businesses must adapt, including economic sanctions, anti-corruption, and anti-money laundering compliance risks for which global businesses should be prepared.

Recent Statistics on the Crisis

As documented by numerous credible sources, the general state of affairs in Venezuela is pretty terrible. Nicolas Maduro first declared a state of emergency in 2016, as inflation surpassed 250% according to International Monetary Fund statistics. The UN High Commissioner for Refugees estimated last year that least 3 million people, or about 10% of the country's population, have fled the country. A study performed by a consortium of Venezuelan universities found that the average Venezuelan lost 17 pounds in 2016 and 24 pounds in 2017. A Lancet Global Health publication this year cited the infant mortality rate as having increased by over 40% since 2006. By the end of 2018, IMF figures pegged inflation at 1,300,000%, a rate that caused the average good to double in price every 19 days, with the projected rate of inflation to possibly hit 10,000,000% in 2019. By comparison, the next-highest projected countrywide increase from the IMF is 73.4%, in Zimbabwe, and the Consumer Price Index in the U.S. rose by 2% last year.

U.S. Recent Responses

In January, the U.S. Department of the Treasury Office of Foreign Assets Control designated Venezuela's state-run oil company, PDVSA, on its sanctions list. Probably the most significant vehicle for public corruption in Venezuela, according to OFAC's statements in January of this year, billions of dollars have been embezzled from PDVSA to enrich political leaders in the Maduro government. Consequently, apart from certain temporarily authorized “wind down” activities, all PDVSA assets subject to U.S. jurisdiction are blocked, and U.S. persons are prohibited from conducting business with the company. OFAC has provided a window during which companies must “wind down” their business with PDVSA.

According to the U.S. Energy Information Agency, in 2018 U.S. companies bought 35.6% of Venezuela's oil exports (over 200 million barrels). Major oil and gas companies, such as Chevron, Halliburton, Schlumberger Ltd, Baker Hughes and Weatherford International, must cease transactions with PDVSA by July 27. Additionally, all payments made by CITGO, which is incorporated in the United States but ultimately majority-owned by PDVSA, must be made to a blocked account in the U.S.

The designation of PDVSA does not create risks solely for U.S. oil and gas companies but also for any company that has business related to the industry. For instance, these sanctions have an impact on the manufacturing, as well as insurance and banking industries. Additionally, since U.S. sanctions automatically extend to entities owned 50% or more by PDVSA, companies probably need to evaluate future transactions on a case-by-case basis: PDVSA has numerous subsidiaries and frequently utilizes third-party vendors. The U.S. government may also increase pressure on non-U.S. companies. U.S. officials have learned that threatening non-U.S. parties with so-called “secondary sanctions” can be very effective, as has been the case with respect to Iran. The U.S. already has acted against companies that they perceive as providing critical support to the Maduro regime, aiming sanctions in March of this year against a Moscow-based bank that according to the U.S. government provided financial services and other support for PDVSA's corrupt activities.

Additional Risks for U.S. Businesses

The root cause of these sanctions, pervasive public corruption in Venezuela and related human rights abuses, creates additional legal risks for U.S. businesses. One example of public corruption has significant legal implications for U.S. financial institutions, which may unwittingly launder proceeds of this corruption in possible violation of the U.S. Foreign Corrupt Practices Act and the U.S. Bank Secrecy Act. In 2016, the Maduro regime started the Comité Local de Abastecimiento y Producción program, which it described as a means to provide subsidized food to Venezuelan citizens. However, the program has provided little apparent relief to ordinary Venezuelans and enriched senior political officials in the Maduro regime. Widespread reporting suggests that both U.S. and international authorities are preparing enforcement actions against individuals involved with the CLAP program.

The corrupt scheme seems to work as follows: The Venezuelan government issues no-bid contracts at inflated prices to shell companies owned by co-conspirators and incorporated in Hong Kong, Panama, Delaware and Florida. The shell company receives the funds from the Venezuelan government and subcontracts the order at a market rate to a food company, “kicking back” the difference between the market price and the inflated contract price to a foreign bank account owned by the same individual. The shell company owner then employs various layering techniques to obfuscate the source of the money in an attempt to evade U.S. anti-money laundering regulations. U.S. financial institutions, therefore, may be used by the foreign account owner to transfer funds to one or more “nested accounts,” a U.S. bank account of a non-U.S. bank, ultimately for the beneficial owner of the intermediary companies used to hide the identity of the beneficial owner.

When the subcontracted companies provide the food shipments to the Venezuelan government, Venezuelan government officials seize another opportunity to enrich themselves at the expense of the Venezuelan people. Public officials sell the highest-quality food items on the black market, receiving compensation through those same foreign bank accounts. The remaining food is then distributed primarily to regions of Venezuela that back the Maduro regime, according to U.S. organizations trying to track the situation. A 2017 survey by the Center for Strategic and International Studies found that 83% of Maduro supporters reported that the CLAP program is their primary source of food, while only 14% of independents reported the same.

Corporate Compliance Takeaways from the Venezuelan Crisis

Under existing U.S. law requirements, such as the U.S. Bank Secrecy Act, U.S. financial institutions are required to establish sufficient compliance frameworks to detect, report, and prevent fraudulent transactions, such as those that may develop from the risks that have emerged as the crisis in Venezuela continues to deepen. Given the profound impact of Venezuelan corruption, especially on human rights, the U.S. government will continue to vigorously enforce economic sanctions and related laws relevant to the Venezuelan crisis. While the U.S. has foremost focused on Venezuelan government actors, enforcement may soon include businesses that do not take adequate steps to adjust their compliance practices in light of recent risks and economic sanctions.

In addition to perhaps the more apparent risks to the financial sector and oil industry, other industries also are affected. Oil is the primary import to the U.S. from Venezuela, but the U.S. also imports organic chemicals, aluminum, fish, and coffee from Venezuela. U.S. persons and businesses moreover purchase hundreds of millions of dollars in services, such as travel, financial, and telecommunications from Venezuelan companies each year. The U.S. government views sanctions as one of its strongest tools in applying pressure to the Maduro regime. As the situation in Venezuela continues to deteriorate, the scope of sanctions is expected to expand. To ensure they do not run afoul of the growing U.S. sanctions regimes, businesses likely should take care to implement several features of U.S. governmental compliance guidance, including a Framework for OFAC Compliance Commitments and the U.S. Department of Justice's Evaluation of Corporate Compliance Programs, such as the following:

• Review and, if necessary, improve the design of their existing compliance programs, to ensure that risks emerging from the Venezuelan crisis are adequately addressed.
• Ensure good faith implementation of corporate compliance programs that keep pace with evolving risks such as Venezuela, which requires: • Commitment from management, and • Ample training opportunities for employees.
• Monitor closely announcements from OFAC, which has issued fifteen press releases regarding sanctions in Venezuela this year alone.

Jo Ritcey-Donohue is the founder and principal at JRD Law in Washington, D.C. She represents the largest and most sophisticated sovereign and multinational corporate clients in matters relating to complex cross-border risk, corporate governance and compliance legal counseling. David Levintow is a summer associate at JRD Law. He is a rising 2L at The George Washington University Law School and a George Washington Scholar.