Practical Tips to Stay Compliant

In order to assist compliance suites with this increasingly complex regime, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) has issued multiple FAQ’s. OFAC FAQs have been vital in understanding how to interpret the rules when dealing with Venezuelan transactions.

Nevertheless, five months after “debt sanctions” against Venezuela were issued, there is still a great deal of confusion among sanctions compliance officers about how to best comply. Many are still uncertain about what activity is covered, as well as what transactions are allowed or prohibited with regard to particular individuals or companies associated with the government of Venezuela. Some financial institutions have opted to play it “safe” and shut all business with Venezuela down.

Any misinterpretations of the complex sanctions regimes against Venezuela could carry a hefty fine. In order to assist, SanctionsAlert.com has interviewed legal and compliance experts in order to provide a ‘Top Ten’ list of practical tips on how to best tackle the Venezuelan sanctions regimes and to give your business the best chance of staying compliant.

 Practical Tip 1 –Evaluate Your Level of Exposure and Risk

 If you are going to continue to operate in Venezuela, the first step in identifying any compliance hurdles is for firms to determine their individual risk exposure and risk appetite.

A good starting point is “KYS” – Know Your Sanctions: Know exactly what is prohibited under the sanctions regime. For example, when OFAC issued the debt sanctions in August 2017, it also issued “General License 3”. This license permitted certain activity concerning bonds that would otherwise be prohibited. The license listed 70+ types of bonds that were permissible to trade and to hold, however, it did not initially identify which bonds were actually prohibited until about one week later,when OFAC issued a clarification about the nature of the prohibited bonds. As it turned out, they were not that common. In such a scenario, a financial institution, in an effort to comply swiftly, may have gone on an elaborate hunt for prohibited bonds and found out a week later, that this time-consuming and costly exercise had been premature.

Next step is to Know Your Customer (KYC), or determine a firm’s risk exposure by examining its client base, distributors, and partners. In order to do this, it is important to assess the adequacy of your existing KYC documentation as well as any connections that the firm may have with Venezuela, including any indirect links. It may be that some firms have no Venezuelan exposure, while some firms engage in business with Venezuela regularly. Each firm must determine its own risk appetite on an individual basis.

Most importantly, once risk appetite is identified, a firm must decide whether or not they have the resources at hand to deal with that risk.

Practical Tip 2- Identify Beneficial Owners

This may be harder than it sounds in many situations as those trying to evade sanctions can be very crafty in covering, or layering, their tracks.  According to Debra Geister, Managing Director of AML Advisory Services at consulting firm Matrix International Financial Services (IFS), “just like the Russian or North Korean sanctions, identifying any business in those jurisdictions presents a unique set of challenges. It puts additional burdens on the KYC/EDD teams to further dig into the potential underlying relationships of customers in those regions”. “It also presents challenges for correspondent banking or internal clearing for global banks”, she adds.

Firms should think logically about what types of business could be linked to Venezuela in consideration of their major industries and exports.

“Similar to the issues we saw with North Korean sanctions”, explains Ms. Geister, “there are challenges from the banks perspective to identify the beneficial owners of any entities that you may be doing business with. This layering to evade sanctions is something that definitely will occur. Venezuela is heavily involved in oil, gas and natural resources so any types of companies would be involved in those mining and exploration industries would be those I would target as higher risk, especially if they are doing business in the Latin American (LATAM) region”.

“We have to dig to identify those beneficiaries”, emphasizes Ms. Geister.

Practical Tip 3- Think Like the ‘Bad Guys’

Firms should also be prepared for sanctions violators to go to great lengths to evade sanctions.As such, compliance professionals should adopt the approach of trying to view a transaction in the eyes of the violator.

“A corrupt regime, such as the one in Venezuela, will look to evade sanctions”, claims Ms Geister. In order to be able to effectively identify suspicious entities and owners, a firm must always step‘into the shoes’ of those trying to evade sanctions in order to best identify suspicious entities and transactions.

“Try to put yourself in the position of having to evade detection. Think like the bad guys”, advises Ms. Geister. “Sanctions create large challenges and threats to a country’s economy. The stakes are high. Think about scenarios that would help you evade those controls. Based on experience, some of these entities go to great lengths to find ways around the sanctions. You want to make sure they are not doing it on your watch through your brand,” she warns.

Practical Tip 4 – Don’t Forget about Cryptocurrencies

In order to effectively identify suspicious transactions, it is necessary to go beyond the usual best practices of transaction monitoring and actively search for novel ways to identify those who may be trying to evade sanctions.One new way that sanctioned regimes, like Venezuela, are managing to evade sanctions is through the use of virtual currencies, or so-called cryptocurrencies.

“We were able to identify a scheme to move money using virtual currencies by creating a query of currency exchanges attached to accounts that were transacting in sanctioned jurisdictions”, says Ms. Geister.“Because we knew that these countries were trying to maneuver around the sanctions, we ended up finding a large number of accounts that were not only moving funds through virtual currencies to sanctioned countries, they were structuring those funds at high velocity”, she adds.

In fact, Venezuela is looking to create their own state-sponsored virtual currency called ‘Petro’, which could potentially help the country to evade sanctions by positing a financial infrastructure outside the control of any central authority.

On January 19, OFAC clarified in their FAQs that: “A currency with these characteristics would appear to be an extension of credit to the Venezuelan government.   Executive Order 13808 prohibits U.S. persons from extending or otherwise dealing in new debt with a maturity of greater than 30 days of the Government of Venezuela.  U.S. persons that deal in the prospective Venezuelan digital currency may be exposed to U.S. sanctions risk.”

Practical Tip 5 – Look to Similar Sanctions Regimes for Interpretive Clues

Though the new Venezuelan sanctions regime can seem very daunting, it is by no means the first of its kind. It can be a good idea to examine preceding sanctions regimes, such as those imposed on North Korea and Russia, for clues on how OFAC will interpret the Venezuelan regime.

Peter Jeydel, Associate at Steptoe & Johnson LLP in Washington, D.C., says that, “OFAC’s Venezuela sanctions program shares a lot of features in common with the Russia/Ukraine primary sanctions program.  It can often be instructive to look to the Russia/Ukraine program for guidance on how OFAC may apply “new debt” prohibitions in the Venezuela context”.

In relation to sanctions against Russia, OFAC has thus far construed the term ‘new debt’ very broadly to include not only bonds, but also virtually any extension of credit. This can include loans and even payment terms in commercial transactions.

That being said, Mr. Jeydel goes on to extend a word of caution:  “Although there are important differences between those programs, so one should not assume that Russia/Ukraine-related guidance necessarily will apply in the Venezuela context.”

Practical Tip 6 – Make Use of PEP Lists

As any good compliance professional will tell you, identifying suspicious transactions does not start and end with OFAC’s SDN List. There are many other lists that can be indicative of a higher risk individual. One of these lists is the Politically Exposed Persons (PEP) List.The Financial Action Task Force (FATF), a standard- setting body for money laundering, defines a PEP as “an individual who is or has been entrusted with a prominent public function.”

Ms. Geister tells us that, “PEP lists are one of the best tools we have to identify those sanctioned entities and also those that have any connection to them”.

These lists can be especially useful in identifying suspicious individuals and their connected entities when dealing with a corrupt regime, such as the one in Venezuela.

Practical Tip 7 –For EU Compliance Officers, U.S. Rules Could Provide Clues

Though the E.U. has also recently cracked down on Maduro’s government, individuals and entities are yet to be designated. Nadiya Nychay, Partner at Dentons in Brussels, believes there may be some merit for E.U. compliance professionals in staying on top of U.S. designations.

The E.U. foreign ministers imposed economic sanctions and arms embargo, on Venezuela on November 13, 2017, in response to the ongoing humanitarian crisis in the struggling South American state (EU Council Regulation 2017/2063).

Ms. Nychay says that,“The EU recently made its first Venezuelan smart sanctions designations.  The seven people designated – all high-level Venezuelan officials – were sanctioned for, among other things, human rights violations (including torture) and undermining the rule of law in Venezuela.From a practitioner’s perspective, it is notable that six out of these seven have already been named Specially Designated Nationals under the US’ Venezuelan sanctions program.   This suggests a high-level of coordination between the EU and US, and that future EU and US Venezuelan designations can be anticipated to hew closely to one another.  Continued harmonization between the two regimes will be valued by international companies active in both jurisdictions, as it will simplify sanctions compliance across the corporate group.”

Practical Tip 8 – Invest in Transaction Monitoring

If nothing else, the new Venezuelan sanctions have greatly increased the number of alerts that are being received by compliance professionals doing business in the LATAM region on a daily basis.

For those institutions that identify a moderate to high-risk appetite with regard to Venezuela, it may be time to think about investing in a transaction monitoring system to help in identifying suspicious transactions. Most experts say that the added costs of having such a system are greatly outweighed by the value it brings to their firm as a whole, as well as to their day-to-day work.

Now more than ever, the market is littered with products that can help to identify sanctioned entities, and it may be advisable for firms that have any exposure to sanctioned businesses or countries to look into a tool that can assist.

Practical Tip 9–Keep Alert for Future Designations

Unlike some other sanctions regimes that are likely to stay static for the time being, Venezuelan sanctions may change in the near future, and not for the better.The U.S. government has already declared its intention to extend and broaden sanctions against the South American country and compliance suites would be wise to take heed.

“If they aren’t sanctioned this week, odds are they will be next week”, warns Vanessa Neumann, President of counter-threat finance consultancy – Asymmetrica – and author of “Blood Profits.”

“As the situation in Venezuela becomes ever more dire, we can anticipate an increasing use of the Global Magnitsky Act, which has enormous powers to to impose financial sanctions and visa restrictions on foreign persons in response to certain human rights violations and acts of corruption. That is in addition to Kingpin Act sanctions, which we can also expect to see more of, as the regime becomes ever more desperate for alternate forms of financing,” she adds.“In short, business with Venezuela, while the Maduro regime remains in power, will prove a major challenge for compliance officers.”

Practical Tip 10 – Don’t Forget Canadian Lists

So far, Canada’s economic sanctions against Venezuela have been restricted to listed persons measures. On September 22, 2017, under SIMA, Canada imposed a broad ban on engaging in activities with President Nicolás Maduro and 39 other listed individuals alleged to be involved in undermining the security, stability or integrity of democratic institutions of Venezuela.

On October 18, 2017, Canada’s Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law) came into force, allowing for the first time sanctions to be applied to foreign nationals considered to be responsible for or complicit in gross violations of human rights or acts of significant corruption. On November 3, 2017, a list was established under the Sergei Magnitsky Law identifying 52 foreign nationals; these included President Maduro and 18 other Venezuelan officials, some of whom were already listed under the SIMA measures.

“Although at the present time, there are no general prohibitions on doing business with Venezuela or certain sectors of the Venezuelan economy, firms doing business abroad should be screening their counter parties against these and other sanctions lists to ensure they do not engage in any dealings with these listed persons and the entities they own or control,” says John Boscariol, Partner at McCarthy Tétrault in Canada.