What companies are targeted by the Order?

The Order applies to the securities of any company designated as a “Communist Chinese military company” (CCMC) by the U.S. Department of Defense (DoD) or Treasury’s Office of Foreign Assets Control (OFAC). The Order initially applies to 31 companies previously designated as CCMCs by DoD earlier this year. The Order will also apply to newly listed CCMCs 60 days after they are designated by the U.S. government.

As written, the Order does not appear to apply to subsidiaries of CCMCs that are not explicitly designated by DoD or OFAC. Further guidance from OFAC on that point would be helpful, however.

What securities are subject to the Order?

The Order applies to all publicly traded securities of CCMCs, including securities that are derivative of or are designed to provide investment exposure to CCMC securities. The Order defines “securities” to include those specified in Section 3(a)(10) of the Securities Exchange Act of 1934.

Are there any exceptions?

The Order allows U.S. persons to divest from existing holdings in the currently listed CCMCs until November 21, 2021, provided that the securities are sold to non-U.S. persons. The Order provides for a 365-day divestment period for CCMCs that are designated in the future. Similar divestment periods are available under various OFAC sanctions programs that target securities.

What’s next?

We expect OFAC to issue guidance clarifying the scope of the Order before it becomes effective, as the agency has done for similar sanctions programs in the past. There are a number of questions that could be addressed by the agency, including how the Order will apply to U.S. broker dealers who facilitate divestment activities by U.S. persons and transactions by non-U.S. persons, U.S. and non-U.S. funds that are backed by CCMC securities, and to what extent the Order will apply to subsidiaries of listed CCMCs.

Notably, the Order takes effect only nine days before the inauguration of the Biden administration. The next administration could suspend or modify the Order, although immediate action on the Order may not be a top priority given other challenges the administration is expected to face upon taking office.

• Dealing in ‘new debt’ of Petróleos de Venezuela (PdVSA), Venezuela’s state-owned oil company, that has a maturity of more than 90 days;
• Dealing in ‘new debt’ of the rest of the “Government of Venezuela” that has a maturity of more than 30 days;
• Dealing in bonds issued by the Government of Venezuela issued prior to Executive Order;
• Transactions related to divided payments or other distributions of profit to the Government of Venezuela from any entity owned or controlled by the government; and
• Purchase certain securities from the Government of Venezuela.

The “Government of Venezuela” is defined broadly, to include entities owned or controlled by the government, including PdVSA and the Central Bank of Venezuela, and to any person acting for or on behalf of the government. According to FAQs issued by OFAC, the Executive Order’s restrictions apply to all entities owned directly or indirectly, 50 percent or more, by PdVSA or the Government of Venezuela. Because the Government of Venezuela is defined to also include entities “controlled” by the government, it is possible that the financial restrictions may also apply to entities in which the government has a controlling, but less than 50 percent, interest. We expect that OFAC will need to clarify this issue in the coming weeks.

According OFAC’s FAQs, impermissible transactions involving PdVSA or the Government of Venezuela must be rejected and reported to OFAC within 10 days of rejection pursuant to Part 501 of OFAC’s regulations.

OFAC also issued several general licenses today. General License 1 authorizes certain wind down activities through September 24, 2017 and General License 2 exempts Citgo and all of its subsidiaries from the new restrictions. The other general licenses involve dealings in certain Venezuelan bonds and the export of medicine, food, and medical devices.

Exporters and companies that do business in Venezuela or with Venezuelan entities need to review their contracts, including payment terms, to ensure compliance with these new sanctions.