On February 9, Reuters reported that, against the background of US sanctions, Venezuelan state-owned oil company Petróleos de Venezuela (PdVSA) informed its clients and partners that they should henceforth transfer money to new accounts at Russia’s GazpromBank. Within a matter of hours, the Russian bank responded that it had not opened accounts for the Venezuelan company; the promptness of that response suggests that GazpromBank understand the rules of the sanction game all too well. Exactly a week later, Reuters then reported that the Venezuelan company’s accounts at a Russian bank had been frozen (PdVSA denied this on its Twitter account.)
The precise status of PdVSA’s business accounts at GazpromBank has yet to be established. However, the US Treasury’s Office of Foreign Assets Control (OFAC) is closely monitoring developments; they will probably have the final word in this strange story.
Venezuela’s Toxic Oil
The regime of Venezuelan President Nicolás Maduro is under severe US sanctions. In 2017, the entire Venezuelan political and military elite under his leadership was placed on the SDN (Specially Designated Nationals and Blocked Persons) sanctions list.
On January 28 this year, on the basis of President Donald Trump’s Executive Order No. 13850, the US added the oil and gas company PdVSA to its sanctions list. It was an important move; the company plays a immensely important role in funding the Venezuelan state budget. PdVSA landed on the sanctions list not simply due to its close links to the Maduro regime, but also due to the role it has played in corruption, embezzlement, and money laundering. Even the official press release for the decision runs to seven paragraphs instead of OFAC’s usual two sentences. The US authorities’ justification is striking: «As Venezuela’s state owned oil company, PdVSA has long been a vehicle for corruption. A variety of schemes have been designed to embezzle billions of dollars from PdVSA for the personal gain of corrupt Venezuelan officials and businessmen.,» reads the release.
And so, an armada of tankers heavy with Venezuelan oil drifts around the Gulf of Mexico. Everybody, especially American buyers, are afraid to accept it. Unlike the case of Russian oligarch Oleg Deripaska’s Rusal and En+ companies, the US authorities did not establish a transition period to bring the new restrictions in force. As of January 28, 2019, PdVSA is under sanctions and all US citizens and internationally operating companies with US participation are prohibited from doing business with PdVSA (they are also obliged to freeze all funds and assets of the Venezuelan oil company.) The only exception applies to American citizens living in Venezuela, and only so that they can continue to fill up their cars. On February 15, Manuel Quevedo, the head of PdVSA, also fell under sanctions.
How Banking Sanctions Work
Immediately after a company such as PdVSA lands on the United States Sanctions List (SDN), the sanctions unit of the US Treasury’s Department of Foreign Assets Control (OFAC) starts monitoring US residents for any signs of enduring ties with sanctioned individuals. Two files are created for each person named on the sanctions list; one digital and one on paper. OFAC carries out these control functions independently, without recourse to government agencies of the US or those of any other state. In effect, the department’s main working tool is the Internet, and any information on a sanctioned person’s communication with anybody else is appended to PdVSA’s file. The purpose of this activity is simple: to use open sources to discover and documents any attempts to avoid, evade, or violate these US sanctions and other restrictions.
Western banks are another important source of information about violations of the sanctions regime and people who attempt them. Some 99% of financial transactions made in US dollars are conducted via US banks; this means that as soon as a joint venture partner or oil buyer sends a payment in US dollars to a PdVSA account at a Russian bank, any corresponding bank based in the US will block it. If the PdVSA business partner tries to send the payment in Euros it will be blocked, for example, by a German bank in Frankfurt am Main. Here the inquisitive reader might wonder why a European correspondent bank would block a transaction which violates a US sanctions regime. The reason is simple; Germany is in the EU, where bank compliance is not subordinate to shareholders and the bank’s own management, but instead to regulators: the national central bank and the European Central Bank (ECB.) These European regulators are well aware that European banks do not want to risk violating US sanctions.
Consequently, the European correspondent bank will immediately notify the US Finance Ministry about the blocked transaction in order to free itself from possible administrative liability under US law. But if the correspondent bank is American or the payment is made in US dollars, then the Financial Crimes Enforcement Network (FINCEN), OFAC’s parent department, will see the status of these transactions in real time and share the information with OFAC immediately.
OFAC must now establish whether the transaction was a violation of US financial law and sanctions regimes. As its main task is to determine whether it was the bank’s intent to violate US law, OFAC will then investigate any connections the bank might have to US jurisdictions. Whether it does or not plays a large role in determining the degree of the bank’s responsibility; if the bank is found to have assets or any other kind of presence in the US, it must either pay a fine equal to the prohibited transfer it facilitated, or a sum of $ 295,200 for each such transfer. If the bank is not found to have any significant connections to US jurisdictions, secondary sanctions can be imposed against it. In this case, the head of OFAC Andrea Gacki, who is responsible for the enforcement of sanctions, will draft a resolution formally adding the bank to the SDN sanctions list.
That draft resolution will end up on the desk of US Secretary of the Treasury Steven Mnuchin, who has the power to sign it and approve the bank’s entry into the SDN sanctions list. If the bank is already found to be subject to sectoral sanctions, then it will simply be «upgraded» to the full sanctions list.
In any case, a bank which lands on this list will become too toxic to deal with. As a result, all US, western, and international companies will immediately cease their relationship with the bank and immediately freezing assets, funds, and payments in makes.
What Awaits Russian Banks Who Still Deal with PdVSA?
Undoubtedly, any bank which counted a state-owned monopoly as one of its clients would have cause for celebration. But no less undoubtable is the role that the US plays as architect and conductor of the modern global financial system. Therefore, the US has also come to call the shots in the global sanctions system.
According to the Oxford dictionary, the adjective «toxic» was 2018’s word of the year. It’s a word with particular relevance to our topic. After all, OFAC is hardly the only body which enforces compliance with US laws and regulations; businesses involved in such large transactions have a considerable interest in doing so themselves. No bank wants to repeat the fate of France’s BNP Paribas, which was fined $ 9 billion by the US authorities for making payments in prohibited jurisdictions to the benefit of individuals subject to sanctions. On February 14, it became known that the Helsinki District Court had dismissed an attempt by Boris Rotenberg, a Finnish-Russian citizen, to file a lawsuit against three Finnish banks which had denied him their services as they had to abide by US sanctions. In autumn 2014, they had refused to administer the businessman’s accounts; four years later, Rotenberg demanded that such a refusal be declared illegal, but the possible repercussions for the banks outweighed the violation of the rights of a client who was subject to US sanctions.
That is to say, the Helsinki court ruled that the banks’ refusal to continue offering services to Mr. Rotenberg was not illegal. Any bank and any large international company incorporates a compliance department, which assesses the risks of each business decision and its possible ramifications. For example, to this day neither Sberbank nor VTB, two of Russia’s largest banks, have opened branches in Crimea. The experience of recent years clearly shows that should a potential client raise the slightest suspicion of sanctions related controversy, compliance departments categorically advise against entering into any business relationship with them, or carrying out any actions on their behalf. Many of these processes are now automated; within an hour after a company’s inclusion on the sanctions list, the internal compliance departments of western banks will block any accounts linked to the implicated individual. And it doesn’t matter how great the desire to do business; making any payment to such a person will be impossible.
Therefore any Russian bank offering services to a company under sanctions risks repeating the fate of Mosoblbank and SMP Bank. The latter came under US sanctions at the end of April 2014 due to being under the control of the Rotenberg brothers, influential members of Putin’s inner circle. The former came under US sanctions on December 22, 2015, after OFAC established that it was also under the control of the brothers. Both banks immediately closed correspondent accounts abroad, while VISA and MasterCard systems refused to recognise their customers’ bank cards. Each received a letter from the SWIFT system operator notifying them that transfers abroad from these banks were now unavailable.
So while Russian banks may be greatly tempted by the chance to take on an extremely profitable new client, the chance of landing on a sanctions list is no less great. Does any bank really want to take that risk?
Whatever the outcome of Maduro’s negotiations with the Russian authorities over PdVSA’s accounts at GazpromBank, one thing is for certain: OFAC is poised to make new entries to its file on PdVSA. Thanks to their access to the SWIFT system, US Treasury staff are waiting for the first person to make that fateful payment into the wrong Russian bank account. Would the Russian bank then credit such a payment?
If it does, the ball is in OFAC’s court; and the stakes have never been higher.