U.S. warns bondholders that negotiating with Venezuela may be illegal

WASHINGTON (Reuters) - The U.S. Treasury has warned bondholders that dealing with Venezuela’s chief debt negotiators, both of whom are blacklisted by the United States, would be “problematic” and could lead to stiff penalties under U.S. sanctions.

Venezuela's President Nicolas Maduro holds a 100,000 bolivar note as he speaks during a meeting with ministers in Caracas, Venezuela, November 1, 2017. Miraflores Palace/Handout via REUTERS

Last week, President Nicolas Maduro invited creditors to a Nov. 13 meeting in Caracas to kick off talks to discuss a restructuring of some $60 billion in Venezuelan bonds.

Creditors have been balking at the proposal, citing concerns over the U.S. sanctions and the security situation in the city.

Maduro charged Vice President Tareck El Aissami, named by U.S. authorities as a drug ‘kingpin’ for his alleged dealings with drug traffickers, with leading the talks.

Another major player in negotiators would be Simon Zerpa, acting economy minister and finance boss of state oil company PDVSA, who is also under U.S. sanctions for alleged corruption.

Both are designated by the United States as a Specially Designated National (SDN).

The U.S. Treasury said that while creditors were not prohibited from attending meetings related to bonds under General License Three of an Aug. 25 executive order by President Donald Trump, any dealings with officials on the SDN list was forbidden.

The order was aimed at ensuring that U.S. investors did not help to finance Maduro’s expansion of a rule that Trump has described as undemocratic. It bans purchases of new equity and debt issued by Venezuela with a maturity greater than 30 days, and by PDVSA with a maturity greater than 90 days.

“While there is no prohibition on U.S. persons attending a meeting related to bonds on the annex to General License Three, the involvement of persons on the SDN list in these meetings appears problematic,” the U.S. Treasury said in guidance shared with Reuters on Wednesday.

“U.S. persons should be cautious in dealings with the Venezuelan government to ensure that they are not engaged in transactions or dealings, directly or indirectly, with an SDN,” it said.

The Treasury said sanctions covered U.S. citizens and green card holders, as well as U.S.-based banks and their foreign branches. Under the U.S. “Kingpin” Act, anyone breaking the law could face up to 30 years in prison and fines of up to $5 million, according to the Treasury.

Financial institutions or businesses could face fines of up to $10 million if they broke the law, it warned.

“Looking at this right now U.S. bondholders will probably not be able to participate in the restructuring,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics.

But even if loopholes existed in the sanctions that allowed the restructuring of some old debt, creditors would likely stay away because any engagement with Venezuela was too risky, according to sanctions experts.

The White House said it was aware of the announced debt restructuring but said: “It was Maduro’s irresponsible economic policies that led Venezuela to this unfortunate situation.”

“He has presided over the long-running and complete collapse of his economy, the looting of the Venezuelan people’s inheritance, and the erosion of the rule of law,” a White House spokeswoman told Reuters.

Maduro has said that Venezuela is the victim of an “economic war” waged by political adversaries and fueled by U.S. sanctions.

Reporting by Lesley Wroughton, Editing by Rosalba O’Brien