U.S. sanctions create risks and challenges for Paraguay's business community

Background

On January 26, 2023, the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury sanctioned the former President of Paraguay, Horacio Cartes (Cartes), four companies owned by Cartes, and Hugo Velázquez (Velázquez), current Vice President of Paraguay.

OFAC designated Cartes, Velázquez, and the following four companies on the List of Specially Designated Nationals and Blocked Persons (SDN List, and persons thereon, SDNs):

• Tabacos USA Inc.
• Bebidas USA Inc.
• Dominicana Acquisition S.A.
• Frigorifico Chajha S.A.E.

(collectively, the Designated Cartes Companies). 

In addition, any entities owned 50% or more, directly or indirectly, by one or more of the newly-designated SDNs are subject to the same restrictions as the newly-designated SDNs themselves (all such persons, plus Cartes, Velázquez, and the Designated Cartes Companies, collectively the Paraguayan SDNs).

At the same time, OFAC issued two General Licenses (GLs), which authorize certain transactions related to winding down activities involving some of the Designated Cartes Companies and other companies owned 50% or more by Cartes. These GLs expire at 12:01am EDT on March 27, 2023.

As a result, as of January 26 – and especially after the expiry of the relevant GLs on March 27, 2023 – this means that any business dealings or other transactions with or for the benefit of any of the Paraguayan SDNs, will create serious risk of violating U.S. sanctions or becoming targeted by U.S. sanctions. This includes dealings with Cartes himself, the Designated Cartes Companies, and any other companies in Grupo Cartes or otherwise which are ultimately owned, 50% or more, by Cartes.

U.S. sanctions overview

OFAC designated Cartes, Velázquez, and the Designated Cartes Companies as SDNs pursuant to Executive Order 13818 (EO 13818) under the Global Magnitsky Human Rights Accountability Act. In addition, any entities owned 50% or more, directly or indirectly, by one or more SDNs are subject to the same sanctions. OFAC targeted Cartes and Velázquez because OFAC determined them to be involved in “rampant corruption that undermines democratic institutions in Paraguay”, and targeted the Designated Cartes Companies for being owned or controlled by Cartes.

As a result, the Paraguayan SDNs are subject to far-reaching property restrictions. The property and interests in property of all Paraguayan SDNs in the United States or within the possession or control of U.S. persons are blocked (e., frozen), and may not be transferred, paid, exported, withdrawn, or otherwise dealt in. U.S. persons¹ are prohibited from making or receiving any contribution or provision of funds, goods or services to, or for the benefit of, any person targeted under EO 13818. As such U.S. persons are generally prohibited from engaging in any dealings with or for the benefit of any Paraguayan SDNs in any manner. 

EO 13818 also prohibits any transaction that causes a violation of any of EO 13818’s other prohibitions. As a result, a non-U.S. .person may violate U.S. sanctions by engaging in any dealings with or for the benefit of any Paraguayan SDN which involve a U.S. nexus. This could potentially include any transactions which involve any U.S. persons (including U.S. person employees of non-U.S. companies), the U.S. financial system (including any U.S. correspondent banks), or U.S.  dollars.

Finally, EO 13818 authorizes additional sanctions against any persons deemed to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person sanctioned under EO 13818. As a result, any non-U.S. person that engages in any dealings with or for the benefit of any Paraguayan SDN risks becoming sanctioned in the same manner.

OFAC also issued two GLs when sanctioning the Paraguayan SDNs: GL 5 and GL 6.

• GL 5 authorizes certain transactions relating to debt and equity or derivatives contracts involving Frigorifico Chajha S.A.E.
• GL 6 authorizes certain transactions ordinarily incident and necessary to the winding down of transactions involving the Designated Cartes Companies and any other companies owned 50% or more, directly or indirectly, by Cartes.

These GLs are in effect until 12:01am EDT on March 27, 2023. Persons with existing relationships with newly-designated Paraguayan sanctions targets may be able to avail themselves of GLs 5 and 6 to exit such relationships without incurring risk under U.S. sanctions. However, the GLs are subject to various terms and conditions and any such transactions should be carefully reviewed.

Key risks

Paraguayan businesses should carefully evaluate existing relationships with the Paraguayan SDNs. To the extent such relationships can be unwound by March 27, 2023, this approach should be considered closely, though careful adherence to the terms of GLs 5 and 6 will be needed.

Following the expiry of GLs 5 and 6 (and beforehand, to the extent that any such dealings fail to comply with the terms and limitations of GLs 5 and 6), any dealings with or involving the Paraguayan SDNs which involve any kind of U.S. nexus will violate US sanctions. As U.S. sanctions are administered on a strict liability basis, this is true regardless of actual knowledge or due diligence exercised.

Even in the absence of any U.S. nexus, any Paraguayan businesses that transact with or for the benefit of any of the Paraguayan SDNs in any manner will risk being targeted with sanctions themselves, and subject to the same restrictions as the Paraguayan SDNs.

Key risks include:

• Banking relationships with Paraguayan SDNs;
• Provision of financing to, or for the benefit of, Paraguayan SDNs;
• Dealing in the services of Paraguayan SDNs – for example, negotiating with, or entering into contracts signed by, or on behalf of, Paraguayan SDNs; and
• Providing goods or services of any kind to, or receiving any goods or services from, Paraguayan SDNs.

Note that the risk of any of the foregoing will be significantly increased where USD or other U.S. nexus is involved, though this risk cannot be eliminated by avoiding any U.S. nexus.

Also, Paraguayan businesses that have financing arrangements from, or other relationships with, financial institutions and other businesses in the U.S. or other countries worldwide may violate sanctions provisions in underlying contracts to the extent they engage in any ongoing relationships with Paraguayan SDNs of any kind.

Finally – although Paraguayan SDNs that were not themselves designated on the SDN List may shed their sanctioned status if their sanctioned shareholder divests to below 50% ownership, OFAC may view any such divestitures with scepticism, or determine that the sanctioned shareholder still wields ultimate control of the business. OFAC may also sanction any persons acting for or on behalf of Paraguayan SDNs.

What Paraguayan businesses should do now

Carefully evaluate any existing business relationships with the Paraguayan SDNs, with particular attention to ongoing transactions that involve USD or any other nexus to the United States, such as involvement of U.S. persons.

Also evaluate whether any business relationships with non-sanctioned Paraguayan entities will involve direct or indirect dealings with Paraguayan SDNs (g., where Cartes is president of an organization, or where Cartes may be indirectly controlling an entity through family members or others).

Consider whether and how these relationships may be terminated under the terms of GLs 5 and 6, prior to March 27, 2023.

Assess risk of violating U.S. sanctions, or becoming targeted by U.S sanctions, as a result of ongoing business dealings with or involving Paraguayan SDNs, and consider best means of mitigating these risks.

Review existing financing and other relationships with U.S. and other foreign financial institutions to assess whether any direct or indirect dealings with Paraguayan SDNs would violate sanctions provisions or trigger notice obligations.

How Allen & Overy can help

Allen & Overy’s experienced U.S. sanctions team can assist Paraguayan businesses in:

• Evaluating risk exposure under U.S. sanctions arising from direct or indirect relationships or dealings with Paraguayan SDNs;
• Advising on risk of violating, or becoming targeted by, U.S. sanctions, and best means of reducing risk while minimizing impact to ongoing business operations;
• Preparing risk-based policies and procedures to mitigate ongoing risk;
• Training directors, officers, managers, and employees in sanctions risk mitigation;
• Preparing contractual language to use with counterparties to reduce risk of indirect exposure to Paraguayan SDNs from suppliers, customers, and other third parties;
• Assessing and managing contractual sanctions obligations in financing and other agreements; and
• Assisting with any contact from OFAC or other U.S. government entities in relation to the Paraguayan SDNs or other U.S. sanctions matters, including requests for information or subpoenas.

If you have any questions or would like to discuss these matters in greater depth, please reach out to any of the contacts at Allen & Overy listed here.

_{¹U.S. persons include, for these purposes, (i) U.S. citizens and permanent residents, (ii) entities organized under US. .law (including foreign branches), and (iii) persons located in the United States.}