Venezuela: Circumventing Foreign Exchange Controls

Exchange controls in Venezuela have been in place since 2003.  In an effort to further control the nation’s currency, in 2005, Venezuela enacted the Foreign Exchange Crimes Act.  Under this law, parties involved in the purchase, sale, transfer, export, import or receipt of foreign currency within Venezuela, without the involvement and control of the Central Bank of Venezuela, are subject to fines and potential imprisonment.

Despite that restriction, until June 2010, it was possible and legal to engage in cross-border securities swaps to repatriate funds.  In short, a party could swap Venezuela-Bolivar denominated securities, such as Venezuelan government debt bonds (DPN bonds), for foreign currency denominated securities held abroad and subsequently liquidated these latter securities for foreign currency abroad.

Amendments to the Foreign Exchange Crimes Act enacted in May 2010 prohibited this swap mechanism.  The amendments characterized securities denominated in foreign currency as forms of foreign currency.  The law made straight swaps of Bolivars for U.S. currency or other foreign currency denominated securities unauthorized transfers of “foreign currency.”

A technique now used by multinational to obtain foreign currency and repatriate funds back the United States or other jurisdictions is to buy gold (or some other commodity) abroad and pay for it with Venezuelan securities denominated in Bolivars, namely DPNs.  Such a transaction apparently does not constitute a breach of the country’s foreign exchange system.  In sum, gold or securities denominated in Bolivars are not included in the definition of “foreign exchange” in the country’s Foreign Exchange Crimes Act.

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