Transparency of the Regulatory System
Venezuela’s regulatory and legal system lacks transparency, is unpredictable, and suffers from corruption. The GBRV’s ruling United Socialist Party of Venezuela (PSUV) and its allies control the executive branch, including all regulatory agencies, the judiciary, the electoral authority, and a theoretically independent branch composed of the Attorney General, the Comptroller General, and the Public Defender (or ombudsman). International observers believe the executive branch exercises undue influence over the judicial, regulatory, and electoral authorities. In December 2015 a coalition of opposition parties won control of the National Assembly. Proposed laws are generally presented for two rounds of discussion in the National Assembly, but the PSUV-dominated Supreme Court has struck down all laws that the opposition-controlled National Assembly has passed, to date. The Supreme Court has ruled that the president has the ability to issue new laws by decree, circumventing the normal legislative process. Executive agencies generally develop and promulgate implementing regulations without consulting private sector representatives of the affected sectors. Regulations are inconsistently enforced.
International Regulatory Considerations
Venezuela is a member of the Southern Common Market (Mercosur), a full customs union and a trading bloc. After joining in July 2012, Venezuela had four years to fully adopt the trade bloc regulations. Venezuela’s membership was suspended in December 2016 due to its failure to implement 200 Mercosur norms and regulations. Venezuela has been a member of the World Trade Organization since 1995.
Legal System and Judicial Independence
Venezuela’s legal system is based on the civil law tradition, reflecting Napoleonic and continental European influences. The commercial and civil codes address most business matters. The investment law stipulates that foreign investments shall be subject to the jurisdiction of Venezuelan courts and any bodies in which Venezuela might participate within the framework of Latin American and Caribbean integration. Venezuelan legal analysts have conflicting views regarding whether the law eliminates the possibility of arbitration. The legal system is generally slow and inefficient, and lacks independence from the executive branch.
Venezuelan law provides for commercial arbitration, based on The United Nations Commission on International Trade Law’s (UNCITRAL) model arbitration law. The private sector Venezuelan Business Center of Arbitration and Conciliation (CEDCA) offers arbitration services. Additional information is available at http://www.cedca.org.ve/ . Venezuela withdrew from the International Centre for Settlement of Investment Disputes (ICSID) in 2012.
Laws and Regulations on Foreign Direct Investment
Navigating the various investment law requirements remains challenging (see Section 2 – Limits on Foreign Control and Right to Private Ownership and Establishment). Obtaining legal counsel is recommended to ensure compliance with laws and regulations.
A 2014 foreign investment law designates the Venezuelan currency commission, the National Center for Foreign Commerce (CENCOEX) as the regulatory authority for foreign investment, under oversight of the Commerce Ministry. This law stipulates the following legal entities and physical persons are subject to its measures: foreign businesses (51 percent or more owned by non-Venezuelans) and their affiliates and subsidiaries (50 percent or more owned by a foreign business); national companies subject to a strategic plan by two or more states; national companies that capture foreign investment as defined by the law; Venezuelans and non-Venezuelans resident abroad who invest in Venezuela; non-Venezuelans resident in Venezuela who undertake investments in Venezuela. The law defines an investment as any legally obtained resources used for the production of goods and services, particularly those of national origin or manufacturing, that contribute to creating jobs, promoting small and medium enterprises (SMEs), local production chains, and innovation. It also includes financial, tangible, and non-tangible assets, as well as reinvested earnings.
Tangible goods are required to make up at least 75 percent of the value of the foreign investment. Foreign investment must be for a minimum value of USD 1 million and for at least five years, CENCOEX may exceptionally approve an investment of no less than USD 100,000 for the promotion of SMEs. After the initial five years and payment of any financial obligations, a foreign investor may repatriate up to 85 percent of the registered foreign investment. This condition is waived if the foreign investor instead sells the business to local investors who will continue to operate the business. In those cases, the foreign investor may repatriate 100 percent of the investment.
The payout of earnings and dividends is done in the local currency in Venezuela. No more than 80 percent of earnings may be repatriated in hard currency in any fiscal year. The GBRV may undertake special measures regarding foreign investments and technology transfer, including limiting earnings and capital repatriation, if extraordinary circumstances affect Venezuela’s balance of payments or international reserves. Neither CENCOEX, nor its predecessor, CADIVI, has authorized USD sales for purposes of earnings or capital repatriation since 2008 (see Section 6 on Foreign Exchange and Remittances).
By law, all foreign investors must contribute to the production of goods and services to satisfy domestic demand and promote non-traditional exports; aid in economic development, research, and innovation; participate in Venezuelan government economic policies; implement responsible business conduct programs consistent with international standards; and align to the objectives of Venezuela’s national economic policy. Failure to comply subjects a foreign investor to revocation of the foreign investment registration and monetary fines.
Foreign investors will enjoy rights as foreign investors once CENCOEX or another competent authority provides them with a foreign investment registration. New regulations should be available on CENCOEX’s website: http://www.cencoex.gob.ve/ .
Competition and Anti-Trust Laws
Procompetencia, the Superintendence for the Promotion and Protection of Free Competition, is the government agency responsible for regulating businesses to ensure competition exists to benefit consumers and producers. In theory, the agency also helps the Ministry of Commerce development public policies by carrying out studies on economic sectors, research the impact of prices on markets, and review commercial laws. However, its role has been significantly diminished over the past several years as the government has elected to use more direct methods to intervene in cases of perceived anti-competitive behavior.
According to the website http://www.procompetencia.gob.ve/ , Procompetencia has been rebranded as the Anti-Monopoly Superintendence with the slogan “Combating the Economic War.”
Expropriation and Compensation
According to the Law on Expropriation for Public Cause or Social Use (2002), Article 2 explains that expropriation is justified when the State acts “for the benefit of a public or social interest” and can be undertaken through the forced transfer of property or other rights of individuals to the government pending a final judgment by the judiciary and “timely” payment of fair compensation.
Article 3 states that assets are considered of public interest/use when they directly provide uses or improvements for common benefit. This executive power has been interpreted broadly, used regularly as a threat to force businesses to act in accordance with the government’s wishes, and carried out frequently in the last fifteen years. In many cases, companies have argued that they have not received the payment of adequate compensation, if any, and foreign companies regularly seek judicial rulings on expropriation outside Venezuela’s jurisdiction when possible (see below).
The industry association CONINDUSTRIA (Confederación Venezolana de Industriales) estimates that there were 700 state interventions (nationalizations or other seizures of private property) during the period 2002 to 2016. The GBRV has not specifically targeted U.S. firms in its expropriations, but many expropriations and investment disputes have involved U.S. businesses. At leave five investment disputes involving firms with U.S. affiliations are ongoing at the International Centre for Settlement of Investment Disputes (ICSID).
ICSID Convention and New York Convention
On January 24, 2012, the GBRV withdrew as a member state from the ICSID Convention. Twenty-four cases pending before ICSID remain active. These pending cases are not affected by Venezuela’s renunciation of the ICSID convention. Between the date of the notice of renunciation and the date when it became effective, foreign investors had an additional six months to file new claims against Venezuela. Because the United States and Venezuela do not have a bilateral investment treaty, ICSID may not have jurisdiction to consider claims raised by U.S. businesses against the GBRV. Some businesses have instead filed claims based on the jurisdiction in which subsidiaries of the U.S. based parent corporation are located, when a bilateral investment treaty is in place in that jurisdiction. Since 2013, ICSID has returned judgments in favor of several claimants. The GBRV has sought to annul ICSID’s judgments within the ICSID forum and to challenge claimants’ efforts to enforce the judgments in U.S. and European courts.
Venezuela is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) and a member of the International Chamber of Commerce’s International Court of Arbitration, which covers commercial disputes.
Investor-State Dispute Settlement
The United States does not have a Bilateral Investment Treaty (BIT) or Free Trade Agreement (FTA) with Venezuela. Numerous investment disputes involving U.S. companies have occurred over the past 10 years. Venezuela has a history of extrajudicial action against foreign investors.
International Commercial Arbitration and Foreign Courts
No alternative dispute solution mechanisms are available as a means to settle disputes between two private parties. Venezuelan court processes are not transparent or consistent in their methods of reaching decisions.
Venezuela’s bankruptcy laws are outdated and inadequate to permit the reorganization of a debtor as a going concern. Insolvent companies that file for bankruptcy or reorganization generally lose control of their businesses and assets to a receiver and a bankruptcy judge, giving creditors fewer options to assert their interests in the process, compared to bankruptcy proceedings in other jurisdictions. All financial and commercial unsecured creditors are treated equally, but they are subordinated to the debtor’s employees, who are due unpaid wages and other labor benefits, as well as to certain taxes. The bankruptcy trustee and advisors also have a statutory preference over all other creditors. Under the commercial code, all creditors that are not secured by a legal and valid security interest, or have a preference as mandated by law (e.g., the debtor’s employees) must be treated equally by the bankruptcy court. Lawyers say Venezuela’s bankruptcy laws incentivize debtors and creditors to negotiate settlements outside the context of formal bankruptcy proceedings.