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.
By presidential decree, Maduro initiated the establishment of the National Constituent Assembly (ANC) in July 2017 outside of Venezuela’s constitutional framework with the directive of re-writing Venezuela’s constitution. The illegitimate ANC has since created numerous other laws, including the 2017 Foreign Investment Law, further eliminating the National Assembly’s role. These legislative processes were not transparent and did not allow room for public comment. These regulations were not data-driven, but rather created to serve the political agenda of the Maduro regime. Executive agencies generally develop and promulgate implementing regulations without consulting private sector representatives of the affected sectors. Regulations are inconsistently enforced, and the 2017 Foreign Investment Law does not mention an enforcement mechanism. It is unknown as to whether such information will follow in supplemental documents. The law does mention the application of fines for violating it statutes, but it does not describe how they would be levied. Laws and regulations are published as official gazettes and can be found online at http://www.imprentanacional.gob.ve/ .
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. While Venezuela is no longer a voting member of Mercosur, in practice, commercial and trade operations remain relatively unchanged. 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 UNCITRAL’s 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.
The 2017 Foreign Investment Law states, “Provided that the internal judicial remedies have been exhausted and previously agreed upon, the Bolivarian Republic of Venezuela may participate and make use of other dispute resolution mechanisms built within the framework of the integration of Latin America and the Caribbean, as well as in the framework of other integration schemes.”
Laws and Regulations on Foreign Direct Investment
Navigating the various investment law requirements remains challenging (see section on Limits on Foreign Control and Right to Private Ownership and Establishment). Obtaining legal counsel is recommended to ensure compliance with laws and regulations. Additionally, the 2017 Foreign Investment Law was passed by the illegitimate ANC, a legislature not recognized by most of the world. Its policies are described below. A description of the guidelines for foreign investment under the prior Foreign Investment Law of 2014 can be obtained by reading the 2017 Investment Climate Statement.
The 2017 Foreign Investment Law designates MPPCOEXIN as the regulatory authority for foreign investment. 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 residents abroad who invest in Venezuela; non-Venezuelans resident in Venezuela who undertake investments in Venezuela. The law defines an investment as “those resources lawfully obtained and destined by a national or foreign investor to the production of goods and services, incorporating raw materials or intermediate and final products with emphasis on those of origin or national manufacture, which contribute to the creation of decent work, promotion of small and medium industry, endogenous productive chains, as well as the development of productive innovation.”
Foreign investment must be for a minimum value of eight hundred thousand euros (€ 800,000) or six million five hundred thousand renminbi (6,500,000) or its equivalent in another foreign currency. The investment must be for at least two years. MPPCOEXIN may exceptionally approve an investment of no less than ten percent of the amount described above for the promotion of SMEs. Upon completion of the two-year period, investors may, upon payment of taxes and other liabilities, make remittances abroad.
Foreign investors will have the right to remit abroad annually 100 percent of the proven profits or dividends that come from their foreign investment in freely convertible currencies. However, in cases of “force majeure or extraordinary economic conditions,” the National Executive may reduce this percentage between 60 percent and 80 percent of the profits.
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.
A notable addition to the 2017 Foreign Investment Law is the explicit prohibition of foreign investors’ involvement in “political debate.” “They cannot participate directly or indirectly in the national political debate or contribute directly or indirectly to the formation of opinions on topics of public interest in the media.” In addition, “companies and their representatives in their capacity as representatives of the same or using the links generated by it may not contribute through donations, contributions, rents and/or logistical facilities, with institutions public or private, or non-governmental organization.” 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 MPPCOEXIN or another competent authority provides them with a foreign investment registration. ProVenezuela, the GBRV’s new investment and export promotion agency, will supposedly be in charge of registration. However, the new Foreign Investment Registry and associated contractual process is not yet complete.
Competition and Anti-Trust Laws
Procompetencia, the Superintendence for the Promotion and Protection of Free Competition, was previously the government agency responsible for regulating businesses to ensure competition exists to benefit consumers and producers. Procompetencia has since been rebranded as the Anti-Monopoly Superintendence with the slogan “Combating the Economic War.” Information regarding this organization is limited, and the website no longer functions.
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 (Confederacion 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 least 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 U.S. 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 U.S. 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.