President Donald J. Trump speaks to a gathering of Venezuelan-Americans at Florida International University. Photo Credit: Andrea Hanks, White House.
This piece is co-authored by American Enterprise Institute Research Fellow, Dr. Ryan C. Berg, and SSP student, Josh Chang
On July 23, the US Department of Treasury sanctioned Santiago and Ricardo José Morón Hernández for their role in selling state assets and illegal gold abroad to finance the regime of Nicolás Maduro in Venezuela.[i] This event highlights an incessant game of “whack-a-mole” between the Maduro regime and the U.S. as Washington generates new sanctions to block the regime’s revenue sources and as Maduro’s associates devise ways to slide past these restrictions. With Maduro firmly entrenched in power and a political transition unlikely to transpire in the short-term, Washington must evaluate how effective its sanctions architecture has been against the regime and how it can improve upon it.
Starting in the early days of Donald Trump’s administration, the U.S. has erected a sanctions net around Venezuela that covers regime officials, state-owned enterprises such as the oil-producing firm Petróleos de Venezuela (PDVSA), and the country’s central bank.[ii] So far, the sanctions have bitten into the regime’s revenue, forced it to default on several loans, and maintained pressure to enter talks with the democratic opposition.[iii] In addition, sanctions on PDVSA have curtailed the country’s oil production to approximately 388,000 b/d as of July 2020 or 60% below the average oil production rate of July 2019.[iv]
Even though sanctions remain Washington’s preferred policy tool against the regime to compel it to negotiate an exit from power, the Maduro regime continues to circumvent US sanctions and accumulate wealth at the expense of the Venezuelan people. By engaging in illicit operations that allow it to offset, to an extent, revenues lost from its precipitous decline in crude oil exports, the Maduro regime has effectively evaded sanctions primarily through illicit gold mining and trade-based money laundering.
In 2016, Maduro announced the opening of the so-called “Arco Minero,” or “Orinoco Mining Arc,” completing a vision first laid out by then-President Hugo Chávez in 2011. This expansive territory in the southern part of Venezuela comprises about 12% of the country and is one of the world’s richest in minerals, including bauxite, coltan, diamonds, and gold.[v] Since its opening, the “Arco Minero”has become a hotspot for illegal gold mining, where horrendous conditions and a resurgence of communicable disease prevail, and marauding gangs run rampant while imposing their own social order.[vi] Venezuela’s state-owned mining companies, Minerven and Compañía Anónima Militar para las Industrias Mineras, Petrolíferas y de Gas (CAMIMPEG), purchase volumes of gold from local wildcat miners, which are then melted into gold bars and transferred to the Central Bank of Venezuela.[vii] Further, civilian airliners’ cargo holds transport even larger amounts of gold from Venezuela, which is difficult to detect, and this gold is eventually formalized into the international gold market.[viii] Turkey, Russia, and the United Arab Emirates are some of the top destinations for Venezuelan gold.
Despite broad-based US sanctions against Venezuela’s illicit gold sector, [ix] the very nature of the international gold market defies regulation. The ease with which gold can be “laundered”—namely by concealing its origins by melting it down and refining it to the quality required by buyers—makes detection and enforcement of existing measures difficult.[x] In theory, gold exported from Latin America requires both certificates of origin and purchase receipts, usually furnished by those who buy directly from miners. But unscrupulous intermediaries occasionally provide fraudulent purchase receipts for illegal wildcat miners or exaggerate the production of legal mines, topping up their exports with illicitly mined gold. These schemes permit the Maduro regime to market Venezuelan gold as originating in nearby countries, such as Colombia or Ecuador, thereby bringing it within the legal framework of the international gold market while also filling up the coffers of criminal groups such as the National Liberation Army.[xi] The hard currency generated by illicit gold has contributed greatly to the resilience of Venezuela’s authoritarian regime.
To handle the regime’s complex international finances, Maduro relies on a coterie of bagmen such as Alex Saab Morán—a global expert in money laundering and illicit finance. Although the US sanctions architecture does not appear capable of deterring illicit gold exports at this time, it does affect Maduro’s ability to bank the proceeds, an activity dependent on shadowy financiers with knowledge and connections in countries plagued by loose financial oversight. The work of these financiers directly impacts the regime’s stability, since access to hard currency is critical to buying off Maduro’s political supporters and cronies. Saab’s recent arrest in Cape Verde and his pending extradition to the United States promises to unravel part of Maduro’s illicit schemes.[xii] The wealth of information on Maduro’s illicit operations to which this circle of financiers is privy makes them attractive targets for a multi-country dragnet.
At the moment, the European Union, Canada, and several Latin American states have all levied various sanctions against Venezuela, ranging from entry bans on regime officials to asset freezes.[xiii] To tighten the impact of sanctions, the U.S. should calibrate them to encompass more of the regime’s illicit revenue sources, coordinate better with international partners’ sanctions, and enhance secondary sanctions against entities that carry out business with the regime, especially given that the international sanctions net against Venezuela is more akin to a messy patchwork of uncoordinated policies rather than a cohesive, solid network.
Washington should address this sieve-like architecture using several tools. In Latin America, Washington should continue to rely on the Inter-American Treaty of Reciprocal Assistance, otherwise known as the Rio Treaty, to coordinate a unified regional response to Venezuela’s dictatorship. The Rio Treaty is a mutual defense pact between the United States and varying countries in the Western Hemisphere, which member-states invoked to increase pressure on the Maduro regime, including imposing sanctions on Venezuela by those countries capable of designating and enforcing them.[xiv] In September 2019, Rio Treaty members agreed to coordinate intelligence on regime activities and sanctions on individual regime officials, meet periodically to evaluate their sanctions, and mend any breaks in the regional sanctions fabric in response to Maduro’s actions.[xv] Furthermore, US diplomats should meet bilaterally with their EU and Canadian counterparts in working groups to discuss these topics in a similar manner as their Rio Treaty partners. In this way, the United States could informally integrate these partners into a more cohesive sanctions network, even if the European Union and Canada are not party to the Rio Treaty.
To have any chance of precipitating a political transition in Venezuela, US sanctions must expand the perimeter around the country and plug gaps in the sanctions architecture considering that the requirements of survival have widened Maduro’s web of allies willing to circumvent US sanctions. Cuba, Iran, Russia, China, and Turkey form the rogues’ gallery now supporting Maduro. The use of secondary sanctions should be ramped up to target entities that deliberately flout US sanctions to offer the Maduro regime a lifeline. The recent US confiscation of Venezuela-bound Iranian oil shows that such sanctions could deprive Maduro of key resources used to sustain his regime and dissuade countries from trying to defy US sanctions at the risk of their own assets and reputations. [xvi]
The breakdown of order at the hands of the Maduro regime has led to the entrenchment of violent transnational guerrilla groups and narcotraffickers within the country, generating spillover effects and regional instability. [xvii] Sanctions are one of the most effective policy tools for Washington to confront Venezuela’s dictatorship and its adverse effects on regional security and should be combined with other means, such as diplomatic support for the democratic opposition and humanitarian assistance to Venezuelan refugees. While US policymakers may not be able to induce a political transition in the short-term, the logic behind US and regional actions is that these various instruments would empower the opposition and provide a pathway for the regime to step down from power. Until then, the United States should continue to monitor the effects of its sanctions, tweak them accordingly to fill gaps, and stand ready to facilitate a democratic transition in Venezuela.
[i] “Treasury Targets Individuals Supporting Illegitimate Maduro Regime’s Corruption,” U.S. Department of the Treasury, July 23, 2020, https://home.treasury.gov/news/press-releases/sm1068.
[ii] For a full review and history of US sanctions against Venezuela, see Clare Ribando Seelke, “Venezuela: Overview of U.S. Sanctions,” Congressional Research Service, last updated June 2, 2020, https://fas.org/sgp/crs/row/IF10715.pdf.
[iii] Moises Rendon, “Are Sanctions Working in Venezuela?” Center for Strategic and International Studies, September 3, 2019, https://www.csis.org/analysis/are-sanctions-working-venezuela.
[iv] “Venezuela’s Oil Exports Stagnant in July at Below 400,000 bpd-data,” Reuters, August 3, 2020, https://www.reuters.com/article/venezuela-oil-exports/venezuelas-oil-exports-stagnant-in-july-at-below-400000-bpd-data-idUSL1N2F5108.
[v] Moises Rendon and Linnea Sandin, “Illegal Mining in Venezuela: Death and Devastation in the Amazonas and Orinoco Regions,” Center for Strategic and International Studies, April 16, 2020, https://www.csis.org/analysis/illegal-mining-venezuela-death-and-devastation-amazonas-and-orinoco-regions.
[vi] “Venezuela: Violent Abuses in Illegal Gold Mines,” Human Rights Watch, February 4, 2020, https://www.hrw.org/news/2020/02/04/venezuela-violent-abuses-illegal-gold-mines#:~:text=According%20to%20international%20and%20local,gathered%20by%20Human%20Rights%20Watch.&text=In%202016%2C%20Maduro%20said%20the,foreign%20companies%20worth%20%245.5%20billion.
[vii] Harry Holmes, “Maduro’s ‘Illicit’ Gold Targeted by US Sanctions,” Organized Crime and Corruption Reporting Project, March 21, 2019, https://www.occrp.org/en/daily/9423-maduro-s-illicit-gold-targeted-by-us-sanctions.
[viii] Gabriele Steinhauser and Nicholas Bariyo, “How 7.4 Tons of Venezuela’s Gold Landed in Africa—and Vanished,” Wall Street Journal, https://www.wsj.com/articles/how-7-4-tons-of-venezuelas-gold-landed-in-africaand-vanished-11560867792.
[ix] For example, the U.S. has designated major companies such as Minerven and CAMIMPEG as well as individuals involved in the trade.
Michael R. Pompeo, “U.S. Sanctions Moron Brothers for their Role in Regime Corruption,” US State Department, July 23, 2020, https://www.state.gov/u-s-sanctions-moron-brothers-for-their-role-in-regime-corruption/.
[x] Andres Martinez Fernandez, “The National Liberation Army in Colombia and Venezuela: Illicit Finance Challenges Stemming from Illegal Mining,” American Enterprise Institute, July 9, 2019, https://www.aei.org/research-products/report/the-national-liberation-army-in-colombia-and-venezuela-illicit-finance-challenges-stemming-from-illegal-mining/.
[xi] “Organized Crime and Illegally Mined Gold in Latin America,” Global Initiative Against Transnational Organized Crime, April 2016, https://globalinitiative.net/wp-content/uploads/2016/03/Organized-Crime-and-Illegally-Mined-Gold-in-Latin-America.pdf.
[xii] Kejal Vyas, “Key Financier of Venezuela’s Maduro Regime Arrested,” Wall Street Journal, June 13, 2020, https://www.wsj.com/articles/key-financier-of-venezuelas-maduro-regime-arrested-11592078537.
[xiii] For a full range of global sanctions against the regime, see the following: “Are Sanctions Working in Venezuela?”; “Venezuela: The Council’s Response to the Crisis,” Council of the European Union, https://www.consilium.europa.eu/en/policies/venezuela/; “Canadian Sanctions Related to Venezuela,” Government of Canada, https://www.international.gc.ca/world-monde/international_relations-relations_internationales/sanctions/venezuela.aspx?lang=eng.
[xiv] Article 6 of the Rio Treaty calls for member-states to develop a unified response to any threat that destabilizes the region.
[xv] Peter J. Meyer, “The Inter-American Treaty of Reciprocal Assistance and the Crisis in Venezuela,” Congressional Research Service, last updated December 11, 2019, https://crsreports.congress.gov/product/pdf/IN/IN11116#:~:text=On%20September%2011%2C%202019%2C%20the,to%20the%20crisis%20in%20Venezuela.&text=The%20states%20parties%20agreed%20to,the%20first%20quarter%20of%202020.
[xvi] Benoit Faucon and Aruna Viswanatha, “U.S. Seizes Iranian Fuel Cargo for First Time,” Wall Street Journal, August 13, 2020, https://www.wsj.com/articles/u-s-seizes-iranian-fuel-cargoes-for-first-time-11597352574.
[xvii] C. Todd Lopez, “Southcom Chief: Venezuela’s Maduro at Center of ‘Vicious Circle of Threats,’” U.S. Department of Defense, August 13, 2020, https://www.defense.gov/Explore/News/Article/Article/2312585/southcom-chief-venezuelas-maduro-at-center-of-vicious-circle-of-threats/.