Bank of England Refuses to Repatriate Gold to Venezuela After United States Imposes New Sanctions

In the theory of general relativity, increasing pressure increases gravitational pull.  Recent events involving the United States, Venezuela, and the United Kingdom have nicely demonstrated that a similar effect can occur in the field of economic sanctions.

On November 1, U.S. President Donald J. Trump, by Executive Order 13850, imposed new sanctions against Venezuela pertaining to the gold sector.  Subsection 1(a) of that order specifically prohibited defined persons

  • “(i) to operate in the gold sector of the Venezuelan economy or in any other sector of the Venezuelan economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State;
  • “(ii) to be responsible for or complicit in, or to have directly or indirectly engaged in, any transaction or series of transactions involving deceptive practices or corruption and the Government of Venezuela or projects or programs administered by the Government of Venezuela, or to be an immediate adult family member of such a person;
  • “(iii) to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any activity or transaction described in subsection (a)(ii) of this section, or any person whose property and interests in property are blocked pursuant to this order; or
  • (iv) to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this order.”

In connection with this intensification of pressure on the Venezuelan Government, the U.S. Office of Foreign Assets Control (OFAC) explained that the order “is designed to counter rampant corruption within the Government of Venezuela” and “provides a powerful tool to impose costs on those who unjustly benefit from dishonest or fraudulent conduct, illicit activity, and/or deceptive transactions within Venezuela’s gold sector or other identified sectors, or in relation to the Government of Venezuela or its projects or programs.”

Shortly thereafter, Reuters reported that the Venezuelan Government was seeking to repatriate about $550 million in gold bars, weighing 14 tons, “from the Bank of England because of fears it could be caught up in international sanctions on the country.”  According to the report, this effort predated the Executive Order, but had been “held up for nearly two months due to difficulty in obtaining insurance for the shipment, needed to move a large gold cargo.”  Gold holdings in the Venezuelan Central Bank declined by more than 50 percent, from 364 tons in 2014 to 160 tons in June 2018, as the expiration of swap operations with various global banks reportedly left those banks, including the Bank of England, continuing to hold Venezuelan gold that served as collateral for the funds lent to Venezuela.

The imposition of the new sanctions, however, apparently prompted the Bank of England to refuse to repatriate the gold to Venezuela.  According to The Times, “British officials are understood to have insisted that standard measures to prevent money-laundering be taken — including clarification of the Venezuelan government’s intentions for the gold.  There are concerns that [Venezuelan President Nicolás] Maduro may seize the gold, which is owned by the state, and sell it for personal gain.”

On its face, the Bank of England’s purported money-laundering argument makes little sense.  It is not unreasonable to think that the Bank of England would not have accepted the Venezuelan Government’s gold years ago if it believed that the gold represented the proceeds of any illegal activity.  That being the case, it would be difficult for the Bank of England now to assert that the repatriation of that same gold, without more, would constitute money laundering.  If Maduro Administration officials were later to divert the repatriated gold for their own benefit, or to sell the gold to raise hard currency and evade existing U.S. sanctions, those actions could constitute criminal violations.  In that event, subsequent transactions with the proceeds of those criminal violations could certainly constitute money laundering.  But predictions of likely future actions are not the same as current facts.

Nonetheless, the Bank of England’s best strategy at the moment, while Maduro contents himself with invective and promises to boost domestic gold production, is to refuse not only to repatriate the gold, but also to engage in any transactions with the gold.  If the Maduro Administration were to change its tactics and seek to sell the gold in the Bank’s possession to a foreign buyer, the Bank would have to assume that Venezuelan officials’ intent was the same, to avoid the U.S. gold sanctions.  Moreover, such transactions would involve the Bank of England even more directly in the Venezuelan Government’s evasion of those sanctions.

It would certainly be better for the Bank, from a legal and diplomatic standpoint, if the European Union (EU) were to expand on its recent extension of its existing sanctions on Venezuela and impose gold-related sanctions that paralleled the November 1 Executive Order’s terms.  Such action would, so to speak, increase international pressure on Venezuela and dramatically increase the Bank’s gravitational pull on the gold.   But as there are no indications yet that the EU is prepared to do so, the Bank must content itself for now with a notion familiar to theoretical physicists: that when pressure is balanced by gravitational pull, a system can reach equilibrium.  How long any system can maintain equilibrium, however, would be beyond the capacity of Einstein – let alone the Governor of the Bank – to predict in the abstract.

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