FORO CUBANO Vol 3, No. 23 – TEMA: BLOQUEO ECONÓMICO –

Assessing the Effectiveness of Sanctions against Venezuela: Illegal Gold Trading and Maduro’s Authoritarian Resilience

Por: Ryan C. Berg, Ph.D*

Agosto 2020

Vistas

*Investigador Principal en Estudios Latinoamericanos, American Enterprise Institute (AEI); Ryan.Berg@aei.org

Introduction

Early in his administration, US President Donald Trump elected to pursue an aggressive campaign of sanctions against Nicolás Maduro’s government in Venezuela. The country’s authoritarianism and humanitarian crisis graced Trump’s agenda from the earliest days of his presidency, spurred by Oval Office meetings with Venezuelan opposition leaders and their spouses (Nakamura, 2017). The Trump administration’s sanctions campaign accelerated after January 2019, when Juan Guaidó, the leader of Venezuela’s National Assembly, assumed the role of interim president based on Maduro’s fraudulent and illegitimate May 2018 election. Seeing Guaidó as the leader of the last democratically elected institution in Venezuela, the United States quickly recognized Guaidó’s legitimacy as interim president—a diplomatic move followed eventually by over sixty other countries (Elizondo, 2019).

In just over three years, the United States has erected an immense sanctions architecture on Venezuela. This includes almost two hundred individual, targeted sanctions, as well as a significant number of sectoral sanctions (Seelke, 2019). External sanctions pressure combined with organic pressure from Venezuela’s streets are an attempt to force Maduro from power. On several occasions, the concerted pressure campaign nearly succeeded (Reuters, 2019. Nonetheless, owing to missteps and allegations of corruption within the opposition, the Maduro government retains its hold on power. The coronavirus pandemic reduces the likelihood of a political transition even further, as Maduro consolidates control under the guise of stay-at-home orders (Parkin, 2020). 

It is an opportune time, therefore, to evaluate the effectiveness of US sanctions on Venezuela and suggest a path for improving sanctions as a policy instrument to facilitate political transition in Venezuela. The article proceeds by adumbrating the sanctions architecture built by the United States. Second, in defiance of the fairly comprehensive nature of US sanctions, it identifies an illicit market that has greatly facilitated Maduro’s survival, namely, illegal gold mining. Third, this article concludes with several policy recommendations for improving the dragnet around Venezuela’s ruling regime, including the issue of so-called “secondary sanctions.”

The Sanctions Architecture

The Trump administration has erected sanctions around Venezuela that cover regime officials, state-owned enterprises, and the country’s central bank. It has leveraged an array of justifications to designate individuals—terrorism, drug trafficking, human rights violations, anti-democratic actions, and corruption, inter alia (Seelke, 2020). Indeed, designations have run the gamut of legislation and executive authorities. Under the Foreign Narcotics Kingpin Designation Act of 1999, the United States has sanctioned individuals involved in Venezuela’s state-sanctioned drug trade by labeling them “specially designated narcotics traffickers.” Utilizing the Venezuela Defense of Human Rights and Civil Society Act of 2014, President Trump has designated some of the highest-level officials in the country, including President Maduro, First Lady Cilia Flores, and Nicolás Maduro Guerra, the president’s son. This legislation permits sanctions designations of those responsible for significant acts of violence and human rights abuses. 

In 2018, President Trump passed Executive Order 13850, which “set forth a framework to block the assets of, and prohibit certain transactions with, any person determined by the Secretary of the Treasury to operate in sectors of the economy or the engage in corrupt transactions with the Maduro government.” (US Department of the Treasury, 2020). Pursuant to this expanded set of authorizations, the Trump administration sanctioned the state-owned oil company, Petróleos de Venezuela (PDVSA) in January 2019, and the state-owned mining company, Minerven, in March 2019, and all of their property and interests in US jurisdictions. 

Then, in August 2019, President Trump issued Executive Order 13884, which blocked all the property and interests of the Maduro government in US jurisdictions and prohibited US persons from engaging in transactions with the Maduro government without prior authorization by the Treasury Department’s Office of Foreign Assets Control (OFAC) (US Department of the Treasury, 2020). Executive Order 13884 was the Trump administration’s broadest sanctions action yet. In theory, it provided an answer as to what the US should do about countries that openly flout sanctions to continue conducting business with Maduro’s regime. In reality, however, it provided little guidance on enforcing so-called “secondary sanctions” against non-Venezuelan entities and individuals that facilitate sanctions evasion (DeYoung, 2019).

Illicit Markets

Maduro’s survival is aided by Venezuela’s lucrative illicit markets. Four years ago, he announced the opening of the Arco Minero, or Orinoco Mining Arc. This action brought to fruition former President Hugo Chávez’s vision for an expansive territory of mining operations first mentioned in 2011. Located in the southern and eastern part of the country, the Arco Minero comprises about 12% of Venezuela’s territory and is rich in some of the world’s most profitable minerals—bauxite, coltan, diamonds, and gold (Rendón, 2020). 

From its opening, the Orinoco Mining Arc has been an epicenter of illegal gold mining. The practice of illegal gold mining has contributed to a resurgence of communicable diseases, unfathomable human rights abuses, and the consolidation of non-state armed groups that impose their own harsh social order (Human Rights Watch, 2020) The Maduro regime is complicit in all of these activities. Its state-owned mining companies, namely Minerven and the Compañía Anónima Militar para las Industrias Mineras, Petrolíferas, y de Gas (CAMIMPEG), purchase gold directly from wildcat miners working in the region. After the smelting process, gold bars are stored in the Central Bank of Venezuela to be exchanged for hard currency later (Rendón, 2020). 

Yet, an even greater sum of illegally mined gold departs Venezuela through illegal channels. The Maduro regime has devised a number of sanctions evasion tactics. Countries such as Suriname, Turkey, and the United Arab Emirates have been willing to flout US sanctions to facilitate the export of Venezuela’s gold to international markets. Mysterious companies such as Sardes, which form part of a cottage industry in Turkey for circumventing US sanctions, have moved an astonishing US$900 million of Venezuelan gold in just a few short months, despite managing only US$1 million in capital (Zerpa, 2020) In 2018 alone, Maduro benefitted from the sale of 73.2 tons of gold to Turkey and the United Arab Emirates (Farah & Yates, 2019). Large quantities of gold transit the Dutch Caribbean islands of Aruba and Curação, too. Proximity to Venezuela and a free trade zone that discourages oversight of goods in transit has made these islands popular for Venezuelan gold laundering. One investigation reveals that between 2014 and 2018, 160 metric tons of gold left Aruba and Curação, 90% of it Venezuelan in origin (Ebus, 2019). 

The cargo holds of civilian airliners, moreover, where contents are rarely scrutinized, have also served as repositories for illegal gold export. In one particularly brazen case of sanctions evasion in 2019, two Russian-owned Boeing 777s landed in Caracas, loaded an unknown cargo, and departed for Uganda. After landing in Uganda, it was revealed that the cargo holds held approximately 7.4 tons of Venezuelan gold, with a market value of over $300 million. Utilizing a gold smelting facility positioned beside the Ugandan runway, the gold quickly shed details of its origins and later appeared on the Turkish market (Steinhauser & Bariyo, 2019). 

The Maduro regime also cooperates with criminal groups to export illegal gold. These groups, such as Colombia’s National Liberation Army (Ejército de Liberación Nacional, ELN) and dissident groups from the Armed Revolutionary Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia, FARC), maintain a significant presence in Venezuela, particularly in the Arco Minero. A recent report argues, “The ELN uses its well-established cross-border networks to smuggle illicit Venezuelan gold and other minerals into Colombia for fraudulent integration into the legal gold and export markets under the guise of locally produced gold. According to the National Directorate of Taxes and Customs, as much as half of Colombia’s gold exports may have entered the country as contraband.” (Martínez, 2020). In return for their services in the mining sector, the Maduro regime occasionally furnishes the ELN with weapons and permits it to operate openly on its territory (EFE, 2019). Such cooperation has become one of the preferred methods of financing for criminal groups in Venezuela, even surpassing traditional sources of revenue such as drug trafficking (International Crisis Group, 2019). 

Unfortunately, the nature of the gold market makes the commodity extremely difficult to regulate. The origin of gold is easily concealed, as it is melted down and refined, in a way that allows it to be “laundered” on the international market. Gold exports from Latin America require certificates of origin and purchase receipts confirming gold’s origin and that it has been ethically sourced—at least in theory. Usually, such certificates are furnished when a company buys gold from miners. However, once proper certificates have been issued, gold is effectively “formalized” into the international market with no further questions asked. 

Further, criminal intermediaries can provide fraudulent purchase receipts and certificates of origin, exaggerating the amount of production reported from legal mines. By topping up exports with illicitly mined gold, unscrupulous actors can “layer” illegal gold into otherwise legal gold exports (Global Initiative against Transnational Organized Crime, 2020). In practice, therefore, the Maduro regime makes money exporting Venezuelan gold labeled as originating in countries such as Colombia, Ecuador, or Suriname. The hard currency generated by the illicit gold trade—and the cuts taken by Venezuela’s army and security forces at checkpoints and in exchange for operating clandestine flights—contributes mightily to the resilience of Maduro’s authoritarian regime. To be sure, the added security of an illicit product that requires only one successful maneuver to integrate into the global market goes a long way toward explaining the Maduro regime’s increasing shift toward gold over other illicit commodities such as drugs, which require constant security (and bribery) from origination point to the end user.


Plugging the Holes 

An important story in the Maduro regime’s authoritarian persistence, despite presiding over one of the largest peacetime economic declines in history, stems from its consistent success in bypassing US sanctions (Kurmanaev, 2019). Indeed, the United States has engaged in several intense rounds of “whack-a-mole”—frustrating cycles of designations and sanctions evasion, followed by further designations. Illicit markets have vitiated the efficacy of US sanctions and permitted the Maduro regime to offset lost revenues from licit markets such as oil exports. 

It is estimated that in 2019, the Maduro regime netted between $1.6 and $3 billion from illegal gold sales—quickly outpacing the oil industry as the regime’s main generator of revenue (Martínez, 2019). In another indication of the scale of Maduro’s illegal gold mining operations, despite the regime’s steady sales of illegal gold, Venezuela’s Central Bank managed to augment its reserves by eleven tons (Farah, 2020). Further, the drive for regime survival has pushed Maduro into the waiting arms of Cuba, Iran, Russia, China, and Turkey, which form the rogues’ gallery currently supporting his regime. Without expanding the sanctions perimeter around Venezuela and plugging the gaps in the sanctions architecture by engaging in so-called “secondary sanctions” against third parties and entities that facilitate trade and circumvent sanctions, there is little chance of precipitating a political transition in Venezuela. The US may also wish to consider investigations of suspicious gold smelters and require them to attain certification from independent regulators. Once a sufficient number have been licensed, businesses could be required to source gold for electronics, automotive, and manufacturing from certified smelters.

If the US can more effectively leverage sanctions to seal off the spoils of illicit revenue sources such as gold, it could eventually lower the exit costs for Maduro and increase the likelihood of a political transition in Venezuela (Rendón, 2019). Although sanctions remain one of the most effective tools Washington can utilize to confront Maduro’s dictatorship, by themselves, they are no guarantee of a change in government—at least not on a timetable the US government may deem desirable (Cohen & Weinberg, 2019). In conjunction with better sanctions targeting and more creative enforcement, the US should engage in greater diplomatic efforts to form a cohesive network with countries that recognize opposition leader Juan Guaidó as the legitimate interim president, rather than permit the sieve-like, uncoordinated sanctions architecture currently in place to remain. 

References


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Cohen, D. S., & Weinberg, Z. A. Y. (2019, mayo 14). Sanctions Can’t Spark Regime Change.


DeYoung, K. (2019). Trump administration threatens penalties on Russia, China for aiding Venezuela’s government. Washington Post. https://www.washingtonpost.com/national-security/trump-administration-threatens-to-sanction-russia-china-for-aiding-venezuelas-government/2019/08/06/0ed664b6-b852-11e9-bad6-609f75bfd97f_story.html


Ebus, B. (2019). Dutch Caribbean a hub for illegal Venezuela gold trade | Miami Herald.
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Steinhouser, G., & Bariyo, N. (2019). How 7.4 Tons of Venezuela’s Gold Landed in Africa—And Vanished—WSJ.


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Zerpa, F. (2020). Mysterious Turkish Firm Helped Maduro Move $900 Million in Gold—Bloomberg.

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