U.S. companies eager to do business in Cuba face a long, difficult road ahead, impeded by a complex regulatory landscape even after the federal government this month eased the 53-year old trade embargo on our socialist southern neighbor.
Effective Jan. 16, the Office of Foreign Assets Control amended its economic sanctions regulations, and the Commerce Department’s Bureau of Industry and Security amended its export control regulations on Cuba. Both changes are the opening moves in President Obama’s announcement in December to re-open diplomatic relations.
Industries with potential to gain the biggest foothold in Cuba include travel, banking, agriculture, residential construction, and telecommunications. The regulations, however, don’t constitute a complete lifting of the embargo. Most trade is still illegal.
“Don’t go and fuel up the corporate jet to Havana just yet,” says John Kavulich, senior policy adviser for the U.S.-Cuba Trade and Economic Council. Compliance, legal, and risk professionals of U.S. companies wanting to do business in Cuba first should review all their potential transactions to ensure they comply with the amended regulations under both OFAC and BIS.
Some U.S. companies that have been doing business with Cuba for a while (under certain narrow conditions, trade with Cuba is legal) praised the reforms. “We see the reforms announced as a positive for U.S. agriculture and businesses,” says Dan Fogleman, a spokesman with Tyson Foods. “We’ve been doing business with Cuba under the existing rules, and we welcome any reforms that will help simplify these transactions in the future.”
Since 2000, U.S. food and agricultural producers have been allowed to sell unprocessed agricultural products—such as corn and soy beans—and raw forestry materials to Cuba under the Trade Sanctions Reform and Export Enhancement Act. The restrictions are tight: U.S. producers must be paid cash in advance, and payments must be funneled through a third-party bank in another country, typically Europe.
“We see the reforms announced as a positive for U.S. agriculture and businesses. We’ve been doing business with Cuba under the existing rules, and we welcome any reforms that will help simplify these transactions in the future.”
Dan Fogleman, Spokesman, Tyson Foods
Global food processing giant Archer Daniels Midland, which has in the past exported agricultural products to Cuba, indicated that it’s weighing its options. “Should trade regulations change between the United States and Cuba, we will be ready to adapt to new opportunities as they arise,” says Jackie Anderson, a spokesperson for ADM.
The newly relaxed regulations expand the scope of permitted commercial sales and exports. Items authorized for export from the United States will include building materials for private residential construction, goods for use by private-sector Cuban entrepreneurs, and agricultural equipment for farmers.
CUBA SANCTION AMENDMENTS
Below, the Treasury Department lists some of the significant elements of changes in the revised regulations for Cuba sanctions.
In all 12 existing categories of authorized travel, travel previously authorized by specific license will be authorized by general license, subject to appropriate conditions. This means that individuals who meet the conditions laid out in the regulations will not need to apply for a license to travel to Cuba.
These categories are: family visits; official business of the U.S. government, foreign governments, and certain intergovernmental organizations; journalistic activity; professional research and professional meetings; educational activities; religious activities; public performances, clinics, workshops, athletic and other competitions, and exhibitions; support for the Cuban people; humanitarian projects; activities of private foundations or research or educational institutes; exportation, importation, or transmission of information or information materials; and certain authorized export transactions.
The per diem rate previously imposed on authorized travelers will no longer apply, and there is no specific dollar limit on authorized expenses. Authorized travelers will be allowed to engage in transactions ordinarily incident to travel within Cuba, including payment of living expenses and the acquisition in Cuba of goods for personal consumption there.
Additionally, travelers will now be allowed to use U.S. credit and debit cards in Cuba.
Travel and Carrier Services –
Travel agents and airlines will be authorized to provide authorized travel and air carrier services without the need for a specific license from OFAC.
U.S. insurers will be authorized to provide coverage for global health, life, or travel insurance policies for individuals ordinarily resident in a third country who travel to or within Cuba. Health, life, and travel insurance-related services will continue to be permitted for authorized U.S. travelers to Cuba.
Importation of Goods –
Authorized U.S. travelers to Cuba will be allowed to import up to $400 worth of goods acquired in Cuba for personal use. This includes no more than $100 of alcohol or tobacco products.
In order to better provide efficient and adequate telecommunications services between the United States and Cuba, a new OFAC general license will facilitate the establishment of commercial telecommunications facilities linking third countries and Cuba and in Cuba.
The commercial export of certain items that will contribute to the ability of the Cuban people to communicate with people within Cuba, in the United States, and the rest of the world will be authorized under a new Commerce license exception (Support for the Cuban People (SCP)) without requiring a license. This will include the commercial sale of certain consumer communications devices, related software, applications, hardware, and services, and items for the establishment and update of communications-related systems.
Additional services incident to internet-based communications and related to certain exportations and reexportations of communications items will also be authorized by OFAC general license.
Consumer Communications Devices –
Commercial sales, as well as donations, of the export and reexport of consumer communications devices that enable the flow of information to from and among the Cuban people, such as personal computers, mobile phones, televisions, memory devices, recording devices, and consumer software, will be authorized under Commerce’s Consumer Communication Devices (CCD) license exception instead of requiring licenses.
Financial Services –
Depository institutions will be permitted to open and maintain correspondent accounts at a financial institution that is a national of Cuba to facilitate the processing of authorized transactions.
U.S. financial institutions will be authorized to enroll merchants and process credit and debit card transactions for travel-related and other transactions consistent with section 515.560 of the CACR. These measures will improve the speed and efficiency of authorized payments between the United States and Cuba.
Click on the link below for more key changes.
Source: Treasury Department.
From a practical standpoint, however, the Cuban government controls almost every aspect of trade transactions, which will create compliance obstacles. Consider, for example, what would happen if a private farmer in Cuba leases land from the government, or if that farmer belongs to a cooperative that’s part of the government? What if he sells some produce to the government and the rest to the free markets?
“The regulations have to define what a ‘private farmer’ is in Cuba,” says Kirby Jones, founder of consulting firm Alamar Associates, a long-time consulting business for working with Cuba. “Every time you open one policy door, you may have five other doors that open,” says Jones.
The regulations also will authorize the commercial export of certain items that “contribute to the ability of the Cuban people to communicate with people in the United States and the rest of the world.” This includes the commercial sale of certain consumer communications devices, related software, applications, hardware, and services.
Internet-based communications will be allowed under a general license. “The question is how quickly and how willing the Cuban government will be to allow that,” said Jonathan Epstein, a partner with law firm Holland & Knight.
Kavulich says the “most striking and potentially complex” component of the policy changes is the re-establishment of direct correspondent banking, which is subject to a “blindingly deep amount of regulation and law.”
Under the regulations, U.S. banks will be allowed to open correspondent accounts at Cuban financial institutions to ease the processing of authorized transactions. That will effectively allow travelers to use U.S. credit and debit cards in Cuba and exporters to make and receive payments in Cuba, without having to go through a third-party bank.
Remittance levels to Cuban nationals and humanitarian projects will be raised from $500 to $2,000 per quarter (excluding officials of the government or the Communist Party). Remittance forwarders will no longer require a specific license.
Also, the definition of the statutory term “cash in advance” has been revised from “cash before shipment” to “cash before transfer of title to, and control of,” the exported items. The change will “allow expanded financing of authorized trade with Cuba, according to OFAC.
For a U.S. bank to establish a business relationship with Cuban financial institutions, compliance officers of U.S. banks effectively will have to certify the books of that Cuban financial institution, Kavulich says. That means telling a long list of regulators—Treasury Department, Justice Department, Office of the Comptroller of the Currency, and the Federal Reserve—that the Cuban bank meets all the required criteria, that it doesn’t engage in money laundering, terrorism financing, drug cartel financing, and more.
“In terms of compliance, that’s a huge headache for a bank to start to figure out how to process transactions in Cuba,” Epstein says. That hurdle alone may be enough for many banks to wait around until someone else goes first and irons out the practical difficulties, before they decide whether the Cuba market is worth the time.
U.S. companies that want to expand their footprint into Cuba shouldn’t wait for all the follow-on regulations and guidance to come out before making their next move. “If a company sits back and waits until this is all approved, they’re going to be late to the party,” Jones says.
In fact, Jones adds, some U.S. companies are already developing strategies to introduce their products and services into the Cuban market, similar to the approach food and agricultural companies took in the late 1990s before it was legal to sell food and agriculture products in Cuba.
Moving forward, companies should consider working collaboratively with regulators as new policy questions arise. “Companies should not be reluctant to talk to OFAC, so that OFAC is not writing regulations in a vacuum,” Jones says.
He gives the hypothetical example of a farm equipment manufacturer. “I would get to know who would buy my tractors and how private farming works,” Jones says. “How do they go about getting loans from the government? How do they go about borrowing from the bank?”
The more knowledge you have on how business is done in Cuba, the more you can inform OFAC, because the agency itself might not know, Jones says. “The industry can play a real role in shaping the regulations, because right now we’re dealing with a blank slate.”