US Issues Regulations Further Easing US Sanctions on Cuba but Significant Restrictions and Compliance Challenges Remain
By Glen Kelley, Doug Jacobson and Michael Burton, Jacobson Burton Kelley PLLC
On September 21, 2015 the Treasury Department's Office of Foreign Assets Control (OFAC) and the Commerce Department's Bureau of Industry and Security (BIS) issued final regulations making additional changes to the US financial and trade embargo of Cuba.
These changes build on changes in the embargo from earlier in 2015, including:
This is particularly true since some members of the US Congress have expressed their displeasure by the Obama Administration's regulatory efforts to chip away the existing embargo and it is likely that Congress will continue to pressure OFAC and BIS to enforce those restrictions that remain in place.
As a result, US companies and their controlled foreign affiliates exploring business opportunities in Cuba must be vigilant to ensure they remain compliant with the ever-changing regulations on Cuba, which have made compliance challenges more complex.
Practical impact of changes to Cuba embargo
The September 21, 2015 changes to OFAC's Cuban Assets Control Regulations (CACR) and BIS's Export Administration Regulations (EAR), which can be found here (OFAC) and here (BIS), make possible some limited additional trade and transactions by US companies with Cuba. However, any new opportunities will be subject to navigating the broad remaining prohibitions under the embargo, and the perhaps even more difficult Cuban regulatory and business environment. Many activities now authorized by the US will not be possible pending further authorizations or other action by the Cuban government.
Overall, in recent years the thaw in US-Cuba relations and the expansion of US travel and commercial exports to Cuba seem to have primarily benefited non-US companies that already have a substantial local presence. For the foreseeable future that trend is likely to continue.
The following is a summary of the September 21, 2015 changes to the CACR and EAR.
Authorized business activity and physical presence in Cuba
Authorized physical presence in Cuba
The amendments to OFAC's CACR for the first time authorize certain US companies, and non-US companies owned or controlled by US persons, are now generally authorized to establish a physical presence in Cuba, including offices, warehouses or retail outlets. This applies only to companies engaged in the following categories of authorized transactions with Cuba, most of which were established or expanded either in the January or September 2015 changes:
(a) Exporters of certain authorized goods to Cuba, including food and agricultural products; medicine and certain medical devices; materials and equipment for use on privately-owned buildings; equipment and supplies for private sector Cuban entrepreneurs; and tools and equipment for private agricultural activity
(b) Authorized air and vessel carriers and other providers of authorized travel services (but a physical presence in Cuba is not authorized for the purpose of providing lodging services)
(c) Providers of authorized telecommunications and Internet-based services to companies and individuals in Cuba
(d) Companies carrying authorized cargo, parcel or mail to or from Cuba
(e) Organizations involved in authorized educational or religious activities
(f) News bureaus in Cuba.
Any companies not within one of these six categories are not authorized to establish a physical presence in Cuba.
Physical presence - practical aspects
As part of establishing an authorized local presence in Cuba, companies may send US employees to reside and work in Cuba, and may hire local employees as well. They may open local bank accounts and fund them, including by wire transfer, provided the funds are used only for authorized activities in Cuba. When such local accounts are closed, the funds must be sent by wire transfer to a US bank.
Two related authorizations are noteworthy. First, BIS has generally authorized the export to Cuba of goods and technology to help establish an authorized physical presence, if those goods are not tightly restricted under US export controls. Items are authorized if they are EAR99 or are controlled for AT (anti-terrorism) reasons only.
Second, other US persons generally are not restricted from dealing with the authorized Cuban operations of these types of companies, notwithstanding the fact that US persons are otherwise generally prohibited from dealing with any person or business operations in Cuba.
Changes in US export controls
Several of the existing categories of authorized trade and commercial transactions were broadened by the September 2015 changes to the EAR and related policy guidance. For example, under certain circumstances, goods authorized for export to the Cuban private sector can be sold to Cuban state-owned enterprises, if they are resold or distributed to the private sector. This highlights a major impediment to exports to Cuba since nearly all items sold to Cuba must be purchased and imported by Cuban state-owned enterprises.
Of potentially greater significance to a broader universe of companies are the July 2015 regulatory changes following the removal of the Cuba terrorism designation that made possible exports to Cuba of a wide range of items covered under BIS license exceptions (general authorizations).
The July 2015 changes to the EAR also removed US jurisdiction over the reexport to Cuba of certain items produced outside the US containing up to 25% US-origin content. The prior de minimis threshold had been 10 percent for many years. Note that all US-origin content counts toward the 25 percent threshold, even if it is EAR99 (not identified on the US Commerce Control List).
Telecommunications and internet-based services
Under the September 2015 amendments to OFAC's CACR, US providers of authorized telecommunications and internet services in Cuba may maintain a more substantial local presence than other categories of US companies:
(1) These US companies may establish Cuban subsidiaries, branches, joint ventures, franchises or other business relationships with any Cuban person including ETECSA, the Cuban government telecoms monopoly.
(2) Unlike other categories of US companies, they are generally authorized to put in place arrangements for licensing and marketing of the authorized telecom and Internet-based services.
Also, most Internet-based services previously authorized for provision to Cuban persons may now also be provided to Cuban government entities. This reduces the compliance burden that US Internet service providers had faced in seeking to ensure that no recipient of such services is a governmental person. This is a pragmatic approach for the government, given the reality that the sector is still government dominated.
Changes to travel and carrier services and aviation sector
Authorized travel transactions
Twelve categories of authorized travel by US persons to Cuba were established or expanded in January 2015. Although legislative constraints would complicate the creation of additional categories of authorized travel, several of the existing categories were broadened in the September 2015 changes.
Anecdotal evidence also suggests that, since January, OFAC has been interpreting some of the travel general licenses in an uncharacteristically broad manner, including the general license covering market research activities. On the other hand, some members of Congress have expressed concern over the use of general licenses to authorize such a broad range of travel.
Authorized travelers in Cuba may now open local bank accounts and may fund them, including by wire transfer, as long as the funds are used only for their authorized travel while in Cuba.
Vessels and aircraft to Cuba
Vessels are now generally authorized to travel between the US and Cuba and to remain in Cuba for up to 14 days, including the provision of on-board lodging (which may be intended to help make possible US-to-Cuba cruises), subject to obtaining required Cuban government authorizations.
General aviation (i.e., private aircraft flights) are now generally authorized to Cuba, and US aircraft may remain in Cuba for up to 7 days, under license exception AVS pursuant to BIS’s Export Administration Regulations. However, the crew operating the aircraft will still require a specific license from OFAC to travel to Cuba since it is unlikely that they will fall within one of the 12 categories of generally licensed travel. This presents a significant practical limitation that warrants additional guidance from OFAC, particularly in the case of aircraft on temporary sojourn in furtherance of one of the 12 authorized travel categories.
It is also now possible for US lawyers to be paid for legal services provided to Cuba or Cuban persons without first having to seek a specific license (authorization) from OFAC, subject to some limitations and reporting requirements.
Generally, it is also now authorized for US persons to seek and obtain legal services from persons in Cuba, which should simplify the process of engaging local Cuban counsel necessary to navigate the local regulatory environment.
Humanitarian and educational activities
OFAC and BIS have expanded the humanitarian and educational activities that are authorized for US persons, including a new authorization of certain microfinance programs in Cuba, and certain standardized testing and Internet-based undergraduate courses provided to Cubans.
Conclusion
While the further relaxation of the Cuba embargo is a positive development, many restrictions and compliance challenges remain. We urge caution for US companies and their controlled foreign affiliates seeking to enter the Cuban market.
That being said, the existing limited commercial channels are slowly being expanded, but there is still a long way to go before US and Cuba commercial and financial relations are normalized.
__________________________
Disclaimer: The information contained herein is for general informational and compliance purposes and does not constitute legal advice. This information is not intended to facilitate or otherwise assist in any prohibited transaction involving Cuba, nor is it intended to evade or avoid any applicable US sanctions. Qualified counsel should be consulted with respect to any specific transaction contemplated with Cuba.
On September 21, 2015 the Treasury Department's Office of Foreign Assets Control (OFAC) and the Commerce Department's Bureau of Industry and Security (BIS) issued final regulations making additional changes to the US financial and trade embargo of Cuba.
These changes build on changes in the embargo from earlier in 2015, including:
- The January 2015 expansion of authorized categories of trade and commercial activity between the US and Cuba; and
- The July 2015 removal of Cuba from the US list of state sponsors of terrorism.
This is particularly true since some members of the US Congress have expressed their displeasure by the Obama Administration's regulatory efforts to chip away the existing embargo and it is likely that Congress will continue to pressure OFAC and BIS to enforce those restrictions that remain in place.
As a result, US companies and their controlled foreign affiliates exploring business opportunities in Cuba must be vigilant to ensure they remain compliant with the ever-changing regulations on Cuba, which have made compliance challenges more complex.
Practical impact of changes to Cuba embargo
The September 21, 2015 changes to OFAC's Cuban Assets Control Regulations (CACR) and BIS's Export Administration Regulations (EAR), which can be found here (OFAC) and here (BIS), make possible some limited additional trade and transactions by US companies with Cuba. However, any new opportunities will be subject to navigating the broad remaining prohibitions under the embargo, and the perhaps even more difficult Cuban regulatory and business environment. Many activities now authorized by the US will not be possible pending further authorizations or other action by the Cuban government.
Overall, in recent years the thaw in US-Cuba relations and the expansion of US travel and commercial exports to Cuba seem to have primarily benefited non-US companies that already have a substantial local presence. For the foreseeable future that trend is likely to continue.
The following is a summary of the September 21, 2015 changes to the CACR and EAR.
Authorized business activity and physical presence in Cuba
Authorized physical presence in Cuba
The amendments to OFAC's CACR for the first time authorize certain US companies, and non-US companies owned or controlled by US persons, are now generally authorized to establish a physical presence in Cuba, including offices, warehouses or retail outlets. This applies only to companies engaged in the following categories of authorized transactions with Cuba, most of which were established or expanded either in the January or September 2015 changes:
(a) Exporters of certain authorized goods to Cuba, including food and agricultural products; medicine and certain medical devices; materials and equipment for use on privately-owned buildings; equipment and supplies for private sector Cuban entrepreneurs; and tools and equipment for private agricultural activity
(b) Authorized air and vessel carriers and other providers of authorized travel services (but a physical presence in Cuba is not authorized for the purpose of providing lodging services)
(c) Providers of authorized telecommunications and Internet-based services to companies and individuals in Cuba
(d) Companies carrying authorized cargo, parcel or mail to or from Cuba
(e) Organizations involved in authorized educational or religious activities
(f) News bureaus in Cuba.
Any companies not within one of these six categories are not authorized to establish a physical presence in Cuba.
Physical presence - practical aspects
As part of establishing an authorized local presence in Cuba, companies may send US employees to reside and work in Cuba, and may hire local employees as well. They may open local bank accounts and fund them, including by wire transfer, provided the funds are used only for authorized activities in Cuba. When such local accounts are closed, the funds must be sent by wire transfer to a US bank.
Two related authorizations are noteworthy. First, BIS has generally authorized the export to Cuba of goods and technology to help establish an authorized physical presence, if those goods are not tightly restricted under US export controls. Items are authorized if they are EAR99 or are controlled for AT (anti-terrorism) reasons only.
Second, other US persons generally are not restricted from dealing with the authorized Cuban operations of these types of companies, notwithstanding the fact that US persons are otherwise generally prohibited from dealing with any person or business operations in Cuba.
Changes in US export controls
Several of the existing categories of authorized trade and commercial transactions were broadened by the September 2015 changes to the EAR and related policy guidance. For example, under certain circumstances, goods authorized for export to the Cuban private sector can be sold to Cuban state-owned enterprises, if they are resold or distributed to the private sector. This highlights a major impediment to exports to Cuba since nearly all items sold to Cuba must be purchased and imported by Cuban state-owned enterprises.
Of potentially greater significance to a broader universe of companies are the July 2015 regulatory changes following the removal of the Cuba terrorism designation that made possible exports to Cuba of a wide range of items covered under BIS license exceptions (general authorizations).
The July 2015 changes to the EAR also removed US jurisdiction over the reexport to Cuba of certain items produced outside the US containing up to 25% US-origin content. The prior de minimis threshold had been 10 percent for many years. Note that all US-origin content counts toward the 25 percent threshold, even if it is EAR99 (not identified on the US Commerce Control List).
Telecommunications and internet-based services
Under the September 2015 amendments to OFAC's CACR, US providers of authorized telecommunications and internet services in Cuba may maintain a more substantial local presence than other categories of US companies:
(1) These US companies may establish Cuban subsidiaries, branches, joint ventures, franchises or other business relationships with any Cuban person including ETECSA, the Cuban government telecoms monopoly.
(2) Unlike other categories of US companies, they are generally authorized to put in place arrangements for licensing and marketing of the authorized telecom and Internet-based services.
Also, most Internet-based services previously authorized for provision to Cuban persons may now also be provided to Cuban government entities. This reduces the compliance burden that US Internet service providers had faced in seeking to ensure that no recipient of such services is a governmental person. This is a pragmatic approach for the government, given the reality that the sector is still government dominated.
Changes to travel and carrier services and aviation sector
Authorized travel transactions
Twelve categories of authorized travel by US persons to Cuba were established or expanded in January 2015. Although legislative constraints would complicate the creation of additional categories of authorized travel, several of the existing categories were broadened in the September 2015 changes.
Anecdotal evidence also suggests that, since January, OFAC has been interpreting some of the travel general licenses in an uncharacteristically broad manner, including the general license covering market research activities. On the other hand, some members of Congress have expressed concern over the use of general licenses to authorize such a broad range of travel.
Authorized travelers in Cuba may now open local bank accounts and may fund them, including by wire transfer, as long as the funds are used only for their authorized travel while in Cuba.
Vessels and aircraft to Cuba
Vessels are now generally authorized to travel between the US and Cuba and to remain in Cuba for up to 14 days, including the provision of on-board lodging (which may be intended to help make possible US-to-Cuba cruises), subject to obtaining required Cuban government authorizations.
General aviation (i.e., private aircraft flights) are now generally authorized to Cuba, and US aircraft may remain in Cuba for up to 7 days, under license exception AVS pursuant to BIS’s Export Administration Regulations. However, the crew operating the aircraft will still require a specific license from OFAC to travel to Cuba since it is unlikely that they will fall within one of the 12 categories of generally licensed travel. This presents a significant practical limitation that warrants additional guidance from OFAC, particularly in the case of aircraft on temporary sojourn in furtherance of one of the 12 authorized travel categories.
OFAC also has added to its regulations the guidance it released several months ago regarding the categories of US and Cuban persons whom carriers may transport to and from Cuba.
Safety of flight licenses
It is now possible to seek specific licenses (transaction-specific authorizations) from BIS to export to Cuba equipment and technology that is located in the US, or is otherwise subject to US export control regulations, for safety of flight purposes.
We expect this specific licensing program will look a lot like the existing programs for other embargoed countries, including Iran (although Iran aviation-related licenses are issued by OFAC, not BIS).
Credit card and banking transactions
Credit card transactions
OFAC has greatly broadened the January 2015 authorization of US credit card network activity in Cuba. It appears that US credit card operators are generally authorized to process credit card transactions of individuals traveling in Cuba, regardless of whether they are US persons or are traveling under any of the 12 categories of authorized travel.
Note that the preceding point is based on new OFAC guidance stating that its regulations authorize “all transactions incident to the processing and payment of credit and debit cards transactions for third-country nationals traveling to, from, or within Cuba”, even if they “may not fall within the 12 categories of authorized travel”.
US Dollar funds transfers
In January 2015, OFAC made several potentially important changes in the banking sanctions on Cuba:
Now, under the September 2015 changes, US banks may retroactively unblock (unfreeze) and return funds that would have qualified for such treatment had they been submitted after the September 2015 changes entered into effect.
Other potential practical effects of these changes
Services to Cubans outside Cuba
The September 2015 OFAC regulation modifies the remaining restrictions on US companies, and non-US companies owned or controlled by US persons, on providing services to Cubans located outside of Cuba, provided the services do not relate to commercial exports of goods or services to or from Cuba.
The restrictions on non-US subsidiaries of US companies providing services to Cuban nationals (particularly in Europe, Canada and Mexico) had presented very serious compliance challenges, as they directly conflicted with local non-discrimination and sanctions blocking laws.
Authorization of related transactions
OFAC and BIS have made an effort in the September 2015 changes to make possible related transactions that are necessary and ordinarily incident to the trade and commercial activities in and with Cuba that are now authorized.
However, some additional clarification might be needed in this area. As previously noted, the OFAC regulations do not authorize the crew of aircraft and vessels authorized to travel to Cuba during the 7- or 14-day period that the aircraft or vessel may remain in Cuba. Thus, an OFAC specific license is needed until further changes are made to the CACR.
Legal services to and from Cuba
Safety of flight licenses
It is now possible to seek specific licenses (transaction-specific authorizations) from BIS to export to Cuba equipment and technology that is located in the US, or is otherwise subject to US export control regulations, for safety of flight purposes.
We expect this specific licensing program will look a lot like the existing programs for other embargoed countries, including Iran (although Iran aviation-related licenses are issued by OFAC, not BIS).
Credit card and banking transactions
Credit card transactions
OFAC has greatly broadened the January 2015 authorization of US credit card network activity in Cuba. It appears that US credit card operators are generally authorized to process credit card transactions of individuals traveling in Cuba, regardless of whether they are US persons or are traveling under any of the 12 categories of authorized travel.
Note that the preceding point is based on new OFAC guidance stating that its regulations authorize “all transactions incident to the processing and payment of credit and debit cards transactions for third-country nationals traveling to, from, or within Cuba”, even if they “may not fall within the 12 categories of authorized travel”.
US Dollar funds transfers
In January 2015, OFAC made several potentially important changes in the banking sanctions on Cuba:
- Since then, US banks have been generally authorized to reject (refuse to process) rather than block (freeze) funds transfers involving foreign parties that do not involve either a US person or the Cuban government.
- US banks have also been generally authorized to process such funds transfers if related to a transaction that a US person would be authorized to carry out.
Now, under the September 2015 changes, US banks may retroactively unblock (unfreeze) and return funds that would have qualified for such treatment had they been submitted after the September 2015 changes entered into effect.
Other potential practical effects of these changes
Services to Cubans outside Cuba
The September 2015 OFAC regulation modifies the remaining restrictions on US companies, and non-US companies owned or controlled by US persons, on providing services to Cubans located outside of Cuba, provided the services do not relate to commercial exports of goods or services to or from Cuba.
The restrictions on non-US subsidiaries of US companies providing services to Cuban nationals (particularly in Europe, Canada and Mexico) had presented very serious compliance challenges, as they directly conflicted with local non-discrimination and sanctions blocking laws.
Authorization of related transactions
OFAC and BIS have made an effort in the September 2015 changes to make possible related transactions that are necessary and ordinarily incident to the trade and commercial activities in and with Cuba that are now authorized.
However, some additional clarification might be needed in this area. As previously noted, the OFAC regulations do not authorize the crew of aircraft and vessels authorized to travel to Cuba during the 7- or 14-day period that the aircraft or vessel may remain in Cuba. Thus, an OFAC specific license is needed until further changes are made to the CACR.
Legal services to and from Cuba
It is also now possible for US lawyers to be paid for legal services provided to Cuba or Cuban persons without first having to seek a specific license (authorization) from OFAC, subject to some limitations and reporting requirements.
Generally, it is also now authorized for US persons to seek and obtain legal services from persons in Cuba, which should simplify the process of engaging local Cuban counsel necessary to navigate the local regulatory environment.
Humanitarian and educational activities
OFAC and BIS have expanded the humanitarian and educational activities that are authorized for US persons, including a new authorization of certain microfinance programs in Cuba, and certain standardized testing and Internet-based undergraduate courses provided to Cubans.
Conclusion
While the further relaxation of the Cuba embargo is a positive development, many restrictions and compliance challenges remain. We urge caution for US companies and their controlled foreign affiliates seeking to enter the Cuban market.
That being said, the existing limited commercial channels are slowly being expanded, but there is still a long way to go before US and Cuba commercial and financial relations are normalized.
__________________________
Disclaimer: The information contained herein is for general informational and compliance purposes and does not constitute legal advice. This information is not intended to facilitate or otherwise assist in any prohibited transaction involving Cuba, nor is it intended to evade or avoid any applicable US sanctions. Qualified counsel should be consulted with respect to any specific transaction contemplated with Cuba.
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