Summary

On Wednesday, December 17, President Obama announced several important developments in US foreign policy towards Cuba, including an agreement with Cuba to relaunch formal diplomatic relations.

Fulfilling a campaign promise to rethink American policy towards Cuba, the President indicated that his administration would take the actions in its power (absent action by US Congress) to relax US sanctions on Cuba, and would seek to rebuild momentum in Congress behind lifting broader elements of the embargo.

President Obama's reasoning is summed up in his observation that "I do not believe we can keep doing the same thing for over five decades and expect a different result."

However, most aspects of the US embargo of Cuba relevant to business and investment can only be altered by an act of Congress. The likelihood of Congressional action is difficult to predict in this climate and with the emotions this issue generates.

Diplomatic and foreign policy breakthroughs

Following a year and a half of intensive, secret discussions brokered by the Canadian government and the Vatican, and with the personal intercession of Pope Francis, the United States and Cuba have agreed to take certain very significant steps to begin to improve relations between the two countries.

The United States and Cuba have each released several individuals held on charges of spying for the other, have agreed to reinstate formal diplomatic relations, and will start negotiations on a few longstanding areas of bilateral contention. President Obama announced the opening of an Embassy in Cuba, which will likely involve the upgrading of the already very large “US Interests Section” (nominally part of the Swiss Embassy) in Havana to full embassy status.

The US State Department will review Cuba's designation under US law as a sponsor of terrorism - Cuba is only one of four countries so designated, along with Iran, Syria and Sudan (and North Korea may soon be re-designated). The review is expected to be complete within six months and it is likely the President will then rescind the designation. The primary impact will be to lift some restrictions on US government foreign aid to Cuba and on exports of certain sensitive or controlled goods to Cuba, though many largely overlapping restrictions will remain in both areas.

Plans for limited lifting of sanctions

The US Office of Foreign Assets Control ("OFAC") in the US Treasury Department will make a number of adjustments to its Cuba sanctions regulations. OFAC has said it will move fairly quickly, to make these changes within a few weeks.

First, the changes to the OFAC regulations will make it easier for US persons to visit Cuba for a number of specific authorized purposes (but not for tourism or general business purposes):

  • In summary the authorized types of travel to Cuba are certain family visits, official government business, journalism, professional research and meetings, educational or religious activities, public performances and sports competitions, humanitarian projects, and activities of research and educational foundations.
  • OFAC will issue a general license, if one does not already exist, for each of these specific categories of travelers, meaning it will no longer be necessary to apply to OFAC for permission for each visitor and visit.
  • To the extent that additional major airlines in the US take interest, it may be possible to find a broader range of carriers and to fly to Cuba from more US cities (currently there are only limited flights direct from the US).

Second, OFAC will eliminate some extraterritorial prohibitions on dealings, by non-US subsidiaries of US companies, with Cuban nationals located outside Cuba.

  • Stated more specifically, companies in countries other than the United States and Cuba, that are owned or controlled by US persons, will no longer be prohibited under US law from engaging in financial transactions with, and providing services to, Cuban nationals located in those countries.
  • These restrictions have been problematic under anti-discrimination laws and other laws of the countries in which these subsidiaries are located.
  • These jurisdictions have adopted laws prohibiting compliance by their nationals and companies with the US embargo of Cuba in order to shield their own foreign trade from potential negative impacts. Compliance by EU or Canadian nationals and companies with any remaining US sanctions on Cuba could therefore still lead to infringement of the relevant anti-boycott laws.

Third, certain limited correspondent banking relationships between US and Cuban banks will be allowed, to process the very limited categories of financial transactions that will be authorized. Also, US-based credit card networks will be allowed (assuming the practical aspects can be worked out) to handle payments on US travelers' credit cards through local Cuban banks. Even these limited steps are striking in light of the pressure placed by US regulators on non-US banks, in recent settlements of sanctions cases, to curtail their business with Cuba.

Fourth, OFAC will ease the required payment terms for the large volume of authorized exports of agricultural products from the United States to Cuba. OFAC will modify the regulatory concept of "payment of cash in advance" to allow payment after the goods leave the US port, and before title over the goods passes to the Cuban purchaser. While this may seem highly technical, OFAC has adopted and then reversed this change before and US companies have found it to have a significant impact on their authorized Cuba exports.

Fifth, OFAC will authorize US person participation in business conferences related to Cuba taking place outside the United States and Cuba. In relation to other sanctioned countries such as Iran there has been confusion over whether US persons can attend conferences focused on these countries that take place, for example, in the EU. Finally, OFAC will increase somewhat the scope and maximum value of remittances that US persons can send to Cuba.

Alongside the planned adjustments to the OFAC regulations, the Bureau of Industry and Security ("BIS") in the US Department of Commerce will make certain adjustments relating to Cuba in the Export Administration Regulations (the "EAR").

Building on the longstanding authorization of the export of agricultural products from the United States to Cuba, certain additional categories of exports will be authorized including certain residential construction materials, goods for private sector Cuban entrepreneurs, and agricultural equipment for small farmers. Complementing these export authorizations, OFAC will authorize the provision of certain business training and other services for private Cuban businesses and small farmers and related travel to Cuba.

Also, the Obama administration has said that the Cuban government has agreed to reduce restrictions on access by Cubans to the internet. The BIS and OFAC will respond by expanding authorizations established in 2009 for the export to Cuba of telecommunications equipment and services. The planned changes are intended to help Cubans’ access to affordable internet and telecoms, to better communicate with the rest of the world. US persons will be authorized to export and establish in Cuba telecoms infrastructure, to export a broader range of consumer telecoms devices and equipment, and to provide related services.

Medium term prospects

Senior US officials have argued the planned diplomatic and sanctions steps are in the US national interest, in three principal ways.

  • First, they argue the new approach is likely to be more effective (and certainly could not be less effective) in encouraging the development of a more free, democratic and prosperous Cuba.
  • Second, it will remove substantial obstacles to US relations with many other countries in Latin America. Secretary of State Kerry has said the embargo has in some ways isolated the United States more than it has isolated Cuba.
  • Third, Cuba will be expected to halt activities that run counter to US interests or are openly antagonistic to the United States.

The Obama administration's position is that if any of these objectives, particularly the last, fail to be realized, any of the lifted sanctions can readily and swiftly be re-imposed.

Most public and official opinion around the world may find these arguments persuasive. In the US, a number of research organizations have found in recent years that the weight of public opinion has been shifting to support a change in the US approach to Cuba. There is broad support by US businesses for the shift in policy – the US Chamber of Commerce promptly issued a statement welcoming and supporting President Obama’s announcement.

Nonetheless, the extent and speed of any substantial lifting of the US embargo will depend on whether the Obama administration can find sufficient support in Congress. This is by no means guaranteed. Many in Congress have vociferously objected to the limited sanctions relief announced thus far. Unlike other sanctions issues (such as Iran) there is disagreement between and within the two parties, with Republicans (who will, in January, control both houses of Congress) largely opposed.

Congress has acted in the past to lift significant pieces of the embargo – for example to authorize US agricultural exports to Cuba, which grew to several hundred million dollars of food exported annually. Based on bills and other proposals that have had some support in recent years, if support can be found in Congress to further relax sanctions, this might include a broader lifting of the travel ban, and of remaining restrictions on the export of other non-sensitive goods to Cuba.

Even then, any substantial lifting of sanctions will likely take at least one to two years, because of their tremendous complexity. Numerous overlapping and interlocking statutes, executive orders and regulations have been put in place over the decades.

Not least, the 1996 statute known as the Helms-Burton Act seeks to discourage non-US persons from investing in Cuba by increasing the risk of private claims by pre-Cuban Revolution property owners. The US Foreign Claims Settlement Commission has "certified" 8,000 such claims, with an aggregate value of nearly US$ 2.0 billion, plus interest. The adjudication and resolution of these private expropriation claims will likely be a component of any broader lifting of sanctions. 

On the other hand, it is entirely possible the Obama administration will be unable to build support in Congress behind the new approach over the next two years, resulting in gridlock or inaction, particularly as the November 2016 election approaches. In that case, there may not be any substantial lifting of sanctions until and unless the new President and Congress can find a way to agree upon taking that path forward.

Conclusion

Freshfields has extensive experience guiding clients through complex and sensitive issues relating to Cuba, including the broad implications for US and non-US companies and financial institutions of the US embargo, and commercial transactions and litigation and other disputes for non-US companies with exposure to Cuba.