Summary

On January 16, 2015, the US Treasury and Commerce Departments published lengthy amendments to the US sanctions and export control regulations that they administer, to implement the limited easing of the US embargo of Cuba announced by President Obama on December 17. We summarized this announcement in our December briefing.

President Obama’s announcement was of great significance from a foreign policy perspective, stating that his Administration would seek to take the limited actions within its power to begin easing the US embargo of Cuba. In a sharp break from US policies maintained for more than five decades, the President announced his Administration would seek to re-open full diplomatic relations with Cuba.

The January 16 regulatory amendments summarized below implement the further objectives announced by President Obama: to expand contacts between the Cuban people and the rest of the world, and make possible greater support from the US for humanitarian projects and small, privately held businesses in Cuba.

As President Obama has acknowledged, most of the broader aspects of the US embargo of Cuba relevant to business and investment can only be altered by an act of Congress. Until then, travel and investment in Cuba by US persons, and non-US companies that US persons own or control will remain strictly limited to a few narrow areas. The likelihood of Congressional action is difficult to predict in this climate, given the numerous variables including the strongly held political views and emotions that this issue generates.

Diplomatic breakthroughs

President Obama’s announcement in December was reportedly preceded by a year and a half of intensive, secret discussions brokered by the Canadian government and with the personal intercession of Pope Francis. During these negotiations, the United States and Cuba agreed to take significant steps to begin to improve their relations.

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. A senior US State Department official will be in Cuba in the third week of January for the first round of these expanded talks. The US will open an Embassy in Cuba, which will likely involve the upgrading of the large “US Interests Section” (nominally part of the Swiss Embassy) in Havana.

The US State Department will review Cuba's designation under US law as a sponsor of terrorism - Cuba is one of only 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.

US-Cuba payments and financial transactions

Certain limited direct and indirect funds transfers and electronic payments are authorized between US and Cuban financial institutions or relating to authorized types of transactions with Cuba:

  • Correspondent banking relationships between US and Cuban banks are now allowed, to support the processing of limited categories of financial transactions that are now authorized.
  • US banks are authorized to process funds transfers between non-US persons located outside the US if they relate to travel to Cuba or other types of transactions now authorized for US persons. US banks are now generally authorized to reject (refuse to process) other funds transfers relating to Cuba between non-US persons, and are no longer required to block (freeze) the relevant funds unless certain specially designated persons are involved.
  • US-based credit card networks and banks are now allowed (assuming the practical aspects can be worked out) to enroll Cuban merchants and handle payments to those merchants, on US travelers' credit cards, through local Cuban banks.
  • Though these steps are limited, they 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. OFAC has increased the scope and size of remittances that US persons can send to Cuba, and US banks no longer need to apply to OFAC for a specific license to handle remittances.

Easing of certain trade restrictions

OFAC has taken certain limited initial steps to ease restrictions on commercial transactions between the US and Cuba:

  • OFAC has eased the required payment terms for the large volume of authorized exports of agricultural products from the United States to Cuba. OFAC modified the regulatory concept of “payment of cash in advance” to allow payment after the goods leave the US port, at any time before title and control over the goods passes to the Cuban purchaser. Although 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.
  • US persons may participate 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.
  • OFAC has lifted certain long-standing restrictions on the entry into US ports of vessels that have engaged in trade with Cuba.
  • OFAC has authorized the commercial importation into the United States of goods that are listed in future by the US State Department as “produced by independent Cuban entrepreneurs.”

Limited categories of authorized exports

Alongside the changes in the OFAC regulations, the Bureau of Industry and Security (“BIS”) in the US Department of Commerce has amended its Export Administration Regulations (the “EAR”). Building on the longstanding authorization for the export of agricultural products from the United States to Cuba, the new “License Exception SCP” is an exception from the general export embargo and authorizes certain additional categories of exports (though separate OFAC authorization may be required if these items do not originate in the US):

  • certain construction materials, equipment and tools for use on private-owned buildings;
  • tools, equipment, supplies and instruments for use by private sector Cuban entrepreneurs;
  • tools and equipment for private agricultural activity (small, non-government owned farms); and 
  • certain other exports of donated items, items for use by certain non-governmental organizations, and temporary exports of certain items for scientific, cultural, educational, or sporting use.

Complementing these export authorizations, OFAC has authorized the provision of certain business training and other services for private Cuban businesses and small farmers and related travel to Cuba.

The Obama administration said in December 2014 that the Cuban government had agreed to reduce restrictions on access by Cubans to the internet. The BIS and OFAC have now expanded authorizations established in 2009 for the export to Cuba of telecommunications equipment and services. The agencies intend these changes to improve Cubans’ access to affordable internet and telecoms, so they can better communicate with the rest of the world:

  • US persons are now generally authorized to export to and establish in Cuba telecoms infrastructure, to export to Cuba a broader range of consumer telecoms devices and equipment, and to provide certain other IT and telecoms design, management and support services. While certain goods previously had to be donated to be eligible, now the covered goods can be sold to Cuba. 
  • US persons are also generally authorized to pay for telecoms services of Cubans in Cuba, and to provide to Cubans fee-based email, messaging, social network, web hosting, and domain-name services.

Expansion of authorized categories of travel

On January 16, the US Office of Foreign Assets Control ("OFAC") in the US Treasury Department made a number of adjustments to its Cuba sanctions regulations. In the following sections we summarize the practical impacts of these amendments. First, it is now easier for US persons to visit Cuba for a number of specific authorized purposes (but not for tourism or general business purposes). 

The authorized types of travel to Cuba include certain family visits (by “close relatives” of Cubans), “people-to-people” trips to Cuba, journalism, professional research and meetings in Cuba, educational activities in Cuba or by Cubans in the US, religious activities in Cuba, the exchange of information and informational materials, public performances and sports competitions in Cuba, official US government business, humanitarian projects, and activities in Cuba of research and educational foundations:

  • OFAC has issued a general license for each of these specific categories of travel, other than those categories for which a general license already existed. This means it will no longer be necessary to apply to OFAC for permission for each visitor and visit. 
  • In an effort to help ensure that general licenses are not used effectively for general tourism, most require that the US traveler’s schedule “not include free time or recreation in excess of that consistent with a full-time schedule”. 
  • As with all OFAC general licenses, there are certain limitations, exclusions and compliance requirements that must be carefully followed. For example, those traveling to Cuba must maintain records of their Cuba-related transactions for five years after they return to the US. 

Currently there are only limited direct flights from the US to Cuba, operated on a charter basis, and tickets must be purchased from specially authorized tour operators. 

  • Once the FAA and other US agencies have issued further rules and authorizations, carriers will be authorized to fly standard scheduled service to Cuba, and individuals will be able to purchase tickets directly from those carriers. 
  • Travel insurance is now also generally authorized.

Travelers are no longer limited to a “per diem” rate of expenses while in Cuba, and are generally authorized to purchase goods and services ordinarily incident to their travel, for personal consumption while in Cuba. Travelers may bring back only up to $400 of Cuban merchandise including up to $100 of Cuban cigars or alcohol for personal use. The prohibition on internet purchases of Cuban cigars and merchandise remains and is actively enforced.

Easing of prohibitions on Cubans outside Cuba

OFAC has eliminated some prohibitions on dealings by non-US subsidiaries of US companies with Cuban nationals located outside Cuba.

  • Companies in countries other than the United States and Cuba that are owned or controlled by US persons are no longer prohibited under US law from engaging in financial transactions with, and providing goods and services to, Cuban nationals located in those countries. Only transactions taking place entirely outside Cuba are authorized – they must not involve the direct or indirect provision of goods or services to or from Cuba. 
  • These extraterritorial aspects of the Cuba embargo posed difficult compliance challenges. Following them often could place non-US companies in violation of the anti-discrimination and sanctions blocking laws of the countries in which they were operating.

The changes in US sanctions will partially mitigate the conflict between the embargo and the blocking and anti-boycott laws of the EU, Germany, Canada and other countries. These jurisdictions have adopted laws prohibiting compliance by their nationals and companies with the US embargo of Cuba. Compliance by EU or Canadian nationals and companies with the broad remaining US sanctions on Cuba may still infringe these blocking laws.

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, they predict 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, US officials expect Cuba 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.

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 in December. 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.

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. The Obama Administration is likely to concentrate now on seeking Congressional action to authorize general business and tourist travel to Cuba, and to lift the remaining restrictions on the export of other non-sensitive goods to Cuba. 

Any substantial lifting of sanctions will likely take years. Numerous overlapping and interlocking statutes, executive orders, and regulations have been put in place over the decades. The 1996 statute known as Helms-Burton seeks to discourage investment by non-US persons 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. As we discuss in our separate briefing, the adjudication or settlement of these private expropriation claims will likely be a component of any broader lifting of sanctions.

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. 

Our Cuba Response Team, set out above, coordinates assistance with any Cuba related questions or concerns. Please do not hesitate to contact your usual contacts in Freshfields or any of the members of the Response Team if you would like to discuss any of the matters addressed in this briefing.