The Obama Administration will submit a report to Congress recommending removal of Cuba from the State Department's list of State Sponsors of Terrorism following a review initiated in December as part of the current plan to reestablish diplomatic relations. As required by law, the Administration's review determined that Cuba had not engaged in terrorist activity in the past six months and relied upon assurances that Cuba will notsupport terrorism in the future. Unless Congress blocks the Administration's action through a joint resolution during the required 45-day Congressional review period, Cuba will be removed from the list. If that occurs, one expected change is that banks will recalculate the historically prohibitive risk and compliance costs associated with financing Cuban transactions.

Cuba was designated March 1, 1982 pursuant to three U.S. laws:

  1. Section 6(j) of the Export Administration Act;
  2. Section 40 of the Arms Export Control Act; and
  3. Section 620A of the Foreign Assistance Act.

The three laws direct the Secretary of State to determine whether the country "repeatedly provided support for acts of international terrorism," but do not explicitly define terrorism. Designation triggers the following substantial restrictions on trade, investment, and foreign assistance, on designated countries, such as Cuba, which the administering agencies will remove after expiration of the 45-day review period:

  • Trade in defense goods and services is outright prohibited. The Arms Export Control Act prohibits exports, credits, guarantees, and other financial assistance, as well as export licensing by the Directorate of Defense Trade Controls (DDTC);
  • All dual-use technology on the Commerce Control List and most other items subject to the Export Administration Regulations (EAR), which are designated "EAR99", require a license for export to Cuba, pursuant to the Department of Commerce's Bureau of Industry and Security (BIS) regulations. Furthermore, most items are subject to a general policy of denial, except certain agricultural commodities and medicine;
  • U.S. persons are prohibited from transacting business with the Cuban government without authorization from the Treasury Department's Office of Foreign Assets Control (OFAC);
  • Products of State Sponsors of Terrorism are not eligible for trade preference programs upon their importation into the United States; and
  • Most foreign aid, including Export-Import Bank financing, is restricted.

Of course, each reform would need to be implemented by regulation through the appropriate agency once the country is delisted. While one or more members will likely introduce a bill to block the rescission pursuant to Section 40 of the Arms Export Control Act, it is not anticipated that any will pass Congress.

Cuba was first designated as a State Sponsor of Terrorism in 1982 for training and arming Communist rebels aiming to overthrow governments in Latin America. Once designated, a country remains a State Sponsor of Terrorism until the designation is rescinded. The State Department must annually report on whether each country "has repeatedly provided support for acts of international terrorism." Recent reports found that while there was no indication that the government armed or trained terrorist groups, the government "continued to harbor fugitives wanted in the United States" by providing housing, food, and medical care.

The State Department's April 14 release affirms that "based on the facts and the statutory standard" the State Department recommends that the President rescind Cuba's designation. The statement noted that while the U.S. continues to have significant concerns with a range of Cuba's policies, these concerns "fall outside the criteria for designation" so the review focused on the narrow question of whether Cuba provided terrorist support during the previous six months. Notably, two of the 2016 Presidential candidates, Senators Marco Rubio (R-FL) and Ted Cruz (R-TX), have signed letters to Administration officials arguing that refusal to extradite American fugitives constitutes support for international terrorism warranting continued designation.

If the designation of Cuba is lifted, only Iran, Syria, and Sudan will remain designated State Sponsors of Terrorism.

A designation may be rescinded two ways. Under one option, the President may submit a report to Congress certifying that: (1) There has been a fundamental change in the leadership and policies of the designee; (2) The designee government is not supporting terrorism; and (3) The designee government has provided assurances that it will not do so in the future.

Alternatively, the President may submit a report to Congress 45 days before the proposed rescission will take effect, certifying that:

  1. The designee government has not supported terrorism in the preceding six-month period; and
  2. The designee government has provided assurances that it will not do so in the future.

Iraq, Libya, North Korea, and South Yemen have all previously had their designations rescinded. The most recent rescissions, Libya in 2006 and North Korea in 2008, followed similar 45-day review periods. In another interesting update, Members of Congress have introduced resolutions as recently as the 114th Congress advocating for the State Department to re-designate North Korea.

While delisting Cuba would loosen certain restrictions on trade and investment, only Congress can lift the embargo by amending the Helms-Burton Act. Under Helms-Burton, Cuba must make "demonstrable progress" in returning $7 billion in expropriated property subject to claims filed with the Foreign Claim Settlement Commission (FCSC) in order to normalize trade. The amount at issue represents 10% of Cuba's current GDP, and presents what may be an insurmountable barrier to lifting the embargo without legislative amendment. Moreover, the practical challenges associated with settling the expropriation claims, many of which were vaguely drafted and are somewhat ambiguous in their references, should not be underestimated notwithstanding this new wave of proposed change.

Certain U.S. agencies, including OFAC and BIS, have already begun rewriting the rules on Cuba pursuant to earlier announcements. OFAC and BIS published Final Rules amending the Cuban Assets Control Regulations (CACR) and EAR effective January 16, 2015, creating general licenses and license exceptions facilitating certain transactions. For example, banks and financial institutions were authorized to open accounts in Cuba and to begin processing credit and debit transactions. These rules, coupled with delisting Cuba as a State Sponsor of Terrorism, are spurring many U.S. organizations, including U.S. financial institutions, to reevaluate the risk of doing business with Cuba and to identify new opportunities throughout industry.

As U.S. government agencies continue to implement new regulations with respect to Cuba, many are carefully evaluating renewed liberalization, and potential opportunities for trade and investment with Cuba. The possible opportunities in such a new regulatory environment deserve careful analysis and guidance tailored to your business.