On September 18, 2015, the Obama Administration announced a series of new changes to the Cuban Assets Control Regulations (CACR) and the Export Administration Regulations (EAR). The new regulations, promulgated just eight months after the initial rule changes announced in January of this year, are designed to further loosen restrictions on travel, commerce, financial interactions and educational exchanges, among other things, between the United States and Cuba. In many ways, these rule changes, which took effect on September 21, 2015, are even more comprehensive than the changes that were announced in January.
For the first time in decades, certain US companies will be permitted to establish offices and other facilities in Cuba under a general license. They will be able to make lease payments for those offices and facilities, employ Cuban nationals, open bank accounts with Cuban financial institutions and perform other transactions in furtherance of their permitted activities on the island.
US telecommunications companies and Internet businesses will be permitted to enter into business relationships with Cuban entities, including state-owned companies, for the purpose of engaging in authorized telecommunications and Internet-based activities in Cuba. The new rules also pave the way for US cruise lines and shipping lines to convey passengers and cargo to Cuba and for US mail and parcel service carriers to begin to operate in Cuba.
Under the new rules, US persons can now send an unlimited amount of remittances to certain Cuban nationals. US persons engaged in authorized travel to Cuba can open bank accounts at Cuban financial institutions, and US financial institutions can open bank accounts for certain Cuban nationals present in the United States.
This paper discusses the new rule changes and their potential impact on commerce, travel, banking and other exchanges between the United States and Cuba.
Physical Presence in Cuba
Among the most important of the changes announced by the administration, the new rules now allow certain US entities to establish a physical presence in Cuba under a general license. These entities will now be able to lease office space, warehouses, retail outlets and other facilities in Cuba; employ Cuban nationals, as well as US citizens, for their Cuban operations; open and maintain bank accounts at Cuban financial institutions; and market their physical presence in Cuba.1 The new rules also allow US entities to export and re-export certain items to Cuba for purposes of establishing and maintaining a physical presence on the island. The following types of entities may establish a physical presence in Cuba for the purpose of carrying out activities otherwise permitted under the CACR and the EAR:
- news bureaus;
- exporters of certain goods (e.g., food, medicines and medical devices, building materials, telecommunications devices, and aviation and vessel safety equipment);
- providers of mail and parcel delivery services and cargo transportation services;
- providers of certain telecommunications and Internet-based services;
- educational organizations;
- religious organizations; and
- travel and carrier service providers.2
Under the new rules, a US exporter that is permitted to export products to Cuba under a license from the Department of Commerce would be able to establish an office in Havana, lease a warehouse in which to store its products on the island, hire a Cuban accountant to work in its office and purchase supplies from Cuban vendors. Under the new rules, US exporters of food, telecommunications providers, mail and parcel delivery services, universities, airlines and cruise lines, among others, will similarly be able to establish a physical presence and engage in a variety of economic transactions within Cuba. As discussed more fully below, however, these companies will still be limited in terms of the kinds of activities that they may engage in directly in Cuba.
Telecommunications and Internet-Based Services
In an effort to promote the free flow of information to and from Cuba, the changes effected by the administration under the new rules have the potential to impact dramatically US involvement in the development of the telecommunications and Internet sectors in Cuba. The new rules allow persons subject to US jurisdiction to establish a business presence on the island through the establishment of subsidiaries, branches, offices, joint ventures, franchises, agencies or other business relationships with Cuban nationals or entities, including state-owned companies, for the purpose of engaging in authorized telecommunications and Internet-based activities.3 It is important to note that the authorization to establish these kinds of business relationships with Cuban nationals and entities applies only to US persons engaged in authorized telecommunications and Internet-based activities. It does not apply more broadly to US persons engaged in other activities for which they may be permitted to establish a physical presence in Cuba as described above.
The new rule changes will most certainly create new opportunities for US telecommunications companies and Internet-based businesses to tap into the Cuban market. For example, under the new rules a US telecommunications company may now enter into a joint venture agreement or become the co-owner of a separate Cuban entity (an "empresa mixta") with Empresa de Telecomunicaciones de Cuba, S.A. (ETECSA), the state-owned telephone company in Cuba, for the provision of authorized telecommunications services on the island.
The new rules also allow US companies to import mobile applications of Cuban origin and to hire Cuban nationals who develop mobile applications.4 Persons subject to US jurisdiction are also authorized to enter into licensing agreements and market Internet-based personal communications applications, such as instant messaging, chat and email, social networking, web browsing, blogging, certain web hosting and domain name registration.5
Under the rule changes that were announced in January 2015, the maximum amount that US persons could remit to Cuban nationals per consecutive three-month period was raised from $500 to $2,000. Under the new rules, that limit has been removed entirely. Now, US persons may make unlimited donative remittances to Cuban nationals, so long as they are not prohibited officials of the Cuban Government or prohibited members of the Cuban Communist Party.6 US financial institutions, including registered broker-dealers and registered money transmitters, will continue to be authorized to collect, forward and receive authorized remittances. US financial institutions will also be permitted to unblock funds that had been frozen previously due to the limitations that existed under the prior rules.7
Cuba has a population of more than 11 million people,8 including an estimated 500,000 self-employed entrepreneurs called "cuentapropistas." The elimination of limits on donative remittances to Cuba could have a dramatic effect on the flow of US dollars directed toward the island. Increased levels of remittances to Cuba's expanding corps of cuentapropistas could have an important effect on the growth of small businesses on the island. US financial institutions, such as money transmitters, involved in the collection, transmission and receipt of remittances also stand to benefit from increased activity under the new rules.
The new rules increase the availability of banking among US and Cuban nationals and financial institutions in the two countries. Under the January 2015 rule changes, US banks were permitted to enter into correspondent banking relationships with Cuban banks. Now, US banks may open accounts for Cuban nationals while present in the United States,9 and US persons may open accounts at Cuban banks for permitted travel to Cuba.10 US businesses authorized to establish a physical presence in Cuba may also open bank accounts at Cuban banks.11
Although the January 2015 rule changes permitted US financial institutions to establish correspondent banking relationships with their Cuban counterparts, only one US bank - Stonegate Bank in Florida - took advantage of the rule change. It will remain to be seen whether the new rule changes will encourage US financial institutions to begin to explore engaging in permitted financial interactions involving Cuban nationals. Those that choose to participate will need to carefully review their compliance programs, including their "know your customer" policies, to ensure that they do not violate the myriad regulations that will continue to apply to them.
The new rules expressly authorize persons subject to US jurisdiction to carry passengers, baggage and cargo by vessel to, from or within Cuba without the need for a specific license. They are also permitted to provide lodging onboard such vessels to passengers engaged in authorized travel to Cuba, including while docked at Cuban ports. The new rules also allow individuals engaging in authorized travel to Cuba to do so aboard recreational vessels. Vessels on temporary sojourn in Cuba will be permitted to remain there for up to 14 consecutive days.
Under the new rules, US cruise lines are able to carry authorized US travelers, as well certain Cuban nationals and nationals of other countries, to and from Cuba. US cargo vessels are also permitted to transport goods authorized for export from the United States directly to Cuba. These changes will almost certainly create new opportunities for US citizens to travel to Cuba, whether aboard commercial cruise lines or recreational vessels. They will also facilitate the export of US goods to the island directly from US ports.
The new rules authorize US lawyers to provide and receive payment for legal services to the Cuban Government and Cuban nationals, including providing legal advice regarding compliance with US law. US lawyers are also permitted to represent Cuban nationals as plaintiffs and defendants in legal, arbitration or administrative proceedings brought before US federal, state or local courts or agencies.12
As economic activity and business relationships expand between US companies and Cuban nationals and entities, including most notably Cuba's state-owned companies, the new rules allow US lawyers to play a role in that expansion. One notable exception in the new rules is a prohibition against US lawyers participating in any settlement or other judicial process that would affect property in which Cuba or a Cuban national has had an interest at any time since July 8, 1963, unless otherwise expressly permitted by the regulations.13
The new rules allow merchandise from Cuba or of Cuban origin coming from a third country to be imported into the United States, so long as: (i) the items are intended as gifts; (ii) their value does not exceed US$100; (iii) they are of a type and quantity normally exchanged as gifts between individuals; (iv) they are sent (presumably by mail) and not carried by a traveler; and (v) the items are not alcohol or tobacco.14
As travel to Cuba increases under the new rules, US travelers will be allowed to send certain limited items of merchandise back to the United States without fear of running afoul of US law.
The new rules allow certain non-commercial educational activity by US academic institutions and their students and faculty, such as:
- non-commercial academic seminars and conferences related to Cuba;
- academic exchanges and joint non-commercial research with academic institutions in Cuba;
- standardized testing, professional certificate examinations and university entrance examinations to Cuban nationals; and
- Internet-based courses to Cuban nationals, so long as such courses are undergraduate level and below.15
The new rules promulgated by the Obama Administration create a number of opportunities for US citizens, companies and educational institutions to play a significant role in Cuba's economic transformation. The fact that they are now allowed to conduct certain activities in Cuba does not, however, mean that US entities will immediately avail themselves of the Cuban market. Many observers have noted that Cuba still represents a very limited market for US businesses due to the continuation of most aspects of the US trade embargo, including the travel ban, and the limited buying power that exists on the island. It is important to note, for example, that for years US news organizations have been permitted to engage in many of the same kinds of activities now being expanded to apply to other types of US businesses, yet to date, few US news organizations have chosen to do so. Similarly, although US banks were permitted to establish correspondent banking relationships with Cuban banks commencing in January of this year, we are aware of only a single bank that has taken advantage of that opportunity to date. It will remain to be seen how quickly other US businesses will move to take advantage of the new rules.
It is also important to note that real limitations exist, both in terms of the kinds of US entities that may establish a physical presence in Cuba and the kinds of activities in which those US entities may engage in Cuba. These limitations exist under US law, as well as the internal laws of Cuba. For example, the universe of US companies that are permitted to establish a physical presence in Cuba is limited to those that are expressly identified in 31 CFR § 515.573(b) (i.e., news bureaus, exporters of authorized goods, mail and parcel carriers, cargo transporters, telecommunications and Internet companies, entities engaged in educational activities and religious organizations). Even those US companies that are permitted to do business in Cuba must be careful not to engage in activities that may be specifically prohibited under US law. For example, telecommunications and Internet-based businesses that enter into permitted business relationships with Cuban nationals or entities are still prohibited from extending credit or otherwise providing financing if the business relationship involves the use of expropriated property over which a US national holds a claim.16
The Cuban foreign investment law that was enacted in 2014 generally allows foreign businesses to operate in Cuba under: (i) joint ventures consisting of foreign and Cuban persons or entities (called "asociaciones económicas internacionales"); (ii) as shareholders of Cuban entities (called "empresas mixtas") in co-ownership with one or more Cuban persons or entities; or (iii) through subsidiaries, affiliates, branches, agencies or other similar structures which are wholly-owned by the foreign business. The law also requires that foreign businesses seeking to engage in business activity in Cuba be approved by the Cuban Government in accordance with procedures established under the law. Accordingly, there is no guarantee that a US business that is authorized to establish a physical presence in or otherwise transact with Cuba under US law would be permitted to do so under Cuban law.
US companies doing business in Cuba will also be subject to other legal limitations that exist under Cuban law, including under Cuba's tax and labor laws. For example, under Cuba's labor regime applicable to foreign investors, US companies seeking to hire Cuban nationals would need to do so through an agreement with one of Cuba's state-sanctioned employment agencies. Under these agreements, the salaries or wages payable to the Cuban employees are determined by the employment agency based on certain factors established by the applicable regulations, rather than through direct negotiation between the employer and the employee. The company pays the employment agency a fee for its services, and the agency pays the Cuban employees. The employer-employee relationship under Cuba's labor laws differs in many other respects from those to which US companies may be accustomed. US companies seeking to establish a physical or business presence in Cuba will need to understand the impact of Cuba's laws on their operations before they expend significant resources to establish operations on the island.
US companies that choose to enter into business relationships with state-owned Cuban entities must also consider the litigation risk of claims or attachment actions that may be filed by holders of default judgments against the Cuban Government. In the past, holders of such default judgments (based on claims against Cuba for alleged acts of terrorism) have sought to attach the assets of state-owned companies in order to satisfy their claims.
Although the Obama Administration's most recent changes to the CACR and EAR further expand opportunities for US individuals and companies to engage in a variety of activities in Cuba, a number of legal and practical hurdles remain which will require careful analysis and consideration.