Author: Michelle Roberts and Bruce Zagaris*
Date: June 6, 2016
In January, March and April 2016, the Obama Administration has continued to normalize relations with Cuba and reduce its unilateral sanctions. The latest regulations came just before an historic visit by President Obama to Cuba on March 21-22, 2016. This was the first such trip by a U.S. president in 88 years. The revisions since last September’s regulatory changes have related primarily to travel related transactions, especially those that will help the Cuban people and enhance people-to-people exchanges. The changes are discussed chronologically by month in which the changes occurred1. While general tourist travel is still not permitted, U.S. persons can easily travel to Cuba if their travel involves any of a number of favored categories. The U.S. has made significant changes to the restrictions on trade financing and a broadening of some of the prior authorizations described in our white paper of December 17, 2015.
1. December 10, 2015– Direct Mail and Direct Flights
On December 10, 2015, the U.S. and Cuba reached an agreement on resumption of direct mail services between the two countries, and concluded talks on direct commercial air service on December 17, 2015. Direct mail flights will take place between the countries several times a week rather than having mail transit third-countries prior to delivery to Cuba. The mail flights are expected to start by the end of the year.
On February 17, 2016, the U.S. and Cuba signed an agreement permitting flights between the two countries to resume for the first time in more than 50 years. Federal officials said the agreement will allow more than 100 daily round-trip flights between the U.S. and 10 airports in Cuba. Charter flights between the two countries — currently the only option for passengers seeking air travel — will be allowed to continue.2 The U.S. Department of Transportation said U.S. carriers must apply by March 2, with final comments and answers due March 21. Passenger and cargo carriers can apply. No restriction exists on aircraft type or size. The government expects to make its decision this summer. Carriers could start selling tickets on those flights in the fall.3
2. January 27, 2016 – Liberalized Licensing Policies, Travel and Trade Finance
2.1. The BIS Rule
On January 27, 2016, the Bureau of Industry and Security, U.S. Department of Commerce (BIS) made some adjustments to its licensing policies on Cuba exports, adopting a general policy of approval on certain exports that previously had been subject to a policy of case-by-case review, and a case-by-case review policy on certain exports that had been subject to a general policy of denial. 81 Fed. Reg. 4580 (Jan. 27, 2016).
The exports/reexports now subject to a general policy of approval include items for safety of civil aviation and safe operation of commercial aircraft engaged in international air transportation (including to state-owned enterprises); telecommunications items to improve communication to, from and among the Cuban people; agricultural-related items that are not defined as “agricultural commodities,” such as insecticides and herbicides, and agricultural commodities that are not eligible for License Exception AGR because they are not EAR99; certain items to human rights organizations or individuals and NGOs that promote independent activity intended to strengthen civil society in Cuba; and items for use by U.S. news bureaus. A license is still require for these items, but the likelihood of receiving a license for these types of exports is now quite high.
The exports/reexports now subject to case-by-case review include items for agricultural production, artistic endeavors, education, food processing, disaster preparedness, relief and response, public health and sanitation, residential construction, and renovation and public transportation. The “case-by-case” review will determine the extent to which such transactions meet the needs of the Cuban people, even if made to state-owned enterprises and parts of the Cuban government that provide goods and services to the Cuban people. A general policy of denial remains in place for exports and reexports of items for use by state-owned enterprises and parts of the Cuban government that primarily generate revenue for the state, including those engaged in tourism and the extraction or production of minerals and raw materials, and for items for the Cuban military or intelligence apparatus.
2.2. The OFAC Rule
For its part, OFAC took coordinated action to amend its Cuban Assets Control Regulations (“CACR”) to ease restrictions on travel and related services, and to remove certain restrictions on trade financing for exports and reexports of non-agricultural, licensed U.S. origin goods. 81 Fed. Reg. 4583 (Jan. 27, 2016). Of particular importance , the changes for financing for licensed goods – which removed a requirement of payment by cash-in-advance and authorized financing directly by U.S. banks instead – excludes financing for agricultural goods authorized for export under the Trade Sanctions Reform and Export Enhancement Act of 2000 (“TSRA”). The TSRA dictates specifically how such exports must be financed, so the restrictions cannot be altered through administrative action alone, so for TSRA exports, payment of cash-in-advance or financing through a third-country bank rather than a U.S. or Cuban bank is still mandated.
On the travel side, OFAC authorized the entry into blocked space, code-sharing, and leasing arrangements by and between U.S. and Cuban airlines to facilitate the provision of carrier services by air, and broadened authorization for U.S. person travel and other transactions related to professional meetings and sporting events, public performances, participation in humanitarian disaster preparedness and response projects, and information and informational materials, including transactions incident to professional media or artistic productions in Cuba, such as music, movies and television production. U.S. profits from such events also no longer have to be donated. . The new authorization for informational materials will permit substantive enhancement of informational materials, the creation of travel-related and other materials for exportation, importation, or transmission, including the filming or production of media programs, music recordings, and the creation of artworks in Cuba by persons that are regularly employed in or have shown professional experience in a field relevant to such professional media or artistic production, as well as employment of Cuban nationals and payments of royalties, opening up greater opportunity for U.S./Cuban artistic collaborations.
OFAC also authorized U.S. person activities directly incident to the temporary sojourn of aircraft and vessels authorized by BIS to travel between the U.S. and Cuba. The activities of U.S. persons, such as pilots and flight attendants, related to normal operation and service on board carriers authorized for travel to Cuba are now expressly authorized.
3. March 16, 2016 – More Authorized Travel, Authorization of U-Turn Transactions, and Expanded Authorizations to Maintain a Physical Presence in Cuba
On March 16, 2016, the Administration eased certain travel restrictions and more fully implemented certain earlier authorizations, summarized below. 81 Fed. Reg. 13971 (Mar. 16, 2016) (BIS Rule) and 81 Fed. Reg. 13989 (Mar. 16, 2016) (OFAC Rule).
3.1. The BIS Rule
The rule revised License Exception AVS to authorize vessels departing the U.S. on temporary sojourn to Cuba to travel to Cuba even if they are laden with cargo bound for other destinations. Previously, a license would have been required for the cargo bound for other destinations to transit Cuba.
The rule also revised License Exception SCP to authorize the export and reexport of items classified EAR99 or controlled for Anti-Terrorism reasons only for use by persons authorized by OFAC to establish and maintain a physical business presence in Cuba. Prior to the rule, License Exception SCP enumerated the activities for which OFAC had generally authorized such physical presence, and that enumerated list would have excluded authorization for exports to persons who received a specific license from OFAC and would not have covered new categories of persons eligible for the OFAC general license, discussed below. Thus, License Exception SCP now authorizes exports and reexports of eligible items to all persons authorized by OFAC to establish a physical presence in Cuba, whether by general or specific license, and automatically covering any future expansions to the OFAC general license.
Finally, the rule adopted a policy of case-by-case review for license applications for exports and reexports of items to enable or facilitate exports from Cuba of items produced by Cuba’s private sector. This expands on the case-by-case review policy for items to help meet the needs of the Cuban people established in the January BIS rule discussed above. Hence, persons who export U.S. goods that can be used to help the Cuban private sector export its products, may be able to export goods to Cuba to facilitate exports by the Cuban private sector. This opportunity is presently small due to the restrictions remaining on the Cuban private sector and the small size of the sector.
3.2. The OFAC Rule
The OFAC rule authorizes expanded people-to-people travel, U-turn transactions, and expands the authorization for businesses to locate in Cuba, as summarized below.
3.2.1. People-to-People Travel
OFAC removed the requirement that people-to-people educational travel be conducted only through a sponsoring organization. Now, travelers are free to choose their own itinerary of educational activities intended to enhance contact with the Cuban people, support civil society in Cuba, or promote independence from Cuban authorities, and that will result in meaningful personal interactions and exchanges. Travelers relying on this authorization must retain records of their travel transactions, demonstrating “a full schedule of authorized activities.” Thus, travelers seeking to further their expertise in rum tasting, cigar smoking, Cuban music, and studying Hemmingway’s novel writing and carousing should be sure to properly document their visits to all distilleries, cafes, historic sites, and factories sufficiently to demonstrate an absence of leisure time for non-exempt activities.
3.2.2. Compensation for Cubans in Non-Immigrant Status
U.S. persons can now more easily hire Cubans visiting the U.S. on a visa since U.S. persons will be authorized to pay them more than just enough to cover living expenses and acquisition of goods for their own personal consumption. U.S. persons can pay them any amount that is consistent with their non-immigrant travel authorization, provided that the Cuban national is not subject to any special tax assessment by the Cuban government. All transactions related to sponsorship or hiring of a Cuban national to work in the U.S. are also now authorized, though the CACR still prohibit payments to the Cuban government in connection with such sponsorship or hiring.
3.2.3. U.S. Persons Traveling Abroad
U.S. persons traveling in third-countries are now generally authorized to acquire Cuban origin goods for personal consumption, and to receive services from Cuba or a Cuban national that are ordinarily incident to maintenance within the third-country. However, importation of the Cuban origin goods is still prohibited unless otherwise authorized. Hence, U.S. persons must consume the Cuban rum and cigars abroad because they are still not able to carry them to the U.S.
3.2.4. U-Turn and Certain Other Financial Transactions Involving Cuba or Cubans
U.S. banks may now process so-called “U-turn transactions” in which Cuba or a Cuban national has an interest. This authorizes Cuba or Cuban-related funds transfers from a bank outside the U.S. that pass through one or more U.S. financial institutions before being transferred to a bank outside the U.S. where neither the originator nor the beneficiary is a U.S. person. Why would such funds transfers pass through a U.S. bank? Probably because the funds transfer is denominated in U.S. dollars. So, essentially, this allows U.S. banks to participate to the extent necessary to process U.S. dollar transactions by non-U.S. persons abroad, including Cubans. Transfers that involve a U.S. person are still prohibited unless otherwise authorized.
U.S. banks may also process U.S. dollar monetary instruments presented indirectly by Cuban banks. Correspondent accounts used for such transactions may also be denominated in U.S. dollars, though it is still prohibited for U.S. banks to open correspondent accounts directly with Cuban banks.
Finally, OFAC is authorizing U.S. banks to open and operate accounts solely for the use of Cuban nationals located in Cuba for the purpose of receiving payments in the U.S. in connection with authorized transactions and remitting such payments to Cuba. For example, OFAC indicated that a Cuban national author could open a U.S. bank account to receive payments for the sale of a book.
In the past, banks and financial institutions have incurred large fines for processing Cuban-related transfers just because the transactions have been denominated in U.S. dollars. Hence, this regulation will be very helpful to financial institutions who may be willing to recommence engaging in Cuba-related transactions.
3.2.5. Expanded Authorization to Establish a Physical Presence in Cuba
In September of last year, OFAC authorized U.S. persons to establish physical locations in Cuba to facilitate the provision of certain authorized activities. OFAC has now expanded the list of categories of businesses/entities eligible to establish a physical business presence in Cuba to include all of the following:
- Providers of telecom services authorized by CACR 515.542(b)-(d) or persons engaged in activities authorized by 515.542(e)
- Providers of internet-based services authorized by CACR 515.578(a) or persons engaged in activities authorized by CACR 515.578(c) or (e)
- Exporters of goods authorized for export to Cuba (or otherwise exempt) by under CACR 515.533 or 559 (e.g., goods licensed by BIS, authorized agricultural commodities, etc.)
- Providers of mail or parcel delivery services authorized by CACR 515.542(a), or providing cargo transportation services in connection with trade involving Cuba that is authorized or exempt
- Providers of travel and carrier services authorized by CACR 515.572
- News bureaus
- Entities organizing or conducting educational activities authorized by CACR 515.565(a)
- Religious organizations engaging in religious activities authorized by CACR 515.566
- Entities engaging in non-commercial activities authorized by CACR 515.574 (Support for the Cuban People)
- Entities engaging in humanitarian projects identified in CACR 515.575(b)
- Private foundations or research or educational institutes engaging in transactions authorized by CACR 515.576
The authorization to establish a physical presence in Cuba includes the authorization to engage in all transactions necessary therefor, including the leasing of physical premises, conducting marketing related to the physical presence, hiring of both Cuban and U.S. nationals to operate the physical presence, and opening and maintenance of bank accounts in Cuba for the purpose of running the location. Certain limitations may apply under certain circumstances, so interested persons should check all terms and conditions of the authorizations in advance.
3.2.6. Student Grants and Awards
To continue to facilitate meaningful educational exchanges, OFAC has authorized the provision of grants, scholarships, and awards to Cuban nationals or in which Cuba or a Cuban national has an interest. For example, a U.S. university can now grant scholarships to Cuban students to pursue a degree. Significant educational exchanges have started between the U.S. and Cuba since the Obama administration’s liberalization of the Cuban regulations.
4. Analysis and Future for U.S./Cuba Sanctions?
Many challenges remain in the U.S./Cuba relationship, including such thorny issues as property claims and human rights. These issues arouse passions in both Cuba and the U.S. It also remains to be seen whether the next administration will embrace Obama’s moves toward liberalization, or seek to suspend them or even roll them back. The statutory embargo remains a firm fixture of U.S. law with seemingly insufficient political will, at least at present, to lift it. This will tie the Administration’s hands and that of any future administration, though there may still be room for some continued incremental loosening around the edges.
Some progress has been made on Internet connectivity in Cuba. The number of private businesses has slowly grown in Cuba. However, little progress has been made on political freedom. While the number of dissidents in detention has steadily increased in recent months, the recent detainees have been held for a few hours at most and released.4
On March 22, 2016, in the midst of the President’s trip to Cuba, several American companies announced and signed agreements to enter the Cuban market and explore business opportunities including: 1) Google Alphabet, which is exploring opportunities to expand Internet access, including by providing laptops and other electronic equipment to a Havana museum; 2) General Electric intends to provide power, aviation, and medical equipment to the Cuban government; 3) Western Union announced its expansion to Cuba; 4) Carnival Corp. announced it will begin traveling to Cuba in May after receiving approval from the Cuban government; 5) Starwood Hotels & Resorts Worldwide Inc. agreed to manage two (and possibly a three) hotels in Havana; and 6) Verizon Communications Inc. and Sprint Corp. will begin offering roaming services for customers visiting Cuba.
The fact that a predominant portion of people-to-people travel must not be with a prohibited official of the Government of Cuba, as defined in 31 CFR § 515.337, or a prohibited member of the Cuban Community Party, as defined in 31 CFR §515.338, illustrate that, notwithstanding the expanded liberalization, the regulations still require care by Americans and can be a trap for the unwary.
The fact that OFAC is now authorizing the provision of educational grants and awards illustrates the delicate balance liberalization is taking, since necessarily at present the Cuban educational system is state-controlled.
The major barrier to U.S. investment in Cuba is the restrictions on foreign investment and private enterprise. Many parts of the economy are still off-limits. The U.S. liberalization is to facilitate investment in Cuba only in activities with private enterprise. The problem is that private enterprise is still limited mainly to persons who moonlight and have limited access to capital. Most of the major economic activities require joint ventures and approval by the Cuban government. A business cannot even hire a single Cuban without the approval of the government. Although the Obama Administration hopes that the Cuban government will liberalize the economy in response to the liberalized Cuban regulations, the Cuban government has not yet responded and does not want to betray the revolution in response to the long-awaited reduction of the sanctions, especially since the U.S. has not removed the Embargo and indeed cannot without action by the U.S. Congress. On April 16, 2016, President Raúl Castro, speaking at the start of the Cuban Communist Party’s three-day congress, said that the U.S., in promoting Cuba’s small private sector, was using “other means” to undermine the system and people needed to be “alert more than ever.” He admitted that the government has completed only one-fifth of the economic changes approved at the last congress in 2011.5
1 This paper contains general legal guidance on the matters discussed herein, but should not be construed as legal opinions on the application of this guidance to any specific facts or circumstances. Opinions provided herein are solely those of the authors.
2 Mark Berman, U.S. and Cuba sign deal restoring passenger flights, WASH. POST, Feb. 16, 2016.
3 Susan Carey, U.S., Cuba in Accord to Reopen Service, WALL ST. J., Feb. 17, 2016, at B1, col. 6.
4 Karen DeYoung and Juliet Eilperin, Eight months after U.S. reopened embassy, Obama to visit Cuba, WASH. POST, Feb. 18, 2016, at A13, col. 2.
5 Victoria Burnett, Castro Urges Cubans to Remain Alert to U.S. Efforts to Alter Communist System, N.Y. TIMES, Apr. 17, 2016, at 10, col. 1.
*Michelle Roberts is Counsel at law firm of Berliner, Corcoran & Rowe, LLP, and member of SanctionsAlert.com Advisory Board. She can be reached at email@example.com. Bruce Zagaris is partner with the law firm of Berliner, Corcoran & Rowe, LLP. He can be reached at firstname.lastname@example.org.