Cuba: New Opportunities and Challenges for Financial Services Institutions

By Kristin Casler

Featuring Simeon M. Kriesberg and Carol J. Bilzi of Mayer Brown LLP

When President Obama announced that decades-long economic sanctions against Cuba would be eased, many business owners cheered the prospect of entering the largely untapped Cuban marketplace. But the eased sanctions on the island country not only increase economic opportunities for U.S.–owned companies, they increase the number of regulatory pitfalls. As the sanctions continue to evolve it is important for companies to monitor them, understand what is and is not changing and what important next steps they should take.

What has not changed

Despite all the hype, most comprehensive Cuba sanctions have remained generally in place. The Helms-Burton Act of 1996 that codified the embargo on Cuba has not changed. In fact, to be prudent, anything that is not expressly permitted by the new regulations should be considered prohibited, said Simeon M. Kriesberg , a partner at Mayer Brown in Washington, D.C.

What has changed

The revisions do, however, provide a number of opportunities for expanded dealings by U.S. financial services entities, said Carol J. Bilz , counsel at Mayer Brown in Washington, D.C. U.S. depository institutions are now permitted to open correspondent accounts with Cuban banks located in Cuba or in third countries and with foreign banks in Cuba, but only for the purpose of facilitating processing of authorized transactions. The Office of Foreign Assets Control (OFAC) also authorizes U.S. depository institutions to engage in all transactions necessary to establish and maintain such correspondent accounts, including testing arrangements. Bilzi noted, however, that Cuban banks are not authorized to open correspondent accounts with U.S. banks.

The Cuba sanctions program is designated as a blocking program, but Bilzi said a new general license relating to wire transfers permits U.S. financial institutions to reject rather than block certain transactions and process some fund transfers involving Cuba. U.S. banks can now reject fund transfers originating and terminating outside the United States, so long as neither the originator nor the beneficiary is a U.S. person and that no prohibited member of the Cuban government or Cuban communist party has an interest in the funds transfer. U.S. banks can also process fund transfers originating outside the United States, when neither the originator nor the beneficiary is a U.S. person, so long as the transfer is one that a U.S. person would be permitted to engage in under the amended Cuba regulations. Transactions that do not fall under this new license must continue to be blocked unless another exception applies, Bilzi said.

Simplified travel finances

An additional change allows authorized travelers to use their debit or credit card for expenditures in Cuba. Credit card companies can now enroll merchants and process such transactions. Further, Bilzi said OFAC has authorized all transactions incident to the processing and payment of credit cards, debit cards and stored value cards used by any person permitted to engage in such financial transactions in Cuba. The financial institutions can even take the travelers’ word for their compliance, as long as the institution did not know or have reason to know that the transaction was not authorized. Travelers can also engage in all transactions ordinarily incident to travel, and they no longer have a per diem spending limit.

Expanded remittances

Likewise, OFAC raised caps on remittances, Bilzi said. The per-quarter limit that could be sent to Cuban nationals for purposes other than emigration was quadrupled to $2,000. OFAC also generally allows without limitations remittances for humanitarian purposes, support for the Cuban people and for development of private businesses. OFAC has upped the amount of remittances that a traveler may take to Cuba from $3,000 to $10,000. Now, U.S. banking institutions, broker-dealers and registered money transmitters are allowed to process authorized remittances to Cuba without having to obtain a license from OFAC. U.S. insurers can provide U.S. and foreign travelers to Cuba with life, health and travel insurance as well, Bilzi said.

Changes affecting Cuban nationals

Under the old provisions, U.S. citizens were prohibited from dealing with Cuban nationals, wherever they were located, with some exceptions. Bilzi said OFAC has over the years relaxed that rule somewhat and the new changes further ease those restrictions. Some of the new requirements affect Cuban nationals who relocate to the United States and become unblocked. As under prior regulations, a Cuban national living in the United States, who is a U.S. citizen or a Green-Card holder or who has applied to become a lawful permanent resident alien and has a pending adjustment of status application, is considered an unblocked national. Now, Bilzi said, OFAC has clarified that a Cuban national who has taken up residence in the United States and is lawfully present and intends to lawfully remain on a permanent basis also meets the criteria to become an unblocked national. Lawfully present and intending to remain so include an individual with a pending application for asylum or one who has been paroled into the United States under Cuban parole or a Cuban medical designation, she said.

A depository institution can open and maintain an account for a Cuban national present in the United States in a non-immigrant status for the duration of their stay. The account must be closed, Bilzi said, prior to the Cuban national’s departure from the United States. In 2011, OFAC created a general license allowing financial institutions to engage in certain transactions with Cuban nationals who permanently reside outside of Cuba, but it required two forms of government-issued documentation. That is now somewhat relaxed, Bilzi said. If those documents are unavailable, the financial institution can rely on reasonable evidence that the individual has lived for the last two years without interruption in a single country outside Cuba or a sworn statement or other evidence that the individual does not intend to or would not be welcome to return to Cuba. A Cuban national permanently residing in a third country (who is not a prohibited official of the Government of Cuba or a prohibited member of the Cuban communist party) is now considered an unblocked national, and all of his or her property in the United States is unblocked.

Bilzi said Cuban sanctions have always had an extraterritorial effect because they applied to foreign entities owned or controlled by U.S. persons. To minimize the impact on Cuban citizens, OFAC now allows foreign firms owned or controlled by U.S. persons to provide goods and services, including financial services, to Cuban nationals located outside of Cuba. However, the transaction must not involve a commercial exportation, directly or indirectly, of goods or services to or from Cuba, so this remains a fairly limited exception, she said.

Often OFAC has issued regulations or general licenses stating that any transaction ordinarily incident to permitted transactions are themselves permitted. It hasn’t done that yet, Kriesberg said. “OFAC has told us that ordinarily incident transactions are permissible, but we were cautioned that they have to be ordinarily incident—directly related to the permitted transactions.”

Exporting goods and services

When licensed U.S. goods were exported to Cuba in the past, permitted financing was very limited. This hasn’t changed much under the new provisions. The export can be financed only through payment of cash in advance of transfer of title (previously it was payment before shipment) or financing by a third- country banking institution with the U.S. institution only confirming and advising. “Even though there are new types of U.S. origin goods that can now be exported to Cuba, the limitations on financing remain substantial,” Kriesberg said. The new types of permitted exports fall under certain license exceptions—expansion of the exception for consumer communications devices (CCDs)—computers, televisions, mobile phones and software; and the license exception for the support of the Cuban people (SCP). Kriesberg said this license is much more vague and allows for Internet services, agricultural tools, construction materials, environmental protection products and renewable energy tools.

Export of services is also allowed and includes travel, telecommunications, software design, business consulting, IT management, adult literacy, vocational training and market research, among others. “So there definitely is an expansion of the types of goods and services from the United States to Cuba that are now permitted, but the financial services aspect of those transactions remains somewhat limited,” he said.

Next steps

Thus, one of the next steps for the financial services industry is to seek from OFAC clarification or expansion of the scope of permitted financing. In particular, clarification is needed regarding exported services; it is already spelled out for exported goods, he said.

All companies should also make intellectual property protection a top Cuba priority, Kriesberg said. “It perhaps was not a priority when U.S. companies couldn’t do much business in Cuba,” he said. “Now there’s definitely the possibility that the trajectory will continue, and it is much more important for firms to ensure their trademarks, trade names and other IP are secure in Cuba.”

As business travel to Cuba becomes more prevalent, Bilzi advised obtaining a license from the Commerce Department for any U.S.–origin hardware and software, such as software carried on a work laptop to Cuba. Hand-carrying company-issued laptops loaded with software from the U.S. to Cuba is considered to be an export. A TMP license exception, which allows business travelers to take their company-issued laptops and software on a temporary basis to most countries, still does not apply to Cuban travel, she said. The business community may want to seek expansion of license exception TMP, she said.

And, of course, any changes to a sanctions program naturally trigger compliance concerns, Kriesberg said. “In the past, compliance with the Cuba sanctions was relatively straightforward because, under the longstanding comprehensive sanctions program, the answer to most questions about whether a particular activity was permissible was, “No, you can do virtually nothing with respect to Cuba.” Now the answer is a much more nuanced one, and companies will have to stay on top of the changes and adapt their programs to stay compliant, he said. “This is one of the challenges for financial services going forward.”

It remains to be seen

All of this is still a work in progress, with many open questions. How will the Cuban government react to the changes? Are mechanisms in place in Cuba to handle the estimated influx in commerce? Are judicial and regulatory reforms needed in Cuba? Some U.S. financial institutions may leap at the new opportunities. Others may just test the waters or sit back and watch. Either way, the companies will best be served by remaining current on the rapidly changing developments on this front.