Overview
On October 17, the Treasury Department’s Office of Foreign Assets Control (OFAC) and the Commerce Department’s Bureau of Industry and Security (BIS) published amendments to the Cuban Assets Control Regulations (CACR) and the Export Administration Regulations (EAR), respectively, taking additional steps to ease the economic sanctions and export control restrictions on Cuba. To accompany these regulatory actions, OFAC has published a fact sheet and amended its Cuba frequently asked questions (FAQs) and travel guidance. In addition, President Obama issued a new Presidential Policy Directive setting out the broad contours of how the normalization of relations between the United States and Cuba may proceed.
In its amendments to the CACR, OFAC has taken the important step of allowing US persons to enter into executory contracts for activity that is currently prohibited by the CACR, provided that the contracts are made expressly contingent on obtaining OFAC authorization or on such authorization no longer being required. This change is significant in that it allows companies and persons subject to the current CACR restrictions to pursue potential business opportunities and conditionally lock up trade and investment transactions in anticipation of continued liberalization of the embargo. This may itself provide momentum for such liberalization, as US business interests may see more vividly the benefits that normal economic relations could bring. Furthermore, these regulatory amendments authorize additional activity related to trade between third countries and Cuba, medical research and pharmaceuticals, the safety of civil aviation, infrastructure development, direct sales to Cuba of consumer goods for personal use, transit of air cargo, travel, and other areas.
We have previously advised on the other recent regulatory amendments involving Cuba on December 18, 2014, January 22, 2015, April 30, 2015, July 29, 2015, October 16, 2015, February 8, 2016, and March 23, 2016. This most recent move follows President Obama’s decision last month to nominate the current Chargé d’Affaires at the US Embassy in Havana to the position of ambassador. If confirmed by the Senate (which is far from certain), he would be the first US ambassador in Cuba in over 50 years, an important symbolic step that could also help move the normalization effort forward over the long-term. But in considering the impact of the changes that have been made over the past few years in US-Cuba policy, it is important to keep in mind that the next US president will have the authority to continue or take a different approach than that of the Obama Administration, both in terms of law and policy.
Executory Contracts: Section 515.534 of the CACR
OFAC added a new general license authorizing US persons to negotiate and enter into contingent contracts for transactions that are prohibited by the CACR, provided that the performance of such contracts (e.g. actually providing goods or services or receiving payments) is made contingent on OFAC (and any other agency whose authorization is required) authorizing the underlying transactions or on such an authorization no longer being required due to a future amendment to the CACR (or other applicable regulations). In addition to contracts, this would cover executory pro forma invoices, agreements in principle, executory offers capable of acceptance such as bids or proposals in response to public tenders, binding memoranda of understanding, and similar agreements. A much narrower general license to negotiate and enter into executory contracts for authorized exports or reexports to Cuba was previously included at Section 515.533(b) of the CACR, so this represents a significant expansion of the scope of this type of authorized activity.
This new general license may create opportunities for US companies and their owned or controlled foreign affiliates to engage in business planning activities in Cuba. It also makes it considerably easier to take advantage of existing general licenses and favorable licensing policies, as it will no longer be necessary to wait for a response from OFAC (which commonly takes several months or even a year or more) in order to begin contractual negotiations and agree upon terms. However, due to the uncertainty about the future trajectory of US-Cuba policy with the end of the Obama Administration approaching, many companies may decide to wait until next year to make significant investments of time or resources.
Trade Between Third Countries and Cuba: Section 515.533(a) of the CACR
OFAC has modified some of the regulatory language limiting the ability of third country companies to trade with Cuba without a license from OFAC, although some OFAC restrictions remain, and authorization may still be required from BIS. Section 515.533(a) of the CACR previously authorized exports and reexports to Cuba that were also authorized by BIS, but stated that reexports (or exports from a third country) were only covered if the items were “100% US-origin.” OFAC has now removed the “100% US-origin” language in an effort to minimize the instances in which an OFAC license would be required for reexports authorized by BIS. With the new language, it is now clear that non-US companies exporting from abroad items that were produced in the United States do not need to seek a license from OFAC if they have obtained BIS authorization – even if those US-produced items contain some foreign-origin content. In addition, there had previously been some lack of regulatory clarity regarding whether non-US companies not owned or controlled by US persons that were engaged in the export/reexport to Cuba of items subject to the EAR were required to obtain a license from OFAC (in addition to BIS) due to OFAC’s restrictions on dealings in “property subject to the jurisdiction of the United States” contained in Section 515.201 of the CACR. With this most recent regulatory revision, non-US entities would not need to obtain a license from OFAC for reexports to Cuba, unless they are owned or controlled by a US person and exporting items produced in a third country. OFAC notes in the Federal Register notice that, despite the changes to Section 515.533, non-US companies that are owned or controlled by US persons generally (subject to a narrow licensing policy in Section 515.559) remain prohibited from exporting to Cuba items that are produced in countries other than the United States or Cuba without authorization from OFAC. Because of statutory restrictions on such exports, opportunities to obtain a license from OFAC may be limited.
Overall, the revisions to Section 515.533(a) appear to be a subtle loosening of the CACR’s restrictions on the ability of third-country companies – particularly those that are not owned or controlled by US persons – to trade with Cuba. OFAC states that this change is intended “for clarity and to minimize the circumstances under which persons authorized by Commerce [i.e., BIS] to export or reexport items to Cuba are required to obtain a specific license from OFAC.” In other words, it is intended to eliminate instances in which both OFAC and BIS are required to license transactions, with OFAC deferring in those cases to BIS. This change to the CACR does not impact the licensing authority of BIS under the EAR, which extends to reexports from third countries of items subject to the EAR, including items with 25% or more US-origin controlled content.
This may have been as far as OFAC could go in lifting restrictions on trade between third countries and Cuba, without implicating the statutory prohibitions found in Section 1706 of the Cuban Democracy Act of 1992 (22 U.S.C. 6005) and reflected in § 515.559 of the CACR. These provisions continue to restrict OFAC from issuing specific licenses to US owned or controlled firms in third countries for most exports to Cuba of items produced in third countries or imports of Cuban-origin goods into third countries.
OFAC made the following additional changes related to exports and reexports of goods to Cuba:
- Created a new general license at Section 515.533 of the CACR authorizing the importation back into the United States or a third country, for service, repair, or replacement, of items previously authorized for export or reexport to Cuba (replacing a previous OFAC case-by-case licensing policy for such imports into the United States), although with a note clarifying that any subsequent export or reexport to Cuba must be separately authorized by BIS, and possibly also by OFAC, pursuant to Sections 515.533 and 515.559
- Expanded the general license at Section 515.584(f) of the CACR, which allows for financing of authorized exports or reexports to Cuba, other than agricultural commodities, to apply to banking institutions other than depository institutions
- Allowed entry into US ports by foreign vessels that have carried certain less-sensitive items (i.e. those that would be designated EAR99 or would be controlled only for anti-terrorism reasons if they were subject to the EAR) from a third country to Cuba in the preceding 180 days
Another change in Section 515.533(a) is a note stating that this general license covers imports into the United States from a third country of items intended for exportation to Cuba, although the exportation to Cuba must be authorized by BIS and must conform to the limitations in Section 515.533(a). Previously, OFAC licenses generally were required to import items intended specifically for exportation to Cuba, even pursuant to a general license.
Medical Research and Pharmaceuticals: Section 515.547 of the CACR
OFAC issued two important new general licenses in the medical sector. The first authorizes US persons to engage in joint medical research projects with Cuban nationals for commercial or non-commercial purposes. The second authorizes importation into the United States of FDA-approved Cuban-origin pharmaceuticals, along with marketing, sales, and distribution of such products in the United States, and steps to obtain the necessary FDA approvals such as discovery and development, pre-clinical research, clinical research, and regulatory review, approval, licensing, and post-market activities. It also authorizes the use of Cuban bank accounts for this activity. Section 515.547 previously only allowed US persons to apply for specific licenses to import sample quantities of Cuban-origin commodities for bona-fide research purposes, so this new general license will present a major new opportunity in light of Cuba’s relatively well-developed medical sector and high level of government support for this type of activity.
Safety of Civil Aviation: Section 515.572 of the CACR
OFAC added a new general license to authorize US persons to provide services to Cuba or Cuban nationals to improve the safety of civil aviation and commercial aircraft. It appears that this general license authorizes services to Cuban nationals wherever located, including those outside of Cuba. This could provide a significant new area of opportunity for US companies, particularly in light of the recent commencement of authorized direct commercial flights between the United States and Cuba, even though exports or reexports of items subject to the EAR would still require a license or use of a license exception from BIS.
Developing Cuban Infrastructure: Section 515.591 of the CACR
OFAC added a general license to authorize the provision of services related to developing, repairing, maintaining, or enhancing Cuban infrastructure, provided this activity is consistent with BIS licensing policy. This new general license covers infrastructure in the following sectors: public transportation, water management, waste management, non-nuclear electricity generation, and electricity distribution, as well as hospitals, public housing, and primary and secondary schools. It also includes projects related to the environmental protection of US, Cuban, and international air quality, waters, and coastlines. This general license only applies to “infrastructure that directly benefit [sic] the Cuban people” (i.e. not exclusively for use by the government, foreign tourists, etc.). OFAC has clarified in the FAQs that the recipient of the services can be the Cuban government or a state-owned entity.
Consumer Goods for Personal Use
BIS expanded License Exception Support to the Cuban People (SCP) to cover exports and reexports of certain less-sensitive types of items (i.e. those that would be designated EAR99 or would be controlled only for anti-terrorism reasons if they were subject to the EAR) that can be characterized as consumer goods and are sold directly (e.g. online) to eligible individuals in Cuba for personal use. This complements an existing case-by-case licensing policy for exports or reexports to Cuba of items that would meet the needs of the Cuban people, including for wholesale or retail distribution for domestic consumption by the Cuban people.
Transit of Air Cargo
BIS expanded License Exception Aircraft, Vessels and Spacecraft (AVS) to authorize air cargo to transit Cuba, complementing an existing authorization for cargo transiting Cuba aboard vessels. In order to qualify for this provision, the cargo cannot be removed from the aircraft or vessel for use in Cuba, must not be transferred to another aircraft or vessel and must leave Cuba with the same aircraft or vessel when it departs.
Travel-Related Transactions
OFAC expanded or amended several general licenses related to travel in order to:
- Allow travel to Cuba to attend or organize professional meetings or conferences in Cuba whose purpose is to promote tourism in Cuba (tourist travel to Cuba by US persons remains prohibited under the Trade Sanctions Reform and Export Enhancement Act of 2000)
- Authorize remittances by US persons to third country nationals to allow them to travel to, from, or within Cuba for a purpose (i.e., one of the 12 general categories) that would be authorized by the CACR
- Remove the monetary value limits from the provision allowing authorized travelers to import merchandise from Cuba into the United States as accompanied baggage; now, only the normal limits on duty and tax exemptions for accompanied baggage and items for personal use will apply (including for alcohol and tobacco products), although OFAC will continue to enforce the requirement that Cuban-origin merchandise be imported as accompanied baggage and for personal use only (i.e., not for commercial purposes or resale)
- Remove the requirement that US persons who acquire Cuban-origin merchandise in third countries must consume it while abroad, authorizing US persons to import it into the United States as accompanied baggage as long as it is for personal use only
- Allow third country nationals to import Cuban-origin alcohol and tobacco products as accompanied baggage, provided they are not importing in commercial quantities or for resale
Grants, Scholarships, and Awards: Section 515.590 of the CACR
OFAC has expanded and consolidated previous general licenses to allow the provision of grants, scholarships and awards in which Cuba or Cuban nationals have an interest (including as recipients) for scientific research and religious activities, along with the previously-authorized educational and humanitarian purposes.
Cuban Government/Communist Party Officials
OFAC has narrowed the definitions of “prohibited officials of the Government of Cuba” and “prohibited members of the Cuban Communist Party.” Several general licenses under the CACR are conditioned on not making exports to or involving these types of officials, in which case a specific license would be required. Consequently, this definition change limits the application of the condition in the relevant general licenses.
Conclusion
These regulatory amendments will open significant new opportunities for trade with Cuba, although important and complex restrictions will remain in place, at least in the near-term. The next several months may be a period of flux and uncertainty for US-Cuba policy and economic sanctions and export controls, but the significant steps that the Obama Administration has taken to loosen the embargo, and growing support in Congress to promote commerce with Cuba, will make it more difficult (though not impossible) for the next administration to reverse course sharply. We will continue to keep you informed of developments in sanctions and export controls. Please contact Edward J. Krauland at +1 202 429 8083, Meredith Rathbone at +1 202 429 6437, Jack R. Hayes at +1 202 429 6491, or Peter Jeydel at +1 202 429 6291.
