On March 16, 2016, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Commerce Department’s Bureau of Industry and Security (BIS) amended the Cuban Assets Control Regulations (CACR) and the Export Administration Regulations (EAR), respectively, further easing the US Government’s sanctions and export controls on Cuba. This is a significant additional step in the Obama Administration’s ongoing effort to move toward a more normal commercial and diplomatic relationship with Cuba, coming on the eve of President Obama’s trip to Cuba from March 20-22, 2016. These amendments to the CACR and the EAR follow previous regulatory changes, on which we have also advised, in January 2015, July 2015, September 2015, and January 2016, along with the re-establishment of scheduled air services between the United States and Cuba announced on February 16, 2016. OFAC and BIS each put out press releases summarizing the amendments, and OFAC has issued updated Frequently Asked Questions (FAQs).
While these regulatory changes will impact different stakeholders in different ways, the most significant development is OFAC’s move to open further the US financial system to Cuba for transactions in which the underlying activity is either authorized or exempt under the CACR, or else outside its jurisdictional scope. This will allow Cuban parties to make more normal use of the US dollar internationally, which will go a long way toward facilitating authorized commerce with US parties, along with activity by parties that are not subject to US jurisdiction. These financial sector changes and other developments are described in more detail below.
Any dealings involving Cuba with a jurisdictional link to the United States will continue to entail considerable risk and regulatory complexity – that will continue to be the case unless Congress passes legislation to lift the statutory embargo on Cuba, which, in the near-term, is not likely. But these amendments to the CACR and the EAR illustrate the Obama Administration’s determination to use executive power to loosen US trade controls on Cuba to a point that, according to Deputy National Security Advisor Ben Rhodes, creates “momentum” that will be challenging to reverse.
The amendments to the CACR will allow Cuban parties to use the US financial system to facilitate certain types of transactions denominated in US dollars that are not subject to, or are authorized or exempt under, US sanctions. While this is a major development that will make it easier for Cuba to take part in international commerce, there are still restrictions on financial activity involving Cuba that will remain in place. The financial sector changes to the CACR fall into three categories, described below:
1) “U-turn” transactions: US banks will be allowed to process funds transfers in which a Cuban person or entity has an interest, provided that the following conditions are met: a) the transfer originates and terminates outside the United States, b) neither the originator nor the beneficiary is a US person, c) none of the parties involved is subject to targeted sanctions, such as OFAC-listed Specially Designated Nationals (SDNs), and d) the transaction does not facilitate otherwise unlawful conduct (such as prohibited trade in US-origin goods, software or technology, or other activity subject to US trade controls anywhere in the world).
The noteworthy aspect of this “u-turn” authorization is that there is otherwise no restriction on the type of underlying activity that is allowed, presumably because the transfers would not be subject to US jurisdiction other than clearing or settling US dollar transactions with correspondent financial institutions in the United States. Typically, these “u-turn” transactions are funds transfers that simply pass through a US bank, but do not otherwise involve any US jurisdictional link. With this new authority, they do not need to be blocked or rejected if detected. “U-turn” transfers are important in that they enable the Cuban business community and others in Cuba to conduct dollar-denominated transactions with third countries. Notably, US banks can also unblock and return (subject to a requirement to report to OFAC) previously blocked funds transfers that could have been processed pursuant to this new authority had it been in place at the time.
2) Monetary instruments: US banks are authorized to “accept, process and give value to” US dollar “monetary instruments” presented indirectly by a Cuban bank – that is, by a third-country bank that receives the instrument from a Cuban bank and that maintains a US dollar correspondent account for the Cuban bank – provided that the underlying transaction by the Cuban bank or its customer is authorized or exempt under the CACR, or is otherwise not subject to the CACR’s prohibitions. This is distinct from the “u-turn” authority in two key respects: first, it is not limited to funds transfers, and, second, it can apply to underlying transactions that are subject to US jurisdiction, such as activity by a US telecommunications company conducting authorized business in Cuba, or US travelers that are visiting Cuba under one of OFAC’s general licenses. Like the “u-turn” provision, this authority also applies without restriction on the type of underlying activity when the underlying activity is not subject to US jurisdiction, such as a European hotel operator whose business does not involve US persons. Notably, OFAC’s FAQs clarify that US and third-country banks are not required in all cases to verify independently that the underlying transactions are not prohibited – the bank receiving the monetary instrument can rely for that purpose on the bank presenting the instrument for processing or payment, unless the receiving bank has knowledge or reason to know that the underlying transaction may be prohibited, i.e., if there are “red flags.” It is interesting that OFAC allows US banks to rely on non-US presenting banks for this purpose.
In order to qualify for this authority, the transaction must involve a “monetary instrument,” which OFAC has not defined. But it does not cover all financial transactions or investments. “Monetary instruments,” as defined by other Treasury Department regulations, are essentially forms of payment, including currency, traveler’s checks, certain negotiable and incomplete instruments (including personal checks, business checks, official bank checks, cashier’s checks, third-party checks, promissory notes, and money orders), and securities or stock in such form that title passes upon delivery. Other financial transactions, such as debt or equity financing, secondary market trading in non-bearer securities, letters of credit, trade finance, and the like, will not be covered.
3) Accounts for Cuban nationals: US banks can open and maintain accounts that are only in the name of a Cuban national located in Cuba and whose sole purpose is to receive payments in the United States and remit the payments to Cuba, provided that the payments are for transactions that are authorized or exempt under the CACR. Although this provision allows US banks to open accounts for Cuban customers, it is a limited authority because it applies only (1) to receiving and remitting payments to Cuba, and (2) when the underlying transaction is authorized or exempt under the CACR, e.g., certain telecommunications-related activity or trade in informational materials. This is distinct from the pre-existing authority for US banks to open and maintain accounts for Cuban nationals in the United States with non-immigrant status.
Other noteworthy changes
- Employment of Cubans in the United States: A new general license will authorize US companies to sponsor, hire, and pay salaries to Cuban nationals to work in the United States on a non-immigrant basis, consistent with the terms of the employee’s visa. The primary conditions are that that the employee cannot be subject to any special tax assessment by the Cuban government, and the employer cannot make additional payments to the Cuban government in connection with the employment. This removes the previous prohibition on providing Cuban nationals with non-immigrant status in the United States compensation over and above what they would need to cover living expenses and goods for personal consumption.
- Business presence: OFAC is expanding the authority for certain US persons to establish and maintain a “business presence” in Cuba, i.e., a business organization or legal entity, including through subsidiaries, joint ventures, franchises, and agency or other business relationships with Cuban individuals or entities. Whereas before this was allowed only for providers of certain telecommunications and internet-based services, it will now also apply to exporters of authorized items to Cuba, providers of mail or parcel transmission and cargo transportation services in connection with authorized trade, and providers of travel and carrier services. These types of businesses were previously authorized to establish a “physical presence” in Cuba to conduct authorized transactions, such as an unincorporated branch office, or a shop or warehouse, but will now be able to establish a business organization as well.
- Physical presence: This new rule for the first time allows human rights and other civil society organizations, those undertaking humanitarian projects, private foundations, and research or educational institutes to establish a physical presence in Cuba.
- Assembling goods in Cuba: This clarifies that the general license to establish a physical presence in Cuba for exporters of goods that are authorized for export or reexport to Cuba by OFAC or BIS, or that are otherwise exempt from the CACR, also allows them to assemble items within Cuba (but does not allow the incorporation of Cuban-origin goods or the processing of raw materials into finished goods).
- Procuring Cuban-origin goods and services in third countries: US persons in third countries will be allowed to acquire Cuban-origin goods, including alcohol and tobacco, for personal consumption while abroad (though the goods cannot be brought back into the United States), and to obtain services from Cuba or a Cuban national that are ordinarily incident to travel and maintenance abroad.
- Educational travel: This provision removes the requirement that educational travel to Cuba be conducted under the auspices of a sponsoring organization. But OFAC still requires a full-time schedule of educational exchange activities and records demonstrating such a schedule. While this may lower the costs and barriers to travelling to Cuba, US persons should be cautious about the restrictions and recordkeeping requirements. Tourist travel remains prohibited.
- Importing Cuban Software: Importing Cuban-origin software into the United States is now authorized, building on the previous authorization to import Cuban mobile apps.
- Grants: US persons can now provide educational or humanitarian grants, scholarships, and awards to Cuban nationals.
- Telecommunications and internet communications: Without amending the CACR, OFAC has added additional information in its FAQs about the scope of these general licenses.
- The telecommunications general license includes “peering”– an arrangement of traffic exchange between internet networks – including with ETECSA, the Cuban state telecommunications provider, for the provision of internet services.
- The internet communications general license allows services related to caching, such as the provision of data storage systems that reduce internet network traffic.
BIS has expanded License Exception Support for the Cuban People (SCP) to cover exports or reexports of less-sensitive items (i.e. those that are designated “EAR99” or controlled only for “anti-terrorism” reasons) for end-use by an OFAC-authorized physical or business presence in Cuba. This expansion will make it easier, for example, for authorized US businesses to set up offices and procure basic goods from outside Cuba.
BIS will now review on a case-by-case basis requests to export or reexport to Cuba items that enable or facilitate exports from Cuba of items produced by private sector entities in Cuba. However, BIS will continue to deny most applications involving items for use by state-owned enterprises and other entities in Cuba that primarily generate revenue for the state, including in the tourism and extractive industries, along with items destined to the Cuban security services. BIS has also clarified that its policy of prohibiting the use of its licenses (through license conditions) to enable exports or reexports from Cuba only applies to activity that primarily generates revenue for the state, and BIS will not generally stand in the way of exports from Cuba of items produced by the Cuban private sector.
License Exception Aircraft, Vessels and Spacecraft (AVS) has been revised to authorize cargo vessels to transit through Cuba when destined for other countries, provided that the cargo departs with the vessel, does not enter Cuban commerce and is not transferred to another vessel in Cuba.
These amendments to the CACR and the EAR do not open up significant new areas of commerce with Cuba, but the financial sector changes will remove significant barriers to carrying out the types of activity that the US Government has already targeted as being favorable to US foreign policy interests, such as communications and people-to-people exchanges. It will also facilitate third-country business with Cuba that is not subject to US jurisdiction.
We will continue to monitor and keep you apprised of sanctions and export control developments. If you have questions about these issues, please contact Meredith Rathbone at +1 202 429 6437, Peter Jeydel at +1 202 429 6291, Ed Krauland at +1 202 429 8083, Jack Hayes at +1 202 429 6491, or Stephen Heifetz at +1 202 429 6227 in our Washington office. You can also follow us on Twitter (@SteptoeIntlReg).
 This reflects the definition of “monetary instruments” under the regulations promulgated by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), at 31 C.F.R. § 1010.100.