New Cuba Policy May Not Significantly Impact Many Sectors

On June 16, 2017, President Trump announced that, “effective immediately, I am canceling the last administration's completely one-sided deal with Cuba.” The Presidential Memorandum setting out this new policy, however, may leave in place most of the steps to ease the embargo that the Obama Administration and previous administrations had taken – with two primary exceptions. First, the new policy will prohibit, with broad sector-specific exceptions, “direct financial transactions” with a specific list of entities linked to the Cuban military, intelligence, and security services, which the US Department of State will publish in the near future. Second, the new policy will re-impose some, but not all, of the limitations on “people-to-people” travel. While these two new restrictions could be significant, their specific scope and impact will not be known until the US Departments of the Treasury, State, and Commerce publish the list and regulations that the Presidential Memorandum requires.

The Presidential Memorandum makes no immediate changes to the applicable regulations. Instead, it directs the US Department of the Treasury’s Office of Foreign Assets Control (OFAC), among others, to “initiate a process to adjust current regulations” to implement this new policy within 30 days.

While the restriction on dealings with entities linked to the Cuban military, intelligence, and security services could have a significant impact, particularly in certain sectors such as tourism and hospitality, there are at least two key elements that involve some discretion in interpretation and implementation – the outcome of which may determine the overall impact of this new policy.

• First, the Presidential Memorandum states that OFAC must prohibit “direct financial transactions” with the covered entities. If OFAC does indeed end up not prohibiting transactions with these entities conducted indirectly, such as through a joint venture partner or local agent, that would greatly lessen the negative impact on business and may provide a compliant path forward even in heavily restricted sectors.
• Second, the Presidential Memorandum appears to exempt several sectors that the Obama Administration had also targeted for more engagement, including telecommunications, transportation, remittances, agriculture, medicine, and medical devices. Depending on the scope and structure of these exemptions, this could significantly reduce the impact of the new restrictions.

The new Cuba policy maintains all 12 general licenses setting out the authorized reasons to travel to Cuba. But the new limitation on people-to-people travel will increase the cost and regulatory burden associated with one subset of one of those 12 categories – non-academic educational travel – by requiring that such trips be conducted under the auspices of a US sponsoring organization like a tour company. For this reason, and because of a likely expectation of more enforcement (along with some probable public misperceptions about the nature of this policy change), it is reasonable to expect a reduction in travel to Cuba, which would have knock-on effects throughout the Cuban economy.

Overall, the Trump Administration’s policy change appears to be a relatively targeted effort to prevent certain types of business with the Cuban military, intelligence, and security services, and to sharpen implementation of the longstanding statutory rule against US “tourism,” without forcing an end to most areas of US-Cuba commerce. It appears to provide for grandfathering of existing commercial activity and disclaims any intent to punish lawful past business. But again, a firm assessment can only be made once the implementing regulations and the State Department’s list are published in the coming months.   

Summary of President Trump's Action

The Presidential Memorandum replaces President Obama’s October 2016 Presidential Policy Directive, on which we previously advised. In Frequently Asked Questions (FAQs) accompanying President Trump's announcement, OFAC said that it “expects to issue its regulatory amendments in the coming months” and that “[t]he announced changes do not take effect until the new regulations are issued.” The US Commerce Department’s Bureau of Industry and Security (BIS) published FAQs with a nearly identical statement. While the information released on June 16 gives some indication of what the new restrictions may look like, the details will be in the regulations. Below we highlight some of the key takeaways at this early stage.

1. Grandfathering of existing commercial activity appears to be in effect.

The White House fact sheet states that lawful, preexisting business arrangements will be permitted, even if they would otherwise fall within the scope of the new restrictions:

Consistent with the Administration’s interest in not negatively impacting American businesses for engaging in lawful commercial opportunities, any Cuba-related commercial engagement that includes direct transactions with entities related to the Cuban military, intelligence, or security services that may be implicated by the new Cuba policy will be permitted provided that those commercial engagements were in place prior to the issuance of the forthcoming regulations.

An OFAC FAQ (along with a nearly identical BIS FAQ) adds: “The forthcoming regulations will be prospective and thus will not affect existing contracts and licenses.” OFAC’s FAQs provide more detailed guidance about how this grandfathering policy will work in the travel context.

However, the precise scope of this grandfathering policy is not clear. It may not amount to a blanket authorization for preexisting business arrangements, and may ultimately be limited to specific contracts or transactions that were concluded prior to the effective date of the coming regulations. (Recall that with the Joint Comprehensive Plan of Action (JCPOA) agreement on Iran’s nuclear program, the scope of protection for past lawful conduct was significantly limited by subsequent interpretations.) Therefore, any optimism on this front should be cautious.

2. The prohibition on certain dealings with the Cuban military, intelligence, and security services could be significant, but it does not appear to be comprehensive, and its impact will vary by sector.

The Presidential Memorandum directs the Department of State to “identify the entities or subentities, as appropriate, that are under the control of, or act for or on behalf of, the Cuban military, intelligence, or security services or personnel (such as Grupo de Administracion Empresarial S.A. (GAESA), its affiliates, subsidiaries, and successors), and publish a list of those identified entities and subentities with which direct financial transactions would disproportionately benefit such services or personnel at the expense of the Cuban people or private enterprise in Cuba.” The regulatory changes to be published by OFAC and BIS “shall prohibit direct financial transactions with those entities or subentities on the list published” by the State Department. OFAC’s FAQs use similar language: “the State Department will be publishing a list of entities with which direct transactions generally will not be permitted.” 

This language raises at least three significant points:

• First, the Memorandum’s focus on “direct” transactions suggests that "indirect" transactions with the listed entities may not be prohibited. It is typical for sanctions restrictions to address explicitly both "direct" and "indirect" transactions, and the omission of "indirect" in the Memorandum may or may not have been purposeful (although it was repeated). This could indicate that these entities may not be subject to an overriding “blocking” order, as some had feared. But, even if this is true, it remains to be seen what practical effect it may have on the ability of US persons or their non-US affiliates to engage with the listed entities.
• Second, the language seems to suggest that the restrictions may apply only to the specific entities on the list that the State Department will publish, and may not touch their unlisted affiliates or personnel. A typical approach of OFAC targeted sanctions is to restrict not only designated entities and persons, but also entities of which they own 50 percent or more, or, in the case of governments, the agencies and instrumentalities that are owned or controlled by the government.
• Third, the Memorandum directs the State Department to list only those entities that are both “under the control of, or act for or on behalf of, the Cuban military, intelligence, or security services or personnel” and “with which direct financial transactions would disproportionately benefit such services or personnel at the expense of the Cuban people or private enterprise in Cuba.” In other words, the State Department appears to have some discretion not to list certain entities affiliated with the Cuban security sector.

While these details will only become clear once OFAC issues the required regulations, such limitations on this otherwise very broad obstacle to doing business in Cuba would significantly reduce its impact.  

Furthermore, the Presidential Memorandum contains explicit carve-outs:

The regulatory changes shall not prohibit transactions that the Secretary of the Treasury or the Secretary of Commerce, in coordination with the Secretary of State, determines are consistent with the policy set forth [elsewhere in the] memorandum and:

(A) concern Federal Government operations, including Naval Station Guantanamo Bay and the United States mission in Havana;

(B) support programs to build democracy in Cuba;

(C) concern air and sea operations that support permissible travel, cargo, or trade;

(D) support the acquisition of visas for permissible travel;

(E) support the expansion of direct telecommunications and internet access for the Cuban people;

(F) support the sale of agricultural commodities, medicines, and medical devices sold to Cuba consistent with the Trade Sanctions Reform and Export Enhancement Act of 2000 (22 USC. 7201 et seq.) and the Cuban Democracy Act of 2002 (22 USC. 6001 et seq.);

(G) relate to sending, processing, or receiving authorized remittances;

(H) otherwise further the national security or foreign policy interests of the United States; or

(I) are required by law.       

Depending on how these carve-outs are implemented, they may result in the continued availability of most of the authorizations that the Obama Administration had put into place. OFAC indicates in a FAQ explaining the remittances carve-out that these exemptions will be broad enough that they will effectively not impede the covered sectors: “the announced changes include an exception that will allow for transactions incidental to the sending, processing, and receipt of authorized remittances to the extent they would otherwise be restricted by the new policy limiting transactions with certain identified Cuban military, intelligence, or security services. As a result, the restrictions on certain transactions in the new Cuba policy will not limit the ability to send or receive authorized remittances.” Again, it remains to be seen what the forthcoming regulations will actually say.

3. The Cuban military controls a significant share of the Cuban economy.

Press reports indicate that the Cuban military, in particular through its commercial conglomerate, GAESA, has a pervasive presence in the Cuban economy. GAESA reportedly was founded by the Ministry of the Interior and has been controlled by Luis Alberto Rodriguez Lopez Calleja, a Cuban Armed Forces General and Raúl Castro’s son-in-law. Some estimate that GAESA controls about 60% of the Cuban economy, with other estimates putting the figure up to 80%. The Miami Herald reports that GAESA controls more than 50 enterprises and that GAESA is linked to entities in virtually every key sector of the Cuban economy, including tourism (hotels, hotel supplies, marinas, car rentals, flights, tours, etc.), retail, restaurants, financial services, imports and exports, oil and gas, joint venture staffing, film production, real estate, agriculture, construction, and others. Below, we highlight some of the concerns that may arise on a sector-by-sector basis.

• Tourism: Grupo de Turismo Gaviota, reportedly affiliated with GAESA, owns nearly 29,000 hotel rooms in Cuba and serves an estimated 40% of Cuba’s foreign tourism.
• Logistics: GAESA reportedly does not control Cuba’s airports or cruise ship terminals, although the security services would necessarily have some presence at all ports. But GAESA reportedly controls the container terminal and warehousing and customs at the Port of Mariel, which now receives most of the cargo that the Port of Havana once handled. It also reportedly runs the free trade zone at the Port of Mariel, where Cuba has focused its favorable policies for foreign investment, potentially jeopardizing that entire development.
• Payments: A number of US financial services companies reportedly rely on the payment infrastructure of GAESA affiliate Financiera Cimex (Fincimex), which, if true, could complicate their ability to continue providing services in Cuba, except possibly in areas covered by a carve-out, such as remittances.
• Telecommunications: The Miami Herald reports that the Cuban telecommunications sector is not controlled by the military, but Reuters states that Rafin, S.A., a financial firm said to be affiliated with GAESA, owns shares in the Cuban telecommunications monopoly Etecsa. Freedom House similarly reports that Rafin recently owned part of Etecsa. However, because there is a carve-out for telecommunications, persons subject to US jurisdiction may be allowed to continue to pursue business in this sector, even if GAESA or some other affiliated entity is involved.
• Agriculture: The Miami Herald reports that the Cuban agricultural sector is not controlled by the military. However, John Kavulich, President of the US-Cuba Trade and Economic Council, stated that because US food and agricultural cargoes are unloaded at the Port of Mariel, run by GAESA, “that would put the Cubans in the position of stopping everything.” But agricultural commodities and cargo transportation are both covered by carve-outs, and a BIS FAQ states that “exports of agricultural products, medicine, and medical devices are governed by statute and will not be impacted.” Agricultural trade between the United States and Cuba has not increased recently – annual sales have ranged from a high of $710 million in 2008 to a recent low of $170.6 million in 2015 –  and $232 million last year. While all trade with Cuba is complex, agriculture may continue to be a growth opportunity.

4. This builds on existing prohibitions on dealings with the Cuban government.

Under OFAC’s Cuban Assets Control Regulations (CACR), GAESA and the rest of the Cuban government and military are already treated as “Cuban nationals,” which are “blocked,” meaning it is already prohibited for persons subject to US jurisdiction to deal with them, unless one of the CACR’s general licenses or exemptions applies. Therefore, OFAC will probably implement this new policy by restricting the applicability of the CACR’s general licenses when the transaction involves a designated military-linked entity. Currently, a few general licenses are already limited when a “prohibited official of the Government of Cuba" (which includes members of the Council of Ministers and flag officers of the Revolutionary Armed Forces, but not lower-ranking officers or any entities) is involved, specifically the general licenses covering the “unblocking” of Cuban nationals resident outside Cuba, receiving payment for legal services, providing telecommunications services to individuals in Cuba (one of several telecommunications general licenses), people-to-people travel (which does not qualify as such if the “predominant portion” of the activities involves prohibited Cuban officials), certain types of remittances (whose recipients cannot include prohibited Cuban officials), publishing, and internet-based services.

The Presidential Memorandum requires that OFAC expand the definition of “prohibited official of the Government of Cuba” in the CACR to include “Ministers and Vice-Ministers, members of the Council of State and the Council of Ministers; members and employees of the National Assembly of People's Power; members of any provincial assembly; local sector chiefs of the Committees for the Defense of the Revolution; Director Generals and sub–Director Generals and higher of all Cuban ministries and state agencies; employees of the Ministry of the Interior (MININT); employees of the Ministry of Defense (MINFAR); secretaries and first secretaries of the Confederation of Labor of Cuba (CTC) and its component unions; chief editors, editors, and deputy editors of Cuban state-run media organizations and programs, including newspapers, television, and radio; and members and employees of the Supreme Court (Tribuno Supremo Nacional).” This change would appear to increase exponentially the number of “prohibited officials” and will have a significant impact in the specific areas listed above in which the availability of a general license is limited by the involvement of such an official. But, as long as the other general licenses remain unaffected by the involvement of such officials, the impact of this change may not be very far-reaching.

5. Prohibiting self-directed people-to-people travel leaves open all other types of authorized travel to Cuba.

The most controversial type of authorized travel to Cuba is so-called “people-to-people” travel, which some have criticized as tourism in disguise. Although tourist travel is prohibited by statute, 12 categories of travel to Cuba are explicitly authorized by statute and by the CACR, one of which is educational travel. People-to-people travel is educational travel that is not undertaken pursuant to an academic degree program.

The Presidential Memorandum states, “Except for educational travel that was permitted by regulation in effect on January 27, 2011, all educational travel shall be under the auspices of an organization subject to the jurisdiction of the United States, and all such travelers must be accompanied by a representative of the sponsoring organization.” This will require OFAC to undo the change made by the Obama Administration that allowed self-directed or “individual” people-to-people tours, i.e., without the involvement of a tour company or other organization.

Beyond this change, the specific meaning of this section of the Presidential Memorandum is unclear. Both of the primary educational travel provisions that were in effect on January 27, 2011 only applied to travel under the auspices of an organization – one allowed for the issuance of specific licenses to certain academic institutions (and in some cases to individuals) for their students and faculty to travel to Cuba under the auspices of the institution; the other allowed for specific licenses for certain private foundations or research or educational institutes to send people to Cuba to collect information. It is not clear whether the Presidential Memorandum seeks to require the involvement of a sponsoring organization other than for people-to-people travel.

OFAC’s FAQs indicate that every other Cuba travel general license will remain unchanged, including family visits, professional research and professional meetings, and others. They also make clear that “group people-to-people travel” (under the auspices of a sponsoring organization) will remain authorized, provided that the travelers adhere to the other preexisting requirements.

The other potentially significant change is the initiation of some sort of OFAC travel audit program, the details of which remain unclear. The Presidential Memorandum states that “the Secretary of the Treasury shall regularly audit travel to Cuba to ensure that travelers are complying with relevant statutes and regulations.” It also requires an annual report from the Inspector General of the Department of the Treasury on the implementation of this audit requirement. But OFAC’s ability to audit a significant number of travelers on an individual basis will be considerably limited by staffing resources, so the real-world impact of this requirement remains to be seen.

The number of US citizens traveling to Cuba surged by 74% from 2015 to 2016, according to Cuban statistics, and the prevailing speculation is that much of that is due to the Obama Administration’s decision to allow individual “people-to-people” travel. According to the Presidential Memorandum, the intent of this policy change is not to curtail all travel to Cuba, but rather to “ensure adherence to the statutory ban on tourism to Cuba.” In fact, the policy seeks to “amplify efforts to support the Cuban people through the expansion of internet services, free press, free enterprise, free association, and lawful travel.”

This balance is reflected in the fact that the new travel policy does not appear to roll back one of the most significant changes made by the Obama Administration – the conversion of the 12 authorized travel areas into general licenses, no longer requiring that travelers apply for an individualized license when travelling for a permissible purpose.

The Way Forward

Although President Trump announced that he had “cancelled” the “deal” President Obama reached with Cuba, this Administration has not rolled back all of the Cuba policy changes made by its predecessor. For example, there will be no change to what is arguably the most significant of the Obama Administration’s step towards rapprochement – diplomatic relations between the United States and Cuba will continue, and the US Embassy in Havana will remain open without seeing its status downgraded. One official has been reported as saying, “We want this relationship to be one in which we can encourage the Cuban people through economic interaction, and that process … has been started. You can’t put the genie back in the bottle 100 percent. It’s not that [President Trump] is opposed to any deal with Cuba, he’s opposed to a bad deal with Cuba.” 

There remains a strong interest in the United States in expanding business and cultural ties with Cuba. As just one illustration of this, the American Farm Bureau stated at the time of President Trump’s announcement that, “Cuba is a $2 billion annual food-import market. Currently, because of some remaining restrictions, the United States sells about $200 million in agricultural products to Cuba, but that nation represents the kind of growth opportunity America’s farmers and ranchers need during this challenging economic period.” This is supported by several bipartisan bills that aim to chip away at certain aspects of the embargo, such as the travel ban and restrictions on exporting agricultural commodities to Cuba. .

Such a bipartisan message can seem hard to ignore, but there are also strong pockets of support for retaining the embargo, especially in the Republican party, which controls both chambers of Congress. Nevertheless, several Republican senators, such as Jeff Flake of Arizona, support repealing the embargo. Sen. Flake stated at the time of the announcement that “any policy change that diminishes the ability of Americans to travel freely to Cuba is not in the best interests of the United States or the Cuban people. It is time Senate leadership finally allowed a vote on my bipartisan bill to fully lift these archaic restrictions which do not exist for travel by Americans to any other country in the world. The bill has 55 total cosponsors and I am convinced it would pass the Senate with upwards of 70 votes.” Given that the Cuba embargo is codified in statute, Congress may at some point have the final word on the future of US-Cuba relations.

We will continue to keep you apprised of Cuba sanctions developments. You can also follow us on Twitter @SteptoeIntlReg and the Steptoe International Compliance Blog.