New Cuba Sanctions Signal Increased Commercial Challenges
This article by counsel Brendan Hanifan and associate Emerson Siegle was published by Law360 on October 30, 2017.
On Nov. 8, 2017, the U.S. government announced changes to the Cuban Assets Control Regulations (“CACR”) and the Export Administration Regulations that implement President Donald Trump’s June 2017 National Security Presidential Memorandum, “Strengthening the Policy of the United States Toward Cuba.” The amendments, effective Nov. 9, create additional hurdles for U.S. companies seeking to do business in Cuba. In addition, the amendments underscore the need for companies subject to U.S. jurisdiction to diligently monitor changes to the U.S. sanctions landscape.
Recent Developments in Cuba Sanctions Policy
The United States introduced sanctions against Cuba in 1962, when President John Kennedy imposed a trade embargo under the authority of the Foreign Assistance Act of 1961 and the Trading with the Enemy Act. The CACR, issued in 1963 and codified in 1996, broadly prohibit “persons subject to U.S. jurisdiction” from engaging in virtually any business or dealings with parties resident in, or organized under the laws of, Cuba, absent a license issued by the U.S. Treasury Department’s Office of Foreign Assets Control.1
In December 2014, President Barack Obama announced a shift in U.S. policy toward Cuba, and from 2015 to 2016, OFAC amended the CACR five times. Collectively, these amendments were intended to normalize relations between the United States and Cuba by increasing travel and commerce. For example, in 2015, OFAC issued general licenses that authorized twelve categories of travel to Cuba (and permitted carriers to provide services to U.S. citizens traveling pursuant to these general licenses). OFAC also eased restrictions on engaging in transactions with Cuban nationals, and issued general licenses permitting U.S. companies to, among other things, provide certain telecommunications and banking services to Cuban nationals, subject to restrictions. Following these changes, many U.S. citizens traveled to Cuba pursuant to the “people-to-people” general license authorizing educational cultural exchange trips to Cuba. In addition, some U.S. companies — particularly in the hospitality and travel industries — began to explore potential business opportunities in Cuba. In 2016, OFAC reportedly approved plans by Starwood Hotels and Resorts Worldwide and Marriott International to open hotels in Cuba.
During the 2016 U.S. presidential campaign, candidate Donald Trump criticized — and threatened to reverse — the Obama administration’s relaxation of U.S. sanctions targeting Cuba. In June 2017, President Trump issued a National Security Presidential Memorandum that pledged support for the United States’ long-standing economic embargo against Cuba and directed the U.S. government to initiate a process that would limit economic support to members of Cuba’s government and ensure compliance with statutory restrictions on tourism to Cuba. That same day, OFAC — in consultation with the U.S. Department of Commerce’s Bureau of Industry and Security and the U.S. Department of State — initiated a review process to implement the National Security Presidential Memorandum by tightening restrictions targeting Cuba.
Overview of Amendments to the CACR and EAR
The Nov. 9 amendments to the CACR and EAR implement four significant changes that restrict the ability of persons subject to U.S. jurisdiction to do business with Cuba.
First, OFAC added a new provision to the CACR that prohibits persons subject to U.S. jurisdiction from engaging in “direct financial transactions”2 with any party designated on the U.S. State Department’s List of Restricted Entities and Subentities Associated With Cuba.3 Concurrently, the State Department published this Cuba restricted list, which identifies entities controlled by, or acting on behalf of, the Cuban military, intelligence, or security services, with whom the U.S. government believes transactions would be detrimental to the Cuban people or private enterprise in Cuba. The inaugural Cuba restricted list includes, among other entities, 84 hotels, two tourist agencies, five marinas, and 10 stores. As a result, a wide range of direct financial transactions with, or on behalf of, entities on the Cuba restricted list, that previously were permissible are now prohibited. However, transactions that were in place prior to the date an entity is added to the Cuba restricted list remain permissible.
Second, BIS established a general policy of denial for license applications to export or reexport items for use by entities on the Cuba restricted list unless such transactions are determined to be consistent with the National Security Presidential Memorandum.4 The practical impact of this change is that it will be difficult for companies seeking to export U.S.-origin goods, services or technology to Cuba to obtain the necessary U.S. government approval unless those goods fall into the newly amended BIS license exception that authorizes the export and reexport of certain items directly in support of the Cuban people.5
Third, OFAC reversed Obama administration changes to the CACR’s definition of “prohibited officials of the Government of Cuba.”6 In October 2016, the Obama administration amended the CACR to exclude broad categories of individuals, including various government officials and employees, individuals affiliated with the Confederation of Labor of Cuba and its component unions, certain employees of Cuban state-run media organizations and programs, and members of Cuba’s Supreme Court. Going forward, these individuals again will be “prohibited officials of the Government of Cuba,” and, therefore, outside of the scope of various general licenses (including general licenses relating to mail and telecommunications and publications).7 In conjunction with OFAC’s action, BIS amended the EAR to exclude this group from several license exceptions (including license exceptions relating to gift parcels and humanitarian donations, consumer communications devices, and support for the Cuban people).8
Fourth, OFAC revised general licenses related to three categories of authorized travel to Cuba. As a result of the changes, OFAC now requires that authorized educational travel9 and people-to-people educational travel10 be conducted under the auspices of — and accompanied by a guide employed by — an organization subject to U.S. jurisdiction. In addition, travelers partaking in authorized travel in support of the Cuban people11 must engage in a full-time schedule of activities related to enhancing Cuban civil society and independence. These changes do not revoke the travel-related general licenses issued by the Obama administration, and preexisting arrangements that were enacted prior to the amendment of these general licenses remain authorized. However, the changes are significant in that they prohibit individual people-to-people and educational travel, authorizations that the Trump administration perceived as subject to abuse and as a surreptitious means to engage in prohibited tourism to Cuba.
New Challenges for Business with and in Cuba
As an initial matter, the Nov. 9 amendments — including introduction of the Cuba restricted list — significantly limit the ability of persons subject to U.S. jurisdiction to take advantage of the Obama administration’s efforts to normalize business relations with Cuba. In addition to prohibiting direct financial transactions with a wide range of Cuban entities, the U.S. government has established a general policy of denial for Cuba-related export license applications, signaling that BIS and OFAC are unlikely to grant specific licenses related to potential commercial opportunities in Cuba. For example, now that the U.S. government has prohibited direct financial transactions with dozens of Cuban hotels — including hotels affiliated with international brands, such as the Spanish hotel chain Iberostar Hotels & Resorts — it is virtually inconceivable that OFAC would grant specific licenses to U.S. companies seeking to open hotels in Cuba (as it did Starwood and Marriott in 2016).12
Similarly, new restrictions on people-to-people and educational travel may limit the ability of cruise lines and other similar ventures that are subject to U.S. jurisdiction to continue offering their current menu of existing services. At minimum, such companies can expect their Cuba-related activities to be subject to greater scrutiny by OFAC than in the final years of the Obama administration, when enforcement of Cuba-related travel restrictions did not appear to be a high priority.
Increased Export Restrictions
The EAR regulate “U.S.-origin items,” as opposed to specified categories of individuals or entities. A license is required to export any item subject to the EAR to Cuba, including items classified as EAR99 (which may be exported to most countries without a license) unless one of several narrow exceptions applies.13 Prior to the Nov. 9 amendments, BIS assessed license applications under a presumption of approval for certain categories of exports to Cuba (e.g., certain medicines, agricultural commodities, and items necessary to ensure the safety of civil aviation).14 For other categories of exports (e.g., items designed to improve infrastructure that directly benefits the Cuban people), BIS assessed license applications on a case-by-case basis, except where the exports would primarily generate revenue for the Cuban government or were destined to the Cuban military, police, intelligence or security services (for which applications were subject to a presumption of denial).15
Following the Nov. 9 amendments, BIS will apply a general presumption of denial to license applications involving any entity on the Cuba restricted list.16 This change in export licensing policy is significant because of the breadth of entities included on the Cuba restricted list, which range from hotels to marinas to businesses (in addition to Cuban government ministries and entities related to the Cuban defense and security sectors). Companies that currently export U.S.-origin products or services to Cuba pursuant to BIS-issued licenses should take notice of the policy change and assess whether their activities may be restricted going forward.
Following U.S. Sanctions Developments
At the time, the Obama administration’s steps to normalize relations with Cuba were heralded as signaling a “new era” in U.S.-Cuba relations,17 and some observers predicted that the change in policy would ultimately open Cuba “to American business, tourism and the Internet.”18 In response to these actions, some U.S. business began pursuing opportunities in Cuba, undoubtedly attracted by the country’s close proximity to the United States, U.S. citizens’ fascination with the unknown, and the possibility of capitalizing on first-mover advantage. The Nov. 9 amendments to the CACR and EAR do not represent a wholesale reversal of Obama administration policy toward Cuba, as President Trump threatened on the campaign trail. Still, the Nov. 9 amendments mark a significant change in policy that, in practice, will forestall many of the commercial opportunities that U.S. businesses have explored — or considered — since late 2014.
The United States’ change of course with respect to Cuba underscores that U.S. sanctions policy — unlike some other elements of U.S. foreign policy — is capable of relatively rapid change. One consequence (or tradeoff) of this policy flexibility is increased compliance costs. For companies that conduct — or are contemplating — business in Cuba, the Nov. 9 amendments create yet another restricted party list, with different rules and restrictions, to screen against (and to continually monitor for updates). For all companies subject to U.S. jurisdiction, the Nov. 9 amendments underscore the critical importance of remaining abreast of changes in U.S. sanctions policy, which have been occurring at an unprecedented pace in recent months. In addition, the Nov. 9 amendments underscore the importance of careful advance planning (e.g., negotiation of contractual termination rights), particularly when approaching business opportunities with parties or in regions that foreseeably could become targets of future (or expanded) sanctions.
The Nov. 9 amendments to the CACR and EAR mark a significant change in U.S. policy toward Cuba. Companies subject to U.S. jurisdiction that are conducting business with Cuban counterparties should promptly assess the impact of the amendments on their current operations. Similarly, companies contemplating business opportunities in Cuba may be well-served to reassess the potential benefits of commercial engagement with Cuba against the potentially high costs of complying with complex — and recently change-prone — U.S. economic sanctions.
Emerson Siegle is an associate in the Ropes & Gray LLP business and securities litigation practice group in Washington, D.C. Brendan C. Hanifin is counsel in the government enforcement group of the firm’s Chicago office.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
1 For purposes of the CACR, “persons subject to U.S. jurisdiction” include (1) U.S. citizens and residents, wherever located; (2) U.S.-organized entities; (3) any person physically located within the United States, regardless of nationality; and (4) foreign-organized entities that are “owned or controlled” by any of the foregoing. 31 C.F.R. § 515.329.
2 A “direct financial transaction” is any transaction where a person acts as the originator on a transfer of funds, whether by wire transfer, credit card, check, or payment of cash, whose ultimate beneficiary is on the Cuba Restricted List, or acts as the ultimate beneficiary on a transfer of funds whose originator is on the Cuba Restricted List. 82 Fed. Reg. at 51,999 (§ 515.209(a)).
3 Cuban Assets Control Regulations, 82 Fed. Reg. 51,998, 51,999 (Nov. 9, 2017) (to be codified at 31 C.F.R. pt. 515).
4 Amendments To Implement United States Policy Toward Cuba, 82 Fed. Reg. 51,983, 51,984, 51,986 (Nov. 9, 2017) (to be codified at 15 C.F.R. pt. 740, 746).
5 Id. at 51,985-86 (§ 740.21).
6 82 Fed. Reg. at 51,999-52,000 (§ 515.337).
7 See 31 C.F.R. §§ 515.542(c), 515.577(a).
8 See 82 Fed. Reg. 51,983, 51,985-86 (§§ 740.12(a)(2)(v)(A), 740.19(c)(2)(i), 740.21(d)(4)(ii)).
9 (82 Fed. Reg. at 52,000-01 (§ 515.565(a)))
10 (id. at 52,002 (§ 515.565(b))
11 (id. at 52,0003 (§ 515.574))
12 There is speculation that the Trump administration may revoke the specific licenses granted to Starwood and Marriott. Susan Crabtree, Trump’s Cuba Changes Could Target Marriott Deal with Castro Military, Washington Free Beacon (June 14, 2017), http://freebeacon.com/issues/trumps-cuba-changes-target-marriott-deal-castro-military/.
13 15 C.F.R. § 746.2(a).
14 Id. § 746.2(b)(1), (2).
15 Id. § 746.2(b)(3).
16 82 Fed. Reg. at 51,984, 51,986.
17 Kevin Liptak & Jim Acosta, Barack Obama and Raul Castro meet, launch new era of U.S.-Cuba ties, CNN (Apr. 12, 2015), http://www.cnn.com/2015/04/11/politics/panama-obama-castro-meeting/index.html.
18 Carla Ann Robbins, What Obama’s Historic Visit to Cuba Really Means for U.S. Businesses, Fortune (Mar. 23, 2016), http://fortune.com/2016/03/23/cuba-obama-castro/.