The Cuba embargo: Does the U.S. shift in policy mean new opportunities for European companies?

By Hamilton Loeb and Scott M. Flicker
Paul Hastings LLP, Washington

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I n December of last year, capping a series of fast-breaking developments, U.S. President Barack Obama called a press conference to declare an end to the policy of economic embargo against Cuba, stating, “Decades of U.S. isolation of Cuba have failed to accomplish our objective of empowering Cubans to build an open and democratic country.” In the several months since that declaration, the President has taken a number of immediate actions that fall within his executive and foreign affairs authority, including re-launching diplomatic relations (the U.S. Government seeks to reopen its embassy in Havana by April of this year) and authorizing numerous limited channels of trade in travel, telecommunications, construction and banking. Other actions to dismantle the more than five decades of sanctions against Cuba will require legislation from the U.S. Congress, always an uncertain prospect rendered still more unpredictable by Republican control of both houses and by a particularly early start to the “silly season” that marks any U.S. presidential election campaign. So what now? Are we at the advent of a new “gold rush,” where U.S. and non-U.S. businesses and investors begin pouring time, attention and capital into Cuba’s economy? Are U.S. companies and financial institutions preparing to enter the market? What about non-U.S. players in Canada, Mexico, or Europe who have sought our assistance in avoiding complications with U.S. enforcers in carrying out their business relationships in Cuba?

Initial, limited relaxation measures

The most under-reported aspect of the President’s new Cuba policy is its somewhat limited impact. The U.S. Administration is highly constrained under existing U.S. law that has enshrined the Cuba embargo regulations with statutory force since the 1990s. In other sanctions imposed upon regimes over the years—Libya, Iran, Iraq (under Saddam Hussein), Sudan, Panama (under Manuel Noriega), and so forth—the President has been free to adjust the scope of restrictions at the edges as a lever to encourage favorable behavior by the targeted country. Congress sought to remove that power with respect to Cuba in the 1996 Helms-Burton Act. Since that time, it has been part of received wisdom that the President and the Treasury Department cannot make substantial changes in the Cuba restrictions by regulatory action alone. So far, President Obama appears to be respecting this line, referring carefully to actions the Administration will take that are “authorized by [current] law.” The White House has not yet formally sought any modification of existing legislation from Congress. With Republican control of the Congress, the Administration has to step carefully in seeking any relief from Cuba sanctions laws, especially as doing so might require expenditure of political capital the President may be saving for another, arguably more important, foreign policy goal—securing a nuclear deal with Iran. Thus, the moves we have seen to date have been somewhat narrow, authorizing expanded travel, use of U.S.-issued debit and credit cards in Cuba, and a relaxation of restrictions on exports of U.S. goods and technology in the fields of telecommunications and construction. These initial, modest steps necessarily fall short of a lifting of the embargo.

New space for overseas companies?

Cuba boasts a number of sectors that are ripe for increased investment, including resorts and leisure, health care and life sciences, transportation, energy and infrastructure, and telecommunications. Given the complexity that remains for U.S. companies to engage directly with Cuban counterparties, we expect to see increased activity in these sectors by non-U.S. companies, taking the shift in U.S. policy as their signal to explore opportunities in the market. The existing U.S. rules, however, continue to cast a long shadow on such activity. The Cuba embargo applies to non-U.S. entities that are owned or controlled by U.S. persons, as well as to all U.S. nationals—wherever located, and by whomever employed. A German company can run afoul of OFAC’s rules by employing an American who participates—whether as a salesman or a member of the board of directors—in dealings with Cuba. Walling off American executives or employees from business activity with Cuba will continue to be required, except in the categories of business that are subject to the general license. Thus, a non-U.S. company that hires an American to lead its North American business strategy will continue to have to carve him or her out of any dealings with Cuban customers. A European hotel operator who acquires management contracts on several Caribbean properties will not be able to use American personnel to oversee the affairs of a Cuban resort. This application of the embargo to transactions by U.S.-owned or U.S.-controlled entities in third countries, or even to non-U.S.-controlled entities dealing in U.S. origin goods or technologies, has long been a source of contention with allies and trading partners, and a real compliance headache for our non-U.S. clients. >> Given the complexity that remains for U.S. companies to engage directly with Cuban counterparties, we expect to see increased activity by nonU.S. companies, taking the shift in U.S. policy as their signal to explore opportunities in the market. << As much as the Obama Administration may like to provide relief from these restrictions, it is barred from doing so by the provisions of the 1996 Helms-Burton Act, that states that “[t]he economic embargo of Cuba, as in effect on March 1, 1996, including all restrictions under part 515 of title 31, Code of Federal Regulations, shall … remain in effect” unless and until the President certifies that a “transition government” has assumed power in Havana. The President can make such a finding only if at least eight specified factors are present. Among those factors are that the government “does not include Fidel Castro or Raul Castro,” that it has “legalized all political activity” and “released all political prisoners,” that it has committed to a timetable for “free and fair elections” with “multiple independent political parties” and “UN or equivalent election monitors,” and that it is establishing an independent judiciary. No such finding is plausible at present, of course. Since “all restrictions” under the OFAC Cuba regulations must remain in place by statute until such a finding—including the restriction on activity of foreign subsidiaries owned or controlled by U.S. persons—there can be no outright move to lift the embargo on conduct by U.S.-controlled entities or U.S. persons located overseas. But the Administration can make decisions about how it deploys its enforcement resources. The White House has –>29 – US law/international law – BLM – No. 1 – March 5, 2015 declared in its communications on the recent policy shift that “[p]ersons must comply with all provisions of the revised regulations; violations of the terms and conditions are enforceable under U.S. law.” How forcefully Treasury and OFAC will back that up with new enforcement actions, in a climate wherein the White House is trying to leave the old Cuba policy behind, will be interesting to watch. One immediate consequence may be to change the calculus on voluntary disclosure of Cuba violations. OFAC’s stated policy is to provide leniency to violators who voluntarily disclose their infractions to OFAC prior to any investigation starting. A company that knows it has violated antiquated rules that U.S. policy now declared to have been a failure might find it easier to make a voluntary disclosure and obtain lenient treatment. And this calculus may provide correct, as we expect the Administration to reserve vigorous enforcement for egregious cases involving contraband or weapons or efforts to undermine U.S. policy by providing economic support to the Cuban government in a manner that falls within the scope of U.S. jurisdiction.

The congressional wildcard

Another open question is what the new Republican Congress will attempt to do on Cuba policy. Today’s Republican Party still contains sizeable elements that oppose any dealings with Cuba as long as the Castro family remains in control. Florida senator Marco Rubio’s reaction to the Obama announcement, predictably, was scathingly hostile (“another concession to tyranny”). Former Florida governor Jeb Bush similarly staked out an adversarial posture, accusing the Obama White House of “reward[ing] … dictators.” Other aspiring Republican presidential candidates who have kept quiet on the Cuba embargo can now be expected to line up in opposition, in order to keep their prospects in a 2016 Florida primary intact. Whether the new Congress will produce legislation to block the Obama initiative—even with Republican majorities— is by no means a foregone conclusion. Nor is it obvious that a vote on such legislation would necessarily divide on straight party lines. The new Obama policy will draw support from some traditional, free-market Republicans, and a pocket of anti-Castro Democrats (such as New Jersey senator Bob Menendez) will not vote with the President on Cuba legislation. For non-U.S. companies and investors, the path to Cuba remains winding, but perhaps less rocky than before the announced policy shift. Opportunities surely exist, and if carefully advised, early entrants could well find the rewards to be well worth the risks.


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