Cuba 2015: President Obama's Cuba Initiative – an Early Legal Analysis
Whether or not one agrees with the substance of President Obama's initiative on Cuba, December 17, 2014 was a historic day. We learned on that day, among other things, that the United States and Cuba have agreed to restore full diplomatic relations (and establish an embassy in each other's territory) for the first time in over 53 years. In addition, the United States this upcoming Spring will look at the issue of dropping Cuba from the list of States sponsoring terrorism that is annually published by the U.S. State Department. (The perception in Cuba is that being on that list has made it very difficult and expensive for Cuba to do banking globally, since many foreign banks are concerned that, should they do business with Cuba while it is still on the U.S. State Department's list of States sponsoring terrorism, it might have negative consequences for their business with the United States.) Further, among other diplomatic initiatives, the United States and Cuba will be seeking ways to cooperate in a variety of different fields of mutual concerns, including drug trafficking and health concerns (such as the recent cooperation fighting the Ebola outbreak in West Africa). Cuba also released Alan Gross, a former AID contractor who had been imprisoned in Cuba for the past five years for providing advanced telecommunications equipment prohibited under Cuban law to Cuba's small Jewish community, as well as another individual who had spent approximately 20 years in prison in Cuba for spying for the United States. The U.S. Government, in turn, released three convicted Cuban spies. Finally, Cuba agreed to release 53 dissidents from its prisons. (As of this writing all have been released, according to the U.S. State Department.)
Beyond these changes in governmental relations, the President announced on December 17 that the United States would be amending its existing laws relating to Cuba in several ways, described below. In effect, both the U.S. Treasury Department's Cuban Assets Control Regulations ("CAC Regulations", administered by the Office of Foreign Assets Control ("OFAC")), and the Commerce Department's Export Administration Regulations ("EA Regulations") pertaining to Cuba – administered by the Bureau of Industry and Security ("BIS") – were amended effective January 16, 2015. The fact that the amendments to both sets of regulations were issued within one month of President Obama's announcement, notwithstanding the intervening holiday season, indicates that both departments involved had been actively engaged in the months of deliberations leading to the President's announcement.
The starting point is to note that the U.S. "embargo" of Cuba has not been lifted. By this we mean the basket of economic restrictions on what U.S. persons can do with Cuba and with Cuban nationals has not disappeared, and most of the key restrictions on doing business with Cuba that were in effect prior to December 17 remain in effect. For example, the freezing of Cuban assets in the United States, the blocking of all Cuban accounts in the United States and the prohibition on cash belonging to Cuban nationals moving through the U.S. banking system, have not been eliminated. (Though it will be interesting to see how these restrictions, as well as the recent levying of huge penalties on financial institutions for dealings with Cuba in violation of U.S. embargo regulations, going forward are reconciled with the renewal of diplomatic relations between the two countries, the possible elimination of Cuba from the list of States sponsoring terrorism, the greater freedom on remittances to Cuba, the authorized use of credit and debit cards in Cuba by U.S. visitors, and the role permitted for U.S. financial institutions in connection with the foregoing, as described in this paper).
Similarly, the same general restrictions on U.S. investment in Cuba and in Cuban businesses and real estate remain in effect (with the exception of some additional loosening of restrictions on telecommunications, discussed below). In addition, the same general prohibitions on trade with Cuba have not changed, except for some exports of construction and other materials to help the emerging private-sector on the island, for exports related to the telecommunications sector, for permitted imports from Cuba's emerging private sector, and for the authorization for US persons visiting the island to bring back up to USD400 in Cuban goods (of which no more than USD100 in alcohol and tobacco.) Additionally, the prohibition on financings to Cuba and Cuban nationals (other than some outside Cuba, see below) has not been lifted. Finally, "tourist" travel to Cuba by U.S. persons continues to be forbidden.
Consequently, the new amendments to the CAC and EA Regulations will not produce any large-scale opening of banking, investment, trade, business and tourism between the United States and Cuba. In terms of short-term impact on the US business sector – leaving aside expanded opportunities for travel -, it is likely that the most important change will be that in authorized payment terms for permitted US exports to Cuba, discussed below. Specifically, the prior requirement that US exports must be paid for by Cuba with cash in advance, has now been relaxed so that payment from Cuba will only be required when "title and control" to the goods passes. Obviously, this will permit some greater leeway in structuring payment terms, at least for products which will be stored anyway for some time before they are consumed.
All of the changes recently effected are in areas where the President of the United States has existing legal authority to act on his own without action by Congress. Likewise, some of the important remaining restrictions on interactions between U.S. persons, Cuba and Cuban nationals remain within the power of the President to amend, and could be modified by this or any future President on his or her own as the relationship with Cuba evolves. Others, such as the restrictions on investment in Cuba and on "tourist" travel to the island by U.S. persons, will require future legislation enacted by Congress. (It should be noted that the White House has called for congressional action to eliminate the restriction or tourist travel.)
Of course, to the extent changes are made by the President without Congressional legislation, any future President legally can reverse them.
Also now possibly in question is the future of the Cuban Adjustment Act, which gives Cubans special immigration status, allowing them to stay in the United States and apply for residency if they can reach U.S. land without a visa, or after any visa they may travel with expires. Quite possibly, after diplomatic relations are restored with Cuba and as the relationship between the two countries evolves, it will be politically more difficult to justify this special status.
Some Recent Background
Over the past 5 years there have been some very significant social and economic, though not political, changes in Cuba. These have notably included the emergence of a small-business private sector which today is said to employ about 500,000 individuals, representing about 10% of the Cuban work force. This sector has been particularly successful in the restaurant and lodging fields – it is now estimated that there are as many as 1,300 private restaurants (popularly called "paladares") in Cuba, and even more bed-and-breakfasts, both heavily catering to tourists. However, altogether, there are some 210 trades in which entrepreneurs (in Cuba called "emprendedores") are allowed to operate a small business. In addition, there has been great emphasis by the Cuban Government on agricultural and other businesses owned and run by worker-owned cooperatives, said to now also employ another 10% or so of the nation's total work force; Cubans are now allowed the right to own, buy and sell up to two residences, and buy, sell and own cars; and Cubans no longer need exit visas in order to travel abroad (other than those in certain jobs, such as doctors), and can remain abroad for long periods of time without losing the right to return to their homeland. The Cuban Government is also now in the process of unifying its two currencies (one for domestic use and one primarily for foreign tourists) into a single currency, which internally is likely to be a somewhat difficult and disruptive process, but is viewed as necessary for future economic development. In 2013, the Cuban Government also published a new foreign investment law more favorable to foreign investors, meant to attract much greater foreign direct investment. (So far there have been few publicly reported instances of new investment in Cuba pursuant to the new law.). In addition, with Brazilian financing the Cuban Government is building a huge Special Trade Zone in the Port of Mariel, roughly an hour's drive from Havana, intended largely to host light manufacturing and trans-shipment facilities in anticipation of the expanded Panama Canal opening, now projected for 2016.
Over the past 15 years the Cuban economy has relied heavily on large subsidies from Venezuela for imported oil. With Venezuela now in the throes of its own significant economic difficulties, there has been speculation as to whether those subsidies will continue, or at least be reduced significantly. Any reduction of those subsidies could prompt Cuba to take further steps to open up its economy.
From the U.S. perspective, in 2009 President Obama greatly liberalized the ability of Cuban-Americans to visit relatives in Cuba and send them cash and other gifts. As a result, hundreds of thousands of Cuban-Americans travel to Cuba annually, and it is estimated that the Cuban diaspora contributes as much as $5 billion annually to the Cuban economy. In fact, a very large percentage of the blossoming small businesses in Cuba these past 6 years have been made possible by capital sent by Cuban-Americans in the United States.
Many U.S. business interests have been advocating for change to the embargo for some time. For example, since 2009 the U.S. Chamber of Commerce has urged lifting the embargo. In addition, in early 2013 the Americas Society/Council of the Americas (AS-COA) published and sent to the U.S. Government a set of proposed changes to the U.S. embargo that President Obama, on his own, could lawfully make. Then, in the Spring of 2014, the AS-COA sponsored an open letter to President Obama, signed by many prominent Americans (including Cuban-Americans), urging the President to take steps consistent with those earlier suggestions. Many of the new changes to the CAC and EA Regulations are reminiscent of the AS-COA's suggestions, particularly the emphasis on assistance to the emerging private small-business sector on the island.
Most recently, this month more than 25 food and agricultural companies and federations formed the U.S. Agriculture Coalition for Cuba, whose avowed aim is to lift the embargo altogether. U.S. agricultural products to Cuba, which have been permitted for some time, have shrunk from a high of USD 710 million in 2008 to USD 266 million in 2014 (through November), many believe because of the much easier payment terms that other countries can offer.
Various polls taken before and after the President's announcement on December 17 show a roughly even split among Cuban-American voters nationally regarding various aspects of the President's initiative. Generally speaking, older members of that community opposed the initiative, while younger ones favored it.
Of the new changes to the CAC and EA Regulations, perhaps legally the most interesting (and socially the most impactful) may be those having to do with expanded travel to Cuba. To understand why, one must first understand that U.S. persons who wish to travel to Cuba can do so either under a "general license" or a "specific license". A general license means that, while one must travel only for a permitted purpose and be able to defend it (including by maintaining pertinent records) if asked upon return to the United States, one need not obtain prior approval from the OFAC before traveling. By contrast, a specific license requires that one obtain prior approval from OFAC before travel, which requires application to OFAC for the license, and can take time. Obviously, traveling to Cuba under a general license is far easier and less expensive, and can be far more spontaneous, than traveling under a specific license.
To understand the legal framework for this, Congress in 2000 restricted the ability of the President of the United States to freely decide who could travel to Cuba and who could not. Specifically, in the 2000 Trade Sanctions Reform and Export Enhancement Act, Congress prohibited the President from allowing "tourist" travel to Cuba without prior Congressional authorization. In part, Congress achieved this by prohibiting the President from allowing any travel to Cuba other than travel permitted under 12 specific categories that then (in 2000) already existed in the CAC Regulations, and continue to exist today. Broadly speaking, those categories are: (1) family visits; (2) official business of the U.S. government, foreign government and certain inter-governmental organizations; (3) journalistic activities; (4) professional research and professional meetings; (5) educational activities; (6) religious activities; (7) public performances, clinics, workshops, athletic and other competitions and exhibitions; (8) support for the Cuban people; (9) humanitarian projects; (10) activities of private foundations or research or educational institutions; (11) exportation, importation or transmission of information or information materials; and (12) certain export transactions that could be authorized under existing regulations and guidelines. Many of these categories have historically had restrictive conditions built in within them, so that even within a category that on its face seems broad and amorphous, such as "support for the Cuban people", some further very-tight hoops had to be jumped through before one could travel.
Prior to January 16 many of these permitted categories also required a specific license from OFAC, so that the U.S. Government specifically determined and approved whether your proposed travel met the applicable conditions before you could travel. From and after January 16, all of these categories of travel will be allowed under general licenses, obviating any need for prior OFAC approval. As already noted, just moving from a specific license to a general license in itself should make it much easier (and less expensive and more spontaneous) for many U.S. persons to travel to Cuba. However, in addition, the amended CAC Regulations in many instances significantly liberalize the conditions previously required under various of the 12 categories.
Additionally to the foregoing, under the amended CAC Regulations travelers in the 12 permitted categories are able to make arrangements through any travel agent, who will also be acting under a general license. Thus, the previous requirement that one travel through a travel agency specifically licensed by the Treasury Department for trips to Cuba, has been eliminated. Specifically - licensed travel agencies in the past, in a sense, served as agents of the Treasury Department by assuring that travel fell within a permitted category, and also served as guidance to would-be travelers to Cuba on what the law allowed. That is no longer the case, and if only as a practical matter, one would expect that travel agents operating under a general license – which means any travel agent who may wish to do so – will be less vigilant in assuring permitted categories of travel are being observed.
All of this means that, in a very real sense, U.S. persons now claiming to travel under one of these 12 categories will do so "on their honor", though they should be prepared to defend their travel in the event they are asked to do so at some point after returning to the United States. (Currently this includes a requirement to maintain records for five years.)
Very importantly, also changing is the requirement that only specifically-licensed airlines provide transportation to and from Cuba. Thus, any licensed airline is now free to fly people to and from Cuba under a general license as well. In the past, flights to Cuba had been conducted only by charter. After the U.S. Department of Transportation makes the necessary corresponding changes to its own rules and procedures, that may be replaced at least to some extent by regularly-scheduled service.
It should be noted again that the statutory prohibition on purely "tourist" travel to Cuba remains and will remain in effect until Congress lifts it, as the White House has already urged. And, the new CAC Regulations are careful to observe that "tourism" is not allowed, mostly by stating repeatedly that a traveler's schedule should not include free time or recreation in excess of that consistent with a full-time schedule for whatever the permitted category of travel is. However, the fact that travel under the 12 permitted categories will now be authorized by general license, will be possible without need to go through particular, specifically-licensed travel agents, as well as changes that the U.S. Government has made within the 12 permitted categories of travel themselves, in some cases greatly expanding their prior reach, could significantly enlarge the number of annual travelers from the United States to Cuba.
In addition, U.S. travelers to Cuba will now be allowed to use credit and debit cards, which in the past had not been possible, though this will be subject to their issuing bank's decision to allow such credit and debit card use. In order to permit the operation of these instruments, as well as in conjunction with the relaxation of requirements for remittances addressed below, U.S. financial institutions are now authorized, though not required, to open accounts at their Cuban counterparts.
Also removed is a prior per diem amount that travelers were allowed to spend in Cuba. Now, travelers may spend whatever amount they deem appropriate on their stay. In addition, the new CAC Regulations state that travelers may take up to U.S. $10,000 in cash with them as permitted "remittances" (see discussion below).
Beyond these changes, U.S. persons continue to be free to apply for special licenses for travel from OFAC in circumstances not encompassed by the general license.
Of course, to go to Cuba one must either have a Cuban passport, or obtain a visa from the Cuban Government allowing the travel. Thus, the Cuban Government will still retain effective control on the number and types of visitors going from the United States.
In addition to the easing of travel restrictions, remittances to Cuba by U.S. persons through the U.S. financial system have also been facilitated. Previously, U.S. persons (other than Cuban-Americans, who had no limits on remittances to family members), through a general license (i.e., without needing authorization from OFAC), could remit up to $500 per quarter for general donative remittances to Cuban nationals (except to certain officials of the Cuban Government or the Communist Party). This amount has now been increased to $2,000 per quarter.
As to donations for humanitarian projects, support for the Cuban people and development of private businesses in Cuba, they, too, are now permitted under a general license. Previously, it was necessary to obtain a specific license from OFAC before engaging in these activities.
In addition, remittances to individuals and independent non-governmental entities in Cuba, including pro-democracy groups and civil society groups, and their members, are now authorized by general license if meant to support a very broad set of "humanitarian projects" in or related to Cuba intended "to directly benefit the Cuban people", as well as to support the development of private businesses, including small farms.
Consistent with this, the requirement that remittance forwarders to Cuba have a specific license, has also been eliminated. As a result, like travel, remittances are now largely to be effectuated "on the honor system", with only the individual making the remittance being required to ensure that the remittance complies with the law. Again, record-keeping is required, and the remitter should be prepared to defend the remittance should there be inquiries from the Government after the fact.
As is the case with the changes to permitted travel, over time these changes may have a significant impact on the amount of remittances sent from the United States to Cuba. However, the foregoing changes do not affect remittances by Cuban-Americans to their families in Cuba, which, as already noted, since 2009 have been allowed without any limit as to amount or frequency. Predictably, these family remittances collectively will remain by far the largest forthcoming to Cuba from the United States for the foreseeable future.
As already noted, trade generally between the United States and Cuba, other than exports of agricultural products, medical products and certain telecommunications equipment, historically has been prohibited. Those prohibitions remain, except that now authorized for export by general license are building materials for private residential construction, goods for use by private-sector Cuban entrepreneurs, and agricultural equipment for small, private-sector farmers. In addition, the new CAC Regulations allow persons subject to U.S. jurisdiction to engage in all transactions, including payments, necessary to import certain products from independent Cuban entrepreneurs, as may be set forth in the future as a Section 525.582 List to be published by the State Department. (See also the discussion under "Communications" below.)
As already suggested, the biggest immediate change from the perspective of U.S. exporters, particularly agricultural exporters, may be that the prior requirement that exports had to be paid for through "cash in advance" – that is, payment before or no later than shipping – has now been modified so that payment will only be required once "title and control" to the products pass to the purchaser. U.S. exporters still cannot extend credit, but this additional time – in some instances products could presumably be warehoused in Cuba before "title and control" pass – may facilitate some transactions.
It should be noted in connection with all of the newly-permitted trade activities that under Cuban law all exports and imports must be made through a government agency, ALIMPORT. Until this changes, it is questionable whether these newly expanded categories of permitted trade will have any significant impact.
As to U.S. travelers to Cuba, they are now authorized to bring back $400 worth of goods, of which no more than $100 can consist of tobacco products and alcohol combined. Until now these imports were not permitted.
Still permitted is the importation of Cuban art, which is not encompassed by the CAC or EA Regulations. Also still available is petitioning for a specific license from OFAC should one wish to engage in a trade transaction not authorized by general license.
For some time there have been limited transactions involving telecommunications in Cuba that have been permitted under the CAC and EA Regulations, with the primary underlying justifications of facilitating contact between Cuban-Americans and their families in Cuba, and increasing the flow of information available to Cubans on the island. Going forward, in addition, the U.S. export of items that will contribute to the ability of the Cuban people to communicate abroad is authorized by general license (i.e., again, "on the honor system"). Included is the sale of consumer communications devices, related software, applications, hardware and services, and items for the establishment and update of communications - related and internet systems.
Also in the communications field, going forward, telecommunications providers are authorized by general license to establish the necessary mechanisms in Cuba, including infrastructure, to provide commercial telecommunications and internet services. Of course, specific licenses may still be petitioned for in instances not permitted by the CAC and EA Regulations.
Again, in practice the extent of what actually will occur in this area will depend on what the Cuban Government is willing to allow.
According to the new CAC Regulations, U.S.-owned or -controlled entities "in third countries" are generally licensed to provide goods and services to and engage in financial transactions with Cuban individuals in third countries. In addition, the new CAC Regulations provide for the unblocking of accounts of Cuban nationals who have permanently relocated outside of Cuba; permit U.S. persons to sponsor and participate in third-country professional meetings and conferences attended by Cuban nationals; permit the provision of certain goods and services to Cuban national sailors sequestered aboard ships in U.S. ports and allow foreign vessels to enter the United States after engaging in certain humanitarian trade with Cuba, among other measures.
President Obama's initiative represents the most significant changes in U.S. – Cuba relations, both politically and commercially, in over 50 years. In the short term, the nascent private sector on the island may have the most to gain, since many of the changes seem intended to assist it. Beyond this, the changes in travel could be critical to what steps may follow in the future, in that over time they may render remaining restrictions on tourism, investment, financing and trade with Cuba, as well as the special immigration status afforded to Cuban refugees under current U.S. law, logically and politically indefensible to the American voting public. How soon that may happen will depend on political developments both in the United States and Cuba, and on how the relationship between the two countries evolves in the next few years. For now, it seems clear that, given the continuation of general restrictions on trade, investment, banking and tourism with Cuba, the United States has not surrendered its economic leverage in future dealings with Cuba, nor will major U.S. corporations be rushing into Cuba on a large scale any time soon.
Perhaps most interesting will be how the continuing freezing of Cuban assets in the United States, and prohibition on Cuban cash moving through the U.S. banking system, is reconciled with proposed new steps relaxing the historic, almost-total separation between banks in the U.S. and Cuba, at least without burdening those banks with even more cumbersome paperwork, regulatory requirements, and the specter of enforcement actions and potential penalties, all of which could deter the banks from pursuing the new possibilities opened to them. (We already saw something similar last year when the Special Interests Section of the Cuban Government in Washington, D.C. had its U.S. banking relationship terminated because it was too burdensome and costly for the bank involved to operate that account, given the extent of U.S. regulation.) Greater and more effective communication and coordination between the State Department, the Treasury Department and federal banking regulators will be required if the President's proposed new changes in the relationship between U.S. banks and Cuba are to go forward as announced; and without a change in that relationship, it is difficult to see how some of the other changes in practice will function well.
The views expressed in this paper are those of the authors only and are provided solely as legal analysis. Please do not make business decisions based solely on the information disclosed herein, but consult your legal counsel.