Since 1960, the U.S. has had an embargo with Cuba. This embargo was largely a reaction to Cuba nationalizing American-owned oil refineries without compensation and was intended to coerce Cuba to move toward “democratization and greater respect for human rights.”
As a result of the embargo, U.S. nationals could not visit Cuba, could not import items from Cuba and could not send items to Cuba beyond specific humanitarian aid such as medical equipment and food. The embargo thus limited business options for U.S. companies seeking to access the Cuban economy, increased the prices of car parts in Cuba and led to the cultural phenomenon of the Cuban cigar.
On Dec. 17, 2014, President Obama announced that certain travel restrictions would be amended, expanded sales and exports would be authorized and U.S. travelers would be permitted to import more goods from Cuba, leading business owners to wonder whether the curtain on Cuba”™s economy would finally be lifted. The short answer is that Obama”™s announcement and subsequent initiatives loosened, but did not disband, the restrictions on U.S. companies exporting goods to Cuba. Whether navigating the perilous restrictions is worth the effort ”” in light of the severe penalties, the Cuban political climate, and the potential for change as a result of the pending presidential election ”” is a business decision that must be made on a case-by-case basis.
PEOPLE CAN TRAVEL TO CUBA NOW, DOES THAT MEAN I CAN DO BUSINESS THERE?
Effective Jan. 16, 2015, the U.S. revised the Cuban Assets Control Regulations and Export Administration Regulations to allow authorized travel to Cuba under certain circumstances. Contrary to popular belief, this does not mean that U.S. citizens may vacation in balmy Havana. Rather, U.S. citizens traveling to Cuba may only do so for certain specific purposes, such as attendance at professional meetings, international sports federation competitions, journalism and humanitarian projects. The regulations even specify that a traveler”™s schedule of activities must provide for only that amount of unscheduled time that is consistent with a full-time job. On March 15, 2016, Obama announced that the travel restrictions would be even further lifted. How the regulations will be amended remains to be seen, but the president”™s announcement suggests that personal travel will be more available and certain restrictions regarding financial products will be lifted.
Unfortunately for businesses, when sanctions for authorized travel to Cuba were lifted, the embargo remained in place. The amendments to the Cuban regulatory regime will allow the granting of a license to export U.S. commodities to Cuba for specific categories of goods, such as telecommunications items and software, agricultural items, and civil aviation. While these are relatively narrow industries and are not likely to aid a small business seeking to break into the Cuban market, they may be a good first step to opening the Cuban economy.
There has been much discussion about the vague license available for “improving living conditions and supporting independent economic activity.” According to additional guidance released in January 2016, the Bureau of Industry and Security within the Department of Commerce (BIS) is creating a case-by-case licensing policy for articles “to meet the needs of the Cuban people” including: items for agricultural production, artistic endeavors, education, food processing, disaster preparedness, relief and response, public health and sanitation, residential construction, public transportation and the construction of infrastructure that directly benefits the Cuban people. While this may be the broadest category of eligible exports, a license is still required.
There is, additionally, the ability to temporarily export goods with the export designation of EAR99 ”” meaning they are not subject to item-based regulation, such as for anti-terrorism concerns ”” for the purpose of a trade show under certain restrictions. This exception to the embargo is very new and does not solve the problem of ultimately exporting such items to Cuba, but may allow exhibition of commodities for a short period of time and under certain conditions in Cuba.
WHAT SANCTIONS REMAIN IN PLACE?
The Office of Foreign Assets Control (OFAC) within the Department of the Treasury regulates U.S. commerce with Cuba. Currently, all transactions providing U.S. exports to Cuba must be licensed by OFAC and are subject to certain restrictions. For example, contracts for the sale of items exported from the United States to Cuba or 100 percent U.S.-origin items that may be re-exported from a third country to Cuba must be expressly contingent on prior authorization from the U.S. Department of Commerce. OFAC even prohibits providing goods and services to Cuban nationals located in third countries if the transaction involves the indirect export of goods or services to or from Cuba. Another concern for businesses is ensuring that exported items don”™t fall into the hands of Cuban state-owned enterprises or agencies, which includes many entities involved in the tourism industry. Exporting to Cuba thus requires more than the typical due diligence.
Thus, although it may be possible for a U.S.-owned or U.S.-controlled entity to conduct business in Cuba, such activity would require a license from OFAC and potentially also BIS.
Initially, the amendments to the Cuban embargo were hamstrung by other prohibitions, such as restrictions on financing. For example, U.S. banks were unable to issue letters of credit and payments were restricted to cash-in-advance or third-country financing. The regulations effective January 27, 2016, seek to remove these barriers by allowing sales on open account and financing by U.S. financial institutions. Unfortunately, these new financial regulations will not apply to agricultural commodities. The amendments in January sought to facilitate authorized exports by allowing certain additional transactions such as allowing travel to conduct market research, commercial marketing or contract negotiation, but it remains to be seen what other exposures exist, such as whether a U.S. entity may hire and pay Cuban nationals.
CONCLUSION
The Cuban export arena is an ever-changing environment that depends on many factors: the U.S. regulatory regime, the Cuban regulatory regime, the political climate, and ”” not least of all ”” the Cuban economy. Business owners may be well advised to pay close attention to the changing Cuban regulations to determine when the ideal time to pursue the Cuban economy might be. If the trend of loosening regulations continues, doing business in Cuba may become an economically viable option for small business. This instant, however, may be reserved for a more narrow set of businesses that don”™t mind lengthy license waiting periods and the potential for political volatility.
Kelly F. O”™Donnell is an attorney in the business organizations and finance practice area of Pullman & Comley LLC in its Bridgeport office. She can be reached at kodonnell@pullcom.com.
