January 2015 Practice Group(s): International Trade U.S. GOVERNMENT IMPLEMENTS CUBA POLICY CHANGES By Daniel J. Gerkin, Jerome J. Zaucha, Donald W. Smith, Michael J. O'Neil On January 16, 2015, the Office of Foreign Assets Control, U.S. Department of the Treasury ( OFAC ), and the Bureau of Industry and Security, U.S. Department of Commerce ( BIS ), each published regulations implementing the Cuba policy changes announced by President Obama on December 17, 2014. 1 See 80 Fed. Reg. 2291 (Jan. 16, 2015) (amendments to the Cuban Assets Control Regulations administered by OFAC); 2 80 Fed. Reg. 2286 (Jan. 16, 2015) (amendments to the Export Administration Regulations administered by BIS). 3 As noted below, these regulations, which became effective upon publication, liberalize certain aspects of trade with Cuba, but fall well short of lifting the embargo, which would require Congressional action. The U.S. embargo against Cuba, which has been in effect since 1963, is the longest standing U.S. economic embargo and the only such embargo still authorized under the Trading with the Enemy Act ( TWEA ). One consequence of TWEA is that the embargo restrictions apply not only to individuals who are citizens or permanent residents of, or who are in, the United States, and to entities organized or located in the United States, but also directly to non-u.s. companies owned or controlled by U.S. individuals or entities. The effect of the embargo, as implemented through the Cuban Assets Control Regulations ( CACR ) administered by OFAC and the Export Administration Regulations ( EAR ) administered by BIS, is to bar any unlicensed trade or transactions from the United States or by U.S. persons and their non-u.s. affiliates directly or indirectly involving Cuba or Cuban nationals, wherever located. Although originally established by Presidential action under TWEA authority, much of the embargo has since become mandated by statute, such that a complete lifting of the embargo is no longer solely a matter of Presidential prerogative. However, even prior to the December 2014 initiatives announced by President Obama, Congress authorized some loosening of the embargo provisions relating to, for example, agricultural and medical trade, telecommunications, and travel. Many of the regulatory amendments enacted as part of President Obama s new Cuba policy expand on existing authorizations and embargo exceptions, including relating to agricultural and medical trade, telecommunications, travel, and remittances and other transactions by expatriate Cubans. As noted above, the amendments do not constitute a lifting of the embargo or even a substantial reduction of the restrictions general commercial activities 1 For a more detailed discussion of the President s announcement, please refer to our December 23, 2014 publication available at http://www.klgates.com/files/publication/d39d36c5-7a4c-49a3-9274- 71c5d81d8808/Presentation/PublicationAttachment/b8596145-19a6-415a-9568-72ba2eb2be71/Public_Policy_Alert_122314.pdf. 2 http://www.gpo.gov/fdsys/pkg/fr-2015-01-16/pdf/2015-00632.pdf. OFAC also published a number of Frequently Asked Questions, which may be accessed through http://www.treasury.gov/resource center/sanctions/programs/documents/cuba_faqs_new.pdf. 3 http://www.gpo.gov/fdsys/pkg/fr-2015-01-16/pdf/2015-00590.pdf.
outside of the scope of already permitted agricultural and medical trade, telecommunications, and travel remain impermissible. The amendments made by OFAC to the CACR principally relate to: (i) travel to and from Cuba and the provision of associated services; (ii) financial services; (iii) insurance; (iv) remittances; (v) telecommunications; (vi) exports to Cuba and imports from Cuba; and (vii) the treatment of Cuban nationals ordinarily resident outside of Cuba. OFAC also has implemented a number of changes incident to the reestablishment of diplomatic relations with Cuba. In the case of the EAR, in implementing the policy changes announced by the President, BIS: (i) amended the EAR to create a new license exception, License Exception Support for the Cuban People; (ii) amended existing License Exception Consumer Communication Devices to eliminate the donation requirement; (iii) amended existing License Exception Gift Parcels and Humanitarian Donations to authorize exports of multiple gift parcels in a single shipment; and (iv) established a general policy of approval for exports and reexports to Cuba of items for the environmental protection of U.S. and international air quality, waters, and coastlines. A detailed description of these amendments to the CACR and the EAR may be found in Appendix I. From the standpoint of substantial commercial activities, the most significant changes likely will be the greater allowance for travel services, limited banking/financial activities, limited types of insurance, permitted telecommunications activities, more flexible payment terms for agricultural and other permitted sales, and transactions with Cuban nationals resident in third countries. Although certain sales of building materials and tools and equipment for agriculture and other private businesses also are authorized, because of the requirement that the sales be to the private sector and not involve the government of Cuba, it is not clear that this change will allow for substantial commercial sales or will be limited in effect to small quantity donations and sales through expatriate Cubans to relatives and friends in Cuba. However, beyond these specific changes, the most significant potential consequence for future commercial activities involving Cuba is that this implementation, of what is hoped to be the first stage of greater loosening of the Cuban embargo, may pave the way for further, more dramatic changes allowing for more substantial commercial activities involving Cuba. Congressional Reaction and Outlook Just prior to the publication of the regulations implementing the Cuba policy changes, Sen. Marco Rubio (R-FL) and Sen. Dan Coats (R-IN) wrote to Treasury Secretary Jacob J. Lew questioning the President s authority unilaterally to normalize relations with Cuba, and Sen. Rubio and Rep. Mario Diaz-Balart (R-FL), among others, sharply criticized the regulations after OFAC and BIS made them publicly available on January 15, 2015. Indeed, Sen. Lindsey Graham (R-SC) has threatened to delay action on any ambassadorial nominees to Cuba and to refuse to appropriate funds for any new embassy in Havana. Confirmation hearings will provide only one of several opportunities for detailed Congressional scrutiny of both the new regulations and the President s authority to adopt them. Regardless whether President Obama appropriately has exercised executive authority to date, it is clear that more sweeping changes, including termination of the embargo, would require Congressional action. Although the President s step-by-step approach to lifting some aspects of the Cuba sanctions appears to preclude further dramatic changes in the near future absent significant changes in Cuba, and there likely is little appetite in Congress to 2
pursue more fundamental changes in the near term, Rep. Charles Rangel (D-NY), long a proponent of unfettered trade with Cuba, introduced the Free Trade with Cuba Act on January 15, 2015, which proposes the lifting of the embargo. Also, both Congress and the Administration have signaled their intention of pursuing commercial diplomacy within the bounds of existing rules. Indeed, a Congressional delegation led by Sen. Patrick Leahy (D- VT) and comprised of Sen. Richard Durbin (D-IL), Sen. Debbie Stabenow (D-MI), Sen. Sheldon Whitehouse (D-RI), Rep. Chris Van Hollen (D-MD), and Rep. Peter Welch (D-VT) visited Cuba between January 17 and January 19, 2015, and Commerce Secretary Pritzker has announced that she will lead a commercial delegation to Cuba later this year. * * * For assistance in navigating the various Cuba policy changes detailed above, or U.S. export controls and embargoes and sanctions more generally, please contact any member of the K&L Gates LLP International Trade practice. 3
APPENDIX I Overview of Changes to the Cuban Assets Control Regulations The amendments made by the Office of Foreign Assets Control, U.S. Department of the Treasury ( OFAC ) to the Cuban Assets Control Regulations principally relate, as set forth in greater detail below, to: (i) travel to and from Cuba and the provision of associated services; (ii) financial services; (iii) insurance; (iv) remittances; (v) telecommunications; (vi) exports to Cuba and imports from Cuba; and (vii) the treatment of Cuban nationals ordinarily resident outside of Cuba. OFAC also has implemented a number of changes incident to the reestablishment of diplomatic relations with Cuba. Travel Whereas certain categories of travel to Cuba previously were authorized by OFAC via a specific license, OFAC now generally authorizes such travel, subject to certain limitations. The following are the categories of authorized travel: o Family visits; o Official business of the U.S. government, foreign governments, and certain intergovernmental organizations; o Journalistic activity; o Professional research and professional meetings; o Educational activities; o Religious activities; o Public performances, clinics, workshops, athletic and other competitions, and exhibitions; o Support for the Cuban people; o Humanitarian projects; o Activities of private foundations or research or educational institutes; o Exportation, importation, or transmission of information or informational materials; and o Export transactions that may be considered for authorization under existing Bureau of Industry and Security, U.S. Department of Commerce ( BIS ) guidelines and regulations with respect to Cuba or engaged in by U.S.-owned or U.S.-controlled foreign firms. Any person relying on a travel-related general license must stringently adhere to the conditions set forth in each respective authorization and must retain specific records related to the authorized travel transactions. Tourist travel remains prohibited. OFAC has eliminated the per diem limitation on spending by authorized travelers while in Cuba. Such travelers may purchase alcohol and tobacco products in Cuba for personal consumption in Cuba, but persons subject to the jurisdiction of the United States still may 4
not purchase such products over the Internet or while in a third country. A person subject to the jurisdiction of the United States means, generally: (i) U.S. citizens and lawful permanent residents (i.e., Green Card holders), wherever located; (ii) entities organized under the laws of the United States; (iii) non-u.s. entities owned or controlled by the persons described in (i) and (ii); and (iv) any person within the United States, regardless of nationality. Persons subject to the jurisdiction of the United States, including airlines and travel agents, are authorized to provide carrier and travel services. o OFAC has clarified that only charter service currently is available and that the U.S. Department of Transportation will establish procedures regarding the restoration of regularly scheduled service to and from Cuba. The U.S. Department of Transportation has deferred the activation of any unused scheduled activity to serve Cuba, as well as any new applications to serve Cuba, until further notice. Furthermore, any air carrier intending to provide such service may need to secure regulatory approvals from other agencies of the U.S. government. o Service providers themselves must retain for at least five years from the date of the transaction a certification from each customer indicating the specific regulatory citation that generally authorizes the travel or a copy of any specific license authorizing such travel. o Absent a specific license, travel via vessel remains prohibited, although OFAC has eased the restrictions on the ability of vessels engaged in authorized trade with Cuba, or carrying agricultural commodities, medicine, or medical devices to Cuba, to call at ports in the United States. Financial Services OFAC has authorized the use of U.S. credit and debit cards in Cuba for travel-related and other transactions and has authorized U.S. financial institutions to enroll merchants and to permit transactions incident to the processing and payment of credit cards, debit cards, stored value cards, checks, drafts, travelers checks, and similar instruments used or negotiated in Cuba. o Please note that OFAC does not require financial institutions or credit card companies to accept, maintain, or facilitate authorized financial relationships or transactions. Furthermore, OFAC has authorized U.S. depository institutions to open correspondent accounts at Cuban financial institutions, in Cuba or in third countries, and at foreign banks located in Cuba, to facilitate the processing of authorized transactions. Please note that Cuban financial institutions cannot yet open correspondent accounts with U.S. financial institutions or financial institutions that are otherwise persons subject to the jurisdiction of the United States. Financial institutions that are persons subject to the jurisdiction of the United States now are authorized simply to reject wire transfers of funds originating and terminating outside the United States where neither the originator nor the beneficiary is a person subject to the jurisdiction of the United States and provided that no prohibited Cuban persons have an interest in the transfer. Furthermore, such financial institutions now are authorized to process funds transfers where neither the originator nor the beneficiary are persons 5
subject to the jurisdiction of the United States and the funds transfer relates to transactions that would be authorized if the originator or beneficiary were a person subject to the jurisdiction of the United States. Insurance Insurance companies remain authorized to provide health insurance-, life insurance-, and travel insurance-related services to authorized travelers and to make payments related to the provision of emergency medical services, and now are permitted to provide global health, life, or travel insurance policies that cover third-country nationals traveling in, or to or from, Cuba. Remittances OFAC raised the quarterly limit on remittances from $500 to $2,000 and raised to $10,000 the total amount of remittances that an authorized traveler can carry to Cuba. OFAC has generally authorized, on a case-by-case basis, unlimited remittances for humanitarian projects, support for the Cuban people, and the development of private business in Cuba. Investment in Cuba, however, remains prohibited. Financial institutions are authorized to provide services in connection with the collection or forwarding of authorized remittances. o Service providers themselves must retain for at least five years from the date of the transaction a certification from each customer indicating the specific regulatory citation that generally authorizes the sending of remittances to Cuba. Telecommunications OFAC has amended existing authorizations regarding the provision of telecommunications services, the provision of services incident to Internet-based communication, and the exportation and reexportation of certain communications items. As a result, for example, persons subject to the jurisdiction of the United States may purchase calling cards for use in Cuba and/or may pay bills directly to a telecommunications operator in Cuba, such as ETECSA (Empresa de Telecomunicaciones de Cuba S.A.). o Regarding Internet-based communications, OFAC generally authorizes services incident to the exchange of communications over the Internet, including instant messaging; chat and electronic mail; social networking; VOIP; sharing of photographs and movies; Web browsing; blogging; Web hosting, provided it is not for the promotion of tourism; and domain name registration. o To the extent not otherwise authorized, OFAC also permits the exportation or reexportation of services relating to software used on personal computers, mobile telephones, and other personal communications devices, as well as services relating to the use of such devices, and services, including software design, business consulting, and information technology management (including cloud storage), that are related to certain items exported or reexported to Cuba pursuant to License Exception Consumer Communication Devices ( License Exception CCD ) set forth in the Export Administration Regulations ( EAR ), items not subject to the EAR, but that would meet 6
the criteria for License Exception CCD, and publicly available software of a type described in License Exception CCD. OFAC also authorizes services to install, repair (including repair training), or replace such items, as well as the importation into the United States of such items by an individual entering the United States, directly or indirectly, from Cuba. o Internet-based communication services, as well as services relating to items exported or reexported under License Exception CCD, may be provided to prohibited officials of the government of Cuba, prohibited members of the Cuban Communist Party, or to organizations owned or controlled by the government of Cuba or the Cuban Communist Party provided that such services are widely available to the public at no cost to the user. Exports and Imports OFAC has authorized transactions directly incident to the conduct of market research, commercial marketing, sales negotiation, accompanied delivery, or servicing in Cuba of items consistent with the export and reexport licensing policies set forth in the EAR. Previously, authorized exports from the United States to Cuba, such as agricultural commodities, required the payment of cash prior to the shipment of the merchandise. OFAC has revised the definition of cash in advance to now mean cash before transfer of title to, and control of, the exported items to the Cuban purchaser. However, many in the agriculture sector have long complained that sales to Cuba are being lost to competitors in Canada and Brazil, for example, because such competitors are making credit sales to Cuban customers. As a result, the National Foreign Trade Council, among others, has predicted that U.S. agricultural organizations will push Congress this year to authorize agricultural sales to Cuba on credit. OFAC also now allows financing by third-country banking institutions for all authorized exports or reexports under certain circumstances. Such financing may be advised or confirmed by U.S. financial institutions. OFAC has authorized certain micro-financing activities and entrepreneurial and business training, as well as imports of certain specified goods and services produced by independent Cuba entrepreneurs. o The U.S. Department of State is responsible for determining which items are eligible for importation and will be publishing a list of such items at http://www.state.gov/e/eb/tfs/spi. OFAC now permits authorized travelers returning from Cuba to import no more than $400 worth of goods from Cuba, including up to $100 in alcohol or tobacco products for personal use only. In addition, persons other than U.S. citizens or permanent lawful residents arriving in the United States on a trip that included Cuba are authorized to import as accompanied baggage alcohol or tobacco products purchased or otherwise acquired in Cuba with a value not to exceed $100 for personal use only. Cuban Nationals Ordinarily Resident Outside Cuba OFAC has taken steps, including by authorizing U.S. financial institutions, to unblock the accounts of Cuban nationals who: (i) have taken up residence in the United States and 7
who (a) are U.S. citizens, (b) are lawful permanent residents, (c) have applied to become lawful permanent residents, or (d) are lawfully in the United States and intend to remain in the United States permanently; and (ii) who have permanently relocated outside Cuba. o Please note that Cuban nationals permanently located outside Cuba remain blocked until it is established that they meet the criteria for unblocking. Persons subject to the jurisdiction of the United States, such as U.S. financial institutions, must obtain satisfactory evidence from such persons, including, for example, a passport, voter registration card, permanent resident alien card, or national identity card. o Absent these, persons subject to the jurisdiction of the United States may rely upon evidence that the individual has been resident for at least two years in a single country outside Cuba or a sworn statement or other evidence that the individual does not intend to, or would not be welcome, to return to Cuba. OFAC also has authorized U.S.-owned or U.S.-controlled entities in third countries to provide goods and services to Cuban nationals in third countries, provided that the transaction does not involve a commercial exportation, directly or indirectly, of goods or services to or from Cuba. Persons subject to the jurisdiction of the United States now are permitted to sponsor, provide services in connection with, and participate in third-country professional meetings, conferences, or similar events that are attended by Cuban nationals, provided that the events do not relate to tourism in Cuba. Overview of Changes to the Export Administration Regulations In implementing the policy changes announced by the President, BIS: (i) amended the EAR to create a new license exception, License Exception Support for the Cuban People ( SCP ); (ii) amended existing License Exception CCD to eliminate the donation requirement; (iii) amended existing License Exception Gift Parcels and Humanitarian Donations ( GFT ) to authorize exports of multiple gift parcels in a single shipment; and (iv) established a general policy of approval for exports and reexports to Cuba of items for the environmental protection of U.S. and international air quality, waters, and coastlines. New License Exception SCP License Exception SCP authorizes the exportation and reexportation of commercially sold or donated: o Building materials, equipment, and tools for use by the private sector to construct or renovate privately owned buildings, including privately owned residences, businesses, places or worship, and buildings for private sector social or recreational use; o Tools and equipment for private sector agricultural activity; and o Tools, equipment, supplies, and instruments for use by private sector entrepreneurs, such as auto mechanics, barbers and hairstylists, and restauranteurs. To be eligible for License Exception SCP, items must be classified as EAR99 (i.e., items subject to the EAR, but not specified on the Commerce Control List in any specific Export Control Classification Number ( ECCN )) or described in an ECCN on the Commerce Control List that is controlled only for antiterrorism ( AT ) reasons. 8
License Exception SCP also authorizes the exportation and reexportation of certain donated items for use in scientific, archaeological, cultural, ecological, educational, historic preservation, or sporting activities. o Such activities cannot relate to the development, production, use, operation, installation, maintenance, repair, overhaul, or refurbishing of any item enumerated or otherwise described on the U.S. Munitions List pursuant to the International Traffic in Arms Regulations or on the Commerce Control List unless the only reason for control is antiterrorism. Temporary exports of certain items by persons departing the United States for their use in scientific, archaeological, cultural, ecological, educational, historic preservation, or sporting activities or for use in professional research also are authorized, subject to the same limitations applicable to donated items. o The research must be directly related to the traveler s profession, professional background, or area of expertise, including area of graduate-level full-time study. o Eligible items must be returned to the United States within two years of the date of export, unless consumed in Cuba or specifically licensed by BIS. EAR99 or AT-controlled items also are authorized for exportation and reexportation to human rights organizations, individuals, or nongovernmental organizations that promote independent activity intended to strengthen civil society. License Exception SCP also authorizes the exportation and reexportation to Cuba of certain items for telecommunications, including access to the Internet, use of Internet services, infrastructure creation, and upgrades. Finally, License Exception SCP authorizes the exportation and reexportation of certain EAR99 or AT-controlled items to Cuba for use by news media personnel and U.S. news bureaus engaged in the gathering and dissemination of news to the general public. o OFAC also has authorized transactions necessary for the establishment and operation of news bureaus in Cuba, including, as of January 16, 2015, the hiring and employment of Cuban nationals in Cuba to provide reporting services or other services related to the gathering and dissemination of news. Amended License Exception CCD License Exception CCD, which was created in 2009 to allow for the donation of consumer communications devices, such as personal computers, mobile telephones, radios, televisions, and digital cameras, was amended to likewise allow commercial sales of an expanded list of such items. Amended License Exception GFT License Exception GFT was amended to remove a note excluding from eligibility consolidated shipments of multiple parcels for delivery to individuals residing in any foreign country, including Cuba. 9
Licensing Policy for Items Relating to Environmental Protection BIS instituted a favorable licensing policy for exports and reexports of items necessary for the protection of U.S. and international air quality, waters, and coastlines (including items related to renewable energy or energy efficiency) Authors: Daniel J. Gerkin daniel.gerkin@klgates.com +1.202.778.9168 Jerome J. Zaucha jerome.zaucha@klgates.com +1.202.778.9013 Donald W. Smith donald.smith@klgates.com +1.202.778.9079 Michael J. O'Neil mike.oneil@klgates.com +1.202.661.6226 Anchorage Austin Beijing Berlin Boston Brisbane Brussels Charleston Charlotte Chicago Dallas Doha Dubai Fort Worth Frankfurt Harrisburg Hong Kong Houston London Los Angeles Melbourne Miami Milan Moscow Newark New York Orange County Palo Alto Paris Perth Pittsburgh Portland Raleigh Research Triangle Park San Francisco São Paulo Seattle Seoul Shanghai Singapore Spokane Sydney Taipei Tokyo Warsaw Washington, D.C. Wilmington K&L Gates comprises more than 2,000 lawyers globally who practice in fully integrated offices located on five continents. The firm represents leading multinational corporations, growth and middle-market companies, capital markets participants and entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations, practices and registrations, visit www.klgates.com. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. 2015 K&L Gates LLP. All Rights Reserved. 10