November 24, 2017
By: EdKraul and, Brian Egan, Keith Huffman, Meredith Rathbone, Jack Hayes, Anthony Rapa, and Peter Jeydel*
Effective November 9, 2017, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Department of Commerce’s Bureau of Industry and Security (BIS) amended the Cuban Assets Control Regulations (CACR) and Export Administration Regulations (EAR), respectively, to implement changes to US Cuba sanctions policy articulated by President Trump in a presidential memorandum issued June 16, 2017. Concurrently, as required by the presidential memorandum, the Department of State published a list of 180 entities and sub entities associated with Cuban military, intelligence, and security services (Cuba Restricted List). As such, US government policy establishes that direct financial transactions conducted by persons subject to US jurisdiction with persons identified on the Cuba Restricted List would disproportionately benefit them at the expense of the Cuban people or private enterprise in Cuba.
Although President Trump announced in June that he was “cancelling the last administration’s completely one-sided deal with Cuba,” the memorandum that he issued in June, and the regulatory changes implemented by the State, Treasury, and Commerce Departments last week, reflect relatively moderate changes to US Cuba sanctions policy, as we initially explained in our June advisory on the matter. While these changes will limit certain US business activity with, and travel to, Cuba, they do not reflect a roll-back of all (or even most) of the Obama Administration’s significant Cuba sanctions reforms.
The key policy changes, explained in more detail below, include:
- New prohibitions on certain “direct financial transactions” with entities and sub entities identified on the Cuba Restricted List
- An expanded definition of “prohibited officials of the Government of Cuba” for which remittances and certain other transactions otherwise authorized by OFAC and BIS are off-limits
- Additional restrictions on authorized travel to Cuba in the “people-to-people,” other “educational,” and “support for the Cuban people” travel categories
- Adjustments to certain export controls for Cuba, including (1) a general policy of denial for license applications to export items for use by entities and sub entities on the Cuba Restricted List, and (2) simplification and expansion of the license exception Support for the Cuban People (SCP)
Each of these new restrictions is subject to exceptions, such as sector-specific exceptions and grandfathering policies, described below. As with all US sanctions on Cuba, these new restrictions are applicable to persons “subject to the jurisdiction of the United States,” including US citizens, US residents, US-incorporated companies, and non-US branches and subsidiaries of US companies.
Prohibition on Direct Financial Transactions with Persons on the Cuba Restricted List
OFAC added a new provision to the CACR (§ 515.209) that prohibits persons subject to US jurisdiction from engaging in certain “direct financial transactions” with entities and sub entities identified on the Cuba Restricted List. We explain key features of this new restriction below.
- Only “direct financial transactions” are prohibited.
Consistent with the presidential memorandum, this new prohibition applies only to “direct financial transactions” with entities or sub entities specifically identified on the Cuba Restricted List. The definition of “direct financial transaction” is more narrow than the definition of “transaction” or “financial transaction” found elsewhere in OFAC’s regulations. Specifically, Section 209(a) of the CACR indicates that a person engages in a “direct financial transaction” by doing either of the following:
- Acting as the originator on a transfer of funds whose ultimate beneficiary is an entity or sub entity on the Cuba Restricted List
- Acting as the ultimate beneficiary on a transfer of funds whose originator is an entity or sub entity on the Cuba Restricted List
On the other hand, “indirect” financial transactions with the entities and sub entities on the Cuba Restricted List are not covered by § 515.209. For example, as set out in the note to § 515.209, the general license in § 515.584(d) that authorizes a banking institution subject to US jurisdiction to process “U-turn” transactions – funds transfers originating and terminating outside the United States, provided that neither the originator nor the beneficiary is a person subject to US jurisdiction – remains in place. Similarly, also as set out in the note, banking institutions subject to US jurisdiction can continue to accept, process, and give credit to US dollar monetary instruments presented indirectly by a Cuban financial institution as set out in the general license in § 515.584(g).
- No 50% rule for the Cuba Restricted List.
The State Department clarified that there is no “50% Rule” for companies owned or controlled by entities on the Cuba Restricted List. Specifically, the State Department stated in a header to the Cuba Restricted List that:
“Entities or sub entities owned or controlled by another entity or sub entity on this list are not treated as restricted unless also specified by name on the list.”
In other words, the Cuba Restricted List is a positive list. This means that subsidiaries of listed entities are not treated as restricted unless they are specifically identified on the Cuba Restricted List. However, if a person subject to US jurisdiction knows that a direct financial transaction is being conducted with an unlisted entity or person acting as an agent for or alter ego of an entity or sub entity identified on the Cuba Restricted List, then caution is warranted under the §515.209 prohibition. The State Department indicated that it intends to publish periodic updates to the Cuba Restricted List in the Federal Register.
- The new restrictions only apply to some pre-existing general licenses and authorizations.
The real impact of the new restriction on “direct financial transactions” for entities or sub entities on the Cuba Restricted List is with respect to the availability of general licenses or other authorizations for what would be the related, underlying transactions.
Although the government of Cuba and military were always considered “blocked” Cuban nationals under the CACR, various general licenses and exemptions within the CACR previously did not prohibit incidental financial transactions with the Cuban government that related to authorized activities. With this new regulatory change, OFAC has explicitly prohibited direct financial transactions with entities and sub entities identified on the Cuba Restricted List in certain general licenses, including:
- § 515.530: Exportation of powers of attorney or instructions relating to certain types of transactions
- § 515.534: Negotiation of, and entry into, contingent contracts relating to prohibited transactions
- § 515.545: Transactions related to information and informational materials
- § 515.560: Travel-related transactions to, from, and within Cuba by persons subject to US jurisdiction
- § 515.561: Family visits
- § 515.564: Professional research and professional meetings in Cuba
- § 515.565: Educational activities
- § 515.566: Religious activities in Cuba
- § 515.567: Public performances, clinics, workshops, athletic and other competitions, and exhibitions
- § 515.572: Provision of travel, carrier, other transportation-related, and remittance forwarding services
- § 515.573: Physical presence and business presence in Cuba and Cuban news bureaus
- § 515.574: Support for the Cuban People
- § 515.576: Activities of private foundations or research or educational institutes
- § 515.577: Transactions necessary and ordinarily incident to publishing
- § 515.578: Exportation, re exportation, and importation of certain internet-based services and importation of software
- § 515.581: Transactions related to conferences in third countries
- § 515.584: Certain financial transactions involving Cuba
- § 515.590: Certain grants, scholarships, and awards
Consequently, no direct financial transaction by a person subject to US jurisdiction with a person or entity identified on the Cuba Restricted List is authorized by these enumerated general licenses (a specific license issued by OFAC would be required). However, OFAC did not add prohibitions related to the Cuba Restricted List to all of the CACR’s general licenses and exemptions. The June 2017 presidential memorandum allows exceptions to remain in place in a number of areas, including transactions related to the transmittal of remittances, the expansion of direct telecommunications and internet access for the Cuban people; the sale of agricultural commodities, medicines and medical devices; and other categories. As a result, it will be important to carefully review the relevant general licenses in determining the extent to which this new prohibition restricts otherwise authorized transactions.
- Pre-existing “commercial engagements” may continue.
In order to be “[c]onsistent with the administration’s interest in not negatively impacting US businesses for engaging in lawful commercial opportunities,” OFAC’s regulations state that the prohibition on direct financial transactions does not apply to transactions with a an entity or sub entity on the Cuba Restricted List related to “commercial engagements” that were “in place” prior to the State Department’s publication of the Cuba Restricted List. In an FAQ published on November 8, OFAC explained that businesses will be permitted to continue with authorized transactions outlined in “contingent or other types of contractual arrangements” agreed to prior to the issuance of the new regulations (November 9).
This will likely come as welcome relief to any US companies that have entered into contractual agreements with respect to Cuba-related activity. But other “commercial arrangements” that were not “in place” as of November 9 may be impacted, even if discussions related to those deals had begun before November 9.
- The Cuba Restricted List is not an exhaustive list.
As we previously explained, the presidential memorandum directed the State Department to publish a list of entities that are both “under the control of, or act for or on behalf of, the Cuban military, intelligence, or security services or personnel” and “with which direct financial transactions would disproportionately benefit such services or personnel at the expense of the Cuban people or private enterprise in Cuba.” In other words, the State Department had discretion not to list certain entities affiliated with the Cuban security sector. Accordingly, while the Cuba Restricted List includes a number of entities and sub entities that play significant roles in the Cuban economy, it is not an exhaustive list, and some members of Congress have criticized the State Department for not including certain entities on the list. As noted before, however, the Cuba Restricted List can be changed at any time.
Some of the key commercial enterprises identified in the Cuba Restricted List include:
- GAESA – Grupo de Administración Empresarial S.A. (the Cuban military’s commercial conglomerate)
- CIMEX – Corporación CIMEX S.A. (Cuba’s Export-Import Corporation, founded by the Ministry of the Interior, but reportedly taken over by GAESA)
- Companía Turística Habaguanex S.A. (the leading hotel chain in Cuba that has reportedly now been taken over by GAESA)
- Gaviota– Grupo de Turismo Gaviota (prominent tourism brand that is reportedly part of GAESA)
- Rafin S.A. (a financial services firm reported to be affiliated with GAESA)
- Zona Especial de Desarrollo Mariel (the economic development zone at the Port of Mariel which is a key area for foreign investment projects).
Another significant listing is the Mariel Special Economic Development Zone, including Almacenes Universales and Terminal de Contenedores de Mariel, S.A., two companies that run the seaport’s container terminal. The Mariel Special Economic Development Zone is Cuba’s first special development zone and was established to lure foreign investment to Cuba. Cuba advertises the zone as a “door open to the world.” Prohibiting direct financial transactions with the zone, including with companies that run the seaport container terminal and warehousing and customs, will likely have a chilling effect on potential US investment in the development zone.
The Cuba Restricted List also includes dozens of hotels located throughout the country, marinas, stores in Old Havana, government entities that directly serve the defense and security sectors, and rum producers and beverage manufacturers owned by the Cuban government.
The list does not include entities from pockets of the Cuban economy reportedly not controlled by GAESA, such as Cuban airports or cruise ship terminals and Cuba’s telecommunications and agriculture sectors. In addition, some entities are notably absent from the Cuba Restricted List, despite reportedly having ties to the Cuban military. For example, a number of US financial services companies reportedly rely on the payment infrastructure of GAESA affiliate Financiera CIMEX, but this company is not listed. Neither did the State Department include VaCuba, which reportedly may be used to pay home and apartment owners for short term rent. Almost immediately after the list was published, Senator Rubio and Representative Diaz-Balart quickly criticized “bureaucrats” at the State Department for failing to give enough muscle to the president’s directive.
Expanded Definition of “Prohibited Officials of the Government of Cuba”
As mentioned in our earlier advisory, a number of general licenses in the CACR and license exceptions in the EAR carve out transactions with “prohibited officials of the Government of Cuba” from the scope of otherwise authorized activities. For example, CACR general licenses otherwise authorizing the “unblocking” of Cuban nationals resident outside Cuba; receipt of payment for legal services; provision of telecommunications services to individuals in Cuba; people-to-people travel; certain types of remittances; and publishing and internet-based services each have limitations related to “prohibited officials of the Government of Cuba.” Similarly, the EAR license exceptions for Gift Parcels and Humanitarian Donations (GFT) and Consumer Communications Devices (CCD) carve out “prohibited officials of the Government of Cuba.”
On October 17, 2016, OFAC narrowed the definition of “prohibited official of the Government of Cuba” in the CACR to cover only the Council of Ministers and flag officers of the Revolutionary Armed Forces. However, the regulatory changes announced on November 9, 2017 revise the definition of “prohibited official of the Government of Cuba” in the CACR to revert back to the definition in place prior to October 17, 2016. BIS also made conforming changes to the EAR.
Accordingly, the definition of “prohibited officials of the Government of Cuba” in the CACR and EAR once again includes:
- Ministers and vice-ministers
- Members of the Council of State and the Council of Ministers
- Members and employees of the National Assembly of People’s Power
- Members of any provincial assembly
- Local sector chiefs of the Committees for the Defense of the Revolution
- Director Generals and sub-Director Generals and higher of all Cuban ministries and state agencies
- Employees of the Ministry of the Interior (MININT)
- Employees of the Ministry of Defense (MINFAR)
- Secretaries and first secretaries of the Confederation of Labor of Cuba (CTC) and its component unions
- Chief editors, editors, and deputy editors of Cuban state-run media organizations and programs, including newspapers, television, and radio
- Members and employees of the Supreme Court (Tribuno Supremo Nacional)
Therefore, there is a renewed and more extensive need to engage in due diligence for those attempting to conduct business in Cuba, so as to determine if an OFAC general license cannot be utilized by persons subject to US jurisdiction if involving or benefitting anyone in the now-expanded categories of prohibited officials of the Cuban government.
Changes to Cuba Travel Authorizations
Although the amendments to the CACR maintained general licenses for all 12 categories of authorized reasons to travel to Cuba, OFAC made two changes to these general licenses that will impact travel from the United States or by persons subject to US jurisdiction to Cuba. First, OFAC made several amendments to the general license authorizing educational travel, eliminating the authorization for individual “people-to-people” educational travel and limiting the scope of this general license to authorize only people-to-people travel conducted under the auspices of an organization. Second, when traveling under the general license for “support for the Cuban people,” travelers must now engage in a full-time schedule of activities that enhances contact with the Cuban people, supports civil society, or promotes the Cuban people’s independence. (As discussed above, OFAC also incorporated the prohibition on direct financial transactions with Cuba Restricted List designees into certain travel-related transactions.)
- Changes to authorized educational travel
OFAC made several amendments to the general license authorizing travel for “educational activities,” 31 CFR 515.565, including eliminating the authorization for individual “people-to-people” educational travel and adding requirements related to other authorized educational travel.
Changes to “people-to people” educational travel
Individual “people-to-people” educational travel (educational travel that does not involve academic study and does not take place under the auspices of a sponsoring organization) had been authorized since the January 27, 2011 amendments to the CACR, as described in our advisory. OFAC amended the CACR to eliminate this authorization.
Under the amended general license, all educational travel (including people-to-people travel) must be conducted under the auspices of an organization that is a person subject to US jurisdiction. In addition, all “people-to-people” travelers to Cuba are required to be accompanied by a person subject to US jurisdiction who is an employee, paid consultant, agent, or other representative of the sponsoring organization, in order “to ensure that each traveler has a full-time schedule of educational exchange activities[.]” Under limitations existing before the November 9 regulatory changes, people-to-people travel must be for the purpose of engaging, while in Cuba, in a full-time schedule of activities that enhance contact with the Cuban people, support civil society in Cuba, or promote the Cuban people’s independence from Cuban authorities; and result in meaningful interactions with individuals in Cuba.
Individuals who had already completed at least one travel-related transaction (such as purchasing a flight or reserving accommodation) prior to the June 16, 2017 presidential memorandum may engage in previously authorized related individual people-to-people travel and transactions.
Other changes to authorized educational travel
OFAC also added requirements that persons subject to US jurisdiction must fulfil in order to avail themselves of the educational travel general license, some of which reflect the CACR prior to January 2011 – before President Obama instituted significant revisions – and some of which reflect restrictions (but not prohibitions) to activities that have been permitted since 2015.
For example, travelers to Cuba under several categories of educational travel, such as travel related to research in support of obtaining a graduate degree at a US institution, will not be permitted to travel to Cuba absent proof of association with a US institution that is subject to US jurisdiction. The level of proof of institutional association differs depending on the type of US institution and the activity in which the traveler is engaged. Students and full-time faculty members of accredited US undergraduate or graduate degree-granting academic institutions, for instance, are authorized to engage – “under the auspices of the institutions” – in transactions related to programs of study, so long as the programs are at least 10 weeks long, and the participants obtain letters from the US institutions confirming the associations and supporting the travel. This amendment reflects the pre-2011 CACR.
Other categories of educational travel require the traveler to be accompanied by someone who is an employee or representative of the sponsoring US organization. The accompaniment requirement reflects a new restriction on activities that have been permitted since 2015.
- Heightened standard for travel related to “Support for the Cuban People”
The amended CACR now require that those traveling under the “Support for the Cuban People” general license (31 C.F.R. § 515.574) engage in a full-time schedule of activities that “(i) [e]nhance contact with the Cuban people, support civil society in Cuba, or promote the Cuban people’s independence from Cuban authorities; and (ii) [r]esult in meaningful interaction with individuals in Cuba.”
This amendment may not significantly restrict this general license, as the general license already required the traveler’s schedule to not include free time in excess of that consistent with a full-time schedule. Further, some activities that previously fell within the “people-to-people” travel category, but no longer do – because the travel does not fall under the auspices of a US institution – may still be authorized under the “Support for the Cuban people” general license. (See § 515.565(b), Example 2.)
Adjustments to Cuba Export Controls
Beyond its conforming change to the definition of “prohibited officials of the Government of Cuba” explained above, BIS made two additional adjustments to the EAR: (1) a general policy of denial for license applications to export items for use by entities and sub entities on the Cuba Restricted List; and (2) simplification and expansion of the license exception SCP.
- New BIS licensing policy regarding Cuba Restricted List designees.
In a January 27, 2016 rule, BIS eased its licensing policy for the export and reexport of items to meet the needs of the Cuban people, including exports and reexports of items to state-owned enterprises, agencies, and other organizations of the Cuban government that provide goods and services for the use and benefit of the Cuban people. In promulgating this rule in 2016, BIS clarified that it would continue to generally deny applications for the export or reexport of items destined to the Cuban military, police, intelligence, or security services, or for use by organizations that primarily generate revenue for the Cuban government.
On November 9, 2017, in accordance with the June 2017 presidential memorandum, BIS amended its licensing policy to clarify that it also generally will deny applications for the export or reexport of items subject to the EAR for use by entities or sub entities on the Cuba Restricted List, unless the transactions are determined by BIS, in coordination with the Department of State, to be consistent with the policy in the presidential memorandum. (For example, BIS might approve export or reexport license applications that relate to activities within the enumerated carve-outs described above, such as direct telecommunications and internet access for the Cuban people and the sale of agricultural commodities.)
In an FAQ accompanying the publication of the policy changes, BIS clarified that the November 9, 2017 rule change does not affect licenses issued by BIS prior to publication of the rule.
- Amendment of License Exception SCP
Section 2(d) of the presidential memorandum states that it shall be the policy of the executive branch to “[a]mplify efforts to support the Cuban people through the expansion of internet services, free press, free enterprise, free association, and lawful travel.” Consistent with this policy, BIS simplified and expanded License Exception SCP (15 CFR § 740.21).
License Exception SCP authorizes the export and reexport to Cuba of certain items for use by the Cuban private sector for private sector economic activities. Prior to the most recent changes, the license exception identified certain types of items, such as tools and equipment, that were eligible for export or reexport to Cuba for (1) use by the private sector to construct or renovate privately-owned buildings, (2) private sector agricultural activities, or (3) use by private sector entrepreneurs.
BIS simplified and expanded the license exception by authorizing the export and reexport to Cuba of items for use by the Cuban private sector for private sector economic activities, without specifying any types of activity or economic sectors. To be eligible for this license exception, the items may not be used to primarily generate revenue for the state or contribute to the operation of the state, including through the construction or renovation of state-owned buildings. Additionally, eligible items are limited to those that are designated as EAR99 or that are controlled for anti-terrorism reasons only on the Commerce Control List.
The November 9 regulatory changes, like the sanctions changes in President Trump’s June 2017 memorandum, are measured adjustments to the US Cuba sanctions program. These changes do not necessarily signal a death knell for many of the business and travel initiatives instituted by US businesses over the past few years. However, given the complexities of the US Cuba sanctions program, persons subject to US jurisdiction should carefully review these changes as they engage in business with or travel to Cuba. Those attempting to engage in transactions will likely need to conduct more extensive due diligence, given the publication of the Cuba Restricted List and the expanded definition of prohibited Cuban government officials.
*This article was posted originally on November 15, 2017 on the Steptoe International Compliance Blog and reposted with permission. Written by: Edward Krauland at +1 202 429 8083, Brian Egan at +1 202 429 8009, Jack Hayes at +1 202 429 6491, Anthony Rapa at +1 202 429 8120, or Peter Jeydel at +1 202 429 6291 in Steptoe Washington office, or Meredith Rathbone at +44 20 7367 8021 or Keith Huffmanat +44 20 7367 8057 in Steptoe London office.