November 16, 2017
On November 8, 2017, the Treasury Department’s Office of Foreign Assets Control (“OFAC”), the Commerce Department’s Bureau of Industry and Security (“BIS”), and the State Department released amendments to the Cuban Assets Control Regulations (“CACR”) and Export Administration regulations (“EAR”), effective November 9, 2017, implementing President Trump’s June 16, 2017 National Security Presidential Memorandum (“NSPM”), “Strengthening the Policy of the United States Towards Cuba.”[1] Additionally, while certain transactions with Cuban parties by U.S. persons remain permitted, the CACR now prohibit transacting with entities listed on the State Department’s new “Cuba Restricted List” (“List”), which was released simultaneously and consists of Cuban entities that the Administration considers to be “under the control of, or act for or on behalf of, the Cuban military, intelligence, or security services personnel.”[2]
Days earlier, United States Ambassador to the United Nations Nikki Haley rebuked the General Assembly’s adoption of its annual resolution calling for the end of the U.S. embargo on Cuba, which was overwhelmingly approved with 191 of the 193 member states voting in favor. In her remarks, Ambassador Haley proclaimed that the American people have spoken by choosing a new President, and that the United States will stand with the Cuban people and against the suffering and abuses inflicted by the Cuban government.[3]
We have previously detailed President Trump’s June 2017 announcement that his administration would reimpose some of the sanctions on Cuba that were relaxed under President Obama. Broadly speaking, the recent amendments achieve the goals articulated in the announcement: keeping the Grupo de Administración Empresarial, a conglomerate run by the Cuban military, from benefiting from the opening in U.S.-Cuba relations and enhancing travel restrictions to “better enforce” the existing ban on U.S. tourism to Cuba.[4]
As detailed below, certain provisions of the amendments allow for continued travel to, and, with respect to the Cuban private sector, increased trade with Cuba. While this can be viewed as consistent with the Administration’s declared goal of “channel[ing] economic activities away from the Cuban military, intelligence, and security services, while maintaining opportunities for Americans to engage in authorized travel to Cuba and support the private, small business sector in Cuba,”[5] these provisions, when viewed together with the increased restrictions, muddy the already difficult-to-navigate regulatory waters.
The new OFAC and BIS amendments cover three main areas:
First, the OFAC amendments now prohibit U.S. persons and entities from engaging in direct financial transactions with entities listed on the State Department’s new “Cuba Restricted List,” while the BIS amendments state that BIS will generally deny license application for the export of items for use by entities on the list.[6] The List includes over 175 entities and sub-entities that operate in a variety of economic sectors, notably, over 80 of which are hotels.[7]
Second, the OFAC amendments restrict people-to-people travel that had previously been authorized, requiring, among other things, that nonacademic educational travel be conducted under “the auspices of an organization that is a person subject to U.S. jurisdiction and that sponsors such exchanges to promote people-to-people contact” and that such travelers are accompanied by a representative of that organization and participate in full-time schedule of activities.[8]
Third, BIS has simplified the Support for the Cuban People (“SCP”) License Exception to the Cuba Embargo, now allowing for the export of all EAR99 items (and those controlled only for anti-terrorism reasons on the Commerce Control List (“CCL”)) to Cuba, provided the intended end user is in the Cuban private sector.[9]
What is Prohibited:
According to OFAC’s amended regulations, those under U.S. jurisdiction are now prohibited from engaging in direct financial transactions with those on the State Department’s new Cuba Restricted List.[10] Additionally, BIS has instituted a policy of general denial of any application for license to export to Cuba where the end-user is on the List.[11] Importantly, though, U.S. persons and entities that have already entered into “contingent or other types of contractual arrangements” prior to the issuance of the new regulations on November 9, 2017 (or the date on which the listed entity was added to the List), will be permitted to proceed with the transactions.[12] This qualification is significant and suggests that the substantial investments made in Cuba by various U.S. parties since the Obama Administration’s easing of sanctions may not need to be unwound.
Who is on the List:
As noted, the Cuba Restricted List contains over 175 entities and subentities that are now blacklisted from engaging in financial companies with persons and entities under U.S. jurisdiction. In addition to the over 80 hotels previously mentioned, the list contains Cuban ministries, holding companies and their subentities, retail stores, and manufacturers (including those in the beverage, fashion, real estate, rum production, and other industries).[13]
Who is not on the List:
Interestingly, however, the State Department has clarified that entities or subentities controlled by those on the List are not treated as restricted unless also specified by name. Almost all other U.S. sanctions programs operate according to the “50 Percent Rule” which provides that non-listed entities owned or controlled by a listed entity (or entities) are automatically and identically restricted. However, in this context, U.S. entities and individuals may continue to transact with those non-Listed entities and subentities.[14] For instance, though the list includes the holding company Corporación CIMEX, S.A., it does not include Fincimex which is its financial services arm (and is involved in all remittances to the island). This too is an important qualification that eases the impact of some of the new prohibitions.
As mentioned, the OFAC amendments eliminate the authorization for individual person-to-person educational travel to Cuba. Instead, individuals who desire to travel to Cuba on this basis must do so under the auspices of an organization that is “subject to U.S. jurisdiction and sponsors such exchanges to promote people-to-people contact,” and the individual traveler must be accompanied by a representative of the sponsoring organization.[15] Further, those traveling under this general license must maintain a “full-time schedule of education exchange activities intended to enhance contact with the Cuban people, support civil society in Cuba, or promote the Cuban people’s independence from Cuban authorities, and that will result in meaningful interaction between the traveler and individuals in Cuba.”[16] Of course, all authorized travel must now exclude direct financial transactions with those entities included on the Cuba Restricted List.[17]
Despite these new restrictions, individuals who have made travel plans under the pre-amendment regulations may proceed with their plans, so long as certain requirements are met. For example, individuals who made person-to-person travel plans and completed at least one travel-related transaction prior to June 16, 2017 may engage in person-to-person travel and related transactions.[18] Moreover, OFAC has stated that any authorized travel (under any of the travel licenses) that has already been “initiated” that involves direct financial transactions with entities on the Cuba Restricted List will continue to be permitted so long as “those travel arrangements were initiated prior to the State Department’s addition of the entity or subentity to the list.”[19] The vague wording of this exception leaves open the question of what constitutes an already “initiated” authorized travel and what is considered to “involve a direct financial transaction” with an entity on the Cuba Restricted List.[20] The fact that transactions with unlisted entities owned or controlled by listed parties remain permitted further complicates the situation.
The last significant amendment to the Cuba sanctions regime relates to the Support for the Cuban People (“SCP”) License Exception. In October 2016, BIS had already broadened the Exception to authorize direct sales, including through online platforms, of eligible consumer goods to eligible individuals in Cuba for their personal use. The Exception had listed certain types of items that qualified for export, including “tools and equipment,” so long as those items were for use by, inter alia, private sector entrepreneurs.[21] The current amendments remove the categorical requirements and allow for the export to Cuba of all items designated EAR99 or those controlled only for anti-terrorism reasons on the CCL, so long as they are for use by the Cuban private sector for private sector economic activities.[22]
While the amendments categorize this change as a “simplification,” it broadens the scope of the License Exception by alleviating the burden of determining whether items qualify for export under the License’s prior categorizations.
It is too early to tell whether these amendments signify that an eventual return to the pre-Obama era nearly total embargo is imminent. Recent stories about human rights abuses in Cuba, attacks on U.S. diplomats in Havana, and the expulsion of various Cuban diplomats serving in the United States are not a promising sign. However, while the regulations certainly impose new limits on parties with whom U.S. persons may transact and claw back the types of permitted travel, the amendments do not fully rescind any of the Obama era authorizations. Indeed, the amendments leave open the door to continued trade through grandfathering in pre-existing contracts and travel-related transactions with parties on the Cuba Restricted List, allowing person-to-person travel if such travel plans were made prior to the issuance of the new regulations, and simplifying the SCP License Exception.
The amendments additionally raise further questions: What qualifies as an existing “contingent or other types of contractual arrangement” with an entity on the List? Can such contracts be renewed in perpetuity? What is the rationale behind including some Cuban military controlled entities on the List and not others, and will the authorization to trade with the non-listed subentities of blacklisted entities persist? How many additional Cuban entities will be added to the Restricted List? What constitutes “initiated” for the purposes of existing person-to-person travel plans? OFAC and BIS will need to clarify these and other ambiguities in the time ahead.
Despite the political rhetoric, the doors to Cuba, unlocked by the previous administration, remain open. While the amendments certainly restrict certain activities, they do not go so far as to completely revoke the previous administration’s authorizations. Perhaps most significantly, the prohibitions against transacting with those on the Cuba Restricted list undoubtedly will hamper future economic opportunities especially in the core tourism sector which was a primary focus of the State Department’s list. Nevertheless, even the Department’s list is partial, allowing transactions with non-listed subentities. Moreover, the “simplification” of the SCP License Exception removes doubt concerning permissible items for export to the Cuban private sector – which may allow greater certainty with respect to the rules of the road for those entities who seek to take advantage of the narrower opportunities for trade and travel.
[1] See Fact Sheet, “Treasury, Commerce, and State Department Implement Changes to the Cuba Sanctions Rules” (Nov. 8, 2017), https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_fact_sheet_11082017.pdf.
[3] Meetings Coverage, “As General Assembly Adopts Annual Resolution Urging End to United States Embargo on Cuba, Delegates Voice Concern About Possible Reversal of Previous Policy (Nov. 1, 2017), https://www.un.org/press/en/2017/ga11967.doc.htm.
[4] Fact Sheet, “White House Fact Sheet on Cuba Policy” (June 16, 2017), https://www.whitehouse.gov/blog/2017/06/16/fact-sheet-cuba-policy.
[5] Fact Sheet, “Treasury, Commerce, and State Department Implement Changes to the Cuba Sanctions Rules” (Nov. 8, 2017), https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_fact_sheet_11082017.pdf.
[7] See 82 Fed. Reg. 52089 (Nov. 9, 2017), https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24449.pdf.
[8] 31 C.F.R. § 515.565(b), https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24447.pdf?utm_campaign=pi%20subscription%20mailing%20list&utm_source=federalregister.gov&utm_medium=email.
[9] 15 C.F.R. § 740.21, https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24448.pdf.
[10] 31 C.F.R § 515.209, https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24447.pdf?utm_campaign=pi%20subscription%20mailing%20list&utm_source=federalregister.gov&utm_medium=email.
[11] 15 C.F.R. § 746.2, note to (b)(3)(i), https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24448.pdf.
[12] OFAC, “Frequently Asked Questions Related to Cuba” (Updated Nov. 8, 2017), at 22-23, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_faqs_new.pdf.
[13] See 82 Fed. Reg. 52089 (Nov. 9, 2017), https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24449.pdf. The State Department may add additional entities or subentities in the future. See id.
[14] See Department of State, “Frequently Asked Questions on the Cuba Restricted List” (Nov. 8, 2017),https://www.state.gov/e/eb/tfs/spi/cuba/cubarestrictedlist/275382.htm.
[15] OFAC, “Frequently Asked Questions Related to Cuba” (Updated Nov. 8, 2017), at 5-6, https://www.treasury.gov/resource-center/sanctions/Programs/Documents/cuba_faqs_new.pdf. According to OFAC’s FAQ’s, an organization for this purpose “is an entity that sponsors educational exchanges that do not involve academic study pursuant to a degree program that promote people-to-people contact.” Id. at 6. Similarly, the amendments restrict authorized educational travel (travel under the auspices of an academic educational program) to be conducted under the auspices of an organization that is subject to U.S. jurisdiction. See id. at 4-5.
[18] Id. at 6. Interestingly, educational travel that is not compliant with the amended regulations that was planned will be permitted so long as at least one transaction occurred prior to the date the regulations went into effect (November 9, 2017) and not the date of the announcement (June 16, 2017). See id. at 5.
[20] OFAC provides examples of “initiated” travel arrangements elsewhere in the FAQs as “at least one travel-related transaction (such as purchasing a flight or reserving accommodation).” See id. at 3. However, it is unclear whether this definition applies broadly, and if so, what other activities may constitute a “travel-related transaction.”
[21] Final Rule, Amendments to Implement United States Policy Toward Cuba, at 5, https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-24448.pdf.
The following Gibson Dunn lawyers assisted in preparing this client update: Adam Smith, Judith Alison Lee, Caroline Krass, Christopher Timura and Jesse Melman.
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