November 4, 2016
On October 14, 2016, the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury and the Bureau of Industry and Security ("BIS") of the U.S. Department of Commerce announced regulatory amendments implementing the Presidential Policy Directive on United States-Cuba Normalization issued by President Barack Obama the same day, and marking another step in advancing the shift in U.S. policy toward Cuba adopted by the Administration in December 2014. The regulatory amendments, implemented as revised sections of the Cuban Assets Control Regulations ("CACR") and the Export Administration Regulations ("EAR"), took effect on October 17, 2016 and, among other things, authorize certain transactions related to Cuban-origin pharmaceuticals, joint medical research, civil aviation safety-related services, and expand and clarify authorizations relating to trade and commerce, grants, and humanitarian-related services designed to directly benefit the Cuban people. Importantly, in furtherance of the President’s policy to support the Cuban people, BIS has significantly broadened its License Exception Support for the Cuban People ("SCP") to authorize direct sales, including through online platforms, of eligible consumer goods items to eligible individuals in Cuba for their personal use.
Background on Historic Changes to Cuba Sanctions Regime
On December 17, 2014, President Obama announced a historic shift in U.S. policy toward Cuba, calling for substantial changes in the diplomatic and economic relationships between the two countries. Since then, the U.S. government has instituted a number of significant changes affecting the broad embargo against Cuba–the State Department removed Cuba from the State Sponsor of Terrorism List, and the Department of the Treasury, in coordinated actions with the Department of Commerce, instituted several rounds of sanctions and export controls relief throughout 2015 and 2016.
In this latest action on October 14, 2016, President Obama issued the Presidential Policy Directive, "to continue to facilitate more interaction between the Cuban and American people, including through travel and commercial opportunities, and more access to information." Pursuant to this latest White House action, OFAC and BIS each announced their respective regulatory amendments on the same day. Supporting the rationale behind the amendments, Treasury Secretary Jacob J. Lew said:
"The Treasury Department has worked to break down economic barriers in areas such as travel, trade and commerce, banking, and telecommunications. Today’s action builds on this progress by enabling more scientific collaboration, grants and scholarships, people-to-people contact, and private sector growth. These steps have the potential to accelerate constructive change and unlock greater economic opportunity for Cubans and Americans."
Similarly, U.S. Secretary of Commerce Penny Pritzker noted that, "[t]hese amendments will create more opportunities for Cuban citizens to access American goods and services, further strengthening the ties between our two countries."
The significant changes brought about by the revised Treasury and Commerce regulations are outlined below.
Changes Affecting the Cuban Embargo
The relevant changes in the regulations, found in the CACR, 31 C.F.R. Section 515, and the EAR, 15 C.F.R. Parts 730-774, respectively, are described below.
Narrowing the Definition of Prohibited Officials:
- Definition of prohibited officials of the Government of Cuba and prohibited members of the Cuban Communist Party: OFAC is amending Sections 515.337 and 515.338 of the CACR to significantly narrow the definitions set forth in these sections. The definition of prohibited officials of the Government of Cuba in Section 515.537 is limited to mean members of the Council of Ministers and flag officers of the Revolutionary Armed Forces. The definition of prohibited members of the Cuban Communist Party in Section 515.538 is now limited to mean members of the Politburo. Likewise, BIS has made conforming changes revising its lists of Cuban government and Cuban Community Party officials by limiting the definition of ineligible officials to include members of the Council of Ministers, flag officers of the Revolutionary Armed Forces, and members of the Politburo. The significantly narrowed definitions of prohibited officials in Cuba mean that U.S. persons now have an expanded scope of potential business partners and counterparties in Cuba.
- Cuban-origin pharmaceuticals: OFAC amended CACR Section 515.547 to add a new general license authorizing the importation into the United States, and the marketing, sale, or other distribution in the United States, of Cuban-origin pharmaceuticals approved by the U.S. Food and Drug Administration ("FDA"). Specifically, transactions incident to obtaining approval from the FDA, including discovery and development, pre-clinical research, clinical research, regulatory review, regulatory approval and licensing, regulatory post-market activities, and the importation into the United States of Cuban-origin pharmaceuticals are authorized. This general license significantly opens up the opportunities for collaboration in the pharmaceuticals industry and means that U.S. persons and entities no longer have to get a specific authorization from OFAC to engage in the above-listed activities.
- Bank Accounts in Cuban Financial Institutions: Additionally, Section 515.547 authorizes persons subject to U.S. jurisdiction who are engaging in such authorized activities to open, maintain, and close bank accounts at Cuban financial institutions as long as such accounts are used solely for the authorized activities.
- Licensing Policy: For items that would not be authorized by the general license in Section 515.547(b), the statement of licensing policy for the importation of Cuban-origin commodities for bona-fide research purposes in sample qualities remains in effect.
- Joint medical research: Additionally, OFAC amended CACR Section 515.547 to authorize persons subject to U.S. jurisdiction to engage in joint medical research projects with Cuban nationals. Both non-commercial and commercial research between U.S. and Cuban nationals is now within the scope of this general license.
Trade and Commerce:
- Direct sales of consumer goods for personal use: In a fairly significant move, BIS has significantly broadened its License Exception Support for the Cuban People ("SCP"), 15 C.F.R. Part 740.21, to authorize exports or reexports of eligible consumer goods directly to eligible individuals in Cuba for their personal use or their immediate family’s personal use. See 15 C.F.R. Part 740.21(b)(4). Importantly, BIS has made clear that pursuant to EAR Section 740.21(b)(4), eligible items, including consumer goods, may now be sold by online retailers and others that sell consumer products directly to end users. To be eligible, items must be designated as EAR99 or be controlled on the Commerce Control List ("CCL") only for anti-terrorism reasons. Additionally, eligible purchasers and end-users must not be members of the Council of Ministers, flag officers of the Revolutionary Armed Forces or members of the Politburo.
- This authorization provides significant room for potential business activity by U.S. entities seeking to export consumer goods to Cuba. The new authorization builds upon existing License Exception SCP provisions, which authorize, inter alia, the export of certain items, such as consumer goods, for use by Cuban private sector entrepreneurs. Cuban domestic retailers would qualify as Cuban private sector entrepreneurs as long as they are not state-owned enterprises and are not otherwise associated with the Cuban Government.
- Transactions incident to exports and reexports to Cuba: Pursuant to CACR Section 515.533(a), transactions ordinarily incident to certain exportations of items from the United States and reexportations of items from a third country to Cuba are authorized, provided such exportations or reexportations are authorized by the Department of Commerce. OFAC made clarifying changes to the provision and added a note to Section 515.533(a) stating that the provision authorizes the importation into the United States of items from a third country for exportation to Cuba pursuant to a license or other authorization by the Department of Commerce. These regulatory amendments are consistent with OFAC’s "one-stop-shop" policy of Section 515.533, pursuant to which no additional OFAC authorization is needed if the exports or reexports to Cuba are authorized by the Department of Commerce.
- Importation of previously exported/reexported items to Cuba for service and repair: OFAC additionally amended CACR Section 515.533 to add a new general license authorizing the importation into the United States or a third country of items previously exported or reexported to Cuba pursuant to Sections 515.533 or 515.559, allowing the recipients of authorized exports or reexports to return the items to the United States or a third country, including for service and repair. Additionally, pursuant to the new general license, persons subject to U.S. jurisdiction are authorized to service and repair such items. However, the exportation or reexportation of serviced, repaired, or replacement items to Cuba must be separately authorized pursuant to Sections 515.533(a) or 515.559, in addition to any required Department of Commerce authorizations. This means that items previously exported to Cuba pursuant to CACR Sections 515.533 or 515.559 can now be returned to the U.S. or the third country from which they were exported or imported into the U.S. or the third country for service and repair and U.S. persons are authorized to service and repair such items.
- Vessel transactions: Pursuant to CACR Section 515.207(a), foreign vessels that call on Cuban ports for trade purposes are prohibited from entering U.S. ports for the purpose of loading or unloading freight for 180 days from the date they depart Cuba, absent OFAC authorization. OFAC amended Section 515.550 of the CACR by adding an additional exception to the prohibition in Section 515.207(a), allowing foreign vessels that have carried from a third country to Cuba only items that, were they subject to the EAR, would be designated as EAR99 or would be controlled on the Commerce Control List only for antiterrorism reasons.
- Contingent contracts: OFAC added a general license in Section 515.534, authorizing persons subject to U.S. jurisdiction to enter into contingent contracts for otherwise prohibited transactions and to engage in transactions ordinarily incident to negotiating and entering into such contracts, provided that the performance of such contracts must be made contingent on OFAC (and any other Federal agency) authorization of the underlying transactions. This general license means that U.S. persons may now negotiate and enter into contracts related to business opportunities in Cuba, provided that performance of such contracts is made contingent on OFAC authorization.
- Services related to developing Cuban infrastructure: OFAC added Section 515.591 to the CACR to authorize persons subject to U.S. jurisdiction to provide Cuba or Cuban nationals with services related to developing, repairing, maintaining, and enhancing Cuban infrastructure, consistent with the export or reexport licensing policy of the Department of Commerce. "Infrastructure" is broadly defined to mean systems and assets used to provide the Cuban people with goods and services produced by public transportation, water management, waste management, non-nuclear electricity generation, electricity distribution sectors, hospitals, public housing, and primary and secondary schools. This general license significantly expands the potential industry sectors and professionals that are now authorized to provide services to the Cuban people.
- Additional grants, scholarships, and awards: Pursuant to CACR Sections 515.565 and 515.575, provision of grants, scholarships, and awards in which Cuba or Cuban nationals have an interest (including as recipients) were previously authorized with respect to educational and humanitarian activities, respectively. OFAC expanded the authorization to two additional categories of activities – scientific research and religious activities - and consolidated these authorizations in a new Section 515.590.
- Importation of Cuban merchandise: Pursuant to CACR Section 515.560, persons subject to U.S. jurisdiction engaging in authorized travel to Cuba were authorized to acquire merchandise in Cuba and import it into the United States as accompanied baggage for personal use, provide that the merchandise had value of $400 or less, with no more than $100 of such merchandise consisting of alcohol or tobacco products. With the most recent round of amendments, OFAC removed the monetary value limits, authorizing merchandise to be imported as accompanied baggage for personal use.
- Transactions in third countries: Pursuant to CACR Section 515.585, persons subject to U.S. jurisdiction but located outside the United States or Cuba were authorized to purchase merchandise otherwise prohibited by CACR Section 515.204, provided that the merchandise was for personal consumption while in a third country. OFAC is now amending Section 515.585 to remove the limitation that the merchandise must be consumed while abroad, to authorize importation of such merchandise into the United States as accompanied baggage, provided that it is for personal use only.
- Foreign passengers’ baggage: OFAC is amending CACR Section 515.569, which previously authorized foreign passengers to import Cuban-origin goods, except Cuban-origin tobacco and alcohol products, as accompanied baggage, to remove the exclusion for alcohol and tobacco products. The conditions remain that the goods not be in commercial quantities and not be imported for resale.
- Professional research and professional meetings in Cuba: OFAC amended the general license in CACR Section 515.564, authorizing persons subject to U.S. jurisdiction to travel to Cuba for purposes of attending or organizing professional meetings or conferences, to remove the restriction in Section 515.564(a)(2)(i) that the purpose of such meetings or conferences not be for the promotion of tourism in Cuba.
- Remittances for third-country national travel: OFAC amended CACR Section 515.570 to authorize persons subject to U.S. jurisdiction to make remittances to third-country nationals for travel by third-country nationals to, from, and within Cuba, provided that such travel would be authorized by a general license if the traveler were a person subject to U.S. jurisdiction.
- Civil aviation safety-related services: OFAC amended CACR Section 515.572, adding a new general license authorizing persons subject to U.S. jurisdiction to provide Cuba and Cuban nationals, wherever located, with services aimed at ensuring safety in civil aviation and the safe operation of commercial aircraft. This general license significantly expands opportunities for the civil aviation sector to provide services in Cuba and to Cuban nationals.
The most recent amendments announced by OFAC and BIS now permit a wider range of activity in Cuba for persons subject to U.S. jurisdiction. In particular, the OFAC general licenses authorizing transactions incident to and importation of FDA-approved Cuban-origin pharmaceuticals, services related to Cuban infrastructure, provision of civil aviation safety-related services and importation of previously exported items for maintenance and repair, as well as authorization to enter in contingent contracts for transactions prohibited by the embargo subject to OFAC approval, provide for broader opportunities of engagement with the Cuban market. The BIS amendment to License Exception SCP now facilitates direct sales to individuals in Cuba by online retailers and others that sell eligible consumer products directly to end users. Additionally, persons subject to U.S. jurisdiction are now permitted to engage in a wider scope of educational and professional collaboration, including through joint medical research, travel and importation of Cuban merchandise for personal use. It is important to note, however, that the embargo on Cuba remains in place and U.S. companies contemplating business activity in Cuba should proceed with caution and ensure their contemplated activities, including transactions incidental to the underlying business activity, are authorized.
 Press Release, The White House, Presidential Policy Directive – United States-Cuba Normalization (Oct. 14, 2016), https://www.whitehouse.gov/the-press-office/2016/10/14/presidential-policy-directive-united-states-cuba-normalization.
 Press Release, The White House, Statement by the President on Cuba Policy Changes (Dec. 17, 2014), http://www.whitehouse.gov/the-press-office/2014/12/17/statement-president-cuba-policy-changes. For a detailed summary of these developments and the regulatory changes implemented since 2014, please see Gibson Dunn Client Alert: U.S. Government Takes First Step Toward Normalizing Relations with Cuba; Restores Diplomatic Ties and Eases Trade Sanctions (Dec. 18, 2014), available at http://www.gibsondunn.com/publications/Pages/US-Government-Takes-First-Step-Toward-Normalizing-Relations-with-Cuba.aspx; Client Alert: U.S. Department of the Treasury and Department of Commerce Issue Rules Implementing Changes in U.S. Policy on Cuba (Jan. 20, 2015), available at http://www.gibsondunn.com/publications/Pages/US-Dept-of-Treasury-and-Dept-of-Commerce-Issue-Rules-Implementing-Changes-in-US-Policy-on-Cuba.aspx; and Client Alert: 2015 Year-End Sanctions Update (Feb. 2, 2016), available at http://www.gibsondunn.com/publications/Pages/2015-Year-End-Sanctions-Update.aspx.
 Press Release, The White House, Statement by the President on the Presidential Policy Directive on Cuba (Oct. 14, 2016), https://www.whitehouse.gov/the-press-office/2016/10/14/statement-president-presidential-policy-directive-cuba.
 Press Release, U.S. Department of the Treasury, Treasury and Commerce Announce Further Amendments to Cuba Sanctions Regulations (Oct. 14, 2016), https://www.treasury.gov/press-center/press-releases/Pages/jl0581.aspx.
 The term "person subject to U.S. jurisdiction" means (a) any individual, wherever located, who is a citizen of the United States, (b) any person within the United States, (c) any corporation, partnership, association, or other organization organized under the laws of the United States or of any State, territory, possession, or district of the United States, and (d) any corporation, partnership, association, or other organization, wherever organized or doing business, that is owned or controlled by persons specified in (a) or (c). See 31 C.F.R. § 515.329.
The following Gibson Dunn lawyers assisted in the preparation of this client alert: Judith Alison Lee, Adam M. Smith, David A. Wolber and Kamola Kobildjanova.
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