Since Dec. 17, 2014, the United States has announced five major rounds of regulatory revisions aimed at normalizing relations with Cuba and easing sanctions against the island country. Each successive round has been designed to build a new regulatory framework bolstering the ability of U.S. businesses and individuals to engage in authorized activities with Cuba. These changes have had the most significant impact on travel and movement of U.S. persons to Cuba, facilitating financial transactions, loosened export control regulations, and increased investment and business opportunities. Nevertheless, it is important to consider that the core of the U.S. embargo on Cuba is based on several laws that remain in place and that cannot be revoked without Congressional action.
While Canadian individuals and corporations are generally exempt from compliance with U.S. sanctions, Canadian companies have nonetheless been affected by the sanctions, even if only indirectly, and stand to gain from the opening U.S. approach.
U.S. Sanctions against Cuba
The U.S. sanctions regime against Cuba is administered primarily under the Cuban Assets Control Regulations (CACR) and the Export Administration Regulations (EAR). These regulatory programs are administered by the Treasury Department's Office of Foreign Assets Control (OFAC) and the Commerce Department's Bureau of Industry and Security (BIS) respectively.
Until recently, U.S. nationals wanting to travel to Cuba had to obtain an individual license to do so and the nature of the travel needed to fall within one of 12 categories of "approved" travel (these include among others, family visits, educational activities, journalistic pursuits, professional research, people to people outreach, and religious activities). Travel under any of these categories is now pre-authorized by a general license, meaning individual license applications are no longer required and individuals will be permitted to travel to Cuba without requiring prior approval as long as it is for an authorized purpose. Transactions incidental to travel are also now permitted, including payment of living expenses and the acquisition in Cuba of goods for personal consumption while in-country, as is the use of credit and debit cards.
Notwithstanding the above, the legal prohibition on U.S. citizens travelling to Cuba for any other reason, including tourism, continues to be prohibited, which means an individual cannot simply board a plane bound for Cuba for a holiday, like Canadians can.
In order to facilitate increased travel to Cuba, direct carrier routes are in the process of being reestablished, and, to this end, certain activities, such as entry into previously blocked airspace and code-sharing arrangements, are now authorized to ensure proper aviation security for direct flights.
"U-turn" payments are now authorized for U.S. financial institutions, meaning that a Cuban national or a company in Cuba will be able to use the U.S. financial system to transfer funds to a third country, including processing payments in U.S. dollars, as long as the recipient at the end of the transaction is a bank outside the United States and where neither the originator nor the recipient is a person subject to U.S. jurisdiction.
Similarly, U.S. banking institutions are now authorized to process U.S. monetary instruments presented indirectly by Cuban financial institutions and to allow correspondent accounts in U.S. dollars to process transactions. This means that banks can now process U.S. dollar monetary instruments, such as cash and travelers' cheques, in connection with authorized transactions involving Cuba or Cuban nationals. In addition, the prohibition on a U.S. banking institution opening correspondent accounts for nationals of Cuba has been softened and, with some exceptions, a Cuban national may open a U.S. bank account.
Imports and Exports
The U.S. ban on Cuban imports remains in force with certain exceptions. One such exception is the general authorization to import Cuban mobile applications into the U.S. and to hire Cuban nationals to run them. Further, U.S. citizens may now purchase and consume Cuban goods in third countries. This means that the prohibition against a U.S. citizen purchasing and consuming a Cuban cigar in Canada has now been revoked. However, that same U.S. citizen cannot bring back any purchased Cuban-origin products back to the U.S.
In addition, certain consumer goods (i.e. consumer communications devices and hardware, personal computers, televisions and consumer software), can now be exported from the U.S. without a license. Similarly, most telecommunications items aimed at improving communications to, from and among the Cuban people are now generally approved for export.
Other categories of goods no longer requiring individual export permits for U.S. companies include:
- building materials for the construction of privately-owned buildings;
- tools and equipment for private agricultural sector; and
- tools, equipment and supplies for use by private sector entrepreneurs.
Further, on a case-by-case basis, OFAC may approve the export of items for the needs of the Cuban people, even if these items are destined to the Cuban state. These categories of goods include goods used for infrastructure, food processing, public health and sanitation, public transportation, residential construction and renovation, pollution control, disaster preparedness, relief and response, and education.
Investment and Business
Persons subject to U.S. jurisdiction can now establish and maintain a business presence in Cuba, including through subsidiaries, branches, offices, joint ventures and franchises with any Cuban individual or entity but only if this relationship is for the type of commerce authorized by OFAC, such as telecommunications services and internet-based services, mail or parcel delivery, cargo transportation services, and travel providers and other authorized carrier services.
OFAC is now also permitting a physical presence in Cuba of persons subject to U.S. jurisdiction in specific instances. Personnel working in news bureaus or for exporters of authorized agricultural products, mail or parcel transmission services, religious organizations or travel services are now authorized to travel to Cuba for work.
Further, U.S. financial institutions can now provide financing for all authorized, non-agricultural exports from the U.S. and re-exports of 100 per cent U.S.-origin items from third countries to Cuba. Under these revisions, this means that exports can now be performed through sales on an open account, financing by a U.S. financed institution or purchased through letters of credit where previously exports and re-exports of U.S.-origin goods could only be undertaken through cash-in-advance or third-country financing.
What does this mean for Canadian companies?
Most significant for Canadian companies is their ability to engage in trade with Cuba with greater certainty when it comes to the export of U.S.-origin goods and to transactions using U.S. currency or transiting through U.S. financial institutions.
Further, it may enable Canadian companies to increasingly rely on the U.S. banking system for commercial purposes. For example, the "U-turn" provision will allow funds to transit between Canada and Cuba through U.S. financial institutions. Further, Canadian companies may be able to rely on financing from U.S. banks for certain transactions.
Last, loosened export restrictions on U.S.-origin goods may enable Canadian companies to leverage opportunities for joint partnerships with U.S. companies to increase exports to the island.
Though policy and laws may change overnight, the implementation of these relaxed sanctions is still in its infancy. And, certain sectors may be slow to adapt to this new-found (relative) commercial liberty. One example is the banking industry, which continues to move slowly to take advantage of the relaxed embargo rule.
As has been evidenced in the past, financial institutions may be slow to provide the types of services now authorized by the United States Government until they have sufficient reassurances that their risks are minimized. Banks have apparently chosen to adopt a "wait-and-see" attitude until they receive clearer instructions from the U.S. government on their interpretation of the changes to the regulations. This may have a negative impact on pioneering companies, seeking to engage in Cuba but unable to conduct even the most basic transactions in-country. It may also restrict new advantages available to Canadian business seeking to enhance their business in Cuba.
In addition, Canadian exporters of U.S.-origin goods are still subject to Canadian requirements, including the requirement to obtain an export certificate for any export of U.S.-origin goods destined for Cuba. This means that, while the U.S. may have authorized the export of U.S.-origin personal computers to Cuba without a license, under Canadian law, a Canadian exporter is still required to seek authorization to ship these items from Canada.
In closing, notwithstanding the loosening of the U.S. Cuban embargo, the interaction between Canadian and U.S. legislation regarding trade with Cuba remains complex and Canadian firms will need to remain cognizant of the ever-changing legal landscape when doing business with Cuba. For example, Canada's anti-blocking legislation, the Foreign Extra-Territorial Measures Act (FEMA) and its associated Orders remain in place and prohibit Canadian companies from complying with U.S. sanctions legislation against Cuba. This can lead to challenges for Canadian entities with U.S. parents or affiliates. For more information on Canada's anti-blocking legislation, see our September 2016 article Canada's Foreign Extraterritorial Measures Act - A backgrounder for doing business in Cuba.
This article was co-written by Pedro Freyre from Akerman.