Cuba: Opening for Business?

Yes, but strict rules and penalties apply

by RaeAnne Marsh

Cuba

What’s important for people eyeing opportunity for business in Cuba to keep in mind is, in spite of the opening of diplomatic relations, there still is a U.S.-Cuba embargo in place. Lifting the embargo will take an act of Congress; what has changed, explains Melissa Proctor, a partner in the law firm Polsinelli, is the two agencies that have jurisdiction over commerce under the embargo have liberalized the rules.

The Treasury Department’s Office of Foreign Assets Control (OFAC) will allow businesses to import commercial goods from Cuba under certain conditions: One is that the items not be specified on the Section 515.582 List published by the State Department (which does still include Cuban cigars and Cuban rum). The other is that the goods be produced by an independent Cuban entrepreneur. While the latter is a growing sector, Proctor notes that most companies in Cuba are owned or controlled by the Cuban government. “Our government wants to encourage the flourishing of private companies separate from the Cuban government,” Proctor explains.

In evaluating the attractiveness of the opportunity, businesses need also factor in the duty imposed on imported goods. Whether the duty rates are lower (“Column 1”) or higher (“Column 2”) depends on the country the goods are coming from, and Cuba’s are at the higher rate. The difference is significant, as Proctor’s examples demonstrate: The duty on golf shoes from countries in Column 1 is 6 percent of the value of the goods; from countries in Column 2, 35 percent. Umbrellas from countries in Column 1 are duty-free; from countries in Column 2, the duty is 40 percent.

Export falls under the jurisdiction of the Commerce Department’s Bureau of Industry and Security. Everything exported from the U.S. requires a license to go to Cuba, under the BIS’s Export Administration Regulations (EAR), including re-exports from another country. But, explains Susan Kovarovics, an attorney with law firm Bryan Cave, there are license exceptions for certain sectors and certain users. The broadest is “Support for the Cuban People,” which includes tools and equipment for entrepreneurs such as barbers and hair stylists, auto mechanics and restaurateurs. Taking advantage of a license exception instead of applying for a specific license to export “removes an application step and the time lag of having to wait for approval from the agency,” Kovarovics explains. But she cautions, “It puts the burden on the party using the license exception to self-police to make sure he is meeting all the criteria.”

Approval through the Commerce Department can take several weeks, and OFAC even longer, according to Proctor, who explains OFAC has fewer licensing officers.

“Tourist travel is still off the table,” Kovarovics says, adding that a lot of people-to-people exchanges have been coordinated but there are restrictions as to schedule and use of time on the ground. However, the rule changes of last September allow U.S. businesses to establish an office and hire local people as well as people subject to U.S. jurisdiction to man that office — “so they can start to do more on-the-ground activity with respect to authorized activities,” she explains. Even a U.S. citizen could stay there, then, if he is doing work related to activities that are authorized instead of having to travel back and forth under one of the general licenses for certain types of travel.

Opportunity has existed in certain sectors for some time, namely agricultural commodities, medicine and medical devices. With the expanded opportunities, Proctor sees the greatest opportunities in the electrical and telecom industries and building equipment and materials.

But Kovarovics emphasizes, “If companies do business in Cuba, it’s important they continue to be aware that the burden of due diligence is on them.” Penalties that can be imposed are “not insignificant,” she notes. Under the EAR, civil penalties can be as much as $250,000 per violation or twice the value of the transaction, and criminal penalties can be imposed up to $1 million per violation and/or 20 years in prison. Under OFAC, civil penalties can be up to $65,000 per violation; criminal, up to $250,000 or twice the value of the transaction, or up to 10 years in prison. (Prison terms apply only to individuals; civil penalties are applicable to both individuals and companies.)

Additionally, a company could lose its export privileges and government contracting privileges. There is also a reputational risk. “If a company is subject to enforcement action that goes to a penalty, that is public. There can be negative press, plus the time and effort associated with the investigation.” And, Kovarovics points out, even if the company succeeds in proving itself not liable, it still has significant costs and effort associated with that investigation.

“Business with Cuba is a very limited opportunity, but at least it’s a start,” Proctor observes. Not only are there more opportunities available now to businesses, but, says Kovarovics, “they have a little more flexibility.”

Susan Kovarovics is a partner with Bryan Cave. She counsels foreign and domestic parties regarding international business regulatory matters involving the International Traffic in Arms Regulations, the Export Administration Regulations, sanctions administered by the Office of Foreign Assets Control, U.S. anti-boycott laws, and the Foreign Corrupt Practices Act.

Melissa Proctor is a Shareholder with Polsinelli. She has extensive experience advising clients in diverse industries on a wide array of issues involving international trade, customs law, export controls, embargoes and economic sanctions, ant-corruption compliance and other government agency requirements.

 

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