US Sanctions: Spotlight On Cuba
The U.S. maintains a comprehensive sanctions program against Cuba, generally prohibiting all trade between the two nations, subject to multiple exceptions. In a previous article we addressed U.S. comprehensive sanctions generally, focusing on Iran, Syria and North Korea. Because the Cuba sanctions program has several idiosyncrasies that are unique to Cuba we address the Cuba sanctions program on its own.
Background to Cuba sanctions
The Cuba sanctions program is the oldest U.S. sanctions program still in existence. It was enacted in the wake of the 1959 Castro revolution in Cuba, and crystalized in essentially its current form in 1963 with the promulgation of the Cuban Assets Control Regulations. As a result, it does not follow the same template as other U.S. sanctions programs.
Cuba sanctions in general: Comprehensive but porous
In some respects, the Cuba sanctions program can be thought of as comprehensive but porous. The general rule is that all transactions between the U.S. or U.S. persons and Cuba are prohibited. But this general rule is followed by multiple exceptions and qualifications that permit limited trading between the U.S. or U.S. persons and Cuba. The scope of these exceptions has varied substantially over the past several years. In general, former President Obama expanded the range of permitted trading with Cuba. Many, but not all, of these changes have been reversed by President Trump.
However, regardless of the administration, the general rule has been and remains that most trade between the U.S. or U.S. persons and Cuba is prohibited.
The U.S. also maintains an embargo on Cuba, generally prohibiting the export to Cuba of goods from the U.S., and the reexport from other countries of U.S. origin items. For this purpose, non-U.S. origin items with more than de minimis U.S. origin content are treated as U.S. origin items. Historically, the de minimis threshold was 25%, which was higher than the 10% threshold applicable to many other programs. However, in October 2019, President Trump lowered the de minimis U.S. origin threshold to 10%. As with other sanctions, limited trading of certain U.S. origin goods to Cuba is permitted under general licenses (which apply to all or parties) or specific licenses (which a specific party may apply for). However, for most items, the Bureau of Industry and Security (BIS), which is part of the U.S. Department of Commerce, maintains a general policy of denial of license requests.
Trading With the Enemy Act
Unlike most U.S. sanctions programs, which fall under the International Emergency Economic Powers Act of 1977 (IEEPA), the Cuba sanctions program falls under the authority of the Trading With the Enemy Act of 1917 (TWEA). The most important practical difference between the two is that penalties under the TWEA are lower than under the IEEPA. The highest civil penalty per transaction under the IEEPA is generally the greater of twice the value of the underlying transaction and $250,000 (inflation-adjusted, currently at $307,922). In contrast, the highest civil penalty per transaction under the TWEA is generally $50,000 (inflation-adjusted, currently at $90,743). However, the “per transaction” qualification is key. Each transaction is treated separately for this purpose, so an ongoing pattern of trade with Cuba that takes the form of multiple “transactions” can very quickly add up to substantial penalties.
Extrarterritoriality and facilitation
Unlike many other sanctions programs, the Cuba sanctions program is purely a primary sanctions program. It applies to U.S. persons and U.S.-origin goods, technology and services, but does not generally apply to non-U.S. persons, who are free to deal with Cuba. However, there are several important qualifications:
Subsidiaries of U.S. persons – The Cuba sanctions apply in full to non-U.S. entities that are owned or controlled by U.S. persons. This generally covers both subsidiaries and 50/50 joint ventures between a U.S. and non-U.S. person. This rule has resulted in several examples of accidental noncompliance. Because most other countries treat Cuba the same as any other non-sanctioned country, a locally managed non-U.S. subsidiary or joint venture of a U.S. person may not realize that its trading with Cuba constitutes a violation until it is too late;
Facilitation – Unlike many other sanctions programs, the Cuba sanctions program does not include an explicit prohibition on “facilitation” (which generally means a U.S. person providing goods, financing or services to a non-U.S. person to assist the non-U.S. person’s transaction with a sanctioned person or country). As a result, it has been theorized in the past that U.S. persons could facilitate a transaction with Cuba without triggering a violation. However, any such argument has effectively been negated in the past few years, as OFAC has pursued multiple violations against U.S. persons for facilitating trade with Cuba. Most recently, on October 1, 2020, Generali Global Assistance, Inc., a U.S. travel service provider, was fined for indirectly insuring Canadian travellers’ trips to Cuba by (a) paying Canadian travelers directly for expenses incurred in Cuba, and (b) reimbursing its Canadian affiliate for payments directly to Cuba. Notwithstanding the fact that the U.S. company did not deal directly with Cuba in any respect, it was assessed (and agreed to pay) a $5,864,860 fine (because each payment to or in respect of a traveller was treated as a separate “transaction,” the potential penalty was an eye-popping $168,545,000); and
U-Turn License – In general, even non-U.S. persons cannot deal in U.S. dollars with sanctioned persons or countries because all or almost all U.S. dollar transactions are cleared through U.S. financial institutions. The Cuba sanctions program previously contained a “U-Turn License” (so-called because U.S. dollar wire transfers enter the U.S. and then make a “U-Turn” back out), which permitted the use of U.S. dollars in trading with Cuba (albeit with restrictions). However, in September 2019, President Trump revoked the U-Turn license. As a result, parties dealing with Cuba generally cannot use U.S. dollars unless they can rely on another exception.
CUBA cruises and hospitality: The pendulum swings back and forth
The history of U.S.-Cuba travel and cruises highlights the constantly changing nature of Cuba sanctions. In general, U.S. persons may travel to Cuba if they fall within one of 12 exceptions to the general prohibition on travel, such as participation in educational activities. Within the exception for educational activities was a subcategory known as “people-to-people” travel. Under the “people-to-people” exception, U.S. persons generally could travel to Cuba, and U.S. cruise companies could travel from the U.S. to Cuba, so long as participants engaged in a full-time schedule of activities that enhanced contact with the Cuban people. Although the exception imposed numerous requirements, such as record-keeping and a requirement that participants not engage in “tourist” activity, “people-to-people” cruises proved a popular option for U.S. passengers and cruise companies to engage in Cuba cruises.
The history of people-to-people cruises dates back to 1999, when former President Clinton first implemented the program, permitting cruise operators to apply for a license from OFAC to conduct the cruises. In 2003, former President Bush revoked the licensing process, but it was reinstated in 2011 by former President Obama. In 2015, former President Obama eased the restrictions by issuing a “general license,” which meant that cruise operators could conduct people-to-people cruises without obtaining a specific license from OFAC. The requirements were further eased in 2016, when former President Obama permitted U.S. persons to self-certify their compliance, effectively permitting non-U.S. cruise companies to engage in unmonitored people-to-people cruises. These last changes were revoked by President Trump in 2017, so that the compliance and monitoring requirements were reinstated, but cruise companies could continue to conduct people-to-people cruises from the U.S. to Cuba under the general license.
In June 2019, OFAC eliminated the people-to-people exception from the U.S. sanctions on Cuba. Not only was the general license revoked, but OFAC announced that it will adopt a general policy of denial with respect to applications for a specific license for people-to-people travel. In other words, the new rules revert to the state that existed prior to 2011, when people-to-people cruises were prohibited, not just the 2011-2015 period, when cruise companies could obtain a specific license for travel.
The Trump Administration has continued to limit the scope of legal travel to Cuba. Most recently, in September 2020, President Trump promulgated new regulations which, inter alia, prohibit U.S. persons from using lodging in Cuba that is identified as owned or controlled by the Cuban government or related parties, and prohibit the import into the U.S. of Cuban alcohol or tobacco for personal use.
In sum, travel between the U.S. and Cuba under the 12 exceptions remains permitted, but the scope of such legal travel has become more and more restricted.
180 Day Rule
A special rule applies to prevent ships that have traded to Cuba from trading to the U.S. shortly thereafter. Under the so-called “180 Day Rule,” a ship that has traded to Cuba generally may not enter a U.S. port to load or unload freight for a period of 180 days after the ship departed from Cuba. This creates a significant disincentive for even non-U.S.-owned ships to engage in completely legal trade with Cuba, since it means waiting half a year to trade with the U.S.
In October 2016, former President Obama issued a license permitting ships that had traded to Cuba to trade with the U.S. without waiting 180 days, so long as the only freight delivered to Cuba was non-U.S. origin goods, that would have been designated as “EAR99,” or subject to U.S. commerce controls only for anti-terrorism reasons. “EAR99” is shorthand for category 99 of the “Export Administration Regulations” (EAR), and consists of U.S. or U.S. origin items that generally do not require an export license. Most U.S. items are EAR99, especially since 2016, when crude oil was removed from the U.S. commerce control list.
Unlike many of the changes to the U.S. sanctions program promulgated by former President Obama, President Trump has left in place the changes to the 180 day rule. As a result, currently, ships that trade most goods to Cuba can call on a U.S. port without waiting 180 days. Shipowners and others are still required to confirm that the goods shipped to Cuba (a) are not of U.S. origin (or if they are of U.S. origin, that they qualify for a license), and (b) would be EAR99 (or controlled solely for anti-terrorism reasons) if they were subject to the EAR.
Helms-Burton Act, Title III
In 1996, the U.S. Congress enacted the Cuban Liberty and Democratic Solidarity (Libertad) Act, commonly referred to as the Helms-Burton Act after its principal sponsors. The Helms-Burton Act largely codified the existing Cuba sanctions program, making it difficult for the president to revoke the sanctions without Congressional approval.
Title III of the Helms-Burton Act creates a private right of action that permits U.S. nationals whose property was expropriated by the Cuban government following the 1959 revolution to bring a lawsuit in U.S. courts against those who “traffic” in such expropriated property. For this purpose, “trafficking” is defined very broadly to include most uses of the property, although it excludes “uses of property incident to lawful travel to Cuba,” to the extent necessary to the conduct of such travel. There are multiple other requirements and qualifications to bringing a Title III lawsuit.
Although Title III was enacted in 1996, it permitted the president to waive its applicability on an ongoing basis. Title III was consistently waived by all U.S. presidents until April 2019, when President Trump permitted it to take effect. Following the end of the waiver, multiple lawsuits have been brought against U.S.-based cruise companies for calling in Cuba. Specifically, the lawsuits have alleged that the Cuban ports (or the land on which they were built) were expropriated by the Fidel Castro government, and therefore that the cruise companies “trafficked” in such expropriated ports. The cruise companies have brought motions to dismiss on multiple grounds (including the claim that their use of ports was “incident to lawful travel to Cuba”), but at least some of the lawsuits have survived the motion to dismiss and are going forward.
It is important to note that a Title III action is independent of U.S. sanctions law, and requires no allegation that U.S. sanctions on Cuba have been violated. Nevertheless, Title III constitutes a significant deterrent to ships trading to Cuba, to the extent that they are at risk of a U.S. lawsuit.
The future of Cuba sanctions
As with other U.S. sanctions programs, the future of U.S. sanctions on Cuba depends in large part on U.S. politics, most immediately, the upcoming U.S. presidential election in November 2020. President Trump has taken a particularly hardline approach to Cuba sanctions, rolling back many (but not all) of the more lenient policies adopted by former President Obama. Presidential candidate Joe Biden has generally indicated a policy proposal of returning to the Obama-era thawing of relations and incremental sanctions relief, although he has provided few specifics. But even the Obama administration was constrained by the Helms-Burton Act and was unable fully to lift the embargo or enact sweeping change. The Cuban-American expatriate community, many of whom are based in the electorally important U.S. state of Florida, has largely opposed any moves to eliminate U.S. sanctions on Cuba. Thus, even if Biden wins the election, it seems likely that the basic framework of the U.S. sanctions program on Cuba will continue for some time, absent significant changes in U.S. politics.
Frequently asked questions
Can a non-U.S. subsidiary of a U.S. company ship non-U.S. goods to Cuba?
No, unless there is a general or specific license permitting such trade. Although the trade would not be subject to the U.S. embargo on Cuba (which generally covers only U.S.-origin goods), non-U.S. subsidiaries of U.S. companies are treated as U.S. persons for purposes of U.S. sanctions, and are generally prohibited from dealing with Cuba, absent an exception.
Can a non-U.S. company with a U.S. affiliate ship non-U.S. goods to Cuba?
Yes, but caution is warranted. Any services provided by the U.S. affiliate may constitute “facilitation” and result in a sanctions violation.
Can a non-U.S. cruise company book cruises to Cuba? Can the cruise company carry U.S. nationals (who embark from outside the U.S.)?
Generally, cruises to Cuba that do not involve any U.S. persons, directly or indirectly, are permitted. However, cruise companies still need to be wary of a private lawsuit under Title III of Helms-Burton. The extent to which non-U.S. cruise companies may be liable for the violations of non-U.S. travelers is not entirely clear. As a practical matter, many cruise companies have taken the risk-averse decision to terminate cruises to Cuba.
Can a U.S. person still travel to Cuba?
Yes, so long as the travel falls within one of the 12 exceptions to sanctions. However, the restrictions and qualifications to such travel have grown in recent years, so such travellers should be wary.
Can a ship that calls in Cuba now call in the U.S. without waiting 180 days?
It depends. You need to confirm that the Cuba trade did not violate U.S. sanctions, and that the goods traded to Cuba were not of U.S. origin (or satisfied a license exemption), and would have been designated “EAR99” (or controlled solely for anti-terrorism reasons) if they were of U.S. origin.
This article is part of a series focused on the application of U.S. sanctions to the shipping community.