U.S. Treasury Releases Revised FAQs Clarifying Upcoming Changes to U.S.-Cuba Sanctions Regulations

HIGHLIGHTS:

• The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) issued a revised set of frequently asked questions (FAQs) further clarifying the upcoming changes to the U.S.-Cuba policy recently announced by President Donald Trump.
• Notably, Cuba-related commercial engagements in place prior to the issuance of the amended regulations, including transactions under both definitive contracts and contingent contracts or other types of contractual arrangements, will remain permitted after the issuance of new regulations even if such commercial engagements involve direct transactions with "Prohibited Entities."
• Certain travel categories, other than individual people-to-people, also will be impacted by the amended regulations.

On July 25, 2017, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) issued a revised set of frequently asked questions (FAQs) further clarifying the scope and implementation process for the upcoming changes to the U.S.-Cuba policy announced by President Donald Trump on June 16, 2017.

In this alert, we provide our comments to the most significant revisions included in these updated FAQs.

Transactions Under "Contingent Contracts" Will Be Grandfathered

The most significant revision to the FAQs is found on current FAQ No. 9 (previously FAQ No. 6 under the June 16 version). In our alert issued on June 16, 2017, we discussed how the FAQs explained the impact that the upcoming changes in the Cuban Assets Control Regulations (CACR) would have with respect to companies subject to U.S. jurisdiction that are already engaged in the Cuban market and that may undertake direct transactions with "Prohibited Entities" (entities and sub-entities related to the Cuban military, intelligence, or security services or personnel, as identified by the State Department, with which direct transactions will be prohibited).

In the June 16 version of the FAQs, OFAC clarified that those Cuba-related commercial engagements (authorized by either a general or a specific license) that were in place prior to the issuance of the amended regulations by OFAC, would remain authorized after the issuance of new regulations even if such commercial engagements involved direct transactions with Prohibited Entities. This means that any agreements or transactions executed, for example, with Gaviota, S.A. or any other entity of Grupo de Administración Empresarial, S.A. (GAESA), both of which are under the structure of the Cuban Ministry of the Armed Forces (MINFAR), before the date of issuance of the new OFAC regulations will remain permitted. Further, any established Cuba business, such as the cruise lines already operating in Cuba, will be able to continue their operations and honor their contracts in Cuba despite the possibility that one or more of their Cuban counterparts is listed as a Prohibited Entity.

However, under the June 16 FAQ No. 6, it was not clear what would happen with those businesses or transactions that 1) were in the negotiation stage (which is a rather long process in Cuba), without definitive agreements or an established commercial relationship in place at the time the new regulations are issued, and 2) include or expect to include direct transactions with one or more Prohibited Entities. A reasonable interpretation of the prior FAQ No. 6 led to the conclusion that those businesses would not be protected and, therefore, would have had to abandon the negotiations despite the significant time and resources that many have put toward such efforts.

The new FAQ No. 9 clarifies this issue by expanding the concept of "Cuba-related commercial engagements in place" to include those "transactions outlined in contingent or other types of contractual arrangements agreed to prior to the issuance of the new regulations." Under this broad explanation of the forthcoming changes, both definitive contracts and contingent contracts or other types of contractual arrangement (likely including Letters of Intent, Memorandum of Understanding and other non-definitive agreements) will be grandfathered under the current regulations and, therefore, protected from being prohibited, even if such contracts or the business transactions therein outlined involve direct transactions with a Prohibited Entity.

Certain Travel Categories, Other Than Individual People-to-People, Will Also Be Impacted

The new FAQ No. 6 states that the new policy will "also impact certain categories of educational travel as well as travel under support of the Cuban people" (emphasis added). This clarification is in line with the National Security Presidential Memorandum signed by the president on June 16, 2017 (Presidential Memorandum); however, it differs from what OFAC had stated in its June 16 version of the FAQs that "[t]he new policy will not result in changes to the other (non-individual people-to-people) authorizations for travel."

According to the Presidential Memorandum, in addition to the changes announced with respect to the individual people-to-people travel, we should expect that, at a minimum, the requirements outlined below will be added to the following categories of authorized travel:

Academic Educational Travel: There are 12 sub-categories of educational travel involving academic study, which are regulated under the general license of Section 515.565(a) of the CACR. The new regulations will require that all academic educational travel must be under the auspices of an organization subject to U.S. jurisdiction and that all persons traveling to Cuba under any of these sub-categories of academic educational travel must be accompanied by a representative of the sponsoring organization. Under the current regulations, such conditions are only required for the non-academic educational travel (specifically, the group people-to-people category) under Section 515.565(b)(4) of the CACR.

Support for the Cuban People: This category of permitted travel is regulated under Section 515.574 of the CACR. The current regulations already require that the schedule of activities of the travelers under this category may not include free time or recreation in excess of that consistent with a full-time schedule. The new regulations will also require that such full-time schedule of activities enhances contact with the Cuban people, supports civil society in Cuba or promotes the Cuban people's independence from Cuban authorities. In addition, the new regulations will require travelers to meaningfully interact with individuals in Cuba. Both of these requirements currently only apply to the people-to-people/non-academic educational travel category under 515.565(b)(1) and (2).

In addition, the new FAQ No. 6 states that following the issuance of the amended CACR, travel-related transactions with Prohibited Entities will not be permitted, unless otherwise authorized by OFAC. We note that this is a much broader language from what the Presidential Memorandum stated because it seems to prohibit not only "direct financial transactions," but also all travel-related transactions with Prohibited Entities. Until the new regulations are issued, we will not know whether OFAC will consider an exception for "indirect transactions" and, if so, how this concept will be defined.

Sponsoring Organizations of People-to-People Travel Do Not Need a Specific License

New FAQ No. 4 confirms what has been assumed and generally understood, but not specifically set forth in the CACR, to wit: the ability of any entity that is subject to U.S. jurisdiction and sponsors people-to-people exchanges to self-designate itself as a "people-to-people organization" without the need to obtain a specific license or any additional authorization from OFAC. As the note to Section 515.565(b)(4) of the CACR points out, to be covered by the general license, an "organization" must not only sponsor and organize the trip to Cuba, but also must lead the people-to-people exchanges by having a full-time schedule of activities in place in which the individual travelers participate (i.e., travelers cannot engage in individually selected and/or self-directed activities).

As the revised regulations are implemented, it is likely that further clarifications – and possibly adjustments – will be necessary.

Holland & Knight Cuba Action Team

Holland & Knight's Cuba Action Team has dealt with Cuba-related issues for more than 20 years. The Cuba Action Team includes a number of lawyers from our robust Latin America Practice, International Trade Practice and our Financial Services Practice. We have extensive experience assisting a wide range of U.S. and non-U.S. clients on Cuban trade embargo issues across diverse industries, including airlines, shipping lines, insurers, agricultural, and pharmaceutical companies and organizations. In addition, Holland & Knight has a Cuban licensed/trained lawyer. Please feel free to contact us.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.