Can Individuals in the United States Invest in Cuba Today?December 2014 – Articles Business Insights: Cuba
As Cuba opens the country for foreign investment and as U.S. interest in playing a role in Cuba grows, some Cuban experts assert that despite the U.S. embargo, an investment in Cuba is not necessarily off-limits to U.S. businesses or individuals. But there are cautions and legalities of which potential investors should be mindful.
The 49/49 Rule
Under current U.S. law, a U.S. person is prohibited from directly engaging in a commercial activity in or with Cuba or from taking any ownership interest in any property in which Cuba or a Cuban national has an interest. However, under the so called 49/49 Rule, a U.S. person may make an investment in a non-Cuban foreign entity that engages in commercial dealings in or with Cuba if:
- the foreign entity is not controlled by U.S. persons; and
- a majority of the revenues of the foreign company are not derived from Cuba.
The legal basis for the 49/49 Rule originates with a letter from the Department of the Treasury in response to an inquiry by John S. Kavulich, II on March 4, 1994 (“the 1994 opinion”), in which Kavulich sought guidance regarding permissible investments in Cuba by U.S. persons.
The 1994 opinion letter is signed by Richard Newcomb, ex-Director of the Department of the Treasury’s Office of Foreign Assets Control (OFAC). In the letter, Newcomb writes:
“A U.S. company or individual may make a secondary market investment in a third country company doing business in Cuba provided that the investment does not result in control in fact of the company by the U.S. investor. A secondary market investment that falls short of a controlling interest is not prohibited.”
The 1994 opinion letter also states that acquiring control of a company that has ongoing business dealings with Cuba would require a license from OFAC, and “injecting capital into a company in a manner supporting its Cuban transactions is prohibited to persons subject to the jurisdiction of the United States unless those transactions are authorized by OFAC or are exempt from regulation.” Therefore, a U.S. person may not make even a minority non-controlling investment in a company if the investment will be used to support the company’s Cuban business.
To determine whether the 1994 opinion represents current thinking at OFAC, we have spoken with OFAC’s officers. Noting all of the caveats that attach to advisory opinions, they said the 1994 opinion continues to reflect OFAC’s current thinking.
Although the 1994 opinion letter addresses the general conditions necessary to satisfy the 49/49 Rule, it fails to establish a fixed-line rule on what constitutes “control” or a “majority of revenues.” These determinations are made on a case-by-case basis by OFAC. Thus, advisory opinions are fact-specific, do not have precedential value and cannot be relied upon by anyone other than the person who requested the opinion. Nevertheless, advisory opinions can provide guidance on OFAC enforcement policy, and reliance upon an advisory opinion is a mitigating factor in the event of an enforcement action.
The first test is “control.” There is presently no definition in U.S. law or regulations for the meaning of “to own or control” a company that engages in commercial activities with Cuba, although OFAC generally presumes “ownership” means “100 percent ownership” and “control” means “50 percent or more ownership.” There is also no measure on what constitutes “control in fact,” and OFAC has been hesitant to provide one. For example, according to OFAC staff, a presumption of control where the ownership share is 50 percent could be rebutted based on a variety of other facts. On the other hand, an ownership interest of something less than 50 percent could be held to be “control in fact” and therefore impermissible. OFAC staff advised that most investments fall into two categories: (1) investments involving a five to 10 percent ownership interest, which it considers overly cautious by investors and is therefore a feasible investment without a specific OFAC approval; and (2) investments involving a 40 to 45 percent ownership interest, which it deems to be investors who “walk the fine line.”
The second test is “majority of revenues.” Neither U.S. regulations nor OFAC opinions have defined or clarified what constitutes a “majority of revenues” for these purposes, but OFAC staff explained that the inquiry in the current regulatory environment is more aptly stated as whether a “predominant amount of revenues” of the foreign entity are generated from commercial activities with or within Cuba. There is no strict test for a “predominant amount of revenues,” although OFAC generally presumes that revenues of 50 percent or more comprise a “predominant amount of revenues.” However, OFAC staff advised that OFAC would consider arguments that revenues of 50 percent do not constitute a “predominant amount of revenues,” depending on other factors relating to the nature of the business activities.
Absent OFAC approval, a person subject to U.S. jurisdiction would be barred from acquiring control-in-fact of a company that does business in Cuba unless the Cuban trade is terminated. A U.S. person therefore cannot attain a controlling interest in a third-country company as long as the third-country company conducts unauthorized business in Cuba at any level. For example, from 1995 until 1998, Genoa-based Costa Crociere operated the Costa Playa cruise ship, which visited the Republic of Cuba, and a subsidiary of Costa Crociere developed and managed the $11 million passenger ship facility at the Port of Havana. In 1997, Carnival Corporation acquired majority ownership and control in Costa Crociere. The following year, OFAC required Carnival Corporation to cease both the operation of the Costa Playa to the Republic of Cuba and the management of the passenger ship facility.
Investments by U.S. Persons in Foreign Companies Involved in Cuba
Generally, if the conditions of the 49/49 Rule are satisfied, a U.S. person may invest in non-Cuban foreign entities that engage in commercial activities in or with Cuba without express approval from the U.S. government. OFAC does not specifically address licensing requirements for limited investment by a person in a foreign entity that engages in commercial activity in or with Cuba. To date, OFAC has not adopted any official policy statements or guidance on this issue. However, while such investments are not prohibited per se, the only way to receive absolute comfort regarding an investment’s compliance with OFAC would be to submit a formal inquiry to OFAC. OFAC would request full corporate documentation on the investors and entities involved in order to determine: (1) whether a license would be required and (2) whether OFAC would issue one.
Presidential Authority To License Transactions in Confiscated Cuban Properties
The Helms-Burton Act (the Act) codified the Cuban Assets Control Regulations (CACR) as it existed in March 1996, authorizing the Secretary of Treasury to exercise licensing authority to support Cuban economic growth, economic independence from the government and re-establishing U.S. property rights. In fact, since Congress codified the Cuba sanctions in 1996, Presidents Clinton, Bush and Obama have each exercised this authority to ease the scope of restrictions applicable to Cuba, without action or approval by Congress.
These are the statutory and regulatory provisions supporting the President’s authority to modify the Cuba sanctions regarding transactions in confiscated properties:
- Section 515.201 of CACR that was in effect in March 1996 prohibits dealings in property in which Cuba or Cuban nationals have an interest but explicitly references the authority of the Secretary of Treasury to establish exceptions to the prohibitions by means of regulations, rulings, instructions, licenses or otherwise.
- Section 103 of the Act prohibits U.S. persons and agencies from knowingly making a loan, extending credit or providing other financing for the purpose of financing transactions involving property confiscated by the Cuban government, with an exception only for financing by a U.S. national owning a claim to the property in connection with a transaction permitted under U.S. law.
- Section 515.208 of the CACR implements Section 103 of the Act.
The absence of explicit statutory or regulatory provisions regarding owners of claims suggests that Congress did not intend to prohibit the executive branch from issuing general or specific licenses to authorize transactions between claimants and Cuba when such licenses are deemed to be appropriate and consistent with U.S. policies.
Consistent with the relevant statutory authorities and restrictions, as well as statutory statements of U.S. policy objectives, the president arguably has sufficient legal authority to modify Section 515.208 of CACR by licensing the following transactions by owners of claims:
- Negotiate lease-license agreements with foreign companies using confiscated properties in Cuba;
- Negotiate a compensation schedule with the foreign entities and the Cuban government;
- Negotiate restitution of properties and transferring of title; and
- Permit direct or indirect investments in confiscated properties to improve the value of the claims.
The U.S. State Department has determined that a claimant entering into an agreement for use of a confiscated property by a third non-U.S. party does not constitute “trafficking” under the Act. The term “trafficking” does not apply when U.S. nationals authorize other parties to make use of confiscated property for which they have claims.
Claimants and potential defendants could utilize this provision to settle their claims, and it would permit the defendants to continue activities in Cuba without further hindrance from the former owners. This process has been applied in at least one instance: the case of ITT’s claims against the Italian telecommunications firm Stet in connection with Stet’s investment in the Cuban telephone company, confiscated from ITT in the early days of the Cuban Revolution. In July 1997, the U.S. State Department approved the agreement and said it constituted a major step toward the enforcement of the Act, reinforced the principle of respect for the property rights of U.S. citizens and would serve as a disincentive to other foreign firms currently operating in or considering investment in confiscated U.S. property in Cuba without authorization of the U.S. claimant.
Precedents also exist of licenses granted by OFAC to visit confiscated properties in Cuba and to negotiate compensation with the Cuban government and the current foreign company dealing business in Cuba.
OFAC does not prohibit a U.S. business or individual subject to U.S. law from making a secondary investment in a non-Cuban foreign entity that has commercial dealings in Cuba provided the investment complies with the 49/49 Rule. A claimant may also be able to finance or invest in his or her own confiscated property and negotiate a compensation for the expropriation in compliance with the CACR. However, a specific license and approval from OFAC may be required depending on the facts of any particular transaction. It is recommended that U.S. persons seeking to invest in foreign entities that engage in commercial dealings with Cuba should first carefully review the rules and policies promulgated by OFAC and seek the advice of legal counsel before making such investments.