OFAC amends rules for independent private-sector entrepreneurs.

LATINVEX SPECIAL
Holland & Knight

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) amended the Cuban Assets Control Regulations (CACR), 31 CFR Part 515, to promote internet freedom in Cuba, support independent Cuban private-sector entrepreneurs and expand the Cuban people’s access to certain financial services. These amendments became effective as of May 29, 2024, when they were published in the Federal Register.

Among other amendments, OFAC authorized Cuban nationals in the private sector and located in Cuba to open and operate bank accounts with U.S. banks and reinstated its authorization for “U-Turn” transactions to allow certain funds transfers in which Cuba or a Cuban national has an interest. According to OFAC, the amended regulations are consistent with President Joe Biden’s promise to increase support for the Cuban people, including their human rights and political and economic well-being.

This Holland & Knight alert discusses OFAC’s regulatory amendments, including who may rely on the authorizations, what transactions are authorized and some of their practical implications. This alert will also highlight the nuances discussed in OFAC’s recently issued and amended frequently asked questions (OFAC FAQs).

Reinstatement of U-Turn Transactions

OFAC amended 31 CFR § 515.584 to reinstate the authorization for U-Turn transactions, which was previously revoked effective as of October 2019. This general license allows any banking institution that is a person subject to U.S. jurisdiction to act as an intermediary bank to process funds transfers in which Cuba or a Cuban national has an interest if 1) the funds transfers originate and terminate outside the U.S. and 2) neither the originator nor the beneficiary or their respective banking institution is a person subject to U.S. jurisdiction. Further, OFAC has authorized the unblocking and return of any transfer that would have been authorized pursuant to the reinstated general license for U-Turn transactions.

Transactions where the originator, the beneficiary or their respective banking institution is a person subject to U.S. jurisdiction remain prohibited unless otherwise authorized (please refer to the analysis below regarding the authorization for U.S. banks to open and maintain bank accounts in the name of Cuban nationals). It’s important to note that foreign subsidiaries and branches of U.S. banks outside the U.S. are subject to U.S. jurisdiction under the CACR and cannot be the originator’s or recipient’s bank unless otherwise authorized under the CACR. Further, as a practical matter, when the U-Turn rule was previously in effect, many U.S. banks would refuse to process such U-Turn transactions for compliance risk reasons and, given OFAC’s expectations regarding diligence, it may be difficult to utilize the U-Turn provisions in practice.

OFAC has also stated that it expects U.S. financial institutions, including their foreign branches and subsidiaries, to conduct due diligence on their own direct customers to confirm that the transactions being processed are consistent with this general license. For instance, a bank should seek ownership structure information for entities, proof of citizenship for individuals and address information in general. All U.S. financial institutions, including those acting solely as intermediaries, should screen against the OFAC Specially Designated Nationals and Blocked Persons List and their own internal filters.

To the extent the remitter or beneficiary of the transaction is not a direct customer, the U.S. banking institution that is acting as an intermediary may rely on the remitter’s or beneficiary’s address as stated in the transaction to determine whether the remitter or beneficiary is a person subject to U.S. jurisdiction, unless the U.S. banking institution knows or has reason to know that the remitter or beneficiary of a transaction is a person subject to U.S. jurisdiction. OFAC will evaluate the totality of the circumstances to determine whether any enforcement action should be taken when a U.S. financial institution fails to timely block a prohibited transaction.

U.S. financial institutions will have to evaluate transactions to determine whether the originator, the beneficiary and their respective financial institution is a U.S. person, but they will not be required to reject or block a U-Turn transaction due to the involvement of a Cuban blocked person.

Definition of Independent Private-Sector Entrepreneurs

OFAC amended 31 CFR § 515.340 to replace “self-employed individual” with the term “independent private sector entrepreneur.” As defined by OFAC, an “independent private sector entrepreneur” is a Cuban national who is not a prohibited official of the government of Cuba as defined in 31 CFR § 515.337 or a prohibited member of the Cuban Communist Party as defined in 31 CFR § 515.338, and is one or more of the following:

• an owner, including a self-employed individual (cuentapropista), or employee of a small private business entity, private cooperative or a sole proprietorship located in Cuba, in each case of up to 100 employees
• an independent contractor or consultant
• a small farmer who owns his or her own land
• a small usufruct farmer who cultivates state-owned land to sell products on the open market or
• a private cooperative or small private business entity located in Cuba of up to 100 employees that is owned only by individuals within the categories described above

Therefore, the term includes individuals (cuentapropistas), as well as entities (mipymes or cooperatives).

OFAC provided several examples of small private business entities or private cooperatives, including agricultural businesses; food and beverage importers; shipping, logistics, expediting and delivery of goods businesses; medical supply businesses; and travel services. OFAC noted that its amendment is consistent with Cuba’s current legislation, which permits the establishment of small- and medium-sized private enterprises (with no state ownership).

U.S. Bank Accounts for Cuban Nationals Located in Cuba

OFAC amended 31 CFR § 515.584 to allow banking institutions to open and maintain bank accounts in the U.S. solely in the name of a Cuban national located in Cuba who is an independent private-sector entrepreneur to 1) receive payments in the U.S. for transactions authorized pursuant to, or exempt from the prohibitions of, the CACR, 2) to remit such payments back to Cuba, including through an online payment platform, and to 3) access and operate the bank account from any jurisdiction. Please note that this amendment expands the current authorization under 31 CFR § 515.584(h)(1), which already allowed banking institutions to open and maintain bank accounts in the U.S. solely in the name of certain Cuban nationals. OFAC FAQ No. 748 offers an example of what would be considered an exempt transaction in this context (a Cuban author domiciled in Cuba could open an account with a U.S. banking institution to receive proceeds for the sale of his or her books).

Interestingly, this general license now covers the possibility for Cuban nationals who are independent private-sector entrepreneurs, wherever located, to use the bank account at a U.S. bank to conduct 1) transactions that are “authorized” pursuant to a general or a specific license from OFAC (for example, payments for the exportation of agricultural commodities from the U.S. to Cuba) and 2) transactions that are “exempt” from the prohibitions of the CACR, which means those transactions that are not directly subject to the CACR because they do not have a U.S. nexus (other than the bank account at a U.S. bank that is now being authorized).

In other words, the “exempt” component of this new authorization means that the U.S. bank holding the bank account in the name of a Cuban independent private-sector entrepreneur may receive payments in connection with transactions that are not otherwise subject to the CACR. These could be, for example, a wire transfer from a Cuban private entity (mipyme) to a non-U.S. provider located in a third country for the purchase of products. Further, it is not yet clear whether the new authorization would require the U.S. bank account to be linked to a commercial use related to the Cuban national line of business or if it could be used by the Cuban national to receive or send funds related to a personal transaction with a non-U.S. person located in a third country.

This general license under 31 CFR § 515.584 of the CACR goes beyond the reauthorization of U-Turn transactions because it allows U.S. banks to process transfers of funds that are related to Cuba, have no U.S. nexus but either originate or terminate in the U.S., and where the U.S. bank is not just acting as an intermediary bank. Nevertheless, without further guidance from OFAC, this may require a case-by-case evaluation as to whether the underlying transaction is permissible under or exempt from the CACR.

In sum, since no guidance has been provided on the potential additional due diligence obligations required of U.S. banks in order to maintain such accounts, the level of due diligence required will need to be evaluated in addition to whether the underlying transaction is permissible under the CACR or exempt from their prohibitions.

How effective these new authorizations will be in terms of facilitating the flow of funds to or from the Cuban private sector will depend on the level of participation of U.S. banks. As a practical matter, the vast majority of U.S. banks have refused to open bank accounts for authorized transactions related to Cuba. For example, most U.S. banks are currently not allowing bank accounts in the name of U.S. companies holding a valid export license from U.S. Department of Commerce for exports to Cuba, despite being a transaction authorized under the CACR and the Export Administration Regulations (EAR).

Internet-Based Services

OFAC amended the CACR to support the Cuban people’s access to U.S. internet services, applications and e-commerce platforms. In particular, 31 CFR § 515.578 authorizes the provision of certain services incident to 1) the exchange of communications over the internet, 2) services to support the exchange of communications over the internet and 3) services related to certain authorized exports or reexports. OFAC amended this general license to provide examples of activity incident to the provision of internet-based communications services such as instant messaging, chat and email, social networking, sharing of photos and movies, web browsing, blogging, web hosting (provided that it is not for the promotion of tourism), domain-name registration, social media platforms, collaboration platforms, video conferencing, e-gaming and e-learning platforms, automated translation, web maps and user authentication services.

While OFAC allows the provision of services related to web hosting, the activity cannot be related to the promotion of tourism. As to the level of expected due diligence, web hosting providers may reasonably rely on information provided to them by their customers in the ordinary course of business, unless they know or have reason to know their provision of web hosting services is for the promotion of tourism.

Further, OFAC clarified that services to support the exchange of communications over the internet include software design, business consulting, information technology management services and cloud-based services, including remote data storage, data transport service, content distribution networks, virtual machines, software as a service (SaaS) and infrastructure as a service (IaaS). It is important to note that the aforementioned activity must support the exchange of communications over the internet. Otherwise, the activity will not be authorized under this general license.

Consistent with OFAC’s policy to support the Cuban people, services related to software used on personal computers, cellphones and other personal communications devices are also authorized. In addition, services – including training, installation, repair or replacement of items related to communications, or items used to develop software that improves the free flow of information or will support private-sector activities in Cuba that are licensed or otherwise authorized by the Commerce Department for exportation or re-exportation to Cuba – are also authorized by OFAC. This requires a determination that the underlying goods are licensed or otherwise authorized by the Commerce Department prior to engaging in related services.

Notably, the importation into the U.S., as well as the exportation or re-exportation from the U.S. to third countries, of Cuban-origin software and Cuban-origin mobile applications is also authorized under this general license. This is intended to allow independent Cuban entrepreneurs to offer their software and mobile applications on global application stores.

It is important to highlight that the general licenses under 31 CFR § 515.578(a)(1)-(3) do not authorize the direct or indirect exportation or re-exportation of services with knowledge or reason to know that such services are intended for a prohibited official of the government of Cuba as defined in 31 CFR § 515.337, a prohibited member of the Cuban Communist Party as defined in 31 CFR § 515.338 or to organizations administered or controlled by the government of Cuba or the Cuban Communist Party. OFAC has clarified that internet-based service providers subject to U.S. jurisdiction may reasonably rely on information provided to them by their customers in the ordinary course of business unless they know or have reason to know a transaction is not authorized.

However, the general licenses under 31 CFR § 515.578(a)(4)(i) do authorize the direct or indirect exportation or re-exportation of certain internet-based services to any Cuban national, including prohibited officials of the government of Cuba as defined in 31 CFR § 515.337 or a prohibited member of the Cuban Communist Party as defined in 31 CFR § 515.338, provided that such services are widely available to the public at no cost to the user. OFAC FAQ No. 1177 lists some examples of these authorized services, including social media platforms, video conferencing, web maps and automated translations, among others.

This alert was written by Holland & Knight attorneys  Aymee D. Valdivia, Andres Fernandez, Jonathan M. Epstein, Ronald A. Oleynik, Andrew K. McAllister, Robert A. Friedman, Gabriel Caballero Jr. , Daniel A. Noste and Catherine Yepes.

This article is based on a Holland & Knight alert. Republished with permission.

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