Banks not rushing to Cuba as fear of entering a legal minefield still lingers

Banks not rushing to Cuba as fear of entering a legal minefield still
lingers
Off the terror list, Cuba represents a less risky proposition but for
bankers it's been tough to get over the hefty fines that once came with
violating sanctions
Thursday 16 April 2015 17.08 BST Last modified on Thursday 16 April 2015
18.06 BST

Barack Obama's decision to remove Cuba from the state sponsors of terror
list after 30 years is many things: a symbol of the cold war's end, a
negotiating tactic to dispel distrust, and – most practically – an
assurance to bankers wary of rushing into a legal minefield.

Nearly four months after Obama and Cuban president Raúl Castro announced
a historic rapprochement and a softening of sanctions against doing
business on the island, few companies have tried to take advantage of
the changes. Lodging company Airbnb set up with locals and streaming
site Netflix made a mostly symbolic entrance there, but the most
powerful forces in finance, the banks, have watched from afar for fear
of getting caught up in a web of sanctions.

The bankers have cause to be concerned. The US has actively pursued
banks who violate sanctions agreements, in 2009 forcing Credit Suisse to
pay a $536m settlement for its dealings with Cuba, Iran and others, and
then drawing a $8.9bn fine from BNP Paribas last year for working with
Sudanese clients. Cuba, Iran, Sudan and Syria are the only nations on
the state sponsors of terrorism list. Also last year M&T Bank, the only
institution that had been available to Cuban diplomats in Washington,
suspended that service.

"You really had an enormous exposure to that risk, from US regulators
who have imposed very substantial fines on financial institutions," said
Pedro Freyre, an international practice attorney for a Miami law firm.

"It made it impossible for Cuba to do anything in the international
banking system with US dollars," agreed Antonio C Martinez II, an
attorney with the Gotham Government Relations Firm, a New York law firm.
"Any bank that touched that sanctions web would get caught in it and fined."

Since the December changes to US rules, the State Department has tried
to persuade banks to get involved in Cuba, including by inviting
executives to meet with officials in Miami a year ago. But bankers felt
no safer after the discussion, said professor Christopher Sabatini, a
Cuba scholar with Columbia University, who attended that meeting.

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Because banks and telecoms have to clear nearly all activity on Cuba
with the Treasury and Commerce departments, complying with US rules
became a losing business in and of itself, Sabatini continued. "The
executives would say, 'There's no way we can go to the board, it's not
profitable for us. We have to staff up all these lawyers, and do all
this paperwork and conform to all these regulations, and simply the
return isn't there.'"

Taking Cuba off the list changed that, he said: "It's removed the fear
of having their profits sort of seized for having done business with a
terrorist-supporting state, and it also makes compliance costs much less."

Banks by nature are very risk-averse
Off the list, Cuba represents a far less risky and expensive proposition
to bankers and other companies, the attorneys said, although that did
not mean bankers would rush to the island. "Just because something is
allowed doesn't mean that it will happen, and these banks are by nature
very risk-averse," Freyre said.

Bankers and most companies have stayed cautious because although January
changes allowed them transactions with Cuban banks, congressional
sanctions remain.

On 1 March, MasterCard removed its block on US-issued cards in Cuba, the
only credit card company to do so. Rob Rowe, vice-president of the
American Bankers Association only offered a cautious statement: "banks
are certainly watching for further developments, but the US government
has a lot more steps to take until the industry can take action."

American Express, Citi and JPMorgan Chase have said they are still
waiting to for more details about how the US and Cuba actually start
applying rules.

The wrangling over banks – an issue Cuban negotiators have repeatedly
raised in talks – also suggests that the US and Cuba in some ways plan
to improvise as they feel their way through the uncharted territory of
rapprochement after 50 years apart.

Major obstacles on both sides are the nations' respective bureaucracies,
for instance. In the US, regulators of byzantine American system can
sometimes be at odds with both officials and businesses. Cuba's highly
centralized system on the other hand treats almost everything on a
case-by-case basis, with decisions made by a select few. Somehow, the
two sides will have to work out ways for the systems to work in tandem.

"They haven't been living completely isolated from the universe – it's
not like North Korea," Freyre said, "but it's not going to be easy."

Freyre said he has seen "a real commitment on the part of the Cuban
authorities to make changes" that can accommodate the US, and Sabatini
noted that the US rules in turn have been written fairly broadly,
"organized more around general principles of US foreign policy" than
specific politics between nations.

With that broad language, the US can adjust how it implements the new
rules as Cuba in turn tries to make its system more flexible. Sabatini
described the State Department's strategy of promoting democracy through
capitalism by saying, "it basically throws it open to more of a market
question than a regulatory one."

Taking Cuba off the list is also a negotiating tactic, Martinez said,
that could help convince Cuba to drop the 10% surcharge it imposes
against the US dollar – another deterrent to doing business there, and
main reason why phone calls to the island are so expensive.

"Think of it as a pipeline," Freyre said. "The United States has one
control valve and Cuba has the other, and the US slowly opens the valve
and gets Cuba to slowly open its valve. It's going to take a while, but
they're beginning to ramp up the flow."

The embargo imposed by Congress still prohibits most investing and
financial transactions on Cuba, and senators and representatives could
still try to fight off the White House's attempt to take Cuba off the
list. Senator and presidential candidate Marco Rubio, for instance,
openly opposes detente with Cuba, as does Florida representative Ileana
Ros-Lehtinan.

Cuba was placed on the list in 1982 for supporting leftist guerrillas in
Latin America, and more recently kept there for providing refuge to
Basque separatists. The Obama administration now says Cuba has not
supported terrorism in the past six months and is now eligible to be
delisted.

Source: Banks not rushing to Cuba as fear of entering a legal minefield
still lingers | World news | The Guardian -
http://www.theguardian.com/world/2015/apr/16/cuba-off-terror-lists-banks-still-wary-sanctions