Last Friday, May 1, the U.S. issued a new Executive Order (“EO”) that radically changes the risk of economic sanctions being imposed on non-U.S. entities with Cuba-related business.
It has already been noted that, given the current state of foreign policy and relations between Spain and the U.S., the new EO could become a convenient vehicle for U.S. retaliation or pressure against Spain through sanctions on Spanish companies doing business with Cuba. Spanish companies are therefore advised to analyze their exposure to Cuba in order to understand and manage this new risk as well as possible.
Until now, unlike most other U.S. economic sanctions programs, U.S. sanctions against Cuba have mainly been primary sanctions.
Primary sanctions on Cuba apply to U.S. persons and entities, their subsidiaries, and also to non-U.S. entities whose Cuba-related transactions have some nexus to the U.S., for example, the use of the U.S. dollar.
Secondary sanctions, by contrast, apply to non-U.S. entities with no requirement that the sanctionable transactions have any nexus to the U.S.
The May 1 EO puts non-U.S. entities with Cuba-related business that meet certain criteria set out in the EO at risk of sanctions. So far, the U.S. has not sanctioned anyone under this new measure. Sanctions under this EO are not automatic. What the EO does is set certain criteria and authorize the U.S. Department of the Treasury and the Department of State to make formal determinations that a non-U.S. entity meets the criteria and is therefore designated and sanctioned. No entity is sanctioned until it is specifically designated (or is 50% or more owned or controlled by previously sanctioned parties).
The main criteria are:
- Operating in the energy, defense and related materiel, metals and mining, financial services or security sectors of the Cuban economy. This could affect both Cuban companies and companies from third countries such as Spain.
- Operating in any other sector that may be added in the future.
- Being owned or controlled by the Government of Cuba.
- “Government of Cuba” is defined very broadly. It includes the government itself, its agencies and instrumentalities, including the Central Bank of Cuba, and any entity controlled by the Government of Cuba, which includes state-owned entities
- Acting on behalf of the Government of Cuba.
- Being owned or controlled by an entity sanctioned under this EO.
- Acting on behalf of an entity sanctioned under this EO.
- Providing goods or services to the Government of Cuba or to entities sanctioned under this EO. This criterion could affect companies from any country, including Spain, that do business with Cuban state-owned entities.
- Being an official, officer or director of the Government of Cuba.
- Being an official, officer or director of entities sanctioned under the EO.
- Being an agency, instrumentality or political subdivision of the Government of Cuba.
- Having taken part in human rights abuses or corruption in Cuba.
- Being an adult family member of a person sanctioned under the EO.
If an affirmative determination is made under any of these criteria, the person or entity concerned would be sanctioned, blocked and added to OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”). Being listed means exclusion from the U.S. commercial and financial systems.
Where the sanctioned entity is a financial institution, the EO provides as an alternative sanction a prohibition on U.S. financial institutions providing correspondent account services to that financial institution, which in practice would prevent the sanctioned financial institution from operating in U.S. dollars.
For individuals, one of the measures following a determination and designation is a ban on entry into the U.S.
An important exception that limits the potential reach of this EO is that it does not apply to activity previously authorized by OFAC’s Cuba sanctions regulations (the Cuban Assets Control Regulations) or by licenses issued by OFAC under those regulations.
U.S. decisions to impose secondary sanctions are highly discretionary and therefore very hard to predict. Meeting one of the criteria does not necessarily mean that sanctions will be imposed. Determinations also tend to be highly politicized. If transactions that technically meet the criteria are not important or significant, sanctions would not normally be imposed. However, given the severe negative consequences of secondary sanctions, even if the risk may be low, it is not a risk to be taken lightly.
For Spanish companies, the risk could be higher than it would normally be, given the current state of relations between the U.S. and Spain.
Related service. If this issue affects your company, at Burke Compliance we analyze it as part of our OFAC economic sanctions service.
