home Cuba, Economic Sanctions Cuba: Fire Sales, Corruption, Lack of Rule of Law & Transparency

Cuba: Fire Sales, Corruption, Lack of Rule of Law & Transparency

Cuba may be known for sugar cane, but there is absolutely nothing sweet about the December 17, 2014 announcement by the President Obama and Raul Castro. If you’re contemplating entering the Cuba market, read on. There remains a lot of unanswered questions that need addressing before pressing ahead.

Officials working for foreign companies doing business in Cuba know very well that doing business in Cuba requires a great deal of patience and, well, creativity. That is to be expected, especially when dealing with a dictatorship and a run down economy. And if you like fire sales, Cuba fits that description to a tee.

Patience, creativity, and fire sale conditions, however, are chock full of legal and compliance risk. That is why many foreign companies doing business in Cuba, in my opinion, work with the Cuban Communist Party leaders that run the economy to keep transactions off official books. When the state owns the capital a well as the means of production, it is easy to do.

The Communist Party leaders that head the agencies have a great deal of power to set prices and other contract terms. If foreign investors step of out line, or after a while fail to deliver what the Party wants, problems begin. Some companies have called it quits. Others who brave to stay, must adapt to party boss terms or, as in the recent case of a Canadian business man this year, sentenced for 15 years in Cuba’s political prison gulag.

President Obama’s December 17 policy decree fails to take in to consideration these and other life problems with respect to Cuba. They handed a much-wanted diplomatic win to the Communist Party for peanuts on the dollar. Literally. Cuba has done business with the rest of the world, since 1959. American companies have sold billions of dollars in goods and services since the mid-1990s. When American companies stop accepting subsidies from the U.S. government (i.e., ag, Ex-Im, etc.), come talk to me about how “free markets” are the cure all for places such as Cuba.

If Cuba wanted to change to a free market system it would have done so a long time ago. This idea that U.S. businesses will change Cuba is, at best, specious.  The current party bosses who run the island have no interest in changing. And the Obama national security team should’ve known better. For all intents and purposes the United States, as of December 17, is now part of the problem. The Cuban street now sees Uncle Sam working mano-a-mano with the regime.

American companies interested in doing business in Cuba under today’s U.S. regulatory structure face significant economic, legal, and compliance considerations. Do they want to help tourism apartheid? Hire Cuban workers, who all work for the state, for what amount to slave wages? Engage in the mordida (bribe) culture? Cuba does not have a modern banking system. Cuba does not believe in modern dispute resolution processes. It has no rule of law to speak of. Stock market? Currency board? Courts? Private property? Good luck.

Through the years, I have advised many American business owners and shareholders about the pitfalls about doing business in Cuba. As of December 17, nothing has changed. Even with the so-called reforms announced by Raul Castro a few years ago, Cuba remains a high risk proposition that, over the long run, may not be worth the effort. And, more importantly, you’ll just about guarantee that U.S. regulators will look at you a little closer just because of your Cuba business line.

Granted, I take a more pessimistic view of things because I also believe that doing business with tin horn dictators such as the Castro brothers, and those few cronies who support them, is bad for business. However, better  forewarned before engaging in any business transaction than surprised when things go wrong. And, as I’ve learned through the years in my law practice, things will go wrong.

For now, if you sell food or medical products as well as telecommunications equipment, it is mostly one big fire sale. Buyer beware. When the Cuban people regain control of the system, an accounting will be had and a lot of this dirty dealing will become public. While U.S. companies tend to do much better than foreign counterparts, they too will be roped in with the bad seeds.

If you work with an American company that is allowed, or will be allowed, to do business with the Cuban regime, be sure you have an attorney, familiar with the system and culture, to pore over your entire business transaction before you sign on the dotted line. And make sure you purchase plenty of insurance. You most likely are going to need it.

I’d like nothing more than for U.S. companies to re-engage in the Cuba market and help rebuild the island after more than half a century of Communist rule. However, before that happens, there is a policy roadmap codified in U.S. law that should be followed. As the Obama Administration provides more context and detail about the December 17 announcement, let’s hope they stick with that legal and regulatory roadmap. It will, over the long run, better protect and advance U.S. interests.

%d bloggers like this: