Cuba is far from being an emerging economy; because of political and economic immaturity, they are more akin to an underdeveloped nation. No matter how hard the Obama administration tries to subvert U.S. law through the regulatory process, and make no mistake about it, they have been doing so, Cuba remains a frontier market that also happens to be subject to comprehensive U.S. sanctions.
It is time that the Congress end their slumber on U.S.-Cuba policy and initiate a series of oversight hearings to expose the lawlessness of recent regulatory changes. U.S. taxpayers are already owed billions of dollars by the Cuba regime. Let’s not make it billions more. And, if you’re contemplating any transactions with Cuba, read on. There are significant federal regulatory compliance issues, as well as potential tax consequences, that you should be aware of.
As I shared with the Wall Street Journal in February 2015, and believe it even more so today, certain sectors in Washington, DC, when it comes to Cuba, are suffering from a severe case of “irrational exuberance”. Among other things, it is irrational to get excited about engaging with a police state and command economy whose total GDP is less than 1/10 or so that of the GDP of South Florida.
Moreover, why would any series businessperson want to do business with party bosses, and those loyal to them, that orchestrated the largest ideologically driven criminal seizure of American business and capital by a foreign government, likely ever? Or otherwise engage in transactions with corrupt Communist party bosses and human rights abusers that amount to, well, fire sales?
The President likely had the power to re-open the U.S. embassy in Havana. He can also ease certain travel restrictions and allow for the export of agricultural, medical, as well as telecommunications goods and services; however, the easing of certain sanctions must not help the regime. Several of the new regulations, especially the ones issued late last year as well as yesterday, are out of harmony with the statutory grant of authority granted the President by Congress.
Just because U.S. regulations incorporate by reference Cuba’s definition of what Cuba says is their “private sector,” a private sector it does not create. There is no private sector in Cuba. Trafficking in property in illegal, a crime; yet, many of these regulatory changes condone and encourage trafficking in stolen property. Facilitating credit or debit card transactions in Cuba by U.S. banks likely conflicts with trafficking laws as well as the statutory prohibition on indirect financing of the regime. And allowing telecommunication companies to sell certain equipment to the regime also triggers these concerns, as well as, potentially, a statutory prohibition on improving Cuba’s telecom infrastructure. These and other legal issues much be cleared up.
The President was granted authority to tighten the sanctions, not weaken them. That it not just me saying that. Just ask senior staff who worked on U.S. laws currently in force. Yesterday, New Jersey Senator Bob Menendez (D-New Jersey), one of the original sponsors of laws currently in force with respect to Cuba, reminded Cuba watchers that the President’s regulatory changes are not only a contravention of the law and the will of Congress, but that “any Administration has the discretion to tighten sanctions, but none have the power to relax them.”
Persons subject to U.S. law, especially financial institutions, should proceed with extreme caution when considering transactions in Cuba or with entities that do business in Cuba. Do not allow Washington-DC Beltway inspired irrational exuberance to cloud your judgment. Engaging with Cuba under the new U.S. regulatory construct will expose persons subject to U.S. law to political and legal risk, not only in Cuba, but in U.S. federal and state courts.
The Congress needs to step up and engage in robust oversight because, at least at this juncture, harmed parties are limited in what they can do via the federal courts. While they are at it, they might want to take a look at the tax code as well. If you are going to engage in transactions with the Cuban regime, the U.S. tax code should not facilitate it or bail you out. Besides – for the tax lawyers and policy wonks out there – there are well-established legal doctrines that tax deductions are not allowed if the deduction would violate public policy (see 26 U.S.C. §§ 162(f), 165, 166, et seq.). Trafficking in stolen property seems to fit under the rubric.
Until the President can legally certify to the Congress that there is a transition government in Cuba, engaging in most Cuba transactions is fraught with significant legal, economic, and public relations risk. Persons subject to U.S. law should proceed with caution and retain legal counsel who know this complex market as well as the regulatory issues that arise in it both in the United States and Cuba.