July 21— One day after the U.S. and Cuba reopened embassies in each other's capitals, Florida-based Stonegate Bank signed the first agreement establishing a correspondent account in the island nation, which is designed to facilitate payments and transactions with the U.S.
At least in the near term, however, the thaw in U.S.-Cuba relations doesn't mean many banks will be quick to follow Stonegate's lead.
U.S. banks are likely to find a challenging market in Cuba, where workers earn less than $50 per month on average and have little familiarity with Western-style banking services. Nor does it help matters that Cuba's military takes a controlling share in virtually all enterprises and there's no legal tradition of protecting foreign investors and companies operating there. What's more, the decades-old U.S. economic embargo remains firmly in place.
“A lot of people are taking the perspective that, look, if the embargo is lifted everyone from the U.S. is going to be running over there pouring in money,” said Matthew Feeley, a Buchanan Ingersoll & Rooney PC shareholder based in Miami. “And I don't think that's going to be the case.”
Still, many U.S. financial services firms are beginning to consider what opportunities exist in Cuba, where U.S. financial institutions have essentially been banned since 1961. Significant economic and political changes there in the future could eventually boost demand for U.S. banking services.
U.S. financial institutions considering doing business in Cuba face big challenges, starting with the country's state-controlled banking system.
The Cuban government and the financial institutions it controls by statute and practice are the only entities that can currently extend credit to Cuban individuals or companies.
“The whole process of financial intermediation takes place mostly in a controlled manner with government institutions, with minimal use of the market,” University of Havana professor Jessica León Mundul wrote in an April 23 paper.
Foreign banks seeking to set up a joint-venture with an existing Cuban partner have to deal with the Cuban military, which owns or controls the majority of Cuban banks. And the Cuban legal system does not currently provide many fundamental investor protections, including recognizing decisions made by international dispute-resolution and arbitration entities.
“I think you have to ask yourself why isn't there more investment today,” Feeley said, noting other countries, including Canada and many European Union nations, are not restricted by any economic embargo yet haven't made large investments in Cuba. “The Cuban government doesn't necessarily want foreign money, because they give up a little control every time someone comes in and opens a business,” he said.
Under rules announced in January amending the Cuban Assets Control Regulations and Export Administration Regulations, U.S. financial institutions are allowed to effectuate authorized transactions with Cuban nationals located outside of Cuba and open correspondent accounts at Cuban banks to facilitate the processing of authorized transactions.
The rules also allow the use of U.S. debit and credit payment cards in Cuba during authorized travel to Cuba. Certain microfinancing projects benefiting private businesses and agricultural operations will also be allowed. The regulations increase the amount of generally licensed remittances to Cuban nationals, other than certain prohibited Cuban and Communist Party officials, to $2,000 per quarter from $500 per quarter.
U.S. insurers will be authorized to provide coverage for global health, life, or travel insurance policies for individuals ordinarily resident in a third country who travel to or within Cuba.
Lawyers and others continue to debate just how U.S. regulatory agencies will enforce the rules, with some saying the rules may have been written to allow banks to interpret permissible activity broadly or to accommodate unanticipated developments as normalization between the two nations proceeds.
“I suspect some ambiguity in the language was intentional, to allow for changing circumstances,” Barbara Kotschwar, a Peterson Institute for International Economics research fellow and Latin American specialist, told Bloomberg BNA.
Some specialists said banks may be able to use correspondent accounts established at Cuban banks to facilitate remittances sent to Cuban nationals, which were estimated to be $3 billion each year before the remittance allowance was increased (The Cuban gross domestic product is roughly $77 billion). Currently, companies such as Western Union Holdings Inc. help provide remittance services to Cuban nationals.
The Obama administration's actions to date, including allowing U.S. banks to open correspondent accounts at Cuban banks, “provides a crack where there could be some [banking] activity subject to some pretty significant restrictions [but] it's hardly an opening that will necessarily get wider,” Covington & Burling LLP partner Kimberly Strosnider told Bloomberg BNA.
“There would probably have to be significant additional changes in regulations and perhaps in the statutes that also form part of the embargo for Cuba to become a significant market for banks to explore new opportunities,” Strosnider said.
Some new opportunities have already emerged, particularly if the Obama administration agencies liberally interpret the policy changes announced to date.
For instance, regulations announced in January permit U.S. financial services firms to engage in limited microfinancing operations, which could be used to assist self-employed Cuban workers or cuentapropistas.
The number of cuentapropistas has increased 300 percent since 2010 to about 490,000 workers as of February 2015, according to a May 20 paper by Saira Pons Pérez, a professor at the University of Havana, commissioned by the Cuba Study Group.
The Cuban government allows cuentapropistas to engage in more than 200 different vocations, and while they generally do not generate large incomes financial arrangements between U.S. financial institutions and cuentapropistas could represent initial contact between U.S. banks and Cubans seeking financial services.
U.S. banks could also try to build a customer base among the recipients of the estimated $3 billion in remittances sent to Cuba by relatives abroad and provide financial services to the 12 categories of travelers now authorized to visit Cuba.
“The immediate financial services market will really be the greater number of U.S. travelers to Cuba,” Kotschwar said. “People who can travel without getting a specific license will be more likely to use U.S. financial services than the emerging entrepreneurial class in Cuba.”
Kotschwar, who helped write a book on U.S.-Cuba economic normalization, said the increased remittance allowance paired with the permissible microfinancing may provide cuentapropistas greater access to capital.
Looking ahead, prepaid cards could be the first vehicle U.S. banks use to enter the Cuban market, American Bankers Association associate chief counsel Robert Rowe told Bloomberg BNA. Those products are comparatively low risk and would serve as an introduction of U.S.-style banking to the Cuban population, he said.
On the commercial-banking side, Rowe said business lending for established economic sectors in Cuba, such as tourism or agriculture, could be initial business-oriented products.
But banks optimistic about entering the Cuban market have to consider the state of the Cuban economy, which “is a basket case,” said Jose Azel, a scholar at the University of Miami Institute for Cuban and Cuban-American Studies.
“The average earnings of a Cuban worker is about $18-20 a month. So you do not have any earning power or disposable income or anything like that,” Azel told Bloomberg BNA.
At least for now, the potential benefits of establishing operations in Cuba are unlikely to outweigh the risks of violating the legal prohibition regime that remains in place, including Bank Secrecy Act requirements and anti-money laundering rules, which continue to be aggressively enforced.
On March 12, the Treasury Department's Office of Foreign Assets Control (OFAC), announced a $258.7 million settlement with Commerzbank AG which involved, in part, accusations the bank facilitated payments violating sanctions imposed on Cuba.
And while MasterCard International Inc., citing recent OFAC guidance, announced in January it would remove its prohibition on U.S.-issued card transactions in Cuba as of March 1, 2015, banks issuing the cards continue to refuse to allow their cards to be used, several lawyers said.
“You can almost picture the risk as an onion, where you have all these different layers that need to be peeled back before banks are able to look at an opportunity and say, ‘Okay, this makes sense,' ” Matthew Aho, Akerman LLP consultant and Cuba policy and business specialist, told Bloomberg BNA.
The restrictions explain why even the Cuban government has found it difficult to obtain banking services in the U.S.
The Cuban Interests Section, which represented the Cuban government in Washington before diplomatic relations were restored, halted consular services in 2014 after Buffalo-based M&T Bank Corp. closed its Cuban accounts in November 2013.
It took State Department intervention to convince Pompano Beach, Fla.-based Stonegate Bank to provide banking services for the Cuban unit and its employees.
“We hope this is the initial step to normalize banking ties between the two countries, which will benefit American companies wanting to do business in Cuba, as well as the Cuban people,” David Seleski, president and chief executive officer of Stonegate Bank said in a statement.
On July 21, Stonegate announced it had signed an agreement to establish a correspondent banking relationship with the Cuban bank Banco Internacional de Comercio S.A., which Seleski described in a statement as “another step in terms of normalizing commercial relations between the U.S. and Cuba.”
While OFAC officials have assured the financial services industry it will respond to questions about what is permissible as they arise, practitioners said U.S. financial institutions would prefer if the government agencies issue additional guidance outlining what constitutes acceptable behavior.
“Banks are particularly skittish about the current atmosphere, even though they've been given permission to form these correspondent relationships. I think they are going to want a little more input from the U.S. government, a little more guidance, about what they can and cannot do,” Feeley said.
Additionally, some Cuban laws dictate Cuban banks' dealings with the U.S. Those laws are open to interpretation by the Cuban government, which also creates uncertainty for U.S. financial institutions.
Any U.S. bank entering the Cuban market would have to adjust to the current structure of the Cuban banking system, which comprises several different types of institutions.
The Banco Central de Cuba, or Cuban central bank, is responsible for supervising Cuban banks and plays a role establishing the country's monetary policy. Interest rates and exchange rates “are dictated centrally, which limits the development of the functions of allocation and transfer of relevant resources for growth, ” according to Mundul, the University of Havana professor.
There are six chief commercial and retail banks; credit is purportedly available for consumer purchases and loans, though factors beyond an applicant's creditworthiness such as social need or a person's standing with the government can determine whether a loan is granted.
Many Cubans already have bank accounts because many companies transfer wages into workers' accounts, though the accounts are typically used solely as depositories.
About a dozen non-Cuban banks and non-bank financial institutions possess representative offices in Cuba, including several Spanish banks and two Canadian banks, according to information compiled by the Cuban government. None of those institutions contacted by Bloomberg BNA would discuss their Cuban operations in any detail.
Lawyers and others described the Cuban banking system as opaque and at times not completely comprehensible. “What they tell you they do and what they actually do in practice is maybe a little bit different. It's a little bit confusing," one Cuban specialist said.
Another roadblock to U.S. banks' participation in the Cuban market could be the lingering issue of outstanding claims U.S. corporations and individuals have against the Cuban government based on the nationalization of private property. Lawyers say resolving this politically sensitive issue is a critical component of the normalization process.
The Justice Department's Foreign Claims Settlement Commission adjudicated 8,816 claims regarding the nationalization, expropriation and other takings of the Cuban government prior to a 1967 deadline, of which it found 5,911 claims to be compensable in the aggregate amount of about $1.8 billion.
A second claims program initiated during the George W. Bush administration to consider claims after that 1967 deadline certified two additional claims totaling $51.1 million. Including interest, lawyers following the claims issue estimated the claims to be worth nearly $8 billion in 2015 dollars.
Rep. Carlos Curbelo (R-Fla.) said the Cuban government may have the ability to pay at least part of the claims itself and could also be resolved by returning the seized assets to their pre-Cuban revolution owners or allowing claimants to participate in the economy of a democratic Cuba. Another idea others mentioned: the Cuban government could raise the money by issuing low-interest bonds.
Having the U.S. government pay claimants as part of a package of measures to normalize relations between Cuba and the U.S., as some have suggested, is “a terrible idea and is offensive to U.S. taxpayers,” Curbelo told Bloomberg BNA.
Also left unresolved is the future of the Cuba embargo, which “remains in force and codified by existing U.S. law,” Stefan Selig, under secretary for international trade at the Commerce Department, said at a June Brookings Institution event.
Members of Congress disagree about whether there is a new consensus to dismantle the embargo first approved in October 1960.
“I have detected no movement whatsoever on any additional unilateral concessions to the Cuban government,” Curbelo said. “The sense that I have gathered here in Congress is that, just like in other negotiations, the Obama administration has received very little in exchange for a whole lot from the Cuban government,” he said.
Rep. John Larson (D-Conn.), who visited Cuba as part of a May Congressional delegation disagreed, saying it's “inevitable” the embargo will be lifted.
“I think you're going to see a steady march” toward repealing the embargo statutes, Larson said.
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