Cuban Embargo May Hold Hidden Perils for Unwary Mining Companies

Attentive readers likely will know that the U.S. embargo on Cuba has once again emerged as a prominent story this summer. Critics of the embargo have found new supporters in Congress, especially in challenging the embargo's restrictions on travel to Cuba by U.S. citizens. Other readers likely have noticed articles that seem to suggest renewed economic activity between the U.S. and Cuba. In reading these stories, it may be tempting to conclude that the U.S. trade embargo has changed, or is about to change - or, at the very least, that the government may be forced to relax enforcement of the embargo in response to public pressure.

That conclusion would be dangerously inaccurate. Not only does the Cuban trade embargo remain in place but, indeed, it has been tightened further; and the U.S. government has enforced the Cuba embargo perhaps more vigorously, and more broadly, than any of the other economic embargoes administered by the Treasury Department.

Economic sanctions have been a key instrument of U.S. foreign policy for decades, and the U.S. currently pursues such sanctions against a number of foreign countries, including not only Cuba but also Angola, Burma, Iran, Libya, and Sudan. Economic sanctions continue to apply to Iraq and North Korea, although those programs now represent "special cases" that are especially sensitive to the day-to-day changes in U.S. policy toward those countries. Other sanctions programs target specific groups or organizations such as terrorists or drug traffickers. As these programs are administered by the Office of Foreign Assets Control ("OFAC") at the Treasury Department, none has been more vigorously enforced than the trade embargo on Cuba.

Since Cuba is one of the world's leading sources of nickel deposits, mining companies have had a long history of involvement there, and several high profile - and controversial - cases involving enforcement of the Cuban embargo have targeted mining companies.

Over the last ninety days alone, the Treasury Department has enforced the Cuba embargo against 28 companies, with average civil fines amounting to more than $21,000 in each case. No industry has been exempt as manufacturers, retailers, banks, shipping lines, even major league sports teams (the New York Yankees) have been the target of enforcement action under the Cuba embargo. The largest fine in recent months was a $250,000 fine imposed on Zim American-Israeli Shipping Co., Inc. Similarly, over that same 90-day period, Treasury has imposed fines averaging more the $5,100 on 76 individuals for violations of the travel restrictions of the Cuba embargo program.

Given this record of enforcement cases under the Cuban trade embargo, companies should be alert to the sometimes surprising ways in which the embargo may affect their business plans.

The Breadth of the U.S. Embargo on Cuba Is a Surprise To Many . . .

The statutory basis for the U.S. embargo on Cuba is the Trading With the Enemy Act ("TWEA"), which confers broad authority on the President to impose restrictions in furtherance of U.S. policy. The embargo is administered by the OFAC and is implemented through the Cuban Assets Control Regulations ("CACR"). The restrictions imposed by the CACR apply to:

• any U.S. citizen or resident of the United States;
  
• any person within the United States;
  
• any business entity organized under U.S. law; and
  
• any "corporation, partnership, or association, wherever organized or doing business, that is owned or controlled" by a U.S. person or persons.

Accordingly - and this is important - the restrictions of the U.S. embargo on Cuba apply not only to U.S. businesses but also to foreign businesses that are "owned or controlled" by a U.S. person(s). This is in contrast to other U.S. embargo programs, such as those applicable to Iran or Libya, which are authorized by the International Emergency Economic Powers Act ("IEEPA"), and which do not permit direct U.S. jurisdiction over foreign corporations.

Companies with activities in the United States - be they U.S. or foreign companies - can find themselves entangled in the Cuban embargo. The CACR's expansive jurisdiction reaches a wide range of offshore activities, including the activities of U.S. persons wherever they may be, and even applies to non-U.S. persons who are employees of or acting on behalf of U.S. persons. It applies as well to non-U.S. parent corporations that are owned or controlled by U.S. interests.

Since they are not "U.S. persons," foreign corporations do not fall within the scope of the CACR unless they are "owned or controlled" by a U.S. person. Thus, foreign subsidiaries of U.S. corporations are subject to the same CACR restrictions that apply to their U.S. parent corporation. Non-U.S. corporations with subsidiaries in the U.S. normally are not within the scope of the CACR unless under the customary indicia of "ownership or control" it can be shown that a U.S. person(s) owns or controls the foreign entity. Analysis of these indicia of ownership or control would include, for example, a review of any U.S. nationals on the board and the board voting procedures. Even where a foreign corporation may itself fall outside the scope of the CACR, its activities may be affected by the CACR's restrictions to the extent that it employs U.S. nationals. No U.S. person, wherever located, may participate in a transaction involving Cuba. If the company's operations cannot be conducted without the participation of that U.S. person, the company is effectively disqualified from that transaction or business.

The various prohibitions of the Cuban embargo create a virtual blanket on interactions with Cuba by prohibiting all transactions in which Cuba has an "interest of any nature whatsoever, direct or indirect"; moreover, courts over the years have shown extraordinary deference to OFAC as that agency has expansively interpreted key terms such as "interest."

From this broadly construed ban on transactions in which Cuba has any interest, the CACR sets out a series of specific prohibitions, including:

• No exports to Cuba: Unless authorized by an exception or a general license under the regulations, no products, technology or services may be exported to Cuba, either directly or through third countries.
  
• No imports of Cuban-origin goods: With very limited exceptions, goods or services of Cuban origin may not be imported into the United States.
  
• No financial transactions with Cuba or Cuban nationals: No contracts or other financial transactions may be undertaken with Cuban entities. All Cuban assets in the U.S. are frozen, and U.S. banks are required to block (and report) any unlicensed transaction involving a Cuban interest.
  
• No unlicensed travel to Cuba: The regulations also include a ban on unlicensed travel to Cuba by U.S. persons wherever they may be located. Travel is permitted, however, for certain narrowly defined purposes, such as: family visits; official government business; journalistic activity; educational and professional research activities; religious activities; public performances; and humanitarian activities.
  
• No evasion or "facilitation": The CACR also prohibit U.S. persons from engaging in any transaction that has the effect of "evading or avoiding" any of the other prohibitions of the CACR. This ban on evasion or avoidance has been broadly construed by OFAC to include a ban on "facilitation" by U.S. persons, a term that is more precisely defined in other OFAC embargo programs to mean support or assistance of any kind involving a transaction with a U.S.-embargoed country.

The restrictions of the Cuba embargo also extend to dealings by U.S. persons with various entities that have been identified on a list published by OFAC as "Specially Designated Nationals" (or "SDNs"). The SDNs are various persons or other entities determined by OFAC to be owned by, or acting on behalf of, a country subject to U.S. economic sanctions. The SDN List currently includes hundred of names associated with the various sanctions programs. As one example, Moa Nickel SA, a mining company in Canada, is identified as an SDN acting on behalf of Cuba. Thus, if a U.S. person were to become involved in any dealings with Moa Nickel, OFAC would view those transactions as if they were with Cuba itself.

And Foreign Companies Can Be Affected Too . . .

Even if they are not owned or controlled by U.S. companies, foreign businesses can be affected by other dimensions of the U.S. embargo on Cuba. The Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996 ("Helms-Burton") supplements the CACR and specifically targets non-U.S. companies.

Although currently suspended by virtue of a Presidential waiver, Title III of Helms-Burton grants U.S. nationals, including Cuban-Americans who became U.S. citizens after their properties in Cuba were confiscated, a private right of action to bring a suit in a U.S. federal court against persons who "traffic" in their confiscated property in Cuba. (The statute defines "trafficking" as, among other things, "engag[ing] in a commercial activity using or otherwise benefiting from confiscated property.")

In contrast to Title III, the provisions of Title IV of Helms-Burton cannot be waived by the President. Under Title IV, foreign persons who traffic in confiscated U.S. property in Cuba can be denied entry into the United States. The ban applies to corporate officers, principals, or shareholders (and to their spouses and minor children) of an entity found to be in trafficking in confiscated property. To date, Title IV sanctions have been invoked against three entities: Sherritt International, a Canadian mining company; Grupos Domos, a Mexican telecommunications company; and STET, an Italian telecommunications company.

Penalties Under the CACR

Violations of the CACR can result in civil penalties up to $55,000 per violation (and OFAC often finds multiple "violations" in a single transaction). Criminal sanctions can include up to 10 years imprisonment and up to $1,000,000 in corporate fines and $250,000 in individual fines. And as the recent record suggests, enforcement of the Cuban embargo continues to be a high priority for OFAC.

Conclusion

Despite the impression one may draw from recent media reports, the U.S. embargo on Cuba remains very much in place and is actively enforced by the Treasury Department's Office of Foreign Assets Control. Of the various U.S. economic sanctions programs, the Cuban embargo has the broadest extraterritorial reach - it affects not only U.S. persons worldwide but also off-shore entities that are owned or controlled by U.S. persons. The Cuban embargo includes a comprehensive series of restrictions that impose a virtual ban on transactions with Cuba for those who come within the scope of the regulations.

Given the continued enforcement activity in this area, and the broad reach of these laws, companies are well advised to understand how their activities and business plans may be affected by the U.S. trade embargo on Cuba.