Commentary originally published by commPRO.biz on April 5, 2016. Written by Emily Grim, Associate, Reneo Consulting, LLC.

On December 17, 2014, President Obama announced the normalization of relations between theUnited States and Cuba. Today, just a short-time after the president’s historic visit to Havana, American citizens are left wondering how this shift in diplomatic relations will affect our country and, more importantly, what our changing relationship with Cuba looks like moving forward.

The bottom-line is that mutually beneficial trade and business partnerships between the U.S. and Cuba have the potential to spur jobs and growth in both countries. As we embark on these new business partnerships, two significant steps must be taken to facilitate sustained and successful relationships.

First, U.S. businesses entering the Cuban marketplace must have access to appropriate insurance to build confidence in the security of their investments. Use of insurance by early U.S. movers in the Cuban realm will set essential precedent for how future business deals between the U.S. and Cuba are structured.

Second, parties to any deal should agree on clear and defined dispute resolution procedures. A better trade framework, including standardized arbitration and alternative dispute resolution procedures, will lead to a stronger and more secure relationship for both parties.

The need for a strong trade framework is immediate as the continued evolution of diplomatic relations between the two countries opens more opportunities for U.S. investment in Cuba. For example, for the first time in half a century, the U.S. Government has loosened restrictions to allow U.S. companies in the export and telecom sectors to enter the Cuban marketplace and even open offices, warehouses, and other sites necessary to facilitate business transactions and otherwise establish a physical presence in the country. Perhaps most importantly, the continued loosening of restrictions on U.S. travel to Cuba will be a huge driver for increased exchanges between U.S. and Cuban citizens, increased investment, particularly in the hospitality sector, and the overall growth of the Cuban economy. The challenge in this realm is whether investments in Cuba’s infrastructure can keep up with this influx of U.S. travelers.

Despite this rapid increase in potential business opportunities, U.S. investors can only realize the full value of these opportunities by paying close attention to Cuba’s unique investment climate and model for economic growth. The smartest U.S. investors will focus on the development of the Cuban economy itself—particularly its export sector—as the country still requires significant capital to become a strong trading partner.  

Evolving diplomatic relations will continue to impact the nature and scope of Cuban investment opportunities, and the learning curve inherent in these changing relations requires a two-way street of respect and flexibility from both sides. Only by using this two-sided approach will multiple sectors of our economy—from travel, hospitality, and transportation to agriculture, biotechnology, and telecommunications—maximize growth potential. In this unique climate, we must focus on facilitating long-term partnerships that support the creation of a robust U.S. trading partner.

0

On January 26, 2016, the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) and U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) announced new amended regulations intended to further promote U.S. policy toward engaging and empowering the Cuban people.  The new amendments increase export opportunities, facilitate authorized travel, and broaden the scope of authorized transactions related to professional meetings and other events, disaster preparedness and response projects, and professional media and artistic productions in Cuba.

A summary of the new OFAC and BIS amendments is below:

FINANCING
Removing financing restrictions for most types of authorized exports.

  • The amendments remove restrictions on payment and financing terms for authorized non-agricultural exports and permit U.S. banks to provide financing, including by issuing a letter of credit for such exports. Under previous regulations, payment and financing terms for all authorized exports were restricted to cash-in-advance or third-country financing.

EXPORTS
Additional amendments to increase support for the Cuban people and facilitate authorized exports.

  • OFAC is expanding an existing general license to authorize certain travel-related transactions incident to the conduct of market research, commercial marketing, sales or contract negotiation, accompanied delivery, installation, leasing, or servicing in Cuba of items permissible for export under BIS regulations.
  • BIS now will generally approve license applications for export of the following:
    1. commodities and software to organizations that promote independent activity intended to strengthen civil society in Cuba;
    2. commodities and software to U.S. news bureaus in Cuba whose primary purpose is the gathering and dissemination of news to the general public;
    3. telecommunications items that would improve communications to, from, and among the Cuban people;
    4. certain agricultural items (such as agricultural commodities not eligible for a license exception, such as insecticides, pesticides, and herbicides); and
    5. items necessary to ensure the safety of civil aviation and the safe operation of commercial aircraft engaged in international air transportation.
  • BIS is also creating a case-by-case licensing policy that will apply to exports of items to meet the needs of the Cuban people, including exports to state-owned entities that provide goods and services to the Cuban people.  Exports eligible for this licensing policy would include, for example, items for agricultural production, education, and construction of infrastructure that directly benefits the Cuban people (e.g., facilities for treating public water supplies and supplying energy to the general public).

AIR CARRIER SERVICES
Additional amendment to facilitate carrier service by air and with Cuban airlines.

  • The amendments authorize entry into blocked space, code-sharing, and leasing arrangements to facilitate the provision of carrier services by air, including entry into such arrangements with a Cuban national.

TRAVEL
Expanding authorizations within existing travel categories to facilitate travel to Cuba for additional purposes.

  • Airline and vessel crew personnel.  The amendments authorize certain personnel who are operating or servicing vessels or aircraft transporting authorized travelers between the U.S. and Cuba to engage in travel-related and other transactions in Cuba to facilitate that transport.
  • Information and informational materials.  The amendments authorize travel-related and other transactions incident to the exportation, importation, or transmission of information, including the filming or production of movies and television programs; music recordings; and the creation of artworks by certain persons in Cuba.  The amendments also expand an existing general license to authorize transactions relating to the creation and dissemination of informational materials, including employment of Cuban nationals and the remittance of royalties or other payments.
  • Professional meetings.  The amendments authorize by general license travel-related and other transactions to organize professional meetings or conferences in Cuba.  The previous general license authorized only attendance at such meetings or conferences.
  • Public performances, clinics, workshops, athletic, and other competitions and exhibitions.  Similar to the change to the professional meetings category, the amendments authorize transactions related to organizing, rather than just attending, these events.  The amendments remove requirements that U.S. profits from certain events be donated to certain organizations and that certain events be run at least in part by U.S. travelers.
  • Humanitarian projects.  The amendments expand the list of authorized humanitarian projects to include disaster preparedness and response.
0

I. INTRODUCTION

Facilitating increased telecommunications services between the U.S. and Cuba has been a cornerstone of President Obama’s new policy toward Cuba.  Soon after the President’s December 17, 2014 announcement regarding this new policy, the U.S. Departments of Treasury and Commerce amended their regulations to broaden opportunities for U.S. companies to provide telecom services and infrastructure to Cuba.  Slow action by the U.S. State Department and the Federal Communications Commission (“FCC”) to amend their Cuba telecom policies, however, has continued to pose obstacles to U.S. telecom providers seeking to do business in Cuba.

In recent weeks, the State Department and FCC have taken long-awaited steps to eliminate these remaining barriers.  These actions will bring FCC regulations more in line with President Obama’s Cuban telecom initiatives and facilitate new opportunities for U.S. telecom companies to do business in Cuba.

II. PREVIOUS FCC REGULATIONS

The FCC implements policies and procedures for Cuba-related telecom service based on policy guidance from the State Department.  Until recently, FCC regulations relied upon guidance from State that had not been updated since January 2010.  These outdated directives placed a number of restrictions on U.S. telecom carriers doing business with Cuba that were inconsistent with the Commerce and Treasury Departments’ recent sweeping regulatory changes regarding the provision of telecom service to Cuba.

  1. Inclusion on Section 214 Exclusion List

Under previous FCC regulations, Cuba was the only country on the “Exclusion List” for international Section 214 applications.  FCC regulations require all facilities-based carriers to obtain Section 214 authorization to provide international call service from the U.S. to foreign countries.  While the authorization process for most countries typically is efficient and streamlined, providing call service to countries on the Exclusion List requires a separate authorization that is notoriously difficult to obtain.  Carriers must go through a burdensome application process that includes State Department review.[1]

  1. Non-discrimination Protections

Previous FCC regulations also required that agreements between U.S. and Cuban carriers comply with certain “non-discrimination” protections, which dictate that all U.S. carriers must receive the same effective accounting rate for providing similar call services between the U.S. and Cuba.  These protections were intended to prevent Cuba’s state-owned telecom company from discriminating among U.S. carriers competing to carry international traffic to the country.  U.S. carriers have argued, however, that such protections prevent them from negotiating lower rates and responding to market forces.  Cuba was the only country to which these non-discrimination protections still applied.[2]

  1. Establishment of Settlement Benchmarks

As an additional competitive safeguard, the FCC has established benchmarks governing the international settlement rates that U.S. carriers may pay foreign carriers to terminate international traffic from the U.S.  Under FCC regulations, U.S. carriers must negotiate settlement rates with Cuban carriers that are at or below the benchmark level of 19 cents per minute, or they must obtain a benchmark waiver from the FCC.[3]  In other words, U.S. providers can only offer direct calls to Cuba and roaming service if they pay the Cuban Government a fee no higher than 19 cents per minute.  These benchmark rates have delayed or derailed U.S.-Cuba telecom transactions in the past, as the Cuban Government historically has required a termination rate higher than 19 cents per minute.[4]

III. NEW FCC ACTION

On October 26, 2015, the State Department issued new policy directives to the FCC regarding telecom service to Cuba.  The FCC published a notice announcing its proposed implementation of those new directives on November 9, 2015.  According to the notice, the FCC will:

  1. Begin the process of removing Cuba from the 214 Exclusion List and immediately cease coordinating with the State Department in evaluating Section 214 applications for service to Cuba.

Implications of Change:  Removing Cuba from the 214 Exclusion List means that communications companies that already have global Section 214 authorizations can provide facilities-based services from the U.S. to Cuba without seeking additional authority or engaging in a burdensome application process.

The FCC has sought expedited comment on its proposal to remove Cuba from the 214 Exclusion List.  Comments are due on December 4, 2015, and reply comments are due on December 9, 2015.  According to some industry experts, the expedited timeframe suggests that the FCC may already be in the process of implementing its proposal.

  1. Begin the process of removing non-discrimination requirements currently applicable to the U.S.-Cuba call transfer route.

Implications of Change:  The FCC will no longer require that all U.S. carriers receive the same accounting rates from the Cuban Government, meaning that U.S. carriers will have more flexibility to negotiate rates and to respond to market forces.

  1. Continue to apply the appropriate benchmark settlement rate for telecom services between the U.S. and Cuba, while still allowing waivers as appropriate.

Implications of Change:  The FCC will continue to maintain the same benchmark settlement rate of 19 cents per minute for calls to Cuba, though the FCC will also continue to allow waivers of limited duration on a case-by-case basis.  The FCC’s failure to modify or eliminate these benchmarks may continue to hinder transactions with Cuba if the Cuban Government continues to require higher call termination fees.  The FCC has shown willingness in the past, however, to grant waivers for transactions in Cuba as necessary.

IV. CONCLUSION

The FCC’s new proposed actions bring FCC policy in line with current Treasury and Commerce regulations and President Obama’s policy on Cuba.  While the continued application of benchmark settlement rates may hinder certain transactions, the FCC’s removal of Cuba from the 214 Exclusion List and elimination of non-discrimination safeguards should make it easier for U.S. carriers to compete in the Cuban telecom market.

[1] See 47 C.F.R. § 63.12.

[2] See International Settlements Policy Reform, IB Dkt. Nos. 11-80, 05-254, 09-10, RM-11322, Report and Order ¶¶ 16–20, FCC 12-145, 27 FCC Rcd 15521 (2012) (“2012 ISP Reform Order”).

[3] See 2012 ISP Reform Order ¶ 17.

[4] Jens Erik Gould, Free Cuba Phone Market Urged on Obama by Nokia, AT&T, Bloomberg Business (Aug. 21, 2010). http://www.bloomberg.com/news/articles/2010-08-31/free-cuba-telecommunications-market-urged-on-obama-by-at-t-nokia-verizon.

0