[co-author: Walter Donaldson II - Freeh Group International Solutions, LLC]

The opening of Cuba to greater commercial and financial activity offers many possibilities for U.S. financial institutions but, with those possibilities, comes a responsibility to meet the complex compliance challenges that accompany them.

After 50 years of embargoes and strained diplomatic relations, the relationship between the United States and Cuba has experienced more openness in the last two years, especially with respect to financial institutions and financial transactions. As is well known, the United States has long prohibited financial transactions with Cuba, dating back to economic sanctions instituted in 1963 after the Cuban missile crisis. Only recently has the Obama administration materially changed U.S. policy towards Cuba, culminating in President Obama’s December 17, 2014 announcement of a formal change to engage with, and empower, the people of Cuba. To implement this announced policy change, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) amended its Cuban Assets Control Regulations five times during 2015 and 2016. These recently changed regulations not only liberalized certain business and travel authorizations, but, importantly, the revisions also expanded the range of authorized financial transactions involving U.S. financial institutions. Additionally, on April 21, 2016, OFAC updated its Frequently Asked Questions Related to Cuba (FAQs) to offer further clarity regarding these recent regulatory revisions. This alert explores the key aspects of the regulatory revisions in connection with financial institutions doing business with Cuba and raises issues for compliance with the Bank Secrecy Act (BSA) /Anti-Money Laundering (AML) framework.

What Has Changed?

OFAC made significant changes that apply to financial transactions related to Cuba, each with its own regulatory challenges. These changes affect banking institutions,¹ which must consider how they will comply going forward.

1. U-Turn Transactions Through the U.S. Financial System

Under the new regulations, so-called “U-turn transactions,” which were previously prohibited, are now authorized. 31 C.F.R. §§ 515.584(d), (e). A U-turn transaction is one in which funds are transferred from a bank outside the United States, but then pass through one or more U.S. financial institutions before ultimately being transferred to a bank outside the United States. The bank that originates the transaction and the bank that ultimately receives the funds are typically separate entities that use U.S. banking infrastructure to facilitate the U-turn transaction. The new regulations allow U-turn transactions, in which Cuba or a Cuban national has an interest, to be conducted through the U.S. financial system.

Under the new rules, neither the originator nor the beneficiary may be a person subject to U.S. jurisdiction. OFAC provided additional guidance in the FAQs that explains that funds may also be transferred or terminated in accounts maintained at foreign branches and subsidiaries of U.S. banking institutions so long as neither the originator of the transaction nor the beneficiary is a person subject to U.S. jurisdiction. Transactions that fall outside this specific set of criteria, including those transactions where the originator or beneficiary is a person subject to U.S. jurisdiction, remain prohibited.

In September 2015, OFAC issued an expanded general license that authorizes banking institutions, subject to U.S. jurisdiction, to open, maintain and close bank accounts for Cuban nationals, provided that the accounts are used only while the Cuban national is located outside of Cuba and that they are not used for transactions that involve a commercial exportation of goods or services to or from Cuba. This general license also authorizes U.S. banking institutions to process remittances from Cuba and Cuban nationals in third countries to the United States.

Under the FAQs, OFAC expects U.S. banks, including their foreign branches and subsidiaries, to conduct due diligence when dealing with their own customers, including with respect to the ownership structure for entities, proof of citizenship for individuals, and confirming address information. This due diligence is designed to confirm that the transaction being processed is consistent with the U-turn general license authorization. All banks, including those acting solely as intermediaries, are required to screen against OFAC’s Specially Designated National (SDN) List and their own internal filters.

When dealing with those who are not bank customers, banking institutions may rely on the remitter’s and/or the beneficiary’s address as stated in the transaction to determine whether the remitter or beneficiary is a person subject to U.S. jurisdiction. This technique is not allowed if the U.S. banking institutions know or have reason to know otherwise that the customer is not located at the provided address.

In cases where the banking institution is acting solely as an intermediary and fails to block a prohibited transaction, OFAC will consider the totality of the circumstances surrounding the bank’s processing of the transaction to determine what, if any, enforcement action to take against the bank. Additionally, U-turn transactions may be processed, notwithstanding the involvement of an SDN of Cuba in the transaction.

2. Processing of U.S. Dollar Monetary Instruments

OFAC added a new provision that authorizes U.S. banking institutions to process U.S. dollar monetary instruments, such as cash and travelers’ checks, presented indirectly by Cuban financial institutions. 31 C.F.R. § 515.584(g). For example, if a Cuban financial institution opens a correspondent account at a European bank, because the European bank may accept U.S. dollars through that account, the U.S. financial institutions may now process transactions that have been converted into U.S. dollar monetary instruments and originate from the correspondent account at the European bank, even though the correspondent account is for a Cuban financial institution.

Correspondent accounts are accounts opened by foreign financial institutions in order to conduct transactions in foreign currencies despite not having a banking license in those jurisdictions. By using correspondent accounts at financial institutions outside of U.S. jurisdiction, Cuban banks are able to offer services to their customers in connection with permissible transactions denominated in U.S. dollars.

It must be noted that the revisions to OFAC’s Cuban Assets Control Regulations do not authorize banking institutions subject to U.S. law to open correspondent accounts for Cuban banking institutions. This prohibition includes foreign banks that are subject to U.S. law because they have branches in the United States.

3. Bank Accounts on Behalf of a Cuban National

OFAC also added a new provision to authorize banking institutions to open and maintain accounts solely in the name of a Cuban national located in Cuba for the purposes only of receiving payments in the United States in connection with transactions authorized pursuant to or exempt from the prohibitions of the Cuban Assets Control Regulations and remitting such payments to Cuba. 31 C.F.R. § 515.584(h). Examples of authorized transactions include payments received related to humanitarian projects and certain independent Cuban entrepreneur-produced goods.

The revisions do not make changes to the types of transactions authorized, but instead allow for banks to open and maintain accounts for Cuban nationals receiving payment in connection with authorized transactions and to remit such payments back to Cuba. As an example, the final rule notes that a Cuban national who is an author located in Cuba would be permitted to open an account with a bank or online payment platform in the United States to receive payments for sales of her book.

4. Remittances

OFAC greatly expanded the general license that allows banking institutions to process authorized remittances to Cuba without having to apply for a specific license. Remittances from Cuba and from Cuban nationals in third countries to the Unites States are also authorized by general license. The changes to the general remittance license also removed the limits on remittances to Cuban nationals other than certain prohibited Cuban government and Communist Party of Cuba officials, and the changes authorize additional remittances to Cuban nationals in connection with the administration of estates.

A banking institution does not need to independently verify that an individual’s travel is authorized when processing Cuba travel-related transactions. Instead, according to the FAQs, the banking institution may rely on U.S. travelers to provide their certifications of authorized travel directly to the person providing travel or carrier services when processing Cuba travel-related transactions, unless the financial institution knows or has reason to know that the travel is not authorized by a general or specific license. In addition, the bookkeeping requirements for banking institutions that provide remittance-forwarding services include an obligation to retain, for at least five years from the date of the transaction, a certificate from each customer indicating the section that authorizes the person to travel or send remittances to Cuba. In the case of a customer traveling under a specific license, a copy of the license must be maintained on file.

5. Credit and Debit Cards

OFAC now allows travelers to use U.S. credit and debit cards in Cuba. As part of the infrastructure for allowing these transactions to occur, U.S. financial institutions are authorized to enroll merchants and process credit and debit card transactions for travel-related transactions under general travel licenses or specific travel licenses. However, OFAC regulations do not require financial institutions or credit card companies to accept, maintain or facilitate authorized financial relationships or transactions.

Know Your Customer (KYC)

Financial institutions have a responsibility to ensure KYC is being performed internally in accordance with customer policies, customer identification requirements, transaction monitoring and risk profiles. KYC begins with the establishment of any banking relationship and must be an ongoing process throughout the life cycle of that relationship. This customer due diligence builds on the original information from the setup of an account and should be updated with every touch point. It may be something as simple as an address or contact information change or name change as a result of a marriage, but it should be a never-ending process that is built into the customer service routine and policies. Enhanced due diligence (EDD) will be critical to ensure compliance with OFAC’s new regulations, to ensure the transactions are authorized, and to ensure that the bank remains in compliance. The EDD process generally starts as a result of a triggered transaction through the monitoring system. However, with these transactions, new filters within the monitoring system will be required to reduce the risk of the bank unintentionally violating a rule. This will cause an increase of EDD for the bank and require adequate investigative resources to ensure any triggered transactions are reviewed in a timely manner.

Pepper Points

• The opening of Cuba to greater commercial and financial activity offers many possibilities for U.S. financial institutions but, with those possibilities, comes a responsibility to meet the complex compliance challenges that accompany them. Given the U.S. government’s previously rigid policies regarding Cuba, many financial institutions understandably have little to no experience applying the BSA/AML framework, specifically the KYC requirements, to transactions that directly or indirectly touch Cuba and its citizens.
• With the thaw in U.S. policy to permit greater financial activity, U.S. financial institutions will need to institute policies to comply with the new framework. Most notably, U.S. financial institutions should revisit their Suspicious Activity Report (SAR) policies as they pertain to Cuban financial transactions. Previously, nearly all such transactions with Cuba were prohibited and likewise would generate a SAR if a U.S. financial institution obtained knowledge or information about the transaction. Now, not all transactions will be presumptively prohibited and therefore likely no longer automatically trigger the requirements to file a SAR.

Specifically, there is one action item for 2016 — U.S. financial institutions involved in international transactions and those institutions particularly active in the Caribbean marketplaces should develop bright lines to be drawn for when to file SARs and to memorialize those changes in written policies.

Endnotes

¹ The term “banking institution” includes any person engaged primarily or incidentally in the business of banking, of granting or transferring credits, or of purchasing or selling foreign exchange or procuring purchases and sellers thereof, as principal or agent, or any person holding credits for others as a direct or incidental part of his business, or any broker; and, each principal, agent, home office, branch or correspondent of any person so engaged shall be regarded as a separate “banking institution.” 31 C.F.R. § 515.314.