How Can Financial Institutions Ensure Compliance with Cuba Sanctions?

Since the U.S. embargo on Cuba took full effect in 1962, sanctions evasion has been a major source of frustration for regulators.

Almost sixty years later, enforcement efforts continue to reveal gaps in compliance, ranging from traditional finance to developing digital channels.

From the Trading with the Enemy Act (1963), which froze Cuban assets and prohibited almost all trade, to the Helms-Burton Act, which sought international sanctions against the Castro regime in Cuba, the island nation has had to navigate a slew of economic restrictions, the majority of which were imposed by the United States.

Sanctions imposed on Cuba have also had an enormous effect on its internal growth.

These continued sanctions have also created a legal labyrinth for businesses, financial institutions, and even sovereign governments grappling with their extraterritorial reach.

Financial institutions may erroneously cooperate with Cuban state-owned firms, such as GAESA or Gaviota, which are officially barred by Cuba OFAC sanctions.

As a result, in this article, we will explore the obstacles that financial institutions have in complying with Cuba sanctions, as well as how they might overcome them.

What are the Cuba sanctions?

Cuba sanctions are a series of economic and commercial restrictions implemented by the United States on the socialist South American country to put pressure on the government in Havana.  US legal statutes such as the Trading with the Enemy Act (TWEA) and the Cuban Assets Control Regulations (CACR) address Cuban sanctions.

These sanctions include a broad embargo on trade, travel, and financial activities imposed by the Office of Foreign Assets Control (OFAC).

The OFAC Cuba sanctions are the most stringent of any sanctions regime in the United States.  These sanctions freeze assets affiliated with the Cuban military, intelligence agencies, and state-owned corporations such as GAESA.

OFAC sanctions on Cuba include prohibitions on business relationships with Cuban state-owned businesses, import and export bans, and asset freezes on persons and organizations on the Cuba sanctions list.

So, When Did the Cuba Sanctions Actually Begin?

US sanctions against Cuba date back to the early 1960s, when the Eisenhower and Kennedy administrations broke economic links following Cuba’s ideological alignment with the Soviet Union.

The Trading with the Enemy Act of 1963 established the embargo.  The act provided legal framework for freezing Cuban assets and prohibited almost all trade.

For decades, Cuba sanctions regulations remained stringent, with only small changes under successive regimes.

Between 2015 and 2017, the Obama administration relaxed sanctions on Cuba, removing it from the State Sponsors of Terrorism list and allowing limited trade and travel.

However, the détente was brief.

OFAC sanctions against Cuba were strengthened once more during the Trump administration.  Trump specifically targeted military-related firms such as GAESA, Cuba’s state-run conglomerate.

The Biden administration upheld these limitations and strengthened prohibitions on financial transactions with Cuban hotels, tourism companies, and other government-related sectors.

Today, the Cuba sanctions list is constantly updated in response to geopolitical developments.  These sanctions reflect both geopolitical hostility and enforcement goals.

What Are the Current Regulations On Cuba Sanctions?

Currently, OFAC’s Cuba Sanctions Program under 31 CFR § 515 is the most comprehensive U.S. economic embargo on the country.

Sanctions on Cuba prohibit nearly all trade and financial transactions between U.S. entities and Cuban parties. Nonetheless, there are limited exceptions for remittances, telecommunications, and humanitarian aid.

The two other lists, which are not part of the SDN list, with their specific requirements from the US State Department concerning Cuba, include:

– Cuba Restricted List

– Cuba Prohibited Accommodations List

The Cuba OFAC sanctions also maintain an extensive Specially Designated Nationals  List, which includes several Cuban nationals, businesses, and government-linked entities.

Among the most notable sanctioned entities is GAESA, Cuba’s military-owned conglomerate, which controls key industries like tourism, import-export, and retail.

A critical aspect of the US sanctions on Cuba is its extra-territorial reach, which means that companies with any US nexus operating anywhere in the world that engage in prohibited transactions with Cuban SDNs may face severe penalties and legal actions.

Therefore, financial institutions (FIs) worldwide should remain watchful, as even indirect dealings like processing payments through third-country intermediaries can trigger enforcement actions under the Cuba sanctions regulations.

Who Is Most Affected by US Sanctions on Cuba?

The international banking industry and global corporations including business supply chains, new fintech products, and cryptocurrency firms are the ones most impacted by the Cuban sanctions, aside from Cuba itself.

The consequences of these sanctions are extensive.  They affect firms around the world, not just those in the United States.

Therefore, financial institutions, especially banks and fintech businesses have to carefully screen transactions for ties to the Cuba sanctions list, as OFAC has penalized institutions for processing payments linked to restricted Cuban entities.

Multinational firms are also subject to compliance issues, especially when operating in areas where middlemen or shell companies are used to conduct Cuban trade.

In recent years, OFAC has extended the reach of Cuba sanctions and now includes cryptocurrency companies, and Cuban-linked digital asset mixers will be added to the SDN List in 2023.

Such an approach indicates that even decentralized financial systems can face enforcement actions.

In simple terms, Cuba sanctions have an impact on both the worldwide banking industry and trade, affecting the commercial supply chains.

Thus, strict due diligence is required to avoid costly breaches.

Did Cuba Face Sanctions From Nations Other Than the US?

While the United States is the primary country imposing extensive and long-standing sanctions on Cuba, other nations have required limited or issue-specific sanctions at various times which often harmonized with human rights and political concerns.

The following infographic illustrates the list of countries or regional blocs (excluding the U.S.) and their policy towards Cuba:

What Challenges Do FIs Face in Complying with Cuba Sanctions?

Financial institutions face serious obstacles in sticking to US sanctions on Cuba due to the complex and far-reaching nature of these restrictions.

Risk of the Extraterritorial Nature of U.S Sanctions

The extraterritorial reach of Cuba Sanctions means its enforcement applies outside the US territorial boundaries, such as foreign branches, subsidiaries, or companies incorporated under laws of foreign jurisdictions, in which US persons have ownership or control.

Even non-U.S. banks that process transactions in U.S. dollars or maintain correspondent accounts with American financial institutions can face OFAC penalties if they facilitate dealings with Cuban entities.

This has led many global banks to over-comply or completely withdraw from Cuba-related transactions even when permitted under domestic regulations to avoid severe enforcement actions.

A very relevant case is that of BNP Paribas, which was fined $8.9 billion in 2014 for violations across multiple sanctions programs, including Cuba OFAC sanctions, due in part to prohibited dollar clearing practices.

Navigating Sanctions Compliance Challenges in the UK and BALTIC Region

Difficulties Caused By Legal Conflict Between Jurisdictions

Another fundamental issue is the legal conflict between jurisdictions. While the Cuba sanctions regulations enforce severe prohibitions, other regions such as Canada and the EU have laws that explicitly disallow compliance with U.S. embargo measures.

The EU Blocking Statute, for instance, blocks European entities from adhering to sanctions on Cuba and allows them to obtain compensation for such restrictions.

This creates a dilemma for multinational banks, which must either risk violating U.S. law or face judicial consequences in Europe.

This was demonstrated in the case of Dutch software company Exact, which annulled its contract with Cuba-based PAM International after being taken over by a U.S. investment firm. This action was taken to avoid contravention of US Sanctions laws.

However, PAM International took this matter to the Dutch court and the Court, keeping up with the EU Blocking Regulation, ordered the Dutch software company Exact to continue performing its contractual obligations of distributing software to Cuba.

This case is a perfect example of a business getting stuck between two conflicting legal jurisdictions.

Risks due to Opaque Ownership Structures

Finally, hidden ownership and entity risk make due diligence more difficult.

It is difficult to assess if a person is associated with prohibited parties because of Cuba’s state-dominated economy, which results in many companies being indirectly controlled by sanctioned corporations.

FIs could unintentionally interact with Cuban state-owned businesses that are specifically forbidden by OFAC sanctions, like GAESA or Gaviota.

Banks run the risk of enabling transactions that break US regulations if they don’t conduct rigorous screening and continuous monitoring, which might result in regulatory fines.

How Can AML Watcher Help You Comply With the Cuba Sanction Regime?

Today, the Cuba sanctions present a continuous compliance challenge for financial institutions, particularly due to their strict enforcement and continuous updates.

Conventional screening techniques that provide delayed updates expose financial institutions to more regulatory risks, which can result in hefty fines for breaking US sanctions against Cuba.

Institutions today need to implement real-time monitoring systems that can quickly update newly designated entities as soon as they are added to restricted lists.

Through real-time warnings on high-risk transactions, AML Watcher offers businesses the most recent screening tools to help them stay ahead of Cuban sanctions.

FIs can better comply with changing regulatory requirements by opting for the Cuba SDN sanctions screening tool offered by AML Watcher.