The US's decision to normalise relations with Cuba promises to create new opportunities for American banks looking to expand. But, with the US government's changes still to be finalised, the country's banks are reacting cautiously.

Communiqués show that the US Chamber of Commerce and powerful US agricultural interests are already thinking about the opportunities that may arise as a result of the Cuba policy changes announced by US president Barack Obama in a December 17 statement. In a move that surprised many, Mr Obama outlined plans to normalise diplomatic relations with Cuba and to ease US-Cuban trade, travel and financial restrictions.

US banks, however, are still focused on the risks of doing business with Cuba, according to some experts.

David Schwartz, president and CEO of the Florida International Bankers Association (FIBA), whose members include US, European, Canadian and Latin American banks, says: “Overall, while there is some optimism among bankers, it is cautious optimism because of the high-risk nature of doing business with Cuba for banks. It is going to be some time before we see any movement on the part of banks regarding Cuba.”

First steps

There are several reasons for the banks' cautious response to Mr Obama's announcement. One of these, which has been included in statements by individual banks, including the leading US mortgage lender San Francisco-based Wells Fargo, is that bankers want to see exactly what changes the Office of Foreign Assets Control (OFAC) at the US Treasury will make to existing regulations restricting and sanctioning US banking relations and US financial transactions with Cuba. And, in the case of trade finance, what changes will be made to trade sanctions by the Bureau of Industry and Security in the Department of Commerce.

Some progress has been made, however. The White House has already released a document outlining in detail which business areas will be opened up for banks. In the current regulatory environment, Mr Schwartz and Robert Rowe, chief legal counsel and vice-president of the American Bankers Association (ABA), both agree that some areas are likely to be more appealing to banks than others, because they involve fewer risks.

Easing restrictions and allowing US credit and debit cards to be used by authorised travellers to Cuba is, Mr Schwartz thinks, one area of potential interest to banks. Such cards, he says, are linked to US bank accounts, so compliance costs and requirements are familiar to banks. Also, the potential additional fee income could be substantial.

Making moves

As a result of Mr Obama's announcement, OFAC is scrapping its requirement for people who are already eligible to travel to Cuba to receive special permission, and it is also going to allow the direct purchase of airline tickets from the US to Cuba. According to the latest available figures from Cuba's National Statistical Office, there were 448,000 US visitors to Cuba, including 350,000 Cuban Americans, in 2013.

The US government is also planning to significantly increase authorised sales and exports from the US to Cuba, focusing on providing goods that strengthen Cuba's nascent private sector and telecommunications development.

Meanwhile, banks will be allowed to use different protocols, depending on what suits them, as opposed to being limited to a rigid ‘cash in advance’ protocol, which is expected to make trade with the country easier.

Still, US banks are likely to be more cautious about the government’s other planned area of US financial liberalisation with Cuba – allowing US institutions to open correspondent accounts at Cuban banks and vice versa, to facilitate the processing of authorised transactions.

Having such accounts would undoubtedly simplify and open up the business of US remittances to Cuba, which were estimated at more than $3.5bn in 2013, according to the Miami-based Havana Consulting Group. The government is also increasing the remittance allowance to $2000 every three months to relatives in Cuba, four times the current limit.

Relief on the way

It is perhaps unsurprising that US banks are not overly eager to move into the Cuban market, given the regulatory environment since the global financial crisis saw a number of these institutions fined for allegedly illegal interactions with the country. The largest such fine was the record $8.9bn that French bank BNP Paribas agreed to pay last year after it violated US sanctions, principally in connection with Sudan, but which also involved Cuba.

“Banks are just not willing to take on risk for financial and reputation reasons,” Mr Schwartz says.

Indeed, many US banks have been implementing a 'de-risking' strategy, looking at the various lines of business on their balance sheets and the types of customers that they deal with, and deciding which are too risky. And part of that de-risking has been singling out activities relating to Cuba, according to Mr Schwartz. The upshot, he says, is that it is now difficult for a customer to open an account if they are engaged in any type of Cuba-related business. And, existing customers already involved in such a business, may well have had their accounts closed by their bank.

Relief is around the corner though, for US and non-US banks alike, as among the US government's changes, the application of Cuban sanctions in third countries is going to be updated and relaxed. The US Department of State, in accordance with presidential instructions, has also started reviewing Cuba’s 1982 designation as a state sponsor of terrorism. Many say Cuba is certain to be taken off the list within six months.

Julia Sweig, a senior fellow and Cuba expert at the Council of Foreign Relations in Washington, says: “The fact that Cuba is on the list is the principal reason why so many banks have found it almost impossible to provide banking services not just to Cuba but to entities from other countries doing business with Cuba, such as foreign embassies.”

Due to all sorts of counter-terrorist financing mechanisms established after the September 11, 2001, attacks, she continues: “Cuba gets caught up in a web that is designed for Iran, Syria, Sudan and, now, North Korea.” De-listing Cuba could therefore be “an enormous trigger for all sorts of businesses, including banking”, she says.

Others, including Mr Rowe at ABA, believe that while this change will be important, it will not make a significant difference to banks.

Limited scope?

A further source of uncertainty is the fact that there are limits to how far the White House can go on its own to lift restrictions and forge strong economic ties with Cuba, without support from US Congress.

The full restoration of trade and travel (including tourism) to Cuba can only be achieved with the lifting of the 54-year-old embargo, which was codified into the Helms-Burton Law in 1996, and would require an act of Congress to repeal, as well as Cuba putting in place many of the fundamentals of democracy.

Still, Mr Obama has the authority to alter regulations based on the 1966 law. Richard Muse, a Washington-based lawyer specialising in laws relating to Cuba, says that the executive branch’s power to extend, revise and modify the Treasury department’s Cuban asset control regulations embargo provisions is basically “unfettered”.

Opening doors

A further difficulty, especially for banks in south Florida, and especially Miami, is that many customers belong to an older, first generation of Cuban émigrés, who are opposed to any rapprochment with Fidel Castro and, more recently, his brother Raul Castro’s, communist government.

Nonetheless, many surveys, including one conducted in 2014 by the Atlantic Council, a Washington think tank, found that in Miami-Dade County, home to the largest Cuban American population in the country, 64% of respondents and a majority of younger Cuban Americans supported normalising relations with Cuba. 

Finally, another unknown is what the rewards be of doing business with Cuba, a small, undeveloped island of 11 million people, will be. Since becoming Cuban leader in 2008, Raul Castro has launched some economic reforms. Last year, Cuba passed a new foreign investment law and a new anti-money laundering and counter-terrorist financing law (a pre-requisite for Cuba being de-listed).

But, says Theodore Henken, professor at Tulane University and an author of several books on the Cuban economy: “The other side of the story is how ready will the Cuban government be to accept  foreign investment on terms that will be enticing to foreign investors and foreign banks... A big problem is that Cuba is not necessarily a country that is a great bet for investors.

“Now... Obama is knocking. Will Raul open the door?”


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