24 Aug 2016
Doing Business with Cuba (1): Foreign Trade Eligibility and Exchange Controls
Despite the tremendous challenge and numerous roadblocks, in December 2014 US President Barack Obama announced the most proactive US policy shift towards Cuba in more than half a century – the re-establishment of full diplomatic relations between the two countries. While the ultimate decision to lift the trade embargo against Cuba remains with the US Congress, it has not stopped the Obama administration from utilising the full extent of executive authority to influence policy change and public perception, both domestically and internationally. Following the re-opening of the US embassy in Havana and the Cuban embassy in Washington D.C. in July 2015, trade restrictions on Cuba have been gradually loosened, offering a brand-new vision for Hong Kong traders. A detailed look at Cuba’s existing trade regime therefore becomes of vital importance.
Eligibility for Conducting Foreign Trade in Cuba
After more than 50 years, the US and Cuba are moving towards normalisation of relations. In line with the expectation of a complete, though gradual, removal of the US trade embargo, an increasing number of international brands are likely to make inroads into the Cuban market, while Cuba is widely expected to gradually embrace a more liberal trade regime.
Before the long-awaited changes become reality, however, parties wishing to trade goods with Cuba must first obtain an authorisation from the Ministry of Foreign Trade and Foreign Investment (MINCEX), which sets out the specific tariff lines for the goods that the entity is authorised to import and/or export. If an entity wishes to import and/or export goods outside the scope of such authorisation, it must obtain an additional authorisation from MINCEX before entering into a contract to carry out such trades.
Import operations in Cuba can only be conducted by an authorised Cuban importing company (a state-controlled agency) or a trade agent, which must comply with a range of conditions in order to maintain its import authorisation as set out in MINCEX Resolution 50/2014. For example, entities are required to have a commercial intelligence system with information on suppliers, foreign customers, principal sellers of the relevant product(s) on a global basis, authorised products, historical prices, contracts signed with suppliers and foreign customers, various trade statistics, etc.
Moreover, the entity must comply with certain commitments and specific administrative procedures and use the goods only for authorised activities. Customs entry must be handled by an authorised customs agent contracted by, and acting in the name of, a Cuban state-controlled company legally allowed to import a given category of product.
The portfolio of foreign suppliers and customers of an entity authorised to import into Cuba must be approved by Cuban authorities. A file must be created for each foreign company added to the portfolio of authorised suppliers/customers with the following information: (1) a profile of the foreign company; (2) a copy of the document establishing the foreign company as well as documentation proving the legal existence of the company, such as certifications issued by commercial or public registers or tax registration information (tax registration information may not be older than six months); and (3) bank guarantees provided by the supplier or customer with evidence of the accounts maintained by such supplier or customer in their country of origin. The file may also include other information of potential interest, including articles of incorporation of the supplier or client, number of years working with the supplier or client, historical contractual information, documents modifying the articles of incorporation, etc.
Once a foreign company is approved for inclusion in a portfolio of suppliers/clients, the entity authorised to import into or export from Cuba must request MINCEX to issue a unique code for the foreign company. The code must normally be issued within seven working days from the date of submission of all required information. In the case of the importation and exportation of samples, MINCEX may issue a temporary code valid for a period of three months.
If a foreign company has conducted business with Cuban entities worth at least US$500,000 a year for a period of three years, it may submit an application to the Chamber of Commerce of the Republic of Cuba to establish a branch in the country. Despite this apparent flexibility, the import of goods for consumption and wholesale/retail distribution channels in Cuba are currently entirely controlled by Cuban entities and not open to participation by foreign companies, even if the foreign company has a commercial presence in Cuba. Foreign companies may be authorised to import under certain circumstances, such as the importation of inputs and raw materials used in production activities carried out in the Mariel Special Development Zone.
On Exchange Controls
It is also worth noting that Cuba imposes strict controls on foreign exchange. The government created a foreign-exchange allocation system in 2009 through which a committee that includes the Central Bank of Cuba and the Ministry of Economy and Planning allocates foreign exchange to various ministries and sectoral bodies in accordance with foreign-exchange availability and government priorities.
These entities subsequently distribute their foreign-exchange allocations to their dependent companies in accordance with their own priorities. The so-called “liquidity capacity” (capacidad de liquidez, or CL) determines the ability of a ministry or sectoral body, and their dependent entities, to carry out import operations.
It is therefore important for foreign exporters to ensure that the importing entity in Cuba has sufficient CL to be able to carry out the import operations, as securing payment from companies that do not have sufficient foreign-exchange liquidity may prove to be very difficult or even impossible. Indeed, not every company that wishes to import consumption or capital goods into Cuba has sufficient CL to pay for such products.
A March 2016 report prepared by Spain’s Economic and Commercial Office in Havana indicates that since 2013 it has been common for Cuban companies to pay for imports through irrevocable unconfirmed letters of credit with deferred payment at 360 days, although better conditions could be secured.
Foreign exporters seeking to receive payment from Cuban suppliers should also be aware of the strict restrictions that the US still maintains on financial and other transactions with Cuba, although some of these have been eased recently. For example, US regulations allow fund transfers from a bank outside the US that pass through one or more US financial institutions before being transferred to a bank outside the US where neither the originator nor the beneficiary is a person subject to US jurisdiction. However, transactions through the US financial system that do not meet these criteria, including all transactions where the originator or beneficiary is a person subject to US jurisdiction, remain prohibited unless otherwise authorised or exempt under US regulations.
 Diplomatic relations between the US and Cuba were severed in 1961 during the Cold War.