Despite Loosened Embargo, Bankers’ Fears Block U.S. Commerce With Cuba

William M. LeoGrande on May 24, 2016

Photo: Bill Hackwell

Photo: Bill Hackwell

One of U.S. President Barack Obama’s most significant measures to promote commerce with Cuba isn’t working. Last March, a few days before the president’s trip to Havana, Washington announced a new package of regulatory reforms loosening the U.S. embargo—the fourth since December 2014. One element of that package licensed U.S. financial institutions to process international transactions between Cuba and non-U.S. parties, so-called “u-turn” transactions. Because most dollar-denominated transactions are cleared through U.S. banks, the ban on these transactions severely hampered Cuban trade.

In fact, lifting that prohibition was at the top of Cuba’s agenda last February when Cuban Minister of Foreign Trade and Investment Rodrigo Malmierca met with U.S. Secretary of Commerce Penny Pritzker for the second round of regulatory talks. If the ban was lifted, Malmierca said, Cuba would end the 10 percent surcharge on the exchange of U.S. dollars for Cuban convertible pesos, which had been imposed to cover the transaction costs Cuba incurred trying to use dollars in foreign trade. When the March regulatory reforms lifted the prohibition, Cuban Foreign Minister Bruno Rodriguez announced that Cuba would lift the surcharge, if the regulatory change was effective.

Unfortunately, it has not been. Although U.S. banks can now legally process Cuban transactions with non-U.S. parties, the banks are refusing to do it. In the past, the United States has levied enormous fines on international banks for processing Cuban transactions in violation of U.S. sanctions. In 2004, UBS was fined $100 million; in 2009, Credit Suisse was fined $536 million; in 2010, Royal Bank of Scotland paid $500 million in fines, and Barclay’s paid $298 million; in 2012, ING Bank was fined $619 million, HBSC $1.9 billion and BNP Paribas a record $8.83 billion. Even after December 2014, France’s Credit Agricole was fined $787 million. At least half a dozen other banks were fined smaller amounts, and dozens more were under investigation.

Some infractions were intentional and also involved other sanctioned countries, principally Iran. But some were inadvertent and self-reported by the banks. They were fined anyway. In 2011, JPMorgan Chase was fined $88.3 million for processing 1,711 wire transfers involving Cuba over a 14-week period, out of hundreds of millions of transactions it processed daily. Although the infractions were unintentional, the bank was fined for having lax controls. Italy’s Intesa Sanpaolo bank was fined $3 million for processing just 53 financial transactions involving Cuba over the course of four years.

The aim of such draconian enforcement was to deter banks from doing business with Cuba by making the costs so high that none would dare take the risk. It worked too well. The first signal that financial sanctions were metastasizing beyond the Treasury Department’s control came in 2013, when M&T Bank refused to continue servicing Cuba’s diplomatic mission in Washington because the compliance costs exceeded the profit. It took the State Department 21 months to find a bank willing to replace M&T. Stonegate Bank finally agreed to do it in July 2015 because, as its CEO put it, he felt a “moral obligation” to help re-establish U.S.-Cuban relations.

“It turns out it’s easier to impose sanctions than it is to dismantle them.”

A second warning sign appeared in late 2015, when U.S. banks refused to transfer funds to Cuba from licensed U.S. travel providers. Even though such transactions were licensed, the banks feared they might be held liable if anyone on the trips was traveling illegally. The Treasury Department’s Office of Foreign Assets Control (OFAC) had to issue a statement reassuring the banks that they could rely on the traveler providers to enforce the regulations.

“Banks are very nervous about any type of misstep … because the fines, even if you only make a small mistake, are huge, explained a Miami lawyer  involved in international banking. “You have to scrutinize everything coming in and out. The problem is, who wants to take that on? You just can’t make money on these accounts.”

So it should not come as a surprise that even though OFAC has now licensed international financial transactions involving Cuba, the banks are still not willing to handle them. “It turns out it’s easier to impose sanctions than it is to dismantle them,” admits a U.S. official.

Washington is facing exactly the same problem with Iran. Earlier this month, Secretary of State John Kerry met with representatives of Europe’s major banks to reassure them that the U.S. was not opposed to commerce with Iran as part of the nuclear deal, even though Iran is still subject to sanctions because it is on the State Department’s list of state sponsors of international terrorism.

Cuba, by contrast, was removed from the terrorism list a year ago. But there has been no comparable diplomatic effort to reassure the banks that sanctions have really been lifted. FAQs on the Treasury Department’s web site are simply not enough, but so far, senior administration officials have been silent.

Havana’s frustration was evident May 16 at the third meeting of the diplomatic commission charged with managing bilateral relations. “It has still not been possible to normalize banking relations,” Cuban diplomat Gustavo Machin complained. Washington, he said, needed to do something “which assures banks that they are not going to be punished for dealing with Cuba.”

A clear, unequivocal policy statement by senior officials at the Treasury or the State Department—preferably the Cabinet secretaries themselves—would go far toward removing this obstacle to commercial engagement. The White House has said that strong commercial ties are the best guarantee that Obama’s opening to Cuba will be “irreversible.” But finance is the lifeblood of commerce. If banks are not certain that they are on solid legal ground processing transaction with Cuba, they won’t do it, and the United States will miss out on one of the main benefits of normalizing relations.

Source: World Politics Review