Banks Need to Prep for OFAC Cuban ‘U-Turn’ Exception Limits

The Department of the Treasury’s Office of Foreign Assets Control recently announced changes to its Cuba sanctions intended to further financially isolate the Cuban government. Most importantly, OFAC will effectively rescind the “U-Turn,” an exception to the Cuban embargo that allowed U.S. banks to process payments involving Cuba as long as they start and end offshore.

OFAC will also further restrict remittances to Cuba. The changes, which take effect Oct. 9, will have the greatest impact on U.S. banks offering foreign correspondent banking services and foreign banks utilizing those services, increasing compliance risks for both.

What Changed?

OFAC’s Cuban Assets Control Regulations (CACR) prohibit persons “subject to U.S. jurisdiction,” such as U.S. citizens, persons physically in the U.S., and U.S.-organized companies and their subsidiaries, from transacting with Cuba or in Cuban property.

Generally, when a person subject to U.S. jurisdiction comes into possession of a Cuban property interest, that property must be blocked (i.e.held indefinitely in a segregated account). In March 2016, the Obama administration introduced the U-Turn, an exception from the blocking requirement that permitted U.S. banks to process Cuba-related transfers beginning and ending outside the U.S., provided that neither the originator nor the beneficiary was a person subject to U.S. jurisdiction.

Starting Oct. 9, U.S. banks will no longer be allowed to process these transactions. Instead, they will be given the choice of rejecting (i.e., returning) the funds, or blocking them as otherwise would be required under the CACR.

Additionally, OFAC eliminated certain previously permitted remittances to Cuba and capped family remittances, while introducing a narrow new category of permitted remittances for self-employed individuals and Cuban non-governmental organizations.

What This Means for U.S. Banks

If a U.S. bank allows processing of Cuban U-Turns (not all do), it will need to adapt its controls to ensure that such transactions are no longer processed and make necessary personnel aware of the changes. Procedures previously used to determine whether to process apparent U-Turns can likely be leveraged to determine whether they can be rejected instead.

To qualify for the new “reject” option, though, U.S. banks will still have to determine if the transaction is a valid U-Turn. There is an open question about whether previous guidance defining permissible U-Turns will still apply.

In 2016, OFAC issued FAQs clarifying that, subject to conditions, U-Turns may involve foreign subsidiaries of U.S. banks as well as Cuban Specially Designated Nationals. The FAQs also set expectations for conducting due diligence on whether the beneficiary and originator are subject to U.S. jurisdiction, including instances in which U.S. banks could rely on information provided by other parties to the transaction.

In conjunction with its recent announcement, though, OFAC issued updated FAQs that no longer contain this guidance. OFAC has thus far been silent on whether the 2016 guidance continues to apply. If the guidance is unclear on how U.S. banks can assess U-Turns, U.S. banks may find it easier to simply block all potential U-Turns instead of trying to determine if they can be rejected.

Finally, U.S. banks may wish to alert foreign correspondent customers that have processed Cuban U-Turns through their account that these transactions will no longer be permitted, and clarify expectations as to the use of the accounts.

Impact on Foreign Banks

To avoid potential asset blocking, account closure, and civil liability, foreign banks initiating U-Turns through the U.S. should discontinue these transactions. Although U.S. banks are permitted to reject U-Turns, there is no guarantee that they will expend the resources needed to ensure that the transaction is a valid U-Turn and can be rejected. Instead, the U.S. bank may simply block the payment and force the foreign bank or its customer to apply to OFAC for release.

Continuing to initiate U-Turns could also result in the loss of the foreign bank’s entire relationship with a U.S. bank. If a U.S. bank rejects multiple transactions from a foreign correspondent banking customer for OFAC reasons, the U.S. bank could choose to exit the relationship due to the perceived compliance risk increase. Intense regulatory scrutiny of foreign correspondent banking activities influences these decisions.

Finally, if a foreign bank continues to initiate U-Turns that a U.S. bank erroneously or unknowingly lets through, the foreign bank may itself face liability for violating the CACR.

What This Means for International Trade with Cuba

Revoking the U-Turn shuts a significant window to the U.S. financial system that foreign persons conducting international trade with Cuba previously enjoyed, limiting opportunities for U.S. dollar trade.

To comply with sanctions, Cuba-related U.S. dollar trade must now either occur entirely outside of U.S. jurisdiction or meet the requirements of a narrowing set of authorizations within the CACR.

What’s Next?

In a press release, Treasury Secretary Steven Mnuchin indicated that the changes are intended to hold the Cuban government accountable for oppressing the Cuban people and backing the regime of Venezuelan President Nicolás Maduro, while supporting private industry in Cuba. Given the volatility in Venezuela, and omnipresence of the government in the Cuban economy, further tightening of the Cuban sanctions remains possible.
(news.bloomberglaw)