February 3, 2016

Cuba and the Coming Telecom Revolution

4 min

Effective January 27, 2016, the Department of Commerce, Bureau of Industry and Security (BIS) policy on the export of telecommunications equipment to Cuba changed from a "case-by-case" review of license applications to a "general policy of approval . . . for exports and reexports of [t]elecommunications items that would improve communications to, from, and among the Cuban people." Coupled with amendments to the Cuban Asset Control Regulations (CACR) announced by Treasury's Office of Foreign Assets Control (OFAC) on the same day, further relaxing the restrictions on economic activities in, and financing exports to, Cuba, the path is now clear for U.S. persons to help bring Cuban telecommunications into the twenty-first century.

Beginning on December 17, 2014, the Obama administration has taken a series of steps to open U.S. diplomatic and economic relations with Cuba with the intent to "engage and empower the Cuban people." Starting in January 2015, OFAC issued an expanded general license authorizing transactions that establish mechanisms to provide commercial telecommunications service in Cuba or linking third countries and Cuba. Then in September 2015, OFAC further authorized U.S. persons to enter into licensing agreements related to, and to market, authorized telecommunications services. The most recent regulatory changes announced by BIS and OFAC on January 26, 2016, and effective January 27, 2016, are the next steps in this process.

While these amendments are aimed at encouraging the development of the private sector in Cuba in a number of areas, this client alert focuses on the potential impact the regulatory changes will have on the Cuban telecommunications sector. Economic intercourse with Cuba is regulated by two separate and interconnected licensing regimes. BIS controls the goods (e.g., equipment) that may be exported to Cuba; OFAC licenses transactions involving Cuba, including the services that may be exported to Cuba, who may go to Cuba, when, and for what purposes, and all financial and contractual interactions with Cuba. Both regimes are coordinated with, and overseen by, the Department of State and, of course, the President and the National Security Council.

The sum of the recent BIS and OFAC policy changes is that U.S. telecom companies may:

  1. Engage in travel-related transactions incident to exploring the Cuban telecom market, as well as the commercial marketing, sales, delivery, installation, or servicing in Cuba items consistent with BIS export policy, "provided that the traveler's schedule of activities does not include free time or recreation in excess of that consistent with a full-time schedule."
  2. Travel to Cuba for professional research or to attend or organize professional meetings relating to telecommunications (again, provided there is no free time or recreation in excess of that consistent with a full-time schedule).
  3. Establish and maintain business presences in Cuba, whether through subsidiaries, branches, offices, joint ventures, franchises, agencies, or other business relationships with any Cuban individual or entity (including ETECSA, the Cuban government-owned telecommunications company.)
  4. Export consumer communication devices to Cuba under BIS License Exception Consumer Communications Devices (CCD), which authorizes the export and reexport of certain commodities and software to eligible recipients in Cuba. Examples of eligible commodities include certain computers, modems, mobile phones, including cellular and satellite telephones, personal digital assistants, and consumer "software."
  5. Expect to receive favorable treatment from BIS for the export of telecommunications equipment, subject to export restrictions on very high-end equipment and sales to "prohibited officials" of the Cuban government and "prohibited members" of the Cuban Communist Party.
  6. Engage in transactions that "establish mechanisms to provide commercial telecommunications services in Cuba or linking third companies and Cuba." This includes wireless, fiber-optic cable, and satellite facilities at one end, to all BIS-approved consumer electronic devices, at the other.
  7. Provide certain internet-based communications services for a fee to certain end users, including e-mail or other messaging platforms, social networking, VOIP, web hosting, or domain name registration.
  8. Use flexible financing with regard to infrastructure projects (previously cash in advance was required) involving exports of items from the United States or "reexports of 100 percent U.S.-origin items from a third country, other than agricultural items or commodities."

As both OFAC and BIS have made clear, the purpose of the new rules involving trade with Cuba is to engage the private sector in that country to the largest extent possible while supporting the Cuban government as little as practicable in keeping with this purpose. In the telecom field, the U.S. government appears to appreciate that major infrastructure projects will be required and that these can be accomplished only by working with the Cuban government.

While specific licenses will be required from BIS to export the equipment necessary to bring Cuba telecom into par with the United States, and U.S. companies must negotiate the remaining OFAC sanctions carefully, U.S. policy is clearly to promote the modernization of Cuba's telecommunications sector. The United States recognizes that a modern telecommunications system is critical to the development of Cuba's private sector.