Last month the US eased its trade and travel restrictions on Cuba, including easing restrictions on financial institutions. The policy change follows an announcement by President Obama in December to change the 54 year-old policy. Obama can't lift the trade embargo without approval from Congress, but through the Treasury and Departments of Commerce he was able to ease some of the rules.
The changes came into effect on Friday. They establish limited opportunities for financial institutions to conduct more business in, and connecting to, Cuba.
"I suspect US banks will focus on establishing corresponding banking relationships and debit card usage," said Carlos Méndez-Peñate, a partner with Akerman in New York. "The easing of the travel ban will make it easier for them to go over and meet with banks and other officials."
Most banks are unlikely to start any new business with Cuba however, until the country is taken off the State Sponsors of Terrorism list. President Obama has instructed Secretary of State John Kerry to look into this. It is expected that Cuba will ultimately be removed which will lift further trade restrictions.
The remittance business for Cuba is close to $4 billion a year. Most of those transactions are executed over wire transfer services. Under the changes US banks will now able to compete by establishing relationships with Cuban banks. The use of US debit cards will also be expanded.
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"There will be political considerations you don’t need in other countries"Matthew Aho, Akerman |
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With travel restrictions eased American bankers will be able to visit the island more easily to meet with officials and their Cuban counterparts. US banks will still not be able to grant their own lines of credit to Cuban business for trade, but they will be able act as advisors and confirm letters of credit to non-US banks.
In 2000, the Trade Sanctions Reform and Export Enhancement Act, relaxed some trade restrictions allowing US companies to sell a limited amount of agricultural and medical supplies to Cuba. Most of these transactions are done as cash and carry due to restrictions on banks with operations in the US granting credit to Cubans.
It's expected that, as the amount of trade financing expands, international organisations such as the World Bank and IMF will act as the lead lenders. US banks are likely to want to partner with these organisations when they first step into the space.
The Cuban market
Some international banks including Scotiabank already have operations in the country. It is hard to tell whether the banking market will become quickly saturated because it's unclear how great the need is. US banks could eventually be a serious competitor to banks operating in Cuba now.
There will be a steep learning curve, though. The banking market in Cuba is highly controlled by the government. Most banks in Cuba are state-owned.
"Since the government exercises such control on the banking system there will be political considerations you don't need in other countries," said Matthew Aho, a consultant in Akerman's corporate group.
Money laundering considerations
US banks that do set up relations with Cuban counterparts will need to consider the anti-money laundering (AML) standards.
The Cuban government has pushed to increase AML standards and oversight, but given the lack of global scrutiny many banks have made little effort.
The Cuban government has set a goal of attracting $2 billion of foreign direct investment per year. Meeting international banking will be a key part of attracting the financing for this.