BIS Imposes Additional Cuba Trade Restrictions and Restricts Use of Temporary Sojourn License Exception for Multiple Countries

On October 19, the US Department of Commerce, Bureau of Industry and Security (BIS) announced another major policy change towards Cuba by further restricting the Cuban government’s access to items subject to BIS’s Export Administration Regulations (EAR) (the “Rule”).

This Rule will have a significant impact on exporters and reexporters currently using certain license exceptions to export to Cuba, who export non-US origin products with US-origin content to Cuba, and who lease commercial aircraft to Cuban state-owned airlines. While billed as a change to exports and reexports to Cuba, the amended rule has potential implications for non-US airlines who fly to other countries (e.g. Iran, Syria, Sudan and North Korea).

The purpose of the Rule is to support “the Administration’s national security and foreign policy decision to hold the Cuban regime accountable for its repression of the Cuban people and its support for the Maduro regime in Venezuela; the Cuban regime denies its people fundamental freedoms while keeping Maduro in power using Cuban military intelligence and state security services.” According to Secretary of Commerce Wilbur Ross, “[t]his action by the Commerce Department sends another clear message to the Cuban regime – that they must immediately cease their destructive behavior at home and abroad[.]” He further noted that “[t]he Trump Administration will continue to act against the Cuban regime for its misdeeds, while continuing to support the Cuban people and their aspirations for freedom and prosperity.”

In a nutshell, the Rule will amend the EAR as follows:

• Aircraft and vessels are not eligible for License Exception Aircraft, Vessels, and Spacecraft (AVS) if they are leased to or chartered by a national of Cuba or a State Sponsor of Terrorism.
• A general 10 percent de minimis level is established for Cuba. The de minimis level for Cuba had been increased to 25 percent on July 22, 2015, when Cuba was removed from the list of state sponsors of terrorism and added to country group E:2.
• The rule revises License Exception Support for the Cuban People (SCP) to make the Cuban government and communist party ineligible for certain donations.
• The rule removes an authorization for promotional items that generally benefit the Cuban government.
• The rule clarifies the scope of telecommunications items that the Cuban government may receive without a license.

1. Cuba Licensing Policy – Denial for Leases to Cubana

The Rule removes BIS’s general policy of approval for applications to export or reexport aircraft leased to Cuban state-owned airlines. This means that there is now a general policy of denial for license applications to lease aircraft to Cuban state-owned airlines. In addition, within seven days, BIS will be revoking licenses through individual notifications to licensees for aircraft that had been leased to Cuban state-owned airlines under BIS’s former policy.

According to BIS’s press release, the Cuban regime had been transporting tourists on aircraft subject to BIS jurisdiction in order to generate revenue. BIS therefore chose to revoke existing licenses for aircraft leases to Cuban state-owned airlines, and stated that it would deny future applications for aircraft leases.

2. License Exception Aircraft, Vessels, and Spacecraft (AVS) Restricted Not Just for Cuba but Iran, Syria, Sudan and North Korea

License Exception AVS authorizes the export or reexport of certain aircraft and vessels on temporary sojourn. The Rule clarifies that aircraft leased to or chartered by a Cuban national are not eligible for License Exception AVS, and clarifies that aircraft are not eligible for License Exception AVS if leased to or chartered by a national of a destination in Country Group E:1 (Terrorist supporting countries), which currently includes Iran, Syria, Sudan and North Korea.

This is a significant change to license exception AVS, which had previously allowed the temporary sojourn by aircraft subject to the EAR provided there was no “sale or transfer of operational control” where “operational control” was defined by a listing of nine criteria.[1] The new rule adds a tenth criteria which must be met – that the aircraft “is not leased to or chartered by a national of a destination in Country Group E:1 or E:2.” This means that, for example, although European airlines can continue to fly aircraft subject to the EAR to Cuba (or Iran, Syria, Sudan or North Korea), they cannot do so in cooperation with national airlines located in any of those countries. Airlines flying on temporary sojourn to those destinations would be well advised to check the terms of any agreements they may have with nationals (individuals and /or companies) of those countries to see if they could be considered a lease or charter of the aircraft to those nationals.

3.De Minimis Rule Reduced from 25 Percent to 10 Percent

Under the EAR, non-US origin products are subject to export and re-export controls if they contain more than a certain percentage (by value) of US-origin controlled content. For all destinations except Iran, Syria, Sudan and North Korea (which were are 10%), EAR re-export jurisdiction is triggered under the de minimis rules only when an item contains more than 25 percent US-origin controlled content (except in some special cases where de minimis drops to zero).

The Rule amends the EAR to make Cuba subject to the general 10-percent de minimis rule, meaning that a BIS license or license exception is required for the reexport to Cuba of foreign-made items containing greater than 10 percent of US-origin controlled content. What content is considered “controlled” is another story. For Cuba, Syria and North Korea, EAR99 items (items that are not listed on the Commerce Control List, which do not require a license for export to most destinations) are US controlled content, meaning that for those countries, de minimis levels are effectively much lower than for Iran or Sudan. It should also be noted that foreign-made items destined for Cuba that incorporate US-origin 9x515 or ‘‘600 series’’ content (including .y content) and certain encryption and other special items continue to be subject to the EAR regardless of the level of US-origin content.

The Rule notes that there is a general policy of denial for license applications for such items, unless they are eligible for another licensing policy described in § 746.2(b) of the EAR.

As we noted in our August 14, 2015 alert, Cuba became eligible for the general 25% de minimis level in 2015 when it was removed from Country Group E:1 and was added to country group E:2, thus putting the de minimis level on par with most other destinations.

This Rule, reducing the de minimis level to 10%, will primarily impact non-US manufacturers who incorporate US-origin materials, parts, or components in their non-US products, or US-origin software in their non-US software, or US origin technology in their non-US technology.

Bottom line: if you were relying on a 25% de minimis to reexport non-US origin products to Cuba, you need to revisit your calculations.

4. License Exception Support for the Cuban People

The Rule also amends License Exception SCP, which authorizes “certain exports and reexports to Cuba that are intended to support the Cuban people by improving their living conditions and supporting independent economic activity; strengthening civil society in Cuba; and improving the free flow of information to, from, and among the Cuban people.”

Under License Exception SCP, the “export or reexport to Cuba of certain donated items for use in scientific, archeological, cultural, ecological, educational, historic preservation, or sporting activities provided specified conditions are met” is authorized. However, under the Rule, exporters or reexporters will now need to apply for a license to donate items to organizations administered or controlled by the Cuban government or communist party. According to the Rule, “this change will give the US Government the opportunity to determine whether donations to those entities would benefit the Cuban people.”

License Exception SCP also “authorizes the export or reexport to Cuba of certain items for telecommunications infrastructure creation and upgrades.” The Rule clarifies that License Exception SCP “is limited to eligible items for the creation and upgrades of telecommunications infrastructure to improve the free flow of information to, from, and among the Cuban people.” The Rule notes that infrastructure items that would be used to connect specific end users (i.e., non-backbone items) “may be used to connect individual Cubans or the Cuban private sector only.” However, “[a]license is required for the export or reexport to Cuba of items for telecommunications infrastructure that would be used to connect other specific end users (e.g., Cuban government ministries and state-owned hotels)[.]”

Finally, the Rule eliminates an authorization under License Exception SCP for items given away for free for promotional purposes. License applications for such exports will be reviewed pursuant to a general policy of denial. However, items for use by the Cuban private sector for private sector economic activities may be eligible for paragraph (b)(1) of License Exception SCP if certain conditions are met.

Given the widespread participation of the Cuban government in the Cuban economy, these restrictions likely eliminate substantially the availability of license exception SCP in cases of donations and telecommunications infrastructure upgrades.

5. How does this fit into the Trump Administration’s overall stance against Cuba?

This Rule is just one more step in the Trump Administration’s efforts to restrict exports and tighten US foreign policy towards Cuba. The Rule comes in the wake of the US Department of Treasury’s Office of Foreign Assets Control’s (OFAC) amendments to the Cuban Assets Control Regulations, effective October 9, 2019, which re-imposed limitations on “U-turn” transactions and remittances. These U-turn transactions, a version of which had been allowed since 2015, had recently enabled US banking institutions to process most funds transfers originating and terminating outside of the United States even though those funds transfers were to or from Cuba or otherwise involved property in which Cuba or a Cuban national had an interest. Under the amendments, US banking institutions are no longer allowed to process such transactions.

6. What does this mean for companies?

If you have been exporting or reexporting from third countries to Cuba under one of the above license exceptions, or you have been re-exporting foreign-made items incorporating US-origin controlled content under de minimis, you should:

• Review your de minimis calculations to determine whether or not your calculations fall above the now applicable 10% de minimis limit.
• If you are using License Exception AVS temporary sojourn to fly to Cuba, Iran, Syria, Sudan or North Korea, review whether you are currently leasing or chartering aircraft to nationals of Cuba, Iran, Syria, Sudan or North Korea.
• If you have a BIS license to lease or charter aircraft subject to the EAR to Cuban state-owned airlines, prepare to have your licenses revoked, assess agreements for force majeure provisions or other provisions excusing performance for legal compliance issues, and come up with contingency plans for your passengers who have already booked flights.
• Review whether you are currently donating items subject to the EAR to the Cuban government and communist party under License Exception SCP.
• Review whether you are exporting or reexporting to Cuba items subject to the EAR for telecommunications infrastructure creation and upgrades.
• Review whether you are currently giving items subject to the EAR to Cuba for free for promotional purposes.

[1] The nine criteria were: 

(i) Hiring of cockpit crew. Right to hire and fire the cockpit crew.

(ii) Dispatch of aircraft. Right to dispatch the aircraft.

(iii) Selection of routes. Right to determine the aircraft’s routes (except for contractual commitments entered into by the exporter for specifically designated routes).

(iv) Place of maintenance. Right to perform or obtain the principal maintenance on the aircraft, which principal maintenance is conducted outside a destination in Country Group E:1 (see supplement no. 1 to this part), under the control of a party who is not a national of any of these countries. (The minimum necessary in-transit maintenance may be performed in any country).

(v) Location of spares. Spares are not located in a destination in Country Group E:1 (see supplement no. 1 to this part).

(vi) Place of registration. The place of registration is not changed to a destination in Country Group E:1 (see supplement no. 1 to this part).

(vii) No transfer of technology. No technology is transferred to a national of a destination in Country Group E:1 (see supplement no. 1 to this part), except the minimum necessary in transit maintenance to perform flight line servicing required to depart safely.

(viii) Color and logos. The aircraft does not bear the livery, colors, or logos of a national of a destination in Country Group E:1 (see supplement no. 1 to this part).

(ix) Flight number. The aircraft does not fly under a flight number issued to a national of a destination in Country Group E:1 (see supplement no. 1 to this part) as such a number appears in the Official Airline Guide.