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The Future of Banking in Cuba

Last update on April 9, 2015.

The Future of Banking in Cuba

Juan Del Busto
Consulting Advisor and Vice President of the Hispanic American Bankers Association
In a historic move, in December 2014 President Obama announced significant steps that the United States will take to change its relationship with Cuba and the Cuban people. The President believes that the isolation steps the U.S. has taken with Cuba since 1961 have failed to accomplish the objective to promote an emerging, prosperous, democratic and stable Cuba. According to the President, this policy has also isolated the U.S. from regional and international partners, hampered the ability to influence outcomes in the Western Hemisphere, and minimalized the potential range of tools to promote positive change in Cuba.
As a result, there has been little progress since 1961 in how Cuba is governed and its communist state. Based on this, the President said, "We cannot keep doing the same thing and expect a different result." The changes he outlined are intended to encourage Cuba to unleash the potential of its people by ending unnecessary restrictions on their political, social, and economic activities. Therefore, it is hoped that these changes will relieve the additional burden of the U.S. sanctions on the Cuban people.
The key components of the new policy are intended to positively impact several areas of U.S. relations with Cuba over the coming months, including:
Diplomatic relations – A central element of the policy is the re-establishment of an embassy in Havana to carry out high-level exchanges and visits between the two governments as part of the normalization process. This will include continued strong support for improved human rights conditions and democratic reforms in Cuba along with other measures to improve conditions for the people of Cuba.
Travel – The policy facilitates an expansion of travel under general licenses for the 12 existing categories of travel to Cuba authorized by law which include family visits, official government business, humanitarian visits, import/export information, and other facets of the travel policy.
Remittances - Remittance levels will be raised from $500 to $2,000 per quarter for general donative remittances to Cuban nationals.
U.S. commercial sales and exports – Items that will be authorized for export from the U.S. include certain building materials for private residential construction, goods for use by private sector Cuban entrepreneurs, and agricultural equipment for small farmers.
U.S. imports – Licensed U.S. travelers to Cuba will be authorized to import $400 worth of goods from Cuba. No more than $100 of this can consist of tobacco products and alcohol combined.
Increasing Cubans' access to communications – Only 5 percent of the people of Cuba have access to the Internet. Telecommunication providers will be allowed to establish the necessary mechanisms, including infrastructure in Cuba, to provide commercial telecommunications and Internet services, which will improve telecommunications between the U.S. and Cuba.
Updating the application of Cuba sanctions in third countries – U.S. owned or controlled entities in third countries will be generally licensed to provide services to, and engage in financial transactions with, Cuban individuals in third countries.
Pursue discussions to address unresolved maritime boundaries in the Gulf of Mexico – This will include three-way discussions between the U.S., Cuba, and Mexico.
Review Cuba's designation as a state sponsor of terrorism – Cuba was first placed on this list in 1982, and the U.S. Secretary of State will conduct a review of the appropriateness of this within the next six months.
Address Cuba's participation in the 2015 Summit of the Americas in Panama – Human rights and democracy will be key Summit themes, and Cuba's participation along with the other countries would be vital.
Banking between the U.S. and Cuba – This initiative focuses on facilitating authorized transaction between the two countries.
Before I explore the many banking-related challenges and questions that stem from the new U.S. policy on Cuba, I first would like to share with you the local initiatives that have been taken in the past to
prepare for further interactions with the island nation. When I was with the Federal Reserve Bank of Atlanta's Miami Branch, we continually kept a keen eye on developments in Cuba and fine-tuned our contingency plans for major changes in the state of the island. In particular, in the 1990's we developed and updated plans for the possibility that the Castro regime would fall and Cuba would become a free state. These plans pertained to banking issues, and to employee issues, like numerous staff wanting to take time off to go home.
This preparedness was unlike the current easing changes announced by President Obama. Our plans focused on a free Cuba state and what the Fed would do regarding banking and transactions with a free state, as well as the free-flow of U.S. citizens and Cuban citizens traveling back and forth. We had several scenarios developed, and kept a close eye on Cuba to update the planning as needed over the years. In addition, at that same time I participated with the Cuban Banking Study Group (CBSG) Chaired by Fernando Capablanca to establish a plan for a modern future banking system under a new civil society ruled by market forces. CBSG was established in 1994 to study the history and development of the Cuban Banking System since the creation of the first bank in 1832. The group developed scenarios for this potential event, just as the Federal Reserve had done at the Central Bank level. The CBSG, working with its members and others including the U.S. Treasury, published a comprehensive report in 1995. Ultimately, that scenario did not take place, and instead 20 years later a different change for U.S. interactions with Cuba has been initiated. Under this current and proposed environment, there are different yet very challenging issues regarding banking relations with Cuba.
That brings me to the most pressing question regarding banking issues as they relate to Cuba: "What now?" Cuba is still running as an independent country, and the steps President Obama outlined in December will be evolving, and it will take months, if not years, for some facets to completely unfold. At whatever point in time the U.S. begins financial relationships with Cuba, we have to proceed cautiously and methodically. The plans outlined by President Obama for banking between the U.S. and Cuba in the new environment will need to be closely scrutinized. They are designed to achieve the following:
U.S. institutions will be permitted to open correspondent accounts at Cuban financial institutions to facilitate the processing of authorized transactions.
The regulatory definition of the statutory term "cash in advance" will be revised to specify that it means: "cash before transfer of title." This will provide more efficient financing of authorized trade with Cuba.
U.S. credit and debit cards will be permitted for use by travelers to Cuba.
These measures will improve the speed, efficiency, and oversight of authorized payments between the U.S. and Cuba.
One of the complex issues to be addressed is the re-establishment of direct correspondent banking, which requires a deep amount of regulation and law. Under current regulations, U.S. banks will be allowed to open correspondent accounts at Cuban financial institutions to facilitate the processing of payments. This will allow travelers to use U.S. credit and debit cards in Cuba, and it will allow exporters to make and receive payments in Cuba, without going through a third party bank.
While the credit card vendors (MasterCard® and American Express®) have announced that they are or will be starting transaction processing, underlying questions remain. For instance, what are the risks, and what laws protect them? What if things changed dramatically and Raul Castro imposed roadblocks to heighten risks to receiving payments? What if a U.S. bank wants to start participating in the Cuban economy -- what correspondent bank will process their payments?
Regarding compliance, there are numerous issues that a bank must address to determine how to process transactions in Cuba. These issues and many others have to be identified, resolved and risk mitigated. Among the ancillary issues are: What are the risks if Raul Castro changes course? What about the Bank Secrecy Act, and how do you classify those individuals you are doing business with? Additionally, there are numerous regulatory issues to identify and mitigate concerning liability, delinquencies and the current banking laws. There are several areas of risk and liability that have to be identified, and corresponding procedures that need to be defined, before the U.S. can fully participate in banking in Cuba in the new environment.
This is a new era, and it brings with it both positive potential components and numerous areas of risk. This is the proverbial double-edged sword. As a 40-year Central Banker in the U.S. and a native Cuban who immigrated to the U.S. at an early age, I have mixed feelings, but see this as an exciting and challenging time. Personally, I have strong political views on this issue. However, those feelings have to be put aside, and we must react and respond to the changes put in front of us and adapt to those in the most effective manner. We have to embrace change, but also proceed cautiously, ensuring that all risks are closely reviewed and addressed.
Juan del Busto is the former regional executive of The Federal Reserve Bank of Atlanta's Miami branch, current chairman of Del Busto Capital Partners, Inc., and consulting advisor to MBAF's Financial Services specialists. For more information call 1-800-239-1474.

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