A warning on doing business in Cuba

A warning on doing business in Cuba
Timothy Belevetz and Ronald Oleynik, Holland & Knight law firm
18 Hours Ago
CNBC.com

The restoration of diplomatic relations between the U.S. and Cuba is
sure to bring new opportunities for U.S. businesses seeking to gain a
foothold in a market of more than 11 million potential consumers who
have had little access to American products and services for more than
50 years. The opportunities are not unlimited, however, and they do not
come without risks, particularly those related to corrupt payments to
government officials prohibited under the federal Foreign Corrupt
Practices Act.

While the regulatory changes that have followed the December 2014 White
House announcement of a rapprochement may not seem as spectacular as
initially believed, there are significant openings hidden in those
regulations that are likely to expand as time goes on. The Obama
administration appears to be taking the same measured approach to
removing the sanctions as it has to tightening the Ukraine sanctions,
that is, a phased approach to test the reaction on the other side (in
this case, the Cuban government) and the reaction of Congress and the
American people. The administration appears to be getting positive
reactions; therefore we should look for a further loosening of
restrictions in the months to come.

Regardless of how quickly the next round of changes comes, it is
important to keep in mind that doing business in Cuba will involve
special risks inherent in a state-controlled economy. Because the state
runs virtually all significant business enterprises, it raises the
possibility that any payment of a bribe related to not only traditional
government functions such as permitting, licensing, and government
contracting but also business deals that in other places would be
strictly between private parties will be a violation of the FCPA. That
law makes it illegal to pay an official of a foreign government, or any
"instrumentality" thereof, to obtain a business benefit. It also
requires U.S. public companies to keep accurate books and records and
adopt an adequate system of financial and accounting controls. Both the
Justice Department and the Securities and Exchange Commission enforce
these requirements.

In a place where state workers earn an average of only $20 per month,
finding additional sources of income becomes essential to survival. This
creates the foundation for government bureaucrats, business managers,
and even high-level government officials to become accustomed to
boosting their income through an illegal use of their position.
Transparency International, a non-governmental organization that
monitors international corporate and political corruption, has given the
country a score of 46 (just below Ghana and above Oman) on an index
where 0 is most corrupt and 100 is transparent.

Although Cuba has not experienced the type of drug-trade related
corruption that besets many other Latin American and Caribbean nations,
reports indicate that it is burdened by widespread graft related to
trade and commerce. As U.S. sanctions open up beyond the current phase
where most allowable transactions must be with Cuban private sector
enterprises, to do business in Cuba, foreign companies likely will need
to partner with the government, which leads to a heightened risk that
illegal payments will be solicited. State ownership of business, coupled
with tight controls on the media and little compliance oversight, has
also led to a lack of transparency and accountability. In this type of
environment, a bribe paid to an official to obtain a commercial benefit
may be less likely to be discovered and disclosed but is no less
illegal, at least under U.S. law.

The good news on the anti-corruption front is that President Raul
Castro, with an eye toward liberalizing the Cuban economy, has initiated
a crack-down on public corruption since taking over from his brother
Fidel in 2008. And those efforts have produced some high profile
results. In 2011, several senior executives at Etecsa, a state-run
telecom company, were arrested on corruption charges and its president
and most of its vice presidents suspended.

That same year, 14 Cuban public officials and businessmen along with a
Chilean executive, all employed by either the state-owned Cubana de
Aviacion airline or Sol Y Son, a tourism company jointly owned by the
Cuban government and Chilean investors, were convicted for receiving or
paying bribes.

This past October, 17 Cuban government officials, including the vice
minister of the sugar ministry, executives of joint venture partners,
and a Canadian businessman were sentenced to as many as 20 years in
prison for their role in a scheme to steer lucrative contracts to a
Canadian transportation equipment company.

There is a question as to whether these high-profile cases are having a
positive effect on the "culture." Critics contend that charges are often
brought to eliminate competitors of a favored business concern. But
there is no question that the threat of criminal penalties — in Cuba and
in the United States — exists for those who are not prudent.

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U.S. businesses hoping to enter the Cuban market must understand that
the state-owned businesses with which they will likely have to interact
will be considered to be "instrumentalities" of the Cuban government.
Not only do they have to exercise great care to avoid paying off public
officials, they must also steer clear of providing money or perks to
business partners that could be construed as bribes.

Although the FCPA itself does not define the full contours of who
qualifies as a foreign official, the widely-publicized 2014 decision
from the Eleventh Circuit Court of Appeals in U.S. v. Esquenazi makes
the prohibition on corrupt payments to "instrumentalities" of foreign
governments applicable to officials of state-owned businesses. That
case, which involved bribes from two Miami businessmen to employees of a
state-owned telecom company in Haiti, is the first appellate court
decision to uphold the Justice Department's long-held position that the
FCPA reaches companies under state ownership and control. It should be
seen as a clear warning for companies looking to take advantage of new
opportunities in Cuba.
Companies should implement vigorous FCPA compliance programs with
training designed to educate employees about the special challenges of
dealing with state-controlled businesses – even where they do not
fulfill a function traditionally performed by government agencies. Those
programs should include tight controls on recording and reporting
payments to business partners, government agencies, and third-party
vendors and intermediaries. (Companies cannot shield themselves by
having third parties pay their bribes.)

There should be close oversight of interactions with Cuban officials,
including, of course, managers of state-owned business partners. An
effective compliance program must also include due diligence at the
front end of a deal and regular audits during and after the execution of
a contract.

Opening the door to trade with Cuba should provide U.S. businesses with
new and profitable opportunities. But it also presents significant
risks. Managing those opportunities by watching for and mitigating FCPA
risk is the best way to keep the DOJ and the SEC from derailing efforts
to establish a beachhead in Cuba.

Commentary by Timothy D. Belevetz and Ronald A. Oleynik. Belevetz is a
partner in Holland & Knight's National White Collar Defense and
Investigations practice and a former federal prosecutor and U.S.
Securities and Exchange Commission attorney. Ronald A. Oleynik chairs
Holland & Knight's International Trade Regulatory practice and is a
member of the firm's Cuba Action Team.

Source: A warning on doing business in Cuba—commentary -
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