Cuba: Risks for US Banks?

Stonegate Bank last month became the first U.S. bank to have a correspondent account in Cuba. (Photo: Stonegate Bank)

Will Cuba mean opportunity or risk for U.S. banks?

Inter-American Dialogue

Florida-based Stonegate Bank on July 21 signed a deal with Cuba’s Banco Internacional de Comercio, making Stonegate the first U.S. bank to have a correspondent account on the island. What opportunities and risks lie in Cuba for U.S. financial firms? What are the main challenges U.S. banks must overcome in order to do business in Cuba? Is the ability of Americans to use credit cards in Cuba just around the corner, and how would that change the financial landscape in Cuba? What is the status of secured transaction laws in Cuba, and do such protections for lenders need to be improved on the island?

Boris Kozolchyk, executive director and founder of the National Law Center for Inter-American Free Trade: The challenges that U.S. banks must overcome in correspondent banking with Cuba involve, among others, letters of credit (LOC), credit cards and secured lending. Correspondent banks’ duty good faith is not only to their own customers, but also to their correspondents and their customers. Consider the correspondent relationship between Banco Internacional de Comercio (BIC) and Stonegate. Assume Stonegate issues a LOC for an importer customer, with a Cuban tobacco exporter as the benefi ciary, and promises to pay the exporter for a large quantity of tobacco. Stonegate asks BIC to pay the tobacco company if the shipping documents comply strictly with the LOC. If the submitted documents do not comply, legally, BIC must reject those documents. Yet, BIC’s failure to pay the Cuban company would have serious economic and political consequences for the company and its employees, and this is why I cannot envision a governmental entitysuch as BIC rejecting documents submitted by the tobacco company, another governmental entity. On the other hand, once BIC pays the Cuban company and debits Stonegate’s account, Stonegate will have to either try to recover money from BIC or reimburse its customer for the losses attributable to the discrepancies and absorb the loss. This situation was not uncommon during the first year of Cuba’s revolutionary takeover of private banks. The same would be true with credit cards: Assume that BIC will be the Cuban processor of Visa cards issued by U.S. banks. Assume further that the Cuban issuing banks will be state entities and that most of their merchant customers will also be such entities. Is there any question that they will receive preferential treatment and the lion’s share of the severely scarce dollar-denominated or supported credit-card business? The key to successful correspondent correspondent banking in Cuba lies with asset-based lending. The sooner Cuba adopts a secured lending law in which business and credit decisions are made not on the basis of who is the customer or beneficiary but rather on the liquidity of the business assets they bring to the table, as was done by Colombia, Costa Rica, Guatemala, Honduras and Mexico, and is being considered by Chile, El Salvador and Peru, the sooner trust will be established in correspondent banking and beyond.

Peter Hakim, president emeritus of the Inter-American Dialogue: “For Cuba, the new relationship with the United States could help to avert a humanitarian crisis in the short run, and over time, offer the county a more hopeful economic future. U.S. ties can contribute to a more robust and sustainable pattern of growth, and perhaps even bring the island a measure of prosperity. Ending the embargo would give Cuba, after a half century of Washington’s economic quarantine, access to the United States’ immense markets, investment capital and tourist flows. A normal economic relationship with the United States would increase Cuba’s attraction for private investors across the globe and open the way for multilateral bank loans. And even if the embargo is kept in place, many of its restrictions will erode in the coming period. Limits on remittance transfers are likely to recede in the face of demands from Cuban-Americans seeking to assist their relatives. Curbs on U.S. travel will be increasingly viewed as constitutional violations and will continue to fade. Lobbying by the U.S. business community should steadily, even if gradually, expand access to Cuban markets for U.S. goods and services. As more U.S. banks develop relations with counterparts in Cuba, controls on credit transactions may be loosened. The greatest uncertainty is whether the Cuban government will take advantage of the new opportunities offered by the U.S. policy changes. The future of the Cuban economy will mostly depend on Cuba’s ability and willingness to undertake a serious agenda of economic reform. On this score, recent history is not reassuring. The snail’s pace of the reform since Raúl Castro took charge is not an encouraging signal that the Cuban leadership intends to reshape the economy or yield its centralized control over it. Indeed, President Castro has repeatedly stated that, while Cuba’s political and economic systems need to brought up-to-date, they will not altered in any fundamental way. Expectations for change in Cuba should be kept modest for the time.

José Manuel Palli, president of World Wide Title in Coral Gables, Fla.: As things stand today, the risks U.S. banks may run into from interacting with Cuba are mostly to be found in the United States. Infringing U.S. laws and incurring heavy fines as a result should still be their main concern. And this may not change for as long as the ‘embargo laws’ remain in place. The amendments last January to the ‘OFAC – BIS’ rules do not amount to any breakthrough for U.S. banks willing to set shop in Cuba. And anything the Treasury and Commerce departments can do to further amend their rules to make them ‘clearer’ is bound to run into incompatibilities with the ‘embargo laws’ and additional confusion. I gave up long ago on trying to make any sense of this joust between Helms-Burton and the more sensible side of our American legal system. All Stonegate Bank did by establishing a link with Cuba’s Banco Internacional de Comercio (which has such links with many banks all over the world) as correspondent banks was avail itself of the privileged gate assignment it has in the fi nancial services race to Cuba as the new U.S. bank now in care of Cuba’s consular services’ banking needs in the United States (the Cuban Interests Section in Washington went several months without a bank). So it got into the elevator of U.S.-Cuba financial interaction on the very ground floor. But even if this may mean a slight benefit for Americans traveling in Cuba, that elevator is still stuck on the ground fl oor, and it is likely to remain there until the embargo is lifted or craftily dismounted, stone by stone. Beyond that, banking in Cuba should prove no harder or riskier for U.S. banks than what they face in other infidel lands.

Republished with permission from the Inter-American Dialogue's biweekly Financial Services Advisor

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