Cuba’s entrepreneurs could open U.S. bank accounts soon. Here’s a look at how it would work

The Biden administration this week modified the regulations on the U.S. embargo on Cuba to allow private entrepreneurs on the island to open and manage U.S. bank accounts, a big bet to support the private sector on the island.

However, the new policy requires several steps before Cubans can take advantage, and several issues are still up in the air.

On Tuesday, the U.S. Treasury Department announced regulations that will authorize U.S. banks to handle accounts for Cuban private business owners. There is the possibility that online payment systems like Venmo or Paypal could offer their services to Cuban entrepreneurs too. A U.S. official discussing the new policy with reporters said the administration expects it to affect the Cuban economy significantly. But before that happens the administration, U.S. financial institutions and Cuban entrepreneurs must clear several hurdles.

In a first, Cuba’s private business owners will be able to use U.S. banks, Treasury says

Cuba is still under a comprehensive economic embargo and it is also on the U.S. list of countries that sponsor terrorism, so the big question is whether that will deter U.S. banks from acting on the announcement.

There’s also uncertainty about the upcoming U.S. presidential election and the possibility that a Republican administration would roll back the new measures.

For its part, the Cuban government said in a statement on Tuesday evening that it would not block the new regulations on their end.

The Miami Herald spoke to people knowledgeable about business practices in the U.S. and Cuba to unpack how the new policy would work in practice.

Will U.S. banks be on board?

When the Treasury Department changes regulations governing the U.S. embargo on Cuba to authorize a new activity, it does not mean that U.S. companies automatically jump to take advantage of it. The embargo is still in place, and Cuba’s being on the U.S. list of countries that sponsor terrorism carries significant financial restrictions.

When dealing with countries under sanctions, U.S. companies have to devote time and money to making sure they are complying with the regulations to avoid fines. In this case, banks will need assurances that even if the administration has authorized the accounts, they won’t run afoul of other sanctions still in place.

Cuba’s private businesses are a relatively small market for American banks, so the question for U.S. banks and companies is: Is this worth it?

In recent years, the answer has been no. Banks have been so reluctant to handle Cuba accounts that even the Cuban embassy in Washington and its U.N mission in New York went months without banking services in the U.S. until First American Bank, with offices in Miami, agreed to operate those accounts.

A U.S. entrepreneur with business interests in Cuba said the recent announcement “is mostly symbolic” because of the increasing cost of compliance for U.S. banks. Banks also fear having to open their books to the Treasury Department if they ever get in trouble for handling Cuban accounts, the person said. Treasury fines on banks handling non-authorized Cuban transactions have also been astronomically high in recent years. In 2018, the U.S. fined French bank Société Générale $1.34 billion for transactions that violated sanctions on Cuba and other countries.

Matthew Aho, a consultant with the law firm Akerman who has worked with Cuban entrepreneurs and U.S. companies doing business with Cuba, said he doesn’t expect banks to rush to open these accounts.

“Banks will be extra cautious, but at the end of the day, we don’t need 10 banks willing to do this. We need one,” he said. “What the administration did is a statement of policy, it is saying this sector exists, it is real. But we have to see how the banks react. Are they going to feel that the regulations are clear, broad enough?”

John Kavulich, president of the U.S.-Trade and Economic Council, said there might be a bank willing to “play the long game and be the first to open one of these accounts. But banks will have many questions.”

A senior administration official acknowledged Tuesday that “the financial institutions will make a risk-based decision” but added that the State Department and the Treasury Department will engage regularly with financial institutions to answer their questions.

Hypothetically, a future Trump administration could easily roll back Biden policies just as Trump did with the Obama engagement policies, which could give banks pause. But unlike U.S.. cruises to Cuba, which Trump banned in 2019, telling banks to close the accounts of Cuban entrepreneurs will create logistical problems “and send the message that the U.S. government is making it very difficult to get your money back,” Kavulich added.

What a Cuban entrepreneur can do with a U.S. bank account

If a U.S. bank finally decides to open an account for a Cuban entrepreneur, how would that work?

First, the Cuban entrepreneur must obtain a visa to travel to the U.S. to open an account in person. The bank might require a co-signer. The Cuban entrepreneur could access the account online from Cuba and make payments to providers abroad. It could also transfer money from another bank in a third country (for example, some Cubans have dual Spanish citizenship, and some Cuban entrepreneurs use Spanish banks to pay suppliers abroad).

The new policy aims to help Cuban entrepreneurs who don’t have bank accounts abroad and currently depend on money-transfer agencies to pay providers on their behalf for a fee.

The Biden measures create an infrastructure for Cuban private businesses that they currently lack, said Aho. If U.S. companies go along, Cuban entrepreneurs will be able to open their own online stores, have access to an online payment system to collect the money and then deposit it in a U.S. bank.

“There is a lot of potential for e-commerce in these regulations,” he said.

That would work best for Cuban private companies that collect money abroad — for example, from Cuban exiles wanting to help their families on the island– rather than in Cuba.

Having a U.S. bank account will give credibility to those businesses, Kavulich added.

But moving money from the United States to Cuba and vice versa will be very difficult because the embargo prohibits a direct banking relationship between the two countries.

The Obama administration authorized U.S. banks and companies to open accounts in Cuba for transactions, but stopped short of allowing Cuban entities to do the same in the U.S., a relationship known as direct correspondent banking.

That means funds can’t be transferred directly from a U.S. bank to a Cuban bank. In order to get their money from a U.S. account to Cuba, the entrepreneurs would have to go through a bank in a third country, or hire people in the U.S. to carry the cash to Cuba in their luggage.

While Cuban private business owners will likely be interested in putting their money in a U.S. bank account, the incentives to transfer money in the opposite direction, from the U.S. to a Cuban bank, are few. Cuban banks are all state-owned, and because the country is going through a severe economic crisis, the banks do not have enough foreign currency to pay off the transfers in dollars. Instead, they pay in a local virtual currency that has continued to devaluate.

Preventing abuse

The Biden administration’s support for Cuba’s emerging private sector has been controversial, and the Tuesday announcement was no different. Human rights activists accused the administration of putting the private sector ahead of human rights on the island, although the Biden administration has said it can support both. Other critics repeated accusations that Cuba’s private sector is a government-controlled ruse and have raised questions about how the administration would handle abuses of the new rules.

“What steps will the Treasury Department take to ensure that they can exclude members of the dictatorship, the military, the Ministry of the Interior and the Communist Party from exploiting these openings?” asked the Washington-based Center for a Free Cuba in a statement. The center also questioned whether allies of Cuba could take advantage. “Will these policies open more access for Russia to evade international sanctions, and provide them with more resources at a critical junction in the illegal war against Ukraine?”

According to the new regulations, U.S. companies cannot provide services to members of the Cuban government, the Communist Party and others on a list of “prohibited officials.” However, activists and independent journalists have uncovered private businesses that, although not directly owned by Cuban government officials, are run by relatives who are not on the banned list.

Currently, it’s the responsibility of U.S. companies to do the research to determine whether a Cuban private company has any links to government officials.

Aho and Kavulich said there is potential for abuse, so some sort of verification system is needed. They said the U.S. government or others will likely need to develop it.

They added that discussions are already taking place about how to vet Cuban private enterprises and how to create a mechanism to add companies linked to the government or the military to the State Department’s list of banned entities.