OFAC Sanctions Update: U.S. Government Authorizes Sanctions Related to Malicious Cyber-Related Activities, Encourages Telecom Investment in Cuba

OFAC Sanctions Update: U.S. Government Authorizes Sanctions Related to Malicious Cyber-Related Activities, Encourages Telecom Investment in Cuba

The U.S. government has taken steps in recent weeks to impose sanctions on individuals and entities posing a uniquely 21st century threat, while strengthening ties to a 20th century foe. On April 1, 2015, President Obama authorized the imposition of sanctions on individuals and entities involved in certain malicious cyber-related activities. At the same time, the administration appears to be promoting telecom and internet investment in Cuba, as evidenced by statements made by an official of the U.S. Department of State just one day earlier. U.S. companies, including those interested in potentially entering the Cuban market, should pay close attention to these actions to ensure ongoing compliance with the U.S. economic sanctions.

Sanctions Related to Malicious Cyber-Related Activities

On April 1, 2015, President Obama signed the Executive Order Blocking the Property of Certain Persons Engaging in Significant Malicious Cyber-Enabled Activities (the "Executive Order"). This action follows a January 2015 executive order authorizing additional sanctions on North Korea in the wake of cyberattacks on Sony and is in response to the increasing prevalence and severity of malicious cybersecurity activities. The Executive Order: (i) authorizes the imposition of sanctions on individuals and entities responsible for, engaged or complicit in, or that materially assist or support malicious cyber-related activities that pose a significant threat to U.S. national security, foreign policy, economic health, or financial stability; and (ii) targets, in particular, cyber threats that harm or significantly compromise critical infrastructure, cause significant disruption to computers or computer networks, or cause significant misappropriation of funds or economic resources, trade secrets, or personal, financial, or commercial information.

This is a new area of sanctions aimed at combating a 21st century threat. Although no initial designations were made in connection with issuance of the Executive Order, persons determined to have engaged in malicious cyber-related activities may be designated on the list of Specially Designated Nationals and Blocked Persons ("SDN List") maintained by the U.S. Department of the Treasury, Office of Foreign Assets Control ("OFAC"). Such persons are considered blocked and U.S. persons are prohibited from engaging in any transactions or other dealings with or involving them or any entities 50 percent or more owned by them. Accordingly, U.S. persons, including, in particular, companies operating in the technology sector or engaged in online commerce, should continue to monitor developments under the Executive Order and ensure that no parties with whom they engage are designated on the SDN List.

Expansion of Telecom and Internet Investment in Cuba

As companies evaluate the recent changes to the Cuban embargo, U.S. telecom companies received a welcome signal last week when a U.S. Department of State official told reporters that U.S. telecom and internet companies could expand into the Cuban market to the degree allowed by the Cuban government. The official's comments followed a round of talks in Havana, Cuba,  between Cuban authorities and U.S. officials focused on increasing internet capacity on the island.

The recent momentum in U.S.–Cuba trade relations stems from the historic shift in U.S. policy toward Cuba announced by the President in December 2014 and implemented in January 2015 through amendments to key regulations, including the Cuban Assets Control Regulations ("CACR") administered by OFAC. Although those revisions did not lift the comprehensive U.S. embargo against Cuba, they do serve to promote expanded economic activity between the countries. Of particular importance to the recent remarks from the State Department official are the amendments to the telecommunications and internet-based communications provisions of the CACR.

Telecommunications. The amendments include an expanded general license that permits transactions, including payments, incident to the provision of telecommunications services related to the transmission or receipt of telecommunications involving Cuba. Under the expanded general license, which is subject to certain reporting requirements, U.S. companies and persons are authorized to enter into, and make payments under, contracts with telecommunications service providers and certain individuals in Cuba for telecommunications services provided to certain individuals in Cuba. The individuals in Cuba cannot be prohibited officials of the Cuban government or prohibited members of the Cuban Communist Party. Additionally, transactions incident to the establishment of telecommunications facilities to provide telecommunications services linking Cuba with the United States or other countries are authorized. According to published guidance from OFAC, the payments provision of the CACR allows U.S. persons to purchase calling cards for use in Cuba or make third-party payments on bills for services provided in Cuba.

Internet-Based Communications. The amendments also authorize, in most circumstances, the exportation or re-exportation of services incident to internet-based communication exchanges, such as instant messaging, email, social networking, web browsing, blogging, and sharing of photos and videos. Exportation and re-exportation of certain services including software design, business consulting, and information technology management services also are now authorized. The complete list of authorizations and restrictions related to certain internet-based services involving Cuba can be found in section 578 of the CACR.

Although Cuba has a relatively small population, comparable to the population of Ohio, U.S. officials have reported that only 5 percent of households in Cuba have free internet access, and that access is some of the slowest in Latin America. To meet its stated goal of connecting 50 percent of households to the internet and 60 percent of the population to mobile services by 2020, Cuba has incentive to foster an attractive investment environment to U.S. companies. For example, shortly after the amended CACR took effect, the United States and Cuba restored direct communications through an agreement between Cuba's national telecommunications company, Empresa de Telecomunicaciones de Cuba SA and New Jersey-based IDT Domestic Telecom, Inc. This may evidence Cuba's willingness to welcome investment by U.S. telecom companies.

U.S. telecom companies should closely examine these changes to determine what opportunities may already be present. They should also continue to monitor these changes as continued developments in this space appear likely.

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