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US lifts the Cuba secondary sanctions waiver

  • United Kingdom
  • Competition, EU and Trade

10-05-2019

The United States (“US”) Government announced on 17 April 2019 that it would not renew a waiver to Title III of the US Helms-Burton Act 1996 (“Title III”) that had effectively prevented former owners of property confiscated following the Cuban Revolution from suing persons who “traffic” in such property. The waiver expired on 2 May 2019 and, on the same day, the first claims under Title III were brought against a British-American cruise operator for alleged “trafficking” in confiscated property.

Background

The US sanctions on Cuba contain secondary sanctions, i.e. those that apply extra-territorially to non-US persons. One example of such secondary sanctions is Title III.

Title III provides a cause of action to US persons against any person – except Cuban citizens residing in Cuba who are not Cuban government or ruling party officials – who ‘traffics’1 in property that was confiscated by the Cuban government on or after 1 January 1959. Title III provides a very wide scope for US persons to make claims against non-US persons, as proceedings can be issued in relation to direct or indirect dealings in confiscated property interests. The Helms-Burton Act also includes a provision allowing the US President to suspend the application of Title III for six months, provided that certain conditions are met. US persons may not bring claims against parties who trafficked in confiscated property if it has been more than two years since the trafficking ceased.

Following the enactment of the Helms-Burton Act, the US faced criticism from several of its allies, all of whom considered that the extra-territorial effect of Title III contravened international law. A number of jurisdictions, including the EU and Canada, adopted blocking legislation in order to protect domestic businesses and individuals by, in essence, attempting to negate the effects of Title III. The EU Regulation 2271/96 (the “EU Blocking Regulation”) forbids EU persons from complying with certain US extraterritorial sanctions, allows companies to recover damages arising from such sanctions, and nullifies the effect in the EU of any foreign court judgments based on them (please see our previous briefing note here).

In addition to implementing the EU Blocking Regulation, the EU issued a legal challenge in 1996 against the US in the World Trade Organisation (“WTO”) Dispute Settlement Body on the basis that the secondary sanctions imposed by the Act were inconsistent with the US’s obligations under the WTO Agreements.

The EU dropped its WTO challenge in 1998 after extensive negotiations with the US whereby an understanding was entered into (the “1997 and 1998 Understanding”), under which the EU was excluded from the extra-territorial application of Title III. On the basis of the 1997 and 1998 Understanding, President Clinton issued the six-month waiver to Title III. Every President since 1998 has renewed the waiver, thus ensuring that US persons could not sue foreign parties, such as EU individuals and entities doing business in Cuba, in relation to property confiscated by the Castro regime.

However, the Trump Administration decided not to extend the waiver when it expired on 1 May 2019. From 2 May 2019, US persons are able to commence proceedings against EU individuals and entities doing business in Cuba involving confiscated property.

Potential impact

As the EU is one of the largest foreign investors in Cuba, and one of Cuba’s top export markets, EU businesses could be significantly adversely affected by the decision not to renew the waiver. The hotel, travel, and tourism industries are likely to be most adversely affected by the secondary sanctions, however, as the scope of Title III is very wide, there are a number of businesses that could be the subject of Title III claims, including:

• any company or individual doing business in Cuba where such business involves a confiscated property

• any company or individual that benefits from another company or individual doing business in Cuba where such business involves a confiscated property

• the financial institutions and lenders of the company doing business in Cuba where such business involves a confiscated property

• any company or individual that ‘traffics’ in confiscated property

If a judgment is made under Title III, the non-US person can be required to pay compensation to the US claimant calculated based on:

• the full value of the confiscated property

• any interest/damages

• the cost of legal fees

irrespective of the amount of economic benefit that the non-US person acquired from the property.

The compensation available under Title III is the amount certified to the claimant by the Foreign Claims Settlement Commission (“FCSC”) plus interest; or the current fair market value or market value when confiscated plus interest, whichever is greater; plus court costs and lawyers’ fees.

The US Justice Department has conducted an initial review of the potential claims that could be brought under Title III. Approximately 5,913 of the claims identified (equating to an approximate worth of $8 billion, due to the interest that has been accruing over the past 60 years) have been recognised by the FCSC, meaning that, as of 2 May 2019, they can immediately be issued in court. A significant number of these claims are against EU companies and individuals.

Claims can also be brought by Cuban persons who settled in the US and whose property was affected by the confiscation. The FCSC estimates that there could be approximately 300,000 claims by Cuban exiles that have acquired US citizenship.

Any claim brought under Title III is subject to a two year limitation period, starting from the relevant time that the ‘trafficking’ ceased.

On 2 May 2019, proceedings were issued in Miami against Carnival Corporation – a British-American cruise operator – under Title III. The claims related to “trafficking in stolen properties”, namely port terminals and warehouse facilities in Santiago de Cuba nationalised following the Cuban Revolution. Carnival Corporation declined to comment, except to say that it was continuing its normal schedule of cruises to Cuba. It has also referred to a statement from the Cruise Lines International Association, an industry group, saying that the operations of cruise lines that do business with Cuba “fall under the lawful travel exemption” under Title III. It remains to be seen how these lawsuits will unfold.

EU response and likely next steps

The decision not to extend the waiver by the Trump Administration exacerbates tensions between the EU and the US due to a lack of alignment on sanctions in relation to a number of jurisdictions (including not just Cuba, but also Iran and Venezuela). The relations were further strained last week by the announcement by the EU that they are proposing to implement $20 billion worth of tariffs on US goods in retaliation to the proposed tariffs by the US on $11 billion worth of EU goods.

The EU has already warned the US that it is ready to protect EU investments and the economic activities of EU persons who may be affected by any lawsuits filed under Title III. In an official joint statement with Canada, the EU stated that it considers the extra-territorial application of autonomous Cuba sanctions by the US to be contrary to international law. In addition, the EU considers the US to be in breach of its commitments in the 1997 and 1998 Understanding, whereby the US committed to waive Title III and the EU suspended its WTO case against the US

The EU stated that it “will consider all options at its disposal to protect its legitimate interests, including in relation to its WTO rights and through the use of the EU Blocking [Regulation].”

Currently, the EU has declined to comment on what measures it is considering, however, it is likely that both the EU and Canada could make use of the WTO dispute resolution system and issue a new WTO challenge.

When the previous EU WTO challenge was issued in 1996, the US indicated that it would defend the Act on the basis of the “national security” exception contained in Article XXI of the General Agreement on Tariffs and Trade (“GATT”). This exception to the obligations under the GATT is available to a WTO member state when it “takes any action which it considers necessary for the protection of its essential security interests”. Recent WTO challenges issued against the US, particularly in relation to its imposition of tariffs on US imports of certain steel and aluminium products, indicates that the US considers the national defence exception to be wide in scope and therefore it is very likely that the US would also defend the Cuban secondary sanctions on this basis. In addition, the US has previously said it considers that once the national security exception is invoked by a WTO member, the WTO Dispute Resolution body cannot examine whether the measures taken by the member for the protection of its essential security interests were appropriate or in violation of any WTO Agreements – a viewpoint which is not without controversy.

In addition, it is likely that the EU will try to make use of the EU Blocking Regulation to shield EU persons from the effects of the US secondary sanctions on Cuba. Currently, it is to be seen how effective the EU Blocking Regulation will be at protecting EU persons from extra-territorial effect of Title III. However, thus far, there has been a lack of enforcement of the EU Blocking Regulation as far as the other Cuba secondary sanctions are concerned (such as those that relate to non-US companies owned or controlled by US persons, as mentioned above) and the rights and prohibitions under the EU Blocking Regulation remain largely untested at EU and Member State level.

Interestingly, Cuba has said that it is willing to reimburse the owners of confiscated property, but only if the US withdraws Title III and only if the communist government is also reimbursed for billions of dollars in damages generated by the six-decade US trade embargo. Such action by the Cuban government could render claims under Title III unnecessary, protecting the interests of companies and individuals doing business in Cuba. However, it is unlikely that the US will accept this compromise.


1. Under Title III, a person if deemed to “traffic” in confiscated property if they knowingly and intentionally (i) sell, transfer, distribute, dispense, broker, manage, or otherwise dispose of confiscated property, or purchase, lease, receive, possess, obtain control of, manage, use, or otherwise acquire or hold an interest in confiscated property, (ii) engage in a commercial activity using or otherwise benefiting from confiscated property, or (iii) cause, direct, participate in, or profit from, trafficking through another person, without the authorization of any United States national who holds a claim to the property. The definition of “trafficking” does not include “(i) the delivery of international telecommunication signals to Cuba; (ii) the trading or holding of securities publicly traded or held, unless the trading is with or by a person determined by the Secretary of the Treasury to be a specially designated national; (iii) transactions and uses of property incident to lawful travel to Cuba, to the extent that such transactions and uses of property are necessary to the conduct of such travel; or (iv) transactions and uses of property by a person who is both a citizen of Cuba and a resident of Cuba, and who is not an official of the Cuban Government or the ruling political party in Cuba.” 22 U.S.C. § 6023(13).

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