Business Forum: Business in Cuba promises rewards, but there's risk, too

After President Obama's historic visit to Havana, many Americans are excited about greater trade and travel opportunities to the island. For good reason: Cuba is an alluring place, and new regulations issued by the Obama administration now permit an unprecedented level of economic activity by U.S. interests. But amid the optimism, U.S. businesses and individuals must be mindful of the risks — as well as rewards — of greater engagement.

As a student at the University of Havana in 2002, I saw firsthand what a challenging environment Cuba can be. The Castro regime exerts total control over almost every aspect of daily life. Poverty on the island is endemic. Free speech is forbidden. Infrastructure is decayed.

All of which is to say, Cuba will not be an easy place for U.S. companies to do business. For companies and individuals considering trade or travel to Cuba, here are just a few things to keep in mind.

First, the embargo is still in place. This means that many economic transactions are still prohibited for U.S. activities. Only Congress has the power to repeal the legislation that underpins the embargo.

Until the embargo is lifted, any economic transactions involving Cuba must be authorized by a license, either general or specific. In most cases these licenses will be issued by the Department of Treasury's Office of Foreign Assets Control (OFAC) or Commerce's Bureau of Industry and Security (BIS). Penalties for violating the embargo can include stiff fines and even criminal charges.

The good news is that OFAC and BIS have done nearly everything in their power to authorize travel and trade within the limits of existing law. Since Presidents Obama and Raul Castro announced a path of normalization in December 2014, OFAC and BIS have issued five sets of regulatory amendments that significantly expand the types of licensed activities. Here are just a few of the highlights:

Travel

The most recent round of regulations permits so-called people-to-people exchanges by individuals. Practically speaking, this means that individuals no longer have to travel to Cuba as part of a licensed group. For businesses seeking to carry out permitted economic activities, travel to Cuba is also permitted, including for sales or marketing purposes.

Financial transactions

U.S. banking institutions can engage in certain Cuban-related transactions that involve Cuban parties, as long as the beneficiaries are not U.S. persons. The rules also increase the remittances that U.S. persons can send to Cuba, permit the use of U.S. credit and debit cards on the island, and allow U.S. financial institutions to open correspondent accounts with Cuban counterparts.

Telecom and related transactions

Telecom-related transactions will now be subject to a general license. Already AT&T and Verizon have established roaming networks that U.S. travelers can use while on the island. Google will also open a new high-tech artists' studio in Havana, offering superfast Wi-Fi connections and the latest Google gadgets, in a country with one of the lowest rates of Internet connectivity in the world.

This list is by no means exclusive. Other industries benefited by recent regulations include commercial aviation, cruise lines and energy. Moreover, OFAC officials have signaled that they will look favorably on any activities that are "incident to" licensed activities. So, for example, if your company sells a product with general application that can also be used to improve the telecommunications network, you may be able to sell to Cuba.

Any project that helps the Cuban people without enriching the regime will also be evaluated on a case-by-case basis.

Risks to U.S. companies

While these opportunities for U.S. businesses are real, so are the challenges. Here are the main risks U.S. companies are likely to face when doing business in Cuba.

First, be prepared for the Cuban bureaucracy. Before a project can proceed in Cuba, it must go through a lengthy and confusing permitting process by the Cuban government. Oftentimes, it is not clear even which Cuban government agency is responsible for issuing a final decision on a project. It will take some time before this process becomes more streamlined.

Second, Cuba's economy is in tatters. Average wages are just $20 a month. Many professionals, including doctors, have abandoned their former careers and begun working in the tourist economy, driving taxicabs or waiting tables. Cuba has a shortage of hard currency, limiting the government's purchasing power.

The third main concern is one that investors look to in any foreign market: rule of law and political risk. Put simply, companies want to know that any money they invest will be safe. In Cuba, there are no such guarantees. While Raul Castro has introduced some modest reforms, Cuba is still a one-party state. There is no independent judiciary to resolve commercial disputes.

In the United States, of course, there is cause for uncertainty as well. The next president could reverse all of Obama's policies with the stroke of a pen.

This is not to suggest that U.S. businesses should avoid Cuba at all costs; far from it. The thaw in relations and new regulations make this an opportune time to explore Cuba's potential. But when evaluating Cuba, make sure that you do your due diligence and proceed with a clear view of the risks involved.

Cuba is an enchanting place with lots to offer. But it is not for the faint of heart.

Evan Berquist, an attorney at Fredrikson & Byron, worked on the Cuba program of a Washington, D.C.-based organization that promotes democracy and human rights. He can be reached at eberquist@fredlaw.com.