Competing in a New Cuba

Carlos Mendez-Peñate, cohead of the Latin America practice at Akerman, was 9 years old when his family fled Cuba for the United States just after the 1959 Cuban Revolution. His father, a lawyer, left behind a practice at what was then one of the country's most elite firms, almost exclusively serving U.S. clients with investments in Cuba.

Now, more than 50 years later, Mendez-Peñate is in some ways picking up where his father left off. The New York-based Akerman partner wants to be one of the dozens of private U.S. lawyers to get in on the opening of formal trade relations between the United States and Cuba. He is fielding phone calls from eager clients, escorting them to Cuba and interpreting the nitty-gritty regulatory details of a vast policy shift from President Barack Obama.

On Dec. 17, 2014, Obama announced that he would open diplomatic relations between the two countries, allow increased exports involving telecommunications, construction materials and farm equipment, and open up the possibility of transactions involving U.S. banks, including credit card transactions.

The potential market is relatively small in some aspects, but monumental in others. Cuba's GDP was about $68 billion in 2011, compared with $335 billion for Colombia and more than $1 trillion for Mexico, according to the World Bank, and the island nation has just 11 million inhabitants. But Cuba's infrastructure is in dire need of updating—lacking, for instance, dependable Internet connectivity—and the country has some desirable natural resources, such as nickel and largely untapped oil fields. With its close proximity to the U.S. and its dazzling beaches and countryside, Cuba is a potential magnet for tourism businesses, such as hotels, gaming and real estate. Cuba has a vibrant health and biotechnology sector, an educated population and a hunger for U.S. goods.

For U.S. lawyers, Obama's announcement is likely to spell a partial weakening, if not an outright dismantling, of the barriers that have stood between the U.S. and Cuba for nearly 55 years. While the trade embargo will still remain in place, failing congressional action, Obama's executive action may be enough to provide some dealmaking opportunity for U.S. lawyers.

"If you take Obama at his word, it's a huge expansion of the prior opportunities," says Mendez-Peñate. "It opens the door for the significant real business, as opposed to counseling people on how to not get caught up in the embargo."

Akerman is one of a handful of U.S. law firms that consider themselves well positioned to compete in a nascent Cuba market. For years Akerman and other firms with Latin America practices, such as Greenberg Traurig and Holland & Knight, have toiled in a niche business handling Cuban embargo-compliance work. Now these firms hope that work will translate into a transactional practice negotiating the deals that could remake Cuba. Trying to stake out a first-mover advantage, these firms are assembling small teams of lawyers, mostly Latin American deal specialists, to focus on a Cuba practice.

Akerman, for example, has a three-partner Cuba initiative, and Holland & Knight has 17 lawyers dedicated to its "Cuba action team." But whether their initiatives go anywhere may depend as much on the whims of geopolitics as it does on the law firm's efforts to enter an uncharted territory.

For Mendez-Peñate, Obama's announcement represents a shifting landscape that can be bittersweet for many Cuban-Americans. He says that his father, who died several years ago, was steadfastly pro-embargo, but he has taken a different view. "Eleven presidents later, the Castro brothers are still there," Mendez-Peñate says, referring to Cuban leaders Fidel and Raúl Castro. "I've come to the conclusion that the most potent medicine or weapon, if you will, is capitalism. It will be very difficult to control this. They can say whatever they want, but I think with the natural proximity to the U.S., it will be difficult to control this once it starts."

Until now, the Cuba-related work performed by U.S. law firms has largely been confined to two areas. Large law firms such as Akerman, Baker & McKenzie, DLA Piper, Duane Morris, Hogan Lovells, Holland & Knight and Greenberg Traurig have for decades largely centered their Cuba-related work on helping companies navigate the maze of laws and regulations that surround the U.S. trade embargo with Cuba. These include the Helms-Burton Act, a 1996 law that codified the embargo under congressional control, as well as tight monetary controls and licenses overseen by the U.S. Office of Foreign Asset Control (OFAC), a division of the U.S. Department of the Treasury. Often, this work is handled by specialists in OFAC sanctions and monetary regulations as part of a broad sanctions and international trade practice.

The Helms-Burton law, for example, set up penalties against international companies that handle property that was expropriated during the Cuban Revolution, a vast provision that touches companies in industries ranging from tourism to sugar. "[Some clients] are European companies that have subsidiaries in the United States and are concerned with compliance issues here because they have active investments in Cuba or are contemplating investments in Cuba," says Robert Muse, a solo practitioner based in Washington, D.C., who says that 90 percent of his practice is Cuba-related. Like most of the lawyers interviewed for this article, Muse declined to name his corporate clients. Most of them do not want to draw attention to their Cuba-related work with the embargo still in place, he says.

Holland & Knight's Andres Fernandez also has an active practice helping international bank clients with headquarters outside the U.S. set up internal controls so legal banking transactions with Cuba did not flow through the U.S. "There are financial institutions in Colombia, for example, that are permitted to do transactions in Cuba," says Fernandez. "But I have helped them to build policies, procedures and controls to make sure they don't process transactions that go through U.S. financial institutions in violation of U.S. law. They have spent lots of money building compliance programs to make sure none of these are run through the U.S. market."

A much smaller slice of the Cuba pie has included work counseling the few U.S. companies that are allowed to perform limited business dealings in Cuba. Even before the Obama administration's new regulations easing the embargo, U.S. companies could do business in Cuba under a few restricted circumstances on humanitarian grounds; under this policy, U.S. companies could provide limited agricultural, pharmaceutical and medical device goods to Cuba. Even these transactions were highly regulated and subject to Treasury Department licenses and strict money controls, and Cubans had to pay for goods up front in cash.

Hogan Lovells has about seven partners in Washington, D.C., who advise between 10 and 20 clients on sanctions work, including pharmaceutical and medical device clients, says Stephen Propst, a Washington-based partner with the firm.

Akerman's Mendez-Peñate in 2014 accompanied representatives from three U.S.-based pharmaceutical clients on a visit to Bio Cuba Farma, the Cuban government-backed biotech company that specializes in drug and vaccine development, to explore potential licensing deals. "They are definitely still continuing their conversations to see if there's anything they can develop," he says of the pharmaceutical companies, whom he declined to name.

Sanchelima & Associates, a three-person law firm based in Miami, has also carved out a niche in another small sector of permitted business with Cuba: intellectual property. Jesus Sanchelima, a Cuban-born, U.S.-educated lawyer, has helped U.S. companies—from local businesses to Fortune 500 giants—register hundreds of patents and trademarks in Cuba, which he says has a robust patent office.

But big deal work, to the extent there is any in Cuba, has effectively been out of reach for U.S. lawyers.

"We can't provide legal services that are in pursuit of transactions in Cuba," says Muse. And so it has been international law firms based outside the U.S., such as Spain's Uría Menéndez, London-based Bird & Bird and Canada's Stikeman Elliott, that have been on the ground, helping to orchestrate a handful of deals with Cuban entities in real estate development, tourism (Europeans have long flocked to Cuba), oil and gas and mining.

These firms typically have one partner, or a very small team, that handles Cuba-related work. One of these lawyers is Uría Menéndez senior associate Lourdes Dávalos Leon, an attorney born and educated in Cuba who pursued an LL.M. in Madrid and decided to stay there. A member of the Spanish bar, she maintains her Cuban qualifications and now counsels clients, mostly European and Asian companies, on Cuba-based transactions, such as a giant condominium complex for foreigners set to start construction this year.

Legal and dealmaking work functions differently in Cuba than in European markets, says Dávalos. To operate in Cuba, foreign companies have nearly always had to establish a joint venture with a Cuban entity, typically an arm of the government. That means that one of the parties in a deal is also its overseer.

"The Cuban state is everywhere in Cuba. They are your partner—and the authority to grant you the license to give you the ability to operate," says Dávalos.

And negotiating deals in Cuba can bring up novel legal questions that multinational companies don't typically face, she says, such as how to value land in a real estate deal. "You cannot bring in some bank and ask for a valuation of the land," says Dávalos. "You, as a foreign partner, have to accept the price of the land that will be valued by the government. You have to trust a lot in the Cuban government."

And then, she said, there is the issue of the conflicts of local counsel. Local firms are effectively an arm of the state; their advice is not wholly independent. At least two law firms, Bufete Internacional and Bufete de Servicios Especializados, assist international clients; foreign firms are not allowed to set up offices in Cuba. Typically, said Dávalos, multinational clients rely on their own firms to provide independent deal advice, while turning to local law firms to do permitting, paperwork and property searches.

Another lawyer with experience in the Cuban market is Hermenegildo Altozano, a Spanish lawyer at Bird & Bird, who received a license to practice law from the Cuban government in 1994 and has advised European companies on Cuban investments for more than 20 years. Previously with Eversheds and Lovells, he left the latter firm when it merged with Hogan & Hartson because of potential conflicts over his Cuba work. Altozano has advised international companies on more than a dozen deals, such as an oil and gas project and a data transmission deal involving Telefonica, the largest Spanish telecom operator. He has also represented Iberia, the Spanish-based airline, in joint ventures with Cuban aviation companies for aircraft maintenance and cargo operations.

"It is not the scale of deals you would be used to if you operated in Colombia or Mexico, or in the United States or Europe," says Altozano. "It's a much smaller market," with the largest deals measuring in the hundreds of millions of dollars, rather than the billions.

And while Altozano says that it can take years to understand the complexities of Cuban dealmaking, Cuba has a robust arbitral system that can help put international investors at ease. Altozano says he has handled more than a dozen arbitrations in Cuba, all but one of which, he says, resulted in a fair outcome. Tribunals supervised by the Cuban Court of International Commercial Arbitration operate under any applicable laws that the parties have agreed to, whether foreign law or Cuban, and Cuba recognizes the New York convention on enforcement of awards, he says.

But Cuba is not for everyone. Garrigues, the large Spanish law firm that has recently opened offices in Colombia, Mexico and Peru, says that while it has handled a few tourism-related transactions in Cuba, the market is still too undeveloped to generate much work. "It's a market that has many opportunities, but only when things change, and things haven't changed for the moment," says Javier Ibáñez, a Bogota, Colombia-based partner in charge of the firm's Latin America practice.

Erik Richer La Flèche, a Montréal-based partner at Stikeman Elliott, has handled nine major transactions in Cuba, almost all joint ventures with a state entity, from mining contracts to hotel projects. Many of his clients saw their joint ventures sour. "The whole mechanism is made to benefit the Cuban state, so if the Cubans feel it is not meeting expectations, they can make life very difficult for the investor," he says.

In November the Cuban government issued a quasi-prospectus advertising $8.7 billion in 246 investment opportunities in Cuba, including oil, tourism and food and agriculture projects, signaling that it was inviting more investment in the country. The move was well-timed for the Obama announcement. But no matter how eager they are to enter Cuba, U.S. companies are still operating in a highly regulated marketplace. The embargo still remains in place, and on January 15, OFAC and the U.S. Department of Commerce issued detailed regulations identifying what kind of commerce will be permissible under Obama's loosening of trade and how new money controls will operate.

"It's not as though this is going to all change overnight and it will be like doing business in Mexico and Canada," says Hogan Lovells' Propst.

Still, Mendez-Peñate is already hunting for opportunities. Within days of Obama's Dec. 17 speech, he says, he received a call from a major telecommunications company interested in a possible Cuban investment, as well as an investment company looking to make acquisitions. He has already booked a trip in March with the investment company, which he declined to name, and says he is setting up meetings with some of the Cuban law firms where he has contacts, to see about building possible relationships.

Soon, Altozano and Dávalos may face competition from a force they've never had to reckon with in Cuba: U.S. lawyers. If American businesses come to Cuba, their law firms may not be far behind.

"My firm is very interested in what is happening, and we have to be positioned there early, before the American law firms arrive," says Uría's Dávalos. Eventually, she predicts, Cuba may have to allow non-Cuban firms to open there.

"If they want big companies to go to Cuba and negotiate, they will have to, step by step, open up to law firms, because the companies want their law firms," she says. "The law firms go with the clients."

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