OFAC released today its monthly civil penalties report and it is, as is usually the case, all Cuba all the time. EFEX Trade, LLC, a company that provides both management consulting and massage therapy services, paid $2,000 for unlicensed remittance forwarding to Cuba. The fine paid is, of course, much less interesting than EFEX’s unusually diverse business model. Please feel free to suggest possible synergies between the company’s two lines of business in the comments section.

In addition, Texas-based Varel Holding, a manufacturer of drill bits, agreed to pay $110,000 for exports made by one of its foreign subsidiaries to Cuba between June 2005 and June 2006. Varel voluntarily disclosed the exports. The OFAC notice indicated that the case was handled under prior enforcement guidelines which provided for a maximum penalty of $11,000 per violation. It’s hard to understand then why the penalty ultimately imposed was only slightly less than the maximum penalty ($121,000) notwithstanding the company’s voluntary disclosure.

There has been a fair amount of publicity regarding the Obama administration’s recent action rolling back Bush administration policies on family remittances and travel to Cuba. The much less discussed communications provision of the action have been touted by some as potentially opening up a number of opportunities for U.S. companies seeking to provide telecom service in and to Cuba. Under these provisions, the new administration is permitting U.S. companies to “enter into agreements to establish fiber-optic cable and satellite telecommunications facilities linking the United States and Cuba” as well as to enter into roaming agreements for cell phone usage in Cuba.

To be understood, however, this action needs to be put into some historical context as comprehensively described in this paper published by the Columbia Business School’s Virtual Institute of Information. When the Cuban embargo was imposed in 1962, this effectively froze the development of telecommunications links between the United States and Cuba, which at that time consisted of a submarine cable with a capacity to carry 130 calls and a tropospheric radio channel with a capacity of 79 calls. OFAC allowed the operation of these telecommunications channels to continue despite the embargo under a grandfather clause but prohibited upgrading these channels and forbidding payment of settlement payments to Cuba. (Settlement payments are those payments made by a carrier to a foreign carrier for connecting the incoming international call to its domestic subscribers.)

When the cable wore out in 1987, OFAC authorized its replacement, but only with the oldest cable available, which turned out to be some mothballed copper-cable with a capacity of 138 circuits. The antique cable was put down between West Palm Beach and Cojimar, Cuba at a cost of $8 million. Cuba refused to activate the cable until the U.S. met its demands for settlement payments for Cuba’s carriage of the local leg of calls originating in the U.S. and carried over the underwater cable. When Hurricane Andrew destroyed the Florida link of the troposphere channel, Cuba allowed a limited number of calls from the U.S. over ItalCable, Italy’s international carrier rather than allow the operation of the cable, which only went into operation several years later.

In the early 90s, the United States began to reconsider its telecommunications policy toward Cuba in large measure because it became easier for U.S. callers to Cuba to make those calls through Canada, bypassing AT&T and other U.S. carriers. As a result, the U.S. allowed carriers to make settlement payments to Cuba, an authority now codified in section 515.548 of the Cuban Assets Control Regulations. Section 515.542 of those regulations authorized transactions incident to the use of cable and satellite channels to provide telephone service to Cuba. As a result, U.S. telephone carriers can freely use existing satellite channels to provide telecom service to Cuba.

Indeed, the real barrier to building additional cable and communications facilities with Cuba may be economic more than regulatory. As an impoverished nation, telecommunications carriers may not see Cuba as a very attractive market. ATT’s response to the new policy was, to say the least, lukewarm:

AT&T spokesman Michael Coe said the [West Palm Beach-Cojimar] cable is no longer in operation, and the company connects calls to the island through third-party carriers. As for roaming agreements and direct connections to Cuba, the company has no plans yet.

“We’re certainly going to study the administration’s proposal,” Coe said.

Further liberalization of U.S. telecom policy toward Cuba is certainly laudable, but, at least for the moment, it’s not clear that the liberalization will have much practical effect.

Don’t start making room in you humidors for any Cuban Cohibas just yet, but provisions attached by the House of Representatives to the 2009 Omnibus Appropriations Act rolling back some Cuba sanctions are likely to be approved by the Senate. At least that’s the word from Senate majority leader Harry Reid.

Three sections of the Omnibus Appropriations Act deal with the Cuba Sanctions program. Section 620 amends the Trade Sanctions Reform and Export Enhancement Act of 2000, commonly known as TSRA, to provide for a “general license” to travel to Cuba in connection with “marketing and sale of agricultural and medical goods.” In OFAC-speak, this means in effect that licenses would no longer be required for such travel. Currently, individuals seeking to travel to Cuba in connection with TSRA transactions need to apply for a specific license. And, although such licenses are generally granted, the specific license requirement can result in delays and added expense in connection with such travel.

Second, section 621 prohibits the expenditure of any funds to enforce amendments to “section 515.560 and section 515.561 of title 31, Code of Federal Regulations, related to travel to visit relatives in Cuba, that were published in the Federal Register on June 16, 2004.” Those amendments, among other things, narrowed the definition of relatives that could be visited, limited such trips to once every three years, imposed a requirement that a specific license be obtained for relative trips that previously could be made under a general license, and decreased the amount of money that could be spent during visits to relatives from $167 per day to $50 per day and $50 per trip. Other amendments to sections 515.560 and 515.561 not involving relatives, such as the amendment allowing authorized travelers to bring back $100 worth of Cuban goods for personal consumption (cigars, of course) would presumably not be affected by section 621.

Finally, section 622 reverses a rule adopted by OFAC requiring that payment be received for TSRA exports to Cuba prior to the ship’s departure from the shipping port. In effect, this eliminated the “cash against documents” rule standard for export transactions. Under that rule, the Cuban buyer’s bank (usually a European bank) would pay for the shipment upon presentation to it of a negotiable bill of lading which is considered to be equivalent to the delivery of the goods themselves. Often the goods would have arrived in the Cuban port prior to this presentation of the bill of lading. Requiring payment prior shipment from the U.S. port, and, hence, prior to delivery of the bill of lading to the confirming bank, materially increased the risk of Cuban TSRA exports and made it more difficult for such transactions to be financed or handled by banks.

With a new administration in the White House, opponents of the Cuba embargo are hoping to pass legislation that could gradually chip away at the total embargo in place against the island. Last week Representative Bill Delahunt [D-Mass.] introduced the Freedom to Travel to Cuba Act. That legislation would completely prohibit the President from prohibiting travel to Cuba, and transactions incident to such travel, by U.S. citizens and legal residents. The only exceptions would be a state of war between the U.S. and Cuba (presumably a war actually declared by Congress) or an imminent danger to public health.

Coincidentally, on the same day that Delahunt introduced his legislation, the pro-embargo group Cuba Democracy Public Advocacy issued a press release announcing the results of a poll that the group had commissioned and which found that 69 percent of Cuban-Americans “support the prohibition of tourist travel to the island.” Leaving aside the somewhat peculiar notion that U.S. policy on this matter should be controlled by the opinions of Cuban-Americans rather than the entire population, the commissioned poll doesn’t really support the conclusion asserted by CDPA.

Accepted poll methodology requires that the questions used by the poll be neutral questions that don’t influence the likely response. For example, a poll might properly ask “Do you prefer Cola A or Cola B,” not “Do you prefer the refreshing taste of Cola A to the acrid taste of Cola B?” Here’s the question asked by the poll which allegedly supports the conclusion that 69 percent of Cuban-Americans do not favor travel to Cuba:

Do you agree or disagree that US tourism [sic] should not be authorized to vacation in Cuba until the Cuban regime releases all political prisoners, respects basic human rights and schedules free elections?

I wonder what the results would have been if the poll asked this question instead:

Do you agree or disagree that U.S. tourists should not be authorized to vacation in Cuba even though such tourism might promote better relations between the United States and the Cuban people?

My guess is that the numbers would be significantly different. Even if a majority of Cuban Americans still agreed with the question biased in the other direction, CDPA doesn’t enhance its credibility by promoting the results of a push-poll.

The National Research Council, a group comprised of representatives of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine, recently released a report that argues that just about everything about U.S. export control regime is broken. Unfortunately, the Council seems incapable of providing concrete solutions to fix the problem other than say that the laws ought to be rewritten from the ground-up and that we need, of all things, two more export agencies. One of the proposed agencies is a gateway agency to receive applications and then send them to the appropriate existing export agency; the other, an appeal body to review the decisions of the various export agencies.

Most of the criticisms of the export regime are fair points and ones that we’ve all heard before. For example, the report argues that U.S. export laws wind up favoring foreign producers of high technology, that the control lists are long, difficult to apply and outdated and control items readily available abroad. With regard to the foreign availability point, the report diminishes its credibility by providing examples that, frankly, aren’t terribly convincing even though better examples were readily at hand.

The first example is, rather surprisingly, based on Sony’s Playstation 3:

Computers with an adjusted peak performance above 0.75 weighted TeraFlops (speed rating) in aggregation are controlled. Yet, using information easily obtained on the internet, linking together 8 Cell processors (jointly developed by IBM, Sony, and Toshiba, and commonly found in the Sony Playstation 3), can produce 1 TeraFlop.

This seems to be a reference to a project by a professor of computational astrophysics to connect 8 PS3s to make a supercomputer that could perform highly complex calculations intended to model black hole events. I couldn’t easily find on the Internet instructions to connect two or more PS3s in a grid and, I suspect, such instructions would require more than casual technical expertise to implement. In short, even if one can theoretically link a bunch of PS3s together into a TeraFlop computer, it’s one thing to obtain such a device already assembled and quite another to obtain components that might be assembled into the controlled item by someone with technical expertise.

The second example cited by the Report relates to the controversial area of encryption controls where there are indeed numbers of good examples of foreign availability. Still, the report botches it:

Symmetric key encryption using greater than 64 bits key is controlled. However, software algorithms with capability greater than 64 bits, such as Twofish and Serpent, are already widely available via the Web.

Apparently the authors of the Report were unaware that publicly-available algorithms like Twofish and Serpent can be exported without a license or even prior review as long as the exporter provides to the Bureau of Industry and Security (”BIS”) a notice providing the link where the source code can be obtained (or a copy of the source code). And even though the publicly-available encryption algorithm can be incorporated into an export-controlled encryption product, the process is not sufficiently trivial so that the algorithm and the encryption product should be treated the same for export purposes.

According to the latest civil penalty information released by the Office of Foreign Assets Control (”OFAC”), the Center for Cross-Cultural Studies (”CC-CS”), a Massachusetts-based company specializing in arranging university study programs abroad, agreed to pay $15,000 to settle allegations that it violated the U.S. embargo on Cuba. Interestingly, the fine appears to relate to activities conducted by CC-CS in connection with otherwise licensed activity.

As usual, the abbreviated squib provided by OFAC provides few details of what actually happened, but Jerry Guidera, a director of CC-CS, sent details of the situation to the website Havana Journal. According to Guidera, the dispute between CC-CS and OFAC centered on a program conducted by CC-CS and Willamette University in Salem, Oregon from 1997 to 2004 (In 2004 tightened OFAC regulations on educational activities in Cuba resulted in the elimination of most U.S. educational programs in Cuba.) CC-CS designed the program and handled the logistics using its staff in the U.S. and in Cuba.

An article from the journal Higher Education, also reprinted at the Havana Journal website, provides even more detail:

It was when the government blocked an attempted wire transfer, intended to cover program costs, in January 2004 … that Guidera said CC-CS came under governmental scrutiny.

“We’ve been dealing with this for almost five years now,” said Guidera, who added … that, in reaching the settlement, there was no finding of fault. He believes the regulations then in place allowed for subcontractors to act on licensees’ behalf. “We’re convinced that we would have won in court.”

“If we had infinite resources we would have kept fighting this one forever.”

Actually, I don’t think CC-CS is on very strong ground here. The Cuban Assets Control Regulations are generally quite specific in detailing what sorts of transactions incident to licensed transactions are permitted, and there isn’t a broad exception for activities of subcontractors or agents of licensees. Moreover, section 515.565(a)(2)(vii) of those regulations, which was not changed by the 2004 amendments, seems to be quite clear that “the organization of and preparation for” licensed educational activities is permitted only “by a full–time employee of a [licensed] U.S. academic institution.” That would seem to suggest pretty clearly that CC-CS’s provision of logistics to Willamette with respect to its Cuba study program required a separate license.

We’re back from vacation and we’re back with a grab bag of things:

• University of Tennessee Professor J. Reece Roth was convicted on eighteen counts, including violations of the Arms Export Control Act for permitting foreign graduate students to have access to information relating to an Air Force project on the use of plasma technologies for unmanned aerial vehicles. According to the report on the Knoxville News Sentinel’s website, a key piece of evidence proving that Roth had knowledge that his conduct was illegal was a set of notes that divided the work between an American graduate student and the Chinese graduate student in order to keep export-controlled technical data away from the graduate student. When this arrangement impeded progress on the project, the students were allowed to share data. Roth claimed that he didn’t believe the information was export-controlled until the project netted an actual military product, a claim that would appear inconsistent with his initial division of work on the project between the American and the Chinese graduate student.
• The Denver Business Journal supplies more information on the Platte River Associates prosecution for allegedly violating the Cuba embargo. The attorney for Platte River told the Denver Business Journal that the prosecution arises from training that the company gave to an employee of a Spanish company, Repsol, that had previously purchased geological modeling software used for oil exploration. The employee arrived with seismic data that appeared to relate to the western Caribbean and possibly to Cuba. There is apparently no allegation that Platte River dealt with any Cubans or the Cuban Government, nor any allegation that Repsol actually used the software in connection with a Cuban project. Instead, it now appears that the government’s case is based not on the sale of the software but the training of the Repsol employee. It’s still a tenuous connection without proof that Repsol used the software in connection with dealings with the Cuban government.
• Someone has made a broad-ranging Freedom of Information Act request at the Office of Foreign Assets Control (”OFAC”), apparently seeking copies of all applications for licenses to export agricultural and medical products to Iran. This has prompted OFAC to send letters to licensees requiring the licensees to assert in writing any claims that information in these licenses is proprietary or confidential to the licensee. Does anyone have any information on who may be seeking this information and why? Please let me know in the comments section.

The Twin State Peregrines, a little league baseball team from Vermont and New Hampshire, is currently playing ball in Cuba with Cuban teams their own age, the first little league tour of Cuba by an American team since 2000 and the first since more stringent travel regulations went into place in 2002. Obtaining approval from OFAC for the privately-funded trip took the team twenty months and three rejections until the travel license was obtained in March of this year. Ironically it’s easier to export cows from Vermont to Cuba than a bunch of pint-sized little leaguers.

News of the baseball tour to the island, not surprisingly, generated an alarmed reaction from some of the predictable corners of support for the Cuba embargo on the Hill. Congressman Lincoln Diaz-Balart called the OFAC action granting the license to the kids “very troubling.”

”Sporting events may be interpreted as diplomatic gestures even when they are not meant to be,” Diaz-Balart said. “And a sporting event is not an appropriate way to respond to the ongoing torture of political prisoners Yuselin Ferrera, Nelson Aguiar and many others.”

Vermont’s Senator Patrick Leahy took Diaz-Balart’s pitch and knocked it out of the park:

”He should pick on someone his own size,” [Leahy] said.

The latest report on the series has the Peregrines 1-1 in the series, losing 16-5 to the Santos and beating the Mangos 19-8.

ABOVE: Nickel Production in Cuba

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The latest release by the Office of Foreign Assets Control (”OFAC”) of recent civil penalty cases reports that Minxia Non-Ferrous Metals, Inc., remitted $1,198,000 to settle allegations that between 2003 and 2006 it purchased or otherwise dealt in Cuban metals. The matter was not voluntarily disclosed to OFAC.

Even though this is the highest fine imposed this year and is substantially higher than the typical fine for a violation of the Cuba embargo, OFAC is, as usual, parsimonious about the details of what happened. The information provided above is all OFAC had to say about the matter. So what led to such a large fine? We can only speculate, but there are some things on which to base such speculations.

Minxia Non-Ferrous Metals is a subsidiary of China Antimony Chemicals Co., Ltd., which, in turn, is a subsidiary of China Minmetals Non-Ferrous Metals Co., Ltd., which is, in turn, a subsidiary of the giant Chinese metal conglomerate China Minmetals Corporation. This climb up the corporate ladder may reveal what had OFAC in a snit about Minxia’s trades — namely, the $600 million joint venture between China Minmetals Corporation and Cuba to exploit Cuba’s large nickel supplies. China is one of the largest consumers of nickel which is a key component of stainless steel, and nickel is Cuba’s largest export — plenty there to get OFAC in a tizzy. In fact, the Bush administration announced a crackdown on nickel exports in July 2006, claiming that they constitute more than half of Cuba’s foreign income.

Sadly for the Chinese, if this was the cause of the fine, the Chinese interest in the nickel joint venture was recently bought out by Venezuela in what may not have been an arms-length, consensual transaction.

ABOVE: Cuban oil well

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Last week we reported on criminal charges filed against a Colorado software company for violating the Cuba embargo. We had hoped to see the criminal information when it became public because the charges seemed, well, a little bit fishy. Now it appears, according to this article in Boulder’s Daily Camera, that the criminal information won’t be made public until a “change of plea” hearing takes place in October. The company had previously pleaded not guilty to the charges.

That article also gives a fair amount of detail about the facts leading to the indictment including claims by the defense attorneys that the company had no direct dealings with the Cuban government:

Foreman, an attorney with Denver-based Haddon Morgan Mueller Jordan Mackey & Foreman, said Thursday that the allegations stem from Platte River’s work in 2000 with Repsol, a Spanish oil and gas company.

He said the Boulder company sold its software program, which analyzes seismic and other ground data to assist in determining potential places to drill for oil, to Repsol in 2000.

A couple of months later, a Repsol employee came to Boulder for further training on using the software, Foreman said. At that time, a Platte River representative recognized that the seismic data looked as if it related to the Caribbean and Cuba, he said.

“I have no idea whether or not Repsol ultimately did anything with Cuba utilizing that software,” Foreman said.

This is all pretty attenuated as a basis for a criminal indictment. Platte River sold software to a Spanish company that then fed data into the program relating to areas around Cuba. Is Microsoft going to go to jail for selling Excel to a Canadian company that then uses the program to analyze its sales figures, including sales to Cuba? It strikes me that you don’t have criminal activity unless it can be demonstrated that Platte River knew that the software was going to be used to aid drilling in Cuba and was in fact later used to aid drilling in Cuba. Short of that, “no cigar,” as they say.

That being said, the mystery about this case only deepens. The change of plea hearing suggests that the defendants are now going to plead guilty and that some sort of plea agreement has been reached. But why would anyone plead guilty on the facts as they appear so far?