By HCG Business Intelligence Unit

When President Donald Trump activated Title III of the Helms-Burton Act, the Cuban market automatically lost what little attractive it still had for those interested in investing in the country. For investors who were already immersed in investments, a real nightmare began. For the Cuban government it meant a strangle hold that has shaken its foundations. The truth is that no one imagined the controversial law was going to be activated at any time in history, let alone the impact that it would have on the Cuban economy in the current circumstances. The impact it has had so far has been devastatingly suffocating.

The consequences, at this early stage have been more powerful than those caused by the lawsuits that have been brought up to this point.  More than a few foreign investors have seen their intention to invest on the island come to a screeching halt. Some have had to renege on signed contracts in advance for fear of sanctions. Such is the case of the French-Italian company Avions de Transport Régional, which had signed a contract with the Cuban government for the sale of two ATR 72-600 turboprop aircraft, an agreement that has just been canceled for fear of reprisals under the Helms-Burton law. A second case has been that of the French company Bouygues Batiment International, which in 2018 obtained the Government's concession to expand and manage the José Martí and San Antonio de los Baños airports[1]. Bouygues had spent several years in Cuba working on different construction projects was the construction arm of the military companies in Cuba (Grupo GAESA). It has worked in the construction of several hotels in Varadero, Cayo Santa María, Cayo Coco and was also part of the construction team for the Gran Manzana Kempinski hotel, the first five-star hotel in Cuba. Since 1999, the company delivered more than 30,000 rooms[2], or 50% of the accommodations offered in Cuba and 100% of those in five-star establishments. They are currently working on a 19,000 rooms project in Bahia de Nipe in Holguin[3], on land confiscated from the United Fruit Company.

Another of the canceled projects has been the renovation of the Cuban railway workshops, which had been signed by the National Society of French Railways (SNCF) and the Union of Cuban Railways, for a value of $46.7 million[4]. The project included the modernization of two large locomotive workshops in Havana and Camagüey, as well as recovering passenger wagons and putting into operation the one known on the island as the 'French train'.

These are three examples of European companies who have preferred to withdraw before fighting potential lawsuits in court, even with the protection that the European Union has promised to companies and entrepreneurs in their respective countries that could be involved in some type of claim or demand.

The Helms-Burton law stops investments in the ZEDM dry

The impact of the activation of title III of the Helms-Burton Act has been felt very strongly in the Mariel Special Development Zone (ZEDM). Investment projects in the ZEDM did not grow in either 2019 and so far in 2020. At the beginning of 2020, only 43 companies had been approved in the ZEDM, of which only 24 are in operation and 19 are in the investment process. Of these, 6 are 100% Cuban capital, 24 are 100% foreign capital and 13 are mixed capital. The years with the highest number of approved companies were 2016 (11) and 2017 (15). In 2018, only 9 companies were approved, a 40% decline compared to 2017. While in 2019 and so far in 2020, no new investment project has been approved. The country with the largest presence so far in the ZEDM is Spain with 10 companies.

Figure 1. Investments in the Mariel Special Development Zone (ZEDM), 2014-2020

Source: Havana Consulting Group

It is also perceived that some of the signed and announced projects have been paralyzed. For example, the project of Mixta Salado Resort, which has as partners the Spanish company GLOBADIA, represented in this case by the company EL SALADO RESORT S.L. (Mercantile Company legally incorporated in Palma de Mallorca, Spain) and CUBAGOLF S.A. (Mercantile Society belonging to the Empresa Extra Hotelera Palmares S.A. de Cuba) [5]. The project aims to build an 18-hole golf course, a 250 room five-star hotel and a 500 rooms four-star hotel, a convention center, a spa, a shopping center and 3,000 apartments for sale. However, after eleven years of intense negotiations to reach an agreement to create the joint venture, the project has been so far abandoned.

Without a doubt, the activation of Title III and the implementation of Title IV of the Helms-Burton Act have changed the rules of the game and the dynamics of investments in the island. If the Cuban government in recent years has faced serious problems in attracting investment from foreign companies, the activation of Title III of the Helms-Burton Act has made it much more difficult to attract foreign investors to invest capital in the country.

Many factors historically and currently hinder the attraction of foreign investment on the island: the precariousness of the system based on a centralized economy, excessive bureaucracy, dual currency, vertical decision-making, taboos that limit the development of the private sector, the limitation that the foreign investor has to only be able to negotiate with state companies, the obligation that foreign companies have to contract local labor force through an employment agency belonging to the government and not directly with the worker and other.

These factors added to the embargo restrictions and the activation of Title III of the Helms-Burton considerably increase the risk of investing in the country. Without a doubt, these are real barriers that not only hinder investment opportunities on the island, but also make more difficult and put at risk the investments and businesses that are already operating in the country.

The ZEDM is vulnerable to lawsuits

In the area where the ZEDM is located, there were four sugar mills and other companies that were confiscated with no compensation at the time of the confiscation  While it is true that no lawsuits related to these properties have yet come to light, it is expected that these will arise at any time.

The four sugar mills located within the ZEDM perimeter are the Central Orozco, the Central Merceditas, the Central San Ramón and the Central Habana. See Map 1.

Map 1. Mariel Special Development Zone. Current investment area and location of the sugar mills that were confiscated at the triumph of the revolution.

Source: Havana Consulting Group

Financial limitations increase the current crisis

The current economic crisis in the country, aggravated by the sharp decline in Venezuelan financial support, the decline in tourism in 2019[6], the decline in exports[7] (including the export of professional services[8]), the failure to pay foreign debt with some creditors of the Paris Club[9], plus the freezing of the reforms[10] paint a gloomy and unattractive panorama for foreign investment. To this must be added that the company CFR I LTD, a debt holder based in London and belonging to the Club of London, has filed an individual claim demanding $1.4 billion from the Cuban government for non-payment of the debt[11].

It is for this reason that several companies already present on the island begin to perceive that the risk of investing increases as the Venezuelan crisis deepens and the US government strengthens its pressure on the island. Likewise, other investors who were undecided about committing begin to cool their investment plans in the face of the escalation of the current scenario and the new obstacles that are coming including the impact that the COVID-19 pandemic has caused in the world economy and the demolishing domino effect that it will have in the economy of the island.

The country's lack of liquidity has put the external debt pact with the Paris Club on the brink of default, which is catastrophic for the Cuban economy, since the few lines of credit they have run the risk of being closed at any moment for lack of payment.

The shortage of products that the dollarized retail trade networks suffer on the island today are a sign that the country does not have foreign exchange to guarantee a stable supply in stores. Commodities like chicken, eggs, oil, and hygiene products are hard to come by these days, a sign that financial capital are scarce to pay suppliers.

In addition, it is not only the payment of the external debt that has been affected. Foreign companies based in the country are having great difficulty repatriating the income generated by their operations on the island., This has increased the level of mistrust towards the government and has generated a climate of uncertainty in the few investors present in the country and by those who are still evaluating investing in the island. This has caused many product suppliers to stop selling to Cuba due to lack of payment. Such is the case of the 56 companies in the Canary Islands that in 2012 exported about 40 million euros to Cuba, today only 15 do so, with a turnover of €5.5 million. The same thing has happened with Chinese suppliers of raw materials and products which has generated a deep crisis in the Cuban pharmaceutical industry and other sectors of the Cuban economy.

Litigation under Helms Burton, the key to being successful in lawsuits is due diligence

Any person or business whose property was confiscated at the triumph of the revolution, and who qualifies under Title III of the Helms Burton Act to file a complaint has an opportunity to claim and obtain compensation for the confiscation and subsequent use of its confiscated properties. However, to be successful the road is long and difficult.

So far 25 lawsuits have been made public, of which 9 are certified and 16 are non-certified. It is an apparently low number compared to the expectations that were created with the announcement of the activation of Title III of the Helms-Burton Act. Complaint processes are usually highly costly and time consuming. At the end of April 2020,  25 lawsuits had been filed, in which more than 146 lawyers working for 51 law firms have been implicated in one way or another; so far there are 79 plaintiffs and about $ 4.1 million has been incurred for attorneys' fees[12].Dozens of other lawsuits are in the works but have not yet been made public. Some are in the negotiation phase with the defendants and others awaiting the results of the first lawsuits that have already been submitted to the court. Others have decided to seek support from the State Department for the implementation of Title IV and to seek negotiation outside the courts in the interest of all parties.  Favorable rulings by the judges hearing several of these lawsuits currently underway as to jurisdiction and qualification would be like a starting gun for others who are waiting for these pending results to institute a lawsuit.

Notwithstanding the above fees, most of the lawsuits filed so far are being worked for the plaintiffs on a contingency basis with zero cost, quite the opposite of what happens with the defendants, who have had to invest thousands of dollars in their defense. For the plaintiffs, most of the law firms involved in the lawsuits have borne the costs of their clients and the costs of “due diligence” on the property being sued. Law firms generally agree 30% to 40% success fee of the total sum claimed in exchange for doing all the legal work at no cost to the client.

The key to prevailing is due diligence, and this involves a tremendous challenge for plaintiffs. Due diligence has two important requirements, 1. obtaining: all information regarding the confiscated property; 2. All information about who is trafficking in the confiscated property.

Regardless of the ambiguities and technicalities of the law, it is essential to reconstruct the history of the property and to be able to demonstrate who the owners were until the moment of the confiscation and the chain of title of the claim since then. For this, it is important to provide copies of titles, records and deeds that demonstrate the ownership of the seized assets in these plaintiffs’ companies or persons and documents to prove and demonstrate the value of the property when it was confiscated.

In addition, as to the claimants birth certificates, marriage certificates, wills, declaration of heirs, certifications from the national archive, commercial and property records, financial statements, and other documents are very important to be able to prove ownership and  prepare a thorough claim.

Not all families and businesses that were affected by the confiscations kept their deeds and other valuable documents. It has been a long time, over 55 years in some cases, and many have given up on a long wait to reclaim their property and obtain compensation. Some, however, maintained the hope of a claim and the information was passed down from generation to generation. Many of the plaintiffs today were children or very young when the confiscation occurred, others were not even born.

Some courts have ruled that the now claimant must have owned the claim at the time Helms Burton was enacted. Unfortunately, many of those claimants, all American citizens, inherited the claims on the confiscated properties after the enactment of the Helms Burton Act on March 12, 1996. Their parents never had the opportunity of claiming because Title III was suspended for more than 23 years until May 2019. As a result, a Miami-Dade court judge denied the rights of the son of a US citizen and did not give him the opportunity to sue on behalf of his deceased father. However, there are legal avenues that can resolve this issue. This is why plaintiffs must do their due diligence and be ready for an extensive battle in federal court.

The other part of due diligence is determining which company is trafficking in the confiscated property, what business is currently taking place on the property, what is the current turnover, how much was the volume of the investment, how was the financing done, during what  period has the confiscated property been and will continue to be exploited, who are its managers, where the company's headquarters are located, identify its subsidiaries and operations in the United States and other countries.

Not all law firms involved in these lawsuits have the information and expertise in American and Cuban law (knowledge of Cuban law is very important) required to perform good due diligence. This information gap has to be filled by lawyers, experts and consulting firms specialized in the Cuban market. These companies and experts are the ones who know where and how to find the information needed to cover both parts of due diligence. If the interpretation of the law by a judge is favorable, a good due diligence leads to success in a lawsuit. This would greatly facilitate the work of the trial lawyers, who are the ones who have to present the cases in court.

As to the claimants and as a part of problem the date of acquisition of the claim there are many cases where the family is large and not all its members with the right to claim have the same expectation of success in the filing of  a lawsuit. This is one of the reasons why so far only 25 lawsuits have been brought. Sometimes, it behooves a defendant to make a private settlement with the plaintiff before the lawsuit is made public, allowing the amount to be paid as compensation in a settlement to be much less than it would be if the lawsuit were made public.

For both parties, both for plaintiffs and defendants, everything counts. A good due diligence can lead to a successful negotiation without going to court, at the end of the day both parties would benefit. The plaintiff is compensated and does justice for his own, while the defendant gives up some s earnings, but he retains the business and operations in Cuba.

Negotiate or fight, what is the best formula to face Helms-Burton?

Many investors ask the strategic question. Apart for fewer and fewer contingency arrangements, it takes large sums of money for lawyers and legal expenses. For many, the risk of losing the lawsuits is real and significant. However, many years have passed and not all those affected certified the claims as required at the time, nor did they keep the documents needed to prove ownership. Searching for these is difficult, especially since the Cuban government does not allow searching the archives under their custody and penalties of up to 20 years in prison for those who try to remove from the country any compromising document that facilitates the filing of a lawsuit. in North American courts. It should also be added that most of the people who suffered the confiscations are no longer alive today, those who survive are their heirs.

The current scenario shows that investors who have invested in island are at risk of being sanctioned by the US Treasury Department, being blacklisted, being fined millions of dollars, losing the credit of the North American financial institutions and their assets in the US, if a lawsuit is filed against them for “trafficking” operating in properties that were confiscated.

Some of these companies are very powerful financially and have enough capital to fight in the courts and try to derail the lawsuits due to technicalities or lack of supporting documents. The most sensible thing for these “traffickers” investors is to negotiate with potential claimants. Negotiating allows the defendant to have continuity in the investment This would guarantee business continuity in the event of a possible change of government on the island, something that could occur in the coming years.

The attitude of the Cuban government in the face the activation of Title III of the Helms-Burton Act has been very erratic So far Cuba has not utilized the possibility of a claim  as opportunity to negotiate and turn these demands into investment opportunities quite the opposite. In addition, the Cuban government cares little or nothing if the foreign investor present in the country risks being sanctioned by the Treasury Department and investors’ assets are confiscated in the United States. In this sense, for the foreign investors involved in the lawsuits, the Cuban Government should seriously consider whether it is worth fighting or negotiating with the prior owners. For those who intend to invest, they must do a rigorous due diligence and could even enter into an agreement with the former owners, if applicable, to be able to make investments in the properties that were confiscated. In this way they would avoid a lawsuit and considerably minimize part of the high risk of what it means to invest on the island today.

Conclusions

Strong internal restrictions and devastating external sanctions have halted investments on the island. The combination of these two factors has placed the Cuban economy in a very adverse scenario, in the midst of a global crisis generated by the expansion of the Coronavirus pandemic and the devastating domino effect that this pandemic has had and will continue to have in the coming months in most economies, including Cuba's.

This situation has led to an internal crisis in the country which has affected not only the supply of food and products for the population, but has also hit the production of medicines and the supply of cooking fuel, transportation, and to generate a shortage of food and hygiene products that makes Cubans life increasingly difficult[13].

On the other hand, in this context, the activation of title III of the Hems-Burton Act has very effectively blocked investments in the country. Its persuasive effect has left the battered and primitive Cuban economy without oxygen to the point that investing today in the island has practically become a suicidal act for investors who bet on the investment opportunities that the Cuban regime tries to sell.

The market of 11 million inhabitants that became - as a result of the prior thaw - the most popular investment destination in the Caribbean, has suddenly become unattractive. Today’s reality shows a stagnant, poor market, technologically and structurally backward. Cuba is currently the market with the lowest purchasing power in Latin America even with the help of remittances from US Cuban relatives. Its appeal albeit limited in the past was presented by the changes generated by the then thaw in relations and the approach of the United States, together with  the timid opening that Raúl Castro allowed which resulted in  in more than 600,000 Cubans starting to work on their own account. However, with the setback to the reforms all the attractiveness that the country had gained to stimulate foreign investment even with its limitations has now disappeared.

The new government team headed by the designated president Miguel Diaz Canel has not known how to guide the economy, quite the contrary. Instead of adopting a renewed strategy applying an opening formula to free the productive forces, he has preferred ideological entrenchment and the continuity of the status quo as a strategy to maintain power. In his speeches and actions, there is no perception of any change in the economic model, but quite the opposite.

The activation of Title III of the Helms-Burton law was the ideal opportunity for a change of strategy by the Cuban government. It was more strategic to negotiate and convert demands into investments, than to dig in and try to give life to a model that is economically and politically failed. The current crisis in the Cuban economy combined with the activation of Title III of the Helms-Burton law has brought the country to the doorstep of a perfect storm. The persuasive effect of the law has severely weighed down investments on the island, its effect has been more damaging for the moment than the lawsuits that have been filed so far.

The Cuban government has chosen to wait for the results of the US elections next November, placing its hopes that President Trump will be defeated by the Democratic candidate and that this in turn deactivates the implementation of the Helms-Burton law. If this scenario does not occur, will the Cuban government sit down to negotiate? Will strategies change? Will the island be able to support four more years without investments? We will see what history holds in store in the coming months. There are many subplots running at the same time that can accelerate an outcome to this currently suspense.

REFERENCES

[1] Radio Televisión Martí. “Ministro: La Habana tuvo que comprar un barco para no perder el petróleo que llevaba”. Febrero 2020. https://www.radiotelevisionmarti.com/a/ministro-la-habana-tuvo-que-comprar-un-barco-para-no-perder-el-petróleo-que-llevaba/259231.html

[2] Excelencias News Cuba. “Bouygues Batiment International apuesta por la infraestructura hotelera cubana”. Julio 2017. https://www.excelenciascuba.com/noticia/bouygues-batiment-international-apuesta-por-la-infraestructura-hotelera-cubana

[3] Diario Las Americas. “Los militares cubanos construyen otro polo turístico en la Bahía de Nipe”. Agosto 2018. https://www.diariolasamericas.com/los-militares-cubanos-construyen-otro-polo-turistico-la-bahia-nipe-n4159415

[4] EFE. “Compañías cancelan negocios con Cuba por temor a sanciones de EEUU”. Febrero 2020. https://oncubanews.com/cuba-ee-uu/companias-cancelan-negocios-con-cuba-por-temor-a-sanciones-de-eeuu/

[5] http://elsalado.com/es-ES

[6] HCG Business Intelligence Unit. “Fall of tourism in Cuba: chronicle of a death foretold”.  THCG Business Report, November-December 2019 Nº 4, THCG & TECH. 

[7] HCG Business Intelligence Unit. “Cuba: Intercambio Comercial de Bienes cae en caída libre”.  THCG Business Report, Febrero 2020 Nº 1, THCG & TECH. 

[8] HCG Business Intelligence Unit. “Negocio de exportación de servicios médicos se desinfla”.  THCG Business Report, Febrero 2020 Nº 1, THCG & TECH. 

[9] HCG Business Intelligence Unit. “Cuba no paga su deuda externa y pone en peligro su acuerdo con el Club de Paris”.  THCG Business Report, Febrero 2020 Nº 1, THCG & TECH. 

[10] HCG Business Intelligence Unit. “Checkmate of the CNAs accelerates the road to chaos”.  THCG Business Report, August-October 2019 Nº 3, THCG & TECH. 

[11] REUTERS. “Cuba facing UK court battle over unpaid government debt”. February 2020. https://www.reuters.com/article/cuba-bonds/cuba-facing-uk-court-battle-over-unpaid-government-debt-idINKBN20D2F0

[12] U.S.-Cuba Trade and Economic Council, Inc. October 2019.

https://www.cubatrade.org/blog/2020/4/25/0pwu9ebybb1hgxmq9fne0blejomdvn

[13] HCG Business Intelligence Unit. “La crisis de liquidez de la economía cubana se profundiza”.  THCG Business Report, Febrero 2020 Nº 1, THCG & TECH.