I continue my exploration of some of the issues around doing business in Cuba, from the Foreign Corrupt Practices Act (FCPA) perspective. Today I want to consider the types of ownership structures that are currently in place and the FCPA issues deriving therefrom. At this time there are three recognized forms of investment: (1) Joint Ventures (JVs); (2) Foreign Capital Company; and (3) International Association Agreement.

Joint Ventures

The first thing to note about JVs in Cuba is that the best you can get is 49% ownership, with the government controlling the remaining 51%. In Cuba, a JV is a separate legal entity that is registered with the government. It is a different legal entity from the two partners and issues shares to its partners. To create a JV you will be required to obtain the authorization of the competent government ministry or state body. The legal documents required are an Association Agreement and Articles of Incorporation.

Foreign Capital Company

This is a separate Cuban domiciled and created corporation, which once again must receive a state license to be created. It must be legally created in Cuba and cannot simply be a branch of an existing foreign corporation. It must issue registry shares to create a legal person who can do business in Cuba. Standard corporate governance documents must be created but this allows the full range of business activities to be conducted both in Cuba and abroad by the Cuban Corporation.

International Association Agreement

This form of entity is more akin to a teaming agreement or some other form of dual participation that is something less than a JV. A foreign company or person might contribute some monies on a project or other basis where they could accrue shares but it is not a capital share. It does not involve the creation of a new corporate entity but is validated by the filing of a public deed and is entered into the Business Register.

Of course, you will have to open a bank account in Cuba. The Central Bank of Cuba heads the Cuban banking system and it consists of nine commercial banks, 15 non-banking institutions and 10 representative offices of foreign banks in the country. Foreign entities are entitled to have accounts and indeed once an investment is approved, the foreign entity is required to open a demand deposit account to receive funds that might come into the company.

I have gone through a somewhat detailed explanation of corporate and business venture structures to re-emphasize the key theme of this week’s blog post. At all times, for all business relations in Cuba, you need to assume you are dealing with government officials. This is true whether they work for a ministry issuing a license to do business in Cuba, a government enterprise doing business in the country or even at a bank. They are all going to be covered by the FCPA.

But more than just understanding what all of your interactions will be with government officials, you should think about the types of corporate structures you want to put in place to protect yourself. As is stated in the FCPA Guidance, “Although the FCPA’s accounting requirements are directed at “issuers,” an issuer’s books and records include those of its consolidated subsidiaries and affiliates. An issuer’s responsibility thus extends to ensuring that subsidiaries or affiliates under its control, including foreign subsidiaries and joint venture partners, comply with the accounting provisions.” This means a US company is responsible for the actions of its JV partners. If you only have a 49% interest, you may not be in a position to control the JV governance or actions.

Similarly, under the International Association Agreement you will have very little ability to control the actions of the entity you are contributing into. This means that in both the JV and this structure, a lengthy and intense dialogue will need to ensue over your expectations not simply that there is no place for bribery and corruption but there will be affirmative compliance with the FCPA. You will also need to put on FCPA training for the JV leadership or your investment partner. Finally, while ongoing monitoring may seem problematic, it will be necessary. You will need to have a formal FCPA compliance program, consisting of policies and procedures in place for a JV or foreign capital company.

The key is going to be your documentation. As every interaction will involve a foreign official under the FCPA, every time you entertain, treat to dinner or meet with a foreign official there should be a record. Before your business folks exclaim, “What an order, I can’t go through with it”; remind them that documentation is a good business practice and indeed will facilitate the business sales process. Moreover any expenses incurred should be recorded for tax reporting purposes.

At some point you will also most probably face the issue of travel by Cuban officials to view your products or sites in the US or other countries. The travel issues seems to bedevil US companies to this day regarding travel of Chinese officials to the US. Yet, to comply with the FCPA, travel for foreign officials is a straightforward exercise with guidelines that have been in place for several years so it really should not be that difficult to comply with the FCPA in the area of bringing Cuban government officials to the US or other locations outside of Cuba. Indeed there have been two Department of Justice (DOJ) Opinion Releases, 07-01 and 07-02, which lay out the requirements that will help to keep you out of FCPA hot water in this area.

Finally, and most importantly, is the Compliance Evangelist mantra, “Document, Document, and Document”. Whatever your engagement is with Cuban officials commit it to paper. If it is travel, gifts or entertainment, catalogue every expense so you can show to any regulator who comes knocking that you are in compliance with the FCPA. The reason is simple, if you do not have appropriate documentation, a regulator reviewing you may well conclude there is a FCPA violation, with no demonstrative evidence to the contrary.

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