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Competing in a New Cuba
Carlyn Kolker, The American Lawyer
January 29, 2015
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.
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"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
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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.
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"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 surpervised 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.
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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 welltimed 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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