Canadian Bank Setting Up Shop In Cuba Borrowed $165 Million From Ohio Treasurer: U.S. Trade Sanctions Exempt Scotiabank

Ohio Loans To Bank Opening Office In Havana 

CINCINNATI (TDB) -- State Treasurer Josh Mandel's office has loaned $165 million to the Bank of Nova Scotia, a Canadian financial institution now moving to set up an office in Havana.  The 4 short-term promissory notes Mandel accepted from Scotiabank appear to pre-date its efforts to open operations on the island.  Yet the loans clearly could be a hot potato because U.S. citizens and companies are prohibited from doing business in Cuba under a strict trade embargo imposed after the communist revolution led by Fidel Castro.  Foreign corporations and businesses generally are exempt from the Cuban Assets Control Regulations.  Mandel, elected to the Ohio treasurer's office in 2010, is a Republican who is gearing up to run for the U.S. Senate against Democrat Sherrod Brown.  Mandel's decision to invest millions in Scotiabank looks embarrassing because he has been aggressive in supporting trade sanctions.  As a state representative in 2007, Mandel promoted legislation to force Ohio's government pension funds to sell off assets in non-U.S companies that did business in Iran, which is covered by the Trading With the Enemy Act.  Information about his legislation is available here.  Mandel's measure did not apply to Cuba.  The Trading With the Enemy Act does apply to Cuba.  And this latest development -- trading with a company that trades with an enemy -- opens Mandel to characterizations as a politician who says one thing for a headline but does another when nobody seems to be looking.

Trade sanctions are an important issue in Washington because American firms can be put at a competitive disadvantage by embargoes. The Cuban exile community in Florida generally supports U.S. policy that make the island off limits, and there have been tensions between the exiles and business interests who want to lift the sanctions.

The loans to Scotiabank are from STAR Ohio, a massive investment fund managed by the treasurer's office.  It pools money from local governments -- counties, cities, and school districts -- and tries to get the best available return from financial markets.  STAR Ohio began operation in 1995, long before Mandel became treasurer.  There is no suggestion the assets in the fund are at risk -- only that money is going to a company doing business in a country under U.S. sanctions.  Mandel has loaned funds in the past to European and Eurozone banks.  He has unwound those deals.  Financial markets are extremely skittish about the safety of  investments of banks in the Eurozone where a sovereign debt crisis could overwhelm economies and trigger economic recession or worse.

Scotiabank's efforts to expand into Cuba became public this week, including a report from the Brazil- Canada Chamber of Commerce that said the news first broke in London from the Financial Times:  London-based Financial Times on Sunday night.

Amid economic reforms on the island, Bank of Nova Scotia has reportedly applied to Cuban authorities to set up a representative office in the capital. Royal Bank is also considering opening an office in Havana, the report said.  Scotiabank, which has extensive operations across South America and the Caribbean, and RBC, Canada’s largest bank, both had branches in the country before the 1959 Cuban Revolution ushered in Communism, and a subsequent U.S. embargo, which slowed foreign investment . . .
The Cuba Trade and Economic Council lists more than 80 companies in Canada with business ties to Cuba, including Bell Canada, Bombardier, and dozens of oil and gas companies.

The Federal Reserve definition of commercial paper -- the type of loan Mandel has made to the Canadian bank -- is as follows:

Commercial paper (CP) consists of short-term, promissory notes issued primarily by corporations. Maturities range up to 270 days but average about 30 days. Many companies use CP to raise cash needed for current transactions, and many find it to be a lower-cost alternative to bank loans.

Crowell & Moring, a Washington law firm active in the trade arena, has published a background paper about the U.S. embargo on Cuba. Some pertinent excerpts:

The statutory basis for the U.S. embargo on Cuba is the Trading With the Enemy Act ("TWEA"), which confers broad authority on the President to impose restrictions in furtherance of U.S. policy. The embargo is administered by the OFAC and is implemented through the Cuban Assets Control Regulations ("CACR"). The restrictions imposed by the CACR apply to:

• any U.S. citizen or resident of the United States;
• any person within the United States;
• any business entity organized under U.S. law; and
• any "corporation, partnership, or association, wherever organized or doing business, that is owned or controlled" by a U.S. person or persons.

Accordingly - and this is important - the restrictions of the U.S. embargo on Cuba apply not only to U.S. businesses but also to foreign businesses that are "owned or controlled" by a U.S. person(s). This is in contrast to other U.S. embargo programs, such as those applicable to Iran or Libya, which are authorized by the International Emergency Economic Powers Act ("IEEPA"), and which do not permit direct U.S. jurisdiction over foreign corporations. 

Companies with activities in the United States - be they U.S. or foreign companies - can find themselves entangled in the Cuban embargo. The CACR's expansive jurisdiction reaches a wide range of offshore activities, including the activities of U.S. persons wherever they may be, and even applies to non-U.S. persons who are employees of or acting on behalf of U.S. persons. It applies as well to non-U.S. parent corporations that are owned or controlled by U.S. interests