Red flags in Cuba slow investment

MIAMI — After an initial wave of enthusiasm following President Obama's decision to re-establish relations and expand trade with Cuba, American businesses are hitting the brakes.

Although companies such as MasterCard, American Express, Netflix and Twitter have announced plans to expand operations in Cuba, they can't flourish on the island until two essential U.S. industries get on board: banking and telecommunications. And so far, officials in those fields are hesitant to jump into the risky Cuban market.

"Capital doesn't like to go where there's risk," said Alex Sanchez, president and CEO of the Florida Bankers Association. "It's not going to Iran, it's not going to Iraq and it probably won't go to Cuba for a while because of the risk."

Ever since Obama and Cuban President Raúl Castro made their historic announcement in December that they would end 50 years of estrangement, diplomats in both countries have been working to formalize that process.

The other part of the deal expands trade between the two countries. American businesses can now sell more products to Cuba and Cuban entrepreneurs can export their products to the U.S. market. American businesses can establish corresponding bank accounts in Cuba to facilitate those transactions, travelers can use their credit and debit cards on the island, and U.S. telecom companies can help build up Cuba's Internet infrastructure.

In the months since, however, lawyers and compliance officers at U.S. companies have been raising red flags. The biggest is that Cuba remains on the U.S. State Department's list of State Sponsors of Terrorism, which severely limits the ability of American companies to do business with the country.

That's just the start. Cuba has no independent judicial system U.S. companies can turn to for settling disputes. The communist government has a long history of seizing foreign property. American companies still face restrictions because of the economic embargo the U.S. maintains on Cuba. In the wake of the 9/11 terror attacks and the U.S. recession, American regulators have cracked down on financial institutions that deal with customers involved in money-laundering, narco-trafficking, terrorism and other high-risk fields.

"In the 1990s, we thought $50 million was a heavy fine. Now we're in the billions," said David Schwartz, former vice president for international compliance risk management at Regions Financial Corporation and now the executive director of the Florida International Bankers Association.

Because of those fears, no U.S. bank has agreed to process transactions conducted in Cuba. In the telecom industry, only one U.S. company — IDT Corp. of New Jersey — has signed a deal with the Cuban government.

Bringing better connectivity to Cuba has been one of the main tenets of Obama's renewed diplomacy with Cuba. Today, a mere 5% of Cuba's 11 million residents are estimated to have access to the Internet — one of the lowest rates in the hemisphere.

Cuba's state telecom company, ETECSA, retains a monopoly on Internet service that is slow and expensive to the average Cuban. Internet service is mostly available through one of 155 cybercafes across the island and an hour of connection costs around $5 an hour, equivalent to a full week's salary.

IDT's agreement, which creates direct long-distance links between U.S. callers and Cuba, represents a "first step," said spokesman Bill Ulrey. Company officials hope the agreement will lead to more Cuba-related services, he said.

Even if more U.S. companies rush to the island offering deals on cellular towers and broadband equipment, it's still largely unknown how much Cuban officials will accept, said John Kavulich, a senior policy adviser at the U.S.-Cuba Trade and Economic Council.

Cuban officials will likely want assurances that the telecom equipment they're offered hasn't been tampered with by the U.S. intelligence agencies, or they may ask for "backdoor" access to monitor the Internet after it's installed. Telecom companies may find those requests difficult to meet, he said.

Cuba has tightly controlled Internet access since it first surfaced in the mid-1990s.

Setting up an Internet system that allows Cuban officials to control its usage would go against Obama's goal of using connectivity as a way to empower Cuban citizens, Kavulich said. "The lack of statements by the Cuban government should be a very large yellow caution flag," he said.

Until Cuba signals a willingness to connect its people, all the telecom firepower and know-how in the USA won't make a difference, said Larry Press, professor of information systems at California State University-Dominguez Hills, who has studied Cuba's Internet.

"The ball's in their court now," he said.

Jervis reported from Austin