CUBAN INVESTMENT OPPORTUNITIES
by
Marc M. HarrisWith the passage of the Cuban Liberty and Democratic Solidarity (Libertad) Act, popularly known as the "Helms-Burton Act," it is not likely anyone in the United States thinks Cuba offers investment opportunity. Although contrary to popular opinion, the latest development in the Cuban situation actually could present bold capitalists a unique opportunity. Ironically, it is the passage of Helms-Burton itself which could enable investment which would mutually benefit Cuba and such entrepreneurs. In addition to the more recent Cuban policy decisions, two historical factors which help create this investment opportunity are a United States Supreme Court decision and the fact that Cuba offered to compensate the companies whose property was nationalized at the time of seizure.
In Banco Nacional de Cuba v. Sabbatino (376 U.S. 398; 84 S. Ct. 923; 1964), the United States Supreme Court reviewed the "Act of State Doctrine," as applied to Cuba's nationalization of property, provided by the Cuban President and Prime Minister pursuant to Law No. 851. The "Act of State Doctrine," was expressed succinctly by Justice Fuller in Underhill v. Hernandez (168 U.S. 250):
Every sovereign State is bound to respect the independence of every other sovereign State, and the courts of one country will not sit in judgement on the acts of the government of another done within its own territory. (252)The Banco Nacional court upheld the "Act of State Doctrine" as articulated in Underhill and a line of other cases dating to an English decision in 1674. The Banco Nacional court stated in dicta that to permit the court of one country to pass on governmental acts of another "would very certainly imperil the amicable relations between governments and vex the peace of nations." (303-304)
With respect to Cuba's seizure of the properties in question, the Banco Nacional court discussed the precedent that "the act of state doctrine is applicable even if international law has been violated." (430) The Banco Nacional court held "the act of state doctrine proscribes a challenge to the validity of the Cuban Expropriation."(438) Thus, the Supreme Court would not challenge the actions by Cuba. This was abandoned as an issue for the Executive branch.
A facet of the Cuban situation, often overlooked, is that Cuba in fact offered to provide compensation to those companies whose property was nationalized. However, the United States' implementation of the embargo made receipt of the compensation impossible. The terms of the offer by Cuba were that American companies could receive 25% of the profits, above US $3,000,000 of sugar sales to the United States. Obviously, with the embargo in place, there would be no Cuban sugar sales to the United States. Hence, by its own policy, the United States voluntarily abdicated its right to compensation.
The original embargo was supplemented by passage of The Cuban Democracy Act of 1992 which prohibits foreign subsidiaries of United States companies from trading with Cuba. More recently, the United States has renewed its stance with the passage of Helms-Burton, which attempts to provide some reprieve to the companies which lost their properties. While the highest court in the United States recognized the nationalization, and although compensation would have been available if not for the embargo, the United States finds companies do have a claim. The United States seeks to provide its citizens with justice of its own design. It seems that in its desire to punish Cuba by implementing an embargo, the United States limited its own corporations' chances to gain compensation for their lost properties and factories. Now, many years later, the United States seeks to carve its own variety of justice according to what it feels is appropriate.
The reality is that the current status of trade relations between the United States and Cuba is not likely to change. A provision of Helms-Burton empowers Congress, rather than the President, to lift the embargo. With a Republican majority in both houses, there is little chance that the embargo will be lifted in the near future. Even without such a majority, President Clinton's stance does not suggest leniency toward Cuba. The legislation is law, and in spite of United Nations pressure and nearly universal condemnation, the current course of American-Cuban relations, for the moment, will not alter.
These issues would not seem, at first, to contribute to creating an attractive investment climate. Helms-Burton is a powerful reiteration of the United States' position. The good news is that Helms-Burton has inadvertently opened up a profitable avenue for enterprising individuals.
The relevant portion of the Helms-Burton Act for the purposes of the imaginative investor is the section which allows United States citizens to sue foreign companies and Cuban governmental entities in United States courts for profiting from property confiscated by the Cuban government. This section, with some assistance from Cuba, would contribute to creating an outstanding investment project. Cuba would need to pass its own legislation in order to create an advantage from Helms-Burton. This is the point at which non-visionaries need not read further.
Acknowledging the fact that the United States made earlier attempts to compensate the American corporations impossible, Cuba could make a new offer. Cuba could legislatively mandate that with the rejection of the percentage of sugar sales compensation, Cuba would provide another avenue for United States companies to obtain compensation. Where companies find the initial offer inadequate, or impossible in this case, they could alternatively file suit on the lost properties. This would be consistent with the Helms-Burton legislation. To facilitate the process, the Cuban law could permit the suits to be filed in either Cuba, or in another jurisdiction such as Panama. The time to file suit would date from Nationalization until one year from present, May, 1998.
The next wrinkle in such a scenario would be that Cuba could make taxes on the properties, which would be the subject of the suits, payable as of the date of filing. The taxes would be payable quarterly. Imagine that Cuba passed legislation which permitted the sale of tax certificates on those properties which were seized. Perhaps, Cuba could model its own law on Florida tax certificate law. Certainly those Americans, to whom the legislation would apply, would object to the passage of the law, so its modeling after a Florida statute would reduce the strength of their arguments.
Under the Florida Statutes, in Chapter 177 Tax Collections, Sales, and Liens, section 197.102 of the "Definitions" section defines tax certificate as:
A legal document, representing unpaid delinquent real property taxes, non ad-velorem assessments, including special assessments, interest, and related costs and charges, issued in accordance with this chapter against a specific parcel of real property and becoming a first lien thereon, superior to all liens, except as provided by s. 197.573(2).Florida Law provides for the sale of such certificates in section 197.432 according to the following terms:
On the day and approximately at the time designated in the notice of sale, the tax collector shall commence the sale of tax certificates on those lands on which taxes have not been paid, and he or she shall continue the sale from day to day until each certificate is sold to pay the taxes, interest, costs, and charges on the parcel described in the certificate. In case there are no bidders, the certificate shall be issued to the county. The tax collector shall offer all certificates on the lands as they are assessed.Section 197.502(2) addresses the manner in which it is possible for an individual to acquire a tax certificate on property:
Any certificateholder, other than the county, who makes application for a tax deed shall pay the tax collector at the time of application all amounts required for redemption or purchase of all other outstanding tax certificates, plus interest, any omitted taxes, plus interest, any delinquent taxes, plus interest, and current taxes, if due, covering the land.If Cuba were to adopt legislation consistent with Florida's, this would allow the issuance of tax certificates against commercial properties on which owners have not paid taxes. Thus, as corporations would sue to re-acquire lost property and factories, in a manner consistent with both Helms-Burton and with the Cuban legislation, they will also assume tax liability for such properties.
It is also possible that with the passage of the tax certificate law, Cuba could enact corollary legislation to establish a high tax rate on the commercial properties. In fact, the rate could be as high as the rate imposed in New York or Michigan. United States corporations would presumably be discouraged by the tax rate. However, the consistency with tax rates in the United States would silence critics who would decry the rate as extortionist. How could Cuba be accused of adopting inequitable legislation when the law is based on New York or Michigan and Florida statutes?
Grateful to those who would support Cuba's growth efforts and its desire to supply its citizens with food and medicine, Cuba may be willing to sell such tax certificates to outside investors. Companies' unwillingness to pay taxes at a rate as high as New York's or Michigan's would place investors, who purchased tax certificates, in a position to acquire a tract of property, on behalf of Cuba, which the Cuban government would be most grateful to possess. In return, Cuba could be willing to compensate the investor for his contribution.
Alternatively, the United States national who had property confiscated may wish to purchase the certificate. However, such former property owners would be prohibited under the terms of the United States embargo from purchasing the tax certificates. Once the former property holder has been denied the original offer of compensation, and has refused to purchase the tax certificate, his rights to the property would therefore pass to the holder of the tax certificate. So while Helms-Burton was enacted to promote former property owners' rights, the embargo terms would prohibit its effectiveness, in the wake of such Cuban legislation.
There is yet another alternative to either purchasing certificates or defaulting on them. The disputes could be submitted to arbitration in Panama. Panama would offer a location convenient to all parties and be a neutral site. Negotiation on neutral ground would provide a measure of comfort to the parties. Thus, Panama could function as a center of activity as a place for negotiation and arbitration.
The net result of this is that international investors, facilitated by the passage of Cuban legislative measures, could earn handsome returns from their contributions to the Cuban economy. Companies that refuse to purchase the tax certificates would place investors in a position to acquire a tract of property on behalf of Cuba. The Cuban government would be happy to acquire the properties, after having offered to make restitution to Americans who formerly held the property.
On its face, Helms-Burton may appear to end all hope of injecting capital into the Cuban marketplace. With a bit of ingenuity, and with the cooperation of Cuban legislators, investors may yet have the opportunity to assuage Cuba's economic crisis and earn a sizable return as well.
About the Author Marc M. Harris is the President of The Harris Organisation, a financial planning and investment management firm with a staff of 150 people based in Panama. They manage a Cuban investing fund.
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