U.S., Cuban Banks Agree to Form Financial Link

By Felicia Schwartz And Ryan Tracy 

WASHINGTON--Florida-based Stonegate Bank signed on Tuesday the first deal to set up a correspondent account in Cuba since President Barack Obama's December move to re-establish relations with the island nation, the bank's president said.

Stonegate Bank and Banco Internacional de Comercio S.A. signed the deal in Havana, seven months after new regulations allowing U.S. banks to open correspondent accounts at Cuban financial institutions took effect.

"For U.S. companies doing business in Cuba, we can facilitate transactions much easier now," said Dave Seleski, the bank's president.

Correspondent accounts allow banks to transact across international borders, often to move money on their customers' behalf. In the next three to four weeks, once Stonegate's correspondent relationship with the Cuban bank is in place, the bank will be able to facilitate payments and transactions directly between the two countries.

"There are a lot of other obstacles to doing business in Cuba all across the board, but suddenly, for firms that can export [to Cuba], that will be the easiest business to do," said Gary Hufbauer, an economist at the Peterson Institute for International Economics. "I would say this is an important step."

Some U.S. business transactions in Cuba are authorized by U.S. Treasury licenses, but all commercial transactions, including remittances, currently go through banks in third countries.

The correspondent account established Tuesday allows Stonegate to maintain a direct tie to a Cuban financial institution. The account will be able to process transactions authorized by the Treasury's Office of Foreign Assets Control.

Speaking by phone from Havana shortly after the deal was signed, Mr. Seleski said the Cuban side seemed eager to get the deal done as a step to improve relations. He arrived there early Tuesday morning after attending the Cuban embassy's flag raising celebrations in Washington on Monday.

The Cuban bank, known also as BICSA, couldn't be reached for comment. It was founded in 1993, has over 600 correspondent relationships and is audited annually by Ernst & Young, Stonegate said.

Stonegate Bank is based in Pompano Beach, Fla., and has $2.3 billion in assets. It is overseen by the Federal Deposit Insurance Corp. and the state of Florida, as opposed to some other banks that have federal charters. It was chartered in 2005 and its portfolio is made up mostly of real-estate loans, according to FDIC records.

In moving to open the correspondent account, Stonegate is taking on a business that has faced close scrutiny in recent years.

U.S. regulators have cracked down on banks that process transactions--including those through correspondent accounts--tied to money laundering or other criminal activity, leading many banks to jettison certain types of customers, such as foreigners working in the U.S, or to pull out of countries with weak oversight of their banking systems.

Cuba was one of about 20 countries labeled "high-risk" in 2014 by the Financial Action Task Force, an organization of U.S. and other governments that promotes strong policies against money laundering.

"We did an extensive risk-management approach to this," Mr. Seleski said. "We evaluated the risk, we evaluated it at the board level, we evaluated it at the compliance-area level, the bank secrecy level....We feel very comfortable that we did something that is very low risk."

The bank conducted three months of compliance reviews and informed the FDIC of its plan to open the account, he said.

The FDIC declined to comment.

Experts said the opening of the correspondent account could be a first step toward allowing the use of credit cards in Cuba. Although some U.S. credit-card companies have said they would begin processing transactions this year, U.S. cards still don't work on the island.

"It does pave the way for this credit-card business," Mr. Hufbauer said. "This is a critical step but not the only link in the chain."

Credit cards will be a necessity as travel from the U.S. to Cuba continues to grow, said Jason Marczak, deputy director of the Atlantic Council's Adrienne Arsht Latin America Center. U.S. travelers to the island now conduct most transactions in cash.

"As we ramp up the number of U.S. tours that are traveling to Cuba, these tours are going to need more services," Mr. Marczak said. "It's unsustainable to have cash-based tourism."

Mr. Seleski said the bank hoped to pursue further opportunities in Cuba, including facilitating the use of credit cards.

"Down the road, there's many other opportunities," he said.

Big banks are likely to watch Stonegate as it opens the first correspondent account, Mr. Marczak said.

"This bank is dipping their toes in the water and if the water is the right temperature, then other banks might seize the opportunity as well, " he said.

Cuba hosted a ceremony in Washington on Monday to raise the flag at its embassy Monday as diplomatic ties between Cuba and the U.S. were officially restored. In May, Stonegate agreed to open a bank account for Cuba to use for its Interests Section in Washington, as its diplomatic post was then known.

In December, Mr. Obama announced a series of steps his administration would take on its own to begin normalizing ties with Cuba, including re-establishing diplomatic relations, removing Cuba from the U.S. list of countries that sponsor terrorism, loosening financial and travel restrictions and authorizing some commercial sales and exports to Cuba's growing private sector. Travel from the U.S. to Cuba as a tourist remains prohibited.

The new regulations took effect in January, but Congress will have to act to fully lift the trade and travel embargoes. Most U.S. companies are currently prohibited from doing business in Cuba.

Write to Felicia Schwartz at [e-mail] and Ryan Tracy at [e-mail]