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by Imad Habre



Preparing for Hong Kong-Related U.S. Sanctions    Provided by: Imad Habre
6/16/2020

On May 29, 2020, President Donald Trump announced1 that the U.S. would “begin the process” of revoking Hong Kong’s separate treatment from mainland China under U.S. laws. The Trump administration also plans to sanction Chinese and Hong Kong officials “directly or indirectly involved in eroding” Hong Kong’s autonomy.

The president’s news conference was short on details or timelines about the forthcoming sanctions. More information is expected from the U.S. Department of State and the U.S. Department of the Treasury in the weeks to come. What should financial institutions (FIs) and other companies look out for in regards to these sanctions?

Background

The president’s announcement followed U.S. Secretary of State Mike Pompeo’s May 28, 2020, Hong Kong Policy Act Report and certification2 to Congress that Hong Kong “does not continue to warrant treatment under United States laws in the same manner as US laws were applied to Hong Kong before July 1997.”3 The certification was required under the Hong Kong Policy Act of 1992,4 as amended by the Hong Kong Human Rights and Democracy Act of 2019.5

This shift in U.S. policy comes in response to the National People’s Congress passing a resolution that authorizes the adoption of national security legislation for Hong Kong. According to the Hong Kong Policy Act Report,6 “China has shed any pretense that the people of Hong Kong enjoy the high degree of autonomy, democratic institutions, and civil liberties guaranteed to them by the Sino-British Joint Declaration and the Basic Law.”

Authorizations for Sanctions

The president did not specify which Chinese or Hong Kong officials would be targeted for sanctions or whether the sanctions would include visa restrictions, blocking sanctions or other measures. The following four laws are already on the books and could be used to authorize Hong Kong-related sanctions:

  • Section 7 of the Hong Kong Human Rights and Democracy Act of 2019,7 which calls for blocking sanctions and U.S. travel bans against foreign persons determined to be responsible for “the extrajudicial rendition, arbitrary detention, or torture of any person in Hong Kong” or “other gross violations of internationally recognized human rights in Hong Kong”
  • Global Magnitsky sanctions8 authorizing blocking sanctions and U.S. travel bans against any foreign person determined “to be responsible for or complicit in, or to have directly or indirectly engaged in, serious human rights abuse”
  • Section 7031(c) of the Department of State, Foreign Operations, and Related Programs Appropriations Act, 2019,9 which authorizes the Secretary of State to ban foreign officials found to have been involved in significant corruption or gross violations of human rights, and their immediate family members, from entering the U.S.
  • The International Emergency Economic Powers Act of 197710 (IEEPA), which allows the president to create new sanctions upon declaring a “national emergency” with respect to any “unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States”
    • IEEPA provided the basis for a series of executive orders issued by U.S. President Barack Obama in 2014 which formed the basis for the current Ukraine-/Russia-related sanctions program,11 including sectoral sanctions and comprehensive sanctions against the Crimea region.

In addition, on May 21, 2020, U.S. Senators Pat Toomey and Chris Van Hollen introduced the Hong Kong Autonomy Act,12 which would, among other things, authorize sanctions against individuals and entities that materially contribute to the contravention of Hong Kong Basic Law. A draft of the bill, which is currently under review in the Senate, includes menu-based secondary sanctions against FIs that engage in significant transactions with such persons.

Risk-Based Approach

There is currently no indication that the U.S. government is considering comprehensive sanctions with respect to Hong Kong. Geographic and historical parallels aside, Hong Kong is unlikely to become the new Crimea.

FIs and companies that treat any country with a sanctions program associated with it as “sanctioned,” will need to rethink that approach when it comes to Hong Kong.

While it is easy for companies to cite sanctions as a reason for stepping away from countries where they have few business interests, Hong Kong’s commercial importance makes doing so impractical. After all, Specially Designated Nationals (SDNs) can be found in almost any country in the world, and Hong Kong already has its share of them. Designations against a handful of officials or companies will not move the risk needle much.

The biggest sanctions risks will continue to come from transactions and front companies related to proliferation, as highlighted in last year’s Financial Action Task Force (FATF) mutual evaluation report,13 and sanctions evasion related to North Korea and other sanctioned territories or governments.

The difference is that U.S. anti-money laundering/counter-terrorist financing (AML/CTF), sanctions, and export control regulators such as the Financial Crimes Enforcement Network, the Office of Foreign Assets Control (OFAC) and the Bureau of Industry and Security (BIS) may be inclined to attribute those risks to People’s Republic of China control over Hong Kong, despite the best efforts of Hong Kong regulators to enforce local AML/CTF and sanctions rules.

Planning Ahead

What should companies be doing in these uncertain times? The following are five proactive steps that can be taken today:

  • Assign responsibility to team members for monitoring developments and communicating with stakeholders. Larger organizations may wish to establish a committee of compliance, business and operational team members to coordinate enterprise-wide responses. U.S.-headquartered companies in particular should establish a clear line of communication between the U.S. and local compliance teams. The same goes for Hong Kong companies with operations in the U.S.
  • Identify useful sources of information such as U.S. government agencies, law firms and trusted commentators. Sign up to receive their email updates. Identify internal stakeholders who should receive critical updates. This includes changes to OFAC’s SDN List, FAQs and guidance.
  • As OFAC sanctions do not generally apply to the activities of non-U.S. persons outside the U.S., companies in Hong Kong may face a choice of whether to comply with U.S. sanctions or to continue engaging in activities targeted by U.S. sanctions. Monitor statements of local government officials and regulators to understand restrictions, if any. Identify touchpoints with the U.S. and the U.S. financial system to avoid inadvertent OFAC violations.
  • As sanctions targets are likely to be government officials and, therefore, politically exposed persons under AML/CTF policies, FIs should be able to identify accounts of newly sanctioned officials (if any) readily based on existing controls. Take a moment to review existing sanctions name-screening controls and ensure that the teams responsible for managing such accounts understand how to handle accounts of sanctioned persons under existing procedures. If no such procedures exist, now is a good time to write them.
  • Companies with significant exposure to the U.S., including the U.S. financial system, may want to consider implementing sanctions compliance protocols in line with recommendations in OFAC’s May 2019 “A Framework for OFAC Compliance Commitments”14 guidance document.

Despite all the noise, the forthcoming U.S. sanctions are expected to be targeted and could be mild. Depending on the Chinese government’s response, the U.S. may choose to expand the sanctions to apply further pressure on officials and policymakers.

There is still hope the current U.S.-China conflict can be resolved with minimal disruption to businesses. Indeed, the Hong Kong Policy Act contemplates Hong Kong “regaining” its autonomy, allowing for rolling back of U.S. measures. As a general rule, the president can terminate sanctions quickly, and OFAC has been willing to lift sanctions against individuals and entities to incentivize changes in behavior.

All the same, companies should be prepared to adapt to sudden changes in U.S. policy on Hong Kong.

Nick Turner, CAMS, lawyer, Steptoe & Johnson, Hong Kong

On May 29, 2020, President Donald Trump announced1 that the U.S. would “begin the process” of revoking Hong Kong’s separate treatment from mainland China under U.S. laws. The Trump administration also plans to sanction Chinese and Hong Kong officials “directly or indirectly involved in eroding” Hong Kong’s autonomy.

The president’s news conference was short on details or timelines about the forthcoming sanctions. More information is expected from the U.S. Department of State and the U.S. Department of the Treasury in the weeks to come. What should financial institutions (FIs) and other companies look out for in regards to these sanctions?

Background

The president’s announcement followed U.S. Secretary of State Mike Pompeo’s May 28, 2020, Hong Kong Policy Act Report and certification2 to Congress that Hong Kong “does not continue to warrant treatment under United States laws in the same manner as US laws were applied to Hong Kong before July 1997.”3 The certification was required under the Hong Kong Policy Act of 1992,4 as amended by the Hong Kong Human Rights and Democracy Act of 2019.5

This shift in U.S. policy comes in response to the National People’s Congress passing a resolution that authorizes the adoption of national security legislation for Hong Kong. According to the Hong Kong Policy Act Report,6 “China has shed any pretense that the people of Hong Kong enjoy the high degree of autonomy, democratic institutions, and civil liberties guaranteed to them by the Sino-British Joint Declaration and the Basic Law.”

Authorizations for Sanctions

The president did not specify which Chinese or Hong Kong officials would be targeted for sanctions or whether the sanctions would include visa restrictions, blocking sanctions or other measures. The following four laws are already on the books and could be used to authorize Hong Kong-related sanctions:

  • Section 7 of the Hong Kong Human Rights and Democracy Act of 2019,7 which calls for blocking sanctions and U.S. travel bans against foreign persons determined to be responsible for “the extrajudicial rendition, arbitrary detention, or torture of any person in Hong Kong” or “other gross violations of internationally recognized human rights in Hong Kong”
  • Global Magnitsky sanctions8 authorizing blocking sanctions and U.S. travel bans against any foreign person determined “to be responsible for or complicit in, or to have directly or indirectly engaged in, serious human rights abuse”
  • Section 7031(c) of the Department of State, Foreign Operations, and Related Programs Appropriations Act, 2019,9 which authorizes the Secretary of State to ban foreign officials found to have been involved in significant corruption or gross violations of human rights, and their immediate family members, from entering the U.S.
  • The International Emergency Economic Powers Act of 197710 (IEEPA), which allows the president to create new sanctions upon declaring a “national emergency” with respect to any “unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States”
    • IEEPA provided the basis for a series of executive orders issued by U.S. President Barack Obama in 2014 which formed the basis for the current Ukraine-/Russia-related sanctions program,11 including sectoral sanctions and comprehensive sanctions against the Crimea region.

In addition, on May 21, 2020, U.S. Senators Pat Toomey and Chris Van Hollen introduced the Hong Kong Autonomy Act,12 which would, among other things, authorize sanctions against individuals and entities that materially contribute to the contravention of Hong Kong Basic Law. A draft of the bill, which is currently under review in the Senate, includes menu-based secondary sanctions against FIs that engage in significant transactions with such persons.

Risk-Based Approach

There is currently no indication that the U.S. government is considering comprehensive sanctions with respect to Hong Kong. Geographic and historical parallels aside, Hong Kong is unlikely to become the new Crimea.

FIs and companies that treat any country with a sanctions program associated with it as “sanctioned,” will need to rethink that approach when it comes to Hong Kong.

While it is easy for companies to cite sanctions as a reason for stepping away from countries where they have few business interests, Hong Kong’s commercial importance makes doing so impractical. After all, Specially Designated Nationals (SDNs) can be found in almost any country in the world, and Hong Kong already has its share of them. Designations against a handful of officials or companies will not move the risk needle much.

The biggest sanctions risks will continue to come from transactions and front companies related to proliferation, as highlighted in last year’s Financial Action Task Force (FATF) mutual evaluation report,13 and sanctions evasion related to North Korea and other sanctioned territories or governments.

The difference is that U.S. anti-money laundering/counter-terrorist financing (AML/CTF), sanctions, and export control regulators such as the Financial Crimes Enforcement Network, the Office of Foreign Assets Control (OFAC) and the Bureau of Industry and Security (BIS) may be inclined to attribute those risks to People’s Republic of China control over Hong Kong, despite the best efforts of Hong Kong regulators to enforce local AML/CTF and sanctions rules.

Planning Ahead

What should companies be doing in these uncertain times? The following are five proactive steps that can be taken today:

  • Assign responsibility to team members for monitoring developments and communicating with stakeholders. Larger organizations may wish to establish a committee of compliance, business and operational team members to coordinate enterprise-wide responses. U.S.-headquartered companies in particular should establish a clear line of communication between the U.S. and local compliance teams. The same goes for Hong Kong companies with operations in the U.S.
  • Identify useful sources of information such as U.S. government agencies, law firms and trusted commentators. Sign up to receive their email updates. Identify internal stakeholders who should receive critical updates. This includes changes to OFAC’s SDN List, FAQs and guidance.
  • As OFAC sanctions do not generally apply to the activities of non-U.S. persons outside the U.S., companies in Hong Kong may face a choice of whether to comply with U.S. sanctions or to continue engaging in activities targeted by U.S. sanctions. Monitor statements of local government officials and regulators to understand restrictions, if any. Identify touchpoints with the U.S. and the U.S. financial system to avoid inadvertent OFAC violations.
  • As sanctions targets are likely to be government officials and, therefore, politically exposed persons under AML/CTF policies, FIs should be able to identify accounts of newly sanctioned officials (if any) readily based on existing controls. Take a moment to review existing sanctions name-screening controls and ensure that the teams responsible for managing such accounts understand how to handle accounts of sanctioned persons under existing procedures. If no such procedures exist, now is a good time to write them.
  • Companies with significant exposure to the U.S., including the U.S. financial system, may want to consider implementing sanctions compliance protocols in line with recommendations in OFAC’s May 2019 “A Framework for OFAC Compliance Commitments”14 guidance document.

Despite all the noise, the forthcoming U.S. sanctions are expected to be targeted and could be mild. Depending on the Chinese government’s response, the U.S. may choose to expand the sanctions to apply further pressure on officials and policymakers.

There is still hope the current U.S.-China conflict can be resolved with minimal disruption to businesses. Indeed, the Hong Kong Policy Act contemplates Hong Kong “regaining” its autonomy, allowing for rolling back of U.S. measures. As a general rule, the president can terminate sanctions quickly, and OFAC has been willing to lift sanctions against individuals and entities to incentivize changes in behavior.

All the same, companies should be prepared to adapt to sudden changes in U.S. policy on Hong Kong.

Nick Turner, CAMS, lawyer, Steptoe & Johnson, Hong Kong.