Today, President Donald Trump signed into law the Hong Kong Autonomy Act ("HKAA"), authorizing the U.S. administration to impose blocking sanctions against individuals and entities (as well as visa bans in the case of individuals) determined to "materially contribute" to the erosion of Hong Kong's autonomy. The HKAA further authorizes secondary sanctions, including the imposition of blocking sanctions, against foreign financial institutions that knowingly conduct a significant transaction with foreign persons sanctioned under this authority.1

Today's enactment is the latest in a string of recent U.S. sanctions targeting China, but as with other measures the HKAA is aimed at individuals to be designated and therefore may not have a significant direct impact on U.S.-China economic relations (political relations are another matter).2 At a high level, the HKAA requires the U.S. administration to issue periodic reports identifying persons and financial institutions sanctionable under the HKAA. Upon issuance of a report, the administration may impose sanctions immediately, but they are not automatic until a year after publication, giving the listed persons or financial institutions up to a year to reverse or mitigate their actions before sanctions are imposed.

The HKAA overlaps substantially with existing legislation. The Hong Kong Human Rights and Democracy Act of 2019,3 adopted last November, already provides authority to sanction persons involved in "gross violations of internationally recognized human rights in Hong Kong," and the Global Magnitsky Human Rights Accountability Act4 also already provides broad authority to sanction those involved in such abuses anywhere in the world, as well as those providing financial, material, or technological support to such persons. It also echoes the recent Uyghur Human Rights Policy Act of 20205 in threatening sanctions against specific individuals and organizations involved in human rights abuses rather than targeting the Chinese regime or economy more generally.

The HKAA, which was passed unanimously with strong bipartisan support, thus appears to be primarily intended to increase political pressure on the administration to effectuate sanctions against Chinese officials and institutions. It remains to be seen which persons and entities the administration will choose to designate; prior experience with secondary sanctions (including nominally "mandatory" sanctions) is that the designation process is highly discretionary and political, and few entities are actually sanctioned.

Sanctions on Foreign Persons

Under the HKAA, the Secretary of State, in consultation with the Secretary of Treasury, has 90 days from today to issue a report to Congress identifying foreign persons (individuals or entities) that "materially contribute" to violations of the UK-China Joint Declaration or the Hong Kong Basic Law, which provide for Hong Kong's "high degree of autonomy" under the "one country, two systems" regime.6 Sec. 5(a). The HKAA further calls for periodic updates to the report. Sec. 5(e). While the President has immediate discretion to impose blocking sanctions and visa bans on foreign persons listed in the report, such sanctions do not become mandatory until one year later, unless the President waives or terminates the sanctions with respect to the listed person (as discussed below). The statute thus contemplates a "cure period" for individuals and entities named as possible sanctions targets to mitigate their actions; how realistic that is in the case of foreign government officials is a separate question.

Sanctions on Foreign Financial Institutions

Not earlier than 30 days and not later than 60 days after the Secretary of State submits the foreign person report to Congress, the Secretary of Treasury, in consultation with the Secretary of State, must submit a second report to Congress (and ongoing updates thereafter) identifying any foreign financial institution that "knowingly conducts a significant transaction" with a foreign person identified in the first report. "Knowingly" is defined as "actual knowledge" of the conduct, circumstance, or result, and "significant" is not defined (but prior OFAC guidance regarding similar statutes leaves the administration with broad discretion to determine significance).7 There is no requirement that the transaction be conducted after the person is designated.

The President is authorized to immediately impose five or more sanctions from a menu of ten against foreign financial institutions included in the second report, ranging from relatively minor restrictions to full blocking sanctions.8 As with the individual sanctions, the President is required to impose five or more of the above sanctions against that institution within one year of listing, and within two years after the relevant report or update, the President is required to expand the sanctions to include all ten of the enumerated sanctions, and again the President has authority to waive or terminate the sanctions.

Removals and Waivers

The HKAA authorizes the President to terminate previously issued designations, subject to congressional disapproval. The President can terminate the application of sanctions and remove a listed foreign person from the relevant report if the actions that merited inclusion in the report (1) do not have a significant and lasting negative effect that contravenes the obligations of China under the Joint Declaration and the Basic Law; (2) are not likely to be repeated in the future; and (3) have been reversed or otherwise mitigated through positive countermeasures taken by the listed person. The President may also waive sanctions against a listed person if the President determines it is in the national security interest of the United States and notifies Congress accordingly (though it is of course simpler for the administration not to list the relevant person in the first place). Congress can override any national security waiver or termination of sanctions with respect to a listed foreign person through a joint resolution.

Future Developments

The exercise of sanctions authorities such as those provided in the HKAA is in practice discretionary and highly political, and this is certain to be true in a relationship as extensive and complex as that between the United States and China. Prior experience with sanctions authorities targeting corruption, human rights abuses, and transacting with U.S. sanctions targets demonstrates that the exercise of these authorities is far from automatic. Accordingly, it remains to be seen whether the HKAA will be used at all and, if so, how prominent (politically or economically) the targets will be. It also remains to be seen how conservative international financial institutions will be in their dealings with Chinese officials active in Hong Kong (perhaps even prior to being named under the HKAA and certainly after); in the past, the mere threat of potential U.S. sanctions, no matter how unlikely, has led some banks to change their behavior. Reportedly, major Chinese banks are already examining contingency plans for loss of access to U.S. dollar clearing and settlement systems.9

All of this comes shortly after the Chinese Foreign Ministry announced earlier this week sanctions against several U.S. officials and members of Congress in retaliation for the U.S. imposition of sanctions against a Chinese government entity and officials under the Uyghur Human Rights Policy Act,10 and there are a wide range of other U.S.-China disputes. Future Chinese retaliation cannot be ruled out.

Footnotes

1. In addition to the United States, other countries have signaled the possibility of additional legal measures against China. For example, France and Germany recently proposed EU countermeasures in response to China's new national security law. See Financial Times, "Global allies step up retaliation for China crackdown in HK" (Jul. 9, 2020), https://www.ft.com/content/3fedcc2c-8636-4ad4-a5bb-7584b0dc2f66.

2. In November 2019, the Hong Kong Human Rights and Democracy Act of 2019 authorized sanctions against foreign persons determined to be responsible for certain human rights violations relating to Hong Kong. On May 28, 2020, U.S. Secretary of State Mike Pompeo announced the decertification of Hong Kong's autonomous status, portending the withdrawal of Hong Kong's special treatment under the Hong Kong Policy Act of 1992. Last month, President Trump signed into law the Uyghur Human Rights Policy Act of 2020, authorizing the imposition of blocking sanctions and visa bans against foreign persons, including Chinese government officials, determined to be responsible for certain human rights abuses in Xinjiang.

3. Pub. L. 116-76.

4. Pub. L. 114-328; see also Executive Order 13818, 82 Fed. Reg. 60839 (Dec. 20, 2017).

5. Pub. L. 116-145.

6. "Materially contributes" is defined as taking action (1) that resulted in the inability of the people of Hong Kong to enjoy freedom of assembly, speech, press, or independent rule of law or to participate in democratic outcomes; or (2) that reduces the high degree of autonomy of Hong Kong. HKAA, Sec. 5(g).

7. See, e.g., OFAC, FAQ 542 (Apr. 6, 2018) and FAQ 545 (Oct. 31, 2017), https://www.treasury.gov/resource-center/faqs/Sanctions/Documents/faq_all.html.

8. The sanctions include prohibitions on: receiving loans or credit from U.S. financial institutions; serving as a primary dealer in U.S. Government debt instruments; serving as an agent of the U.S. Government or as a repository for U.S. Government funds; foreign exchange transactions subject to U.S. jurisdiction involving the foreign financial institution; transfers of credit or payments between or through financial institutions within U.S. jurisdiction involving the foreign financial institution; all property transactions (i.e., blocking sanctions); exports, reexports, and in-country transfers of commodities, software, and technology subject to U.S. jurisdiction directly or indirectly to the foreign financial institution; U.S. persons' investing in or purchasing "significant amounts" of equity or debt instruments of the foreign financial institution; entry into the United States of corporate officers, principals, or controlling shareholders of the foreign financial institution. Any or all of the foregoing may also be imposed on the principal executive officer or officers of the foreign financial institution. HKAA, Sec. 7(b).

9. See Reuters, "Chinese banks prepare contingency plans over threat of U.S. sanctions, sources say" (Jul. 9, 2020), https://www.reuters.com/article/us-china-banks-usa-sanctions-exclusive/exclusive-chinese-banks-prepare-contingency-plans-over-threat-of-u-s-sanctions-sources-say-idUSKBN24A1I2.

10. Ministry of Foreign Affairs of the PRC, July 13, 2020, press conference, https://www.fmprc.gov.cn/mfa_eng/xwfw_665399/s2510_665401/t1797455.shtml.

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