On July 2, 2020, the US Congress passed the Hong Kong Autonomy Act (HKAA), providing for mandatory sanctions against individuals, entities and financial institutions in response to China's National Security Law for Hong Kong. The HKAA is the latest in a series of US measures in response to the ongoing disagreement with China regarding China's obligation to maintain Hong Kong's autonomous status under the Joint Declaration and the Basic Law. As further detailed in our recent Alerts1, it follows a number of steps taken by the United States, including:-
- The May 27, 2020 certification by the Secretary of State under the Hong Kong Human Rights and Democracy Act that Hong Kong no longer enjoys sufficient autonomy in order to justify special treatment by the US,
- The May 28, 2020 announcement by President Trump that the United States would initiate the process of revoking Hong Kong's favorable treatment under US law and
- The decision by the Chinese Government to introduce a National Security Law for Hong Kong, which took effect on June 30, 2020.
- Announcements this week by the State Department of visa restrictions on Chinese government officials, and by the Commerce Department of the elimination of exceptions treating Hong Kong more favourably than China for exports of goods and technology to Hong Kong, and China's threat of visa restrictions against US officials.
The HKAA was passed by unanimous consent, and therefore with veto-proof support, by the Senate and House of Representatives. It has not yet been signed into law by the President but is expected to be enacted into law in the coming few days.
The Major Provisions of the HKAA
|Section 3 -||
This section lists a number of "findings" by Congress which conclude:-
"(16) The ways in which the Government of China, at times with the support of a subservient Government of Hong Kong, has acted in contravention of its obligations under the Joint Declaration and the Basic Law, as set forth in this section, are deeply concerning to the people of Hong Kong, the United States, and members of the international community who support the autonomy of Hong Kong."
|Section 5(a) -||
No later than 90 days after the legislation is passed the Secretary of State must submit a report identifying any "foreign person" that is "materially contributing to, has materially contributed to, or attempts to materially contribute to the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law" (an Identified Foreign Person)
|Section 5(b) -||
Between 30 and 60 days after the submission of the Secretary of State's report under section 5(a), the Secretary of the Treasury must submit "a report that identifies any foreign financial institution that knowingly conducts a significant transaction with a foreign person identified in [the Secretary of State's report]" (an Identified FFI).
|Section 6 -
||The President can (and in certain circumstances shall, subject
to possible waiver) impose sanctions (primarily the freezing of
assets and associated prohibitions on dealings of any kind) on an
Identified Foreign Person.
|Section 7(a) -||
The President shall, subject to possible waiver, impose sanctions on an Identified FFI. There are 10 possible sanctions (see below) and, absent a waiver, the law would require the President to impose at least five of them within a year after an Identified FFI is named in the Secretary of the Treasury's report and then to impose all of these sanctions two years after the FFI is so named.
|Section 7(b) -||
The potential sanctions are:-
|Section 8(a) -||The President has the discretion to waive the imposition of sanctions with respect to any foreign person or foreign financial institution where such waiver is in the national security interest of the US. However, the law requires advance notice to Congress before any waiver may be exercised, and establishes a mechanism for Congress to disapprove of and to block the exercise of this waiver authority under the HKAA.|
|Section 8(b) -||
The President can remove any foreign person or foreign financial institution from the relevant report where the Secretary of State and the Secretary for the Treasury determine that the relevant person or entity has taken steps to remediate the wrongdoing or that the wrongdoing is unlikely to be repeated.
- Status of Legislation. The HKAA is not yet in
force. It requires the President's signature. However, given it
passed both the Senate and the House with unanimous consent, and
therefore a veto-proof majority, the HKAA will likely be enacted
into law soon. The President has 10 days to sign or veto the
legislation subject to Congressional override. If the President
does nothing, the bill will become law at the end of the 10-day
- Broad Implementing Discretion. Notwithstanding
the mandatory provisions in the legislation, the President retains
important discretion in a number of respects regarding the
imposition of sanctions against individuals, entities and financial
institutions under the law. These discretionary factors will in
practice have an important role to play in actual implementation of
the law, and an understanding of these considerations could play an
important part of a risk mitigation strategy for persons and
entities whose activities could expose them to sanctions.
a. Timing. The President does not need to impose any sanctions immediately. The Secretary of State's report on Identified Foreign Persons (Identified Foreign Persons Report) is due within 90 days of enactment, while the Secretary of the Treasury's report on Identified FFIs (Identified FFI Report) is due within 30 – 60 days of the Identified Foreign Persons Report. In each case, the President may wait for 12 months from the issuance of those reports to impose sanctions on a person or entity identified therein. The November Presidential elections are bound to play a role in the timing of any sanctions, and the balance of power between the White House and Congress may also have an impact on the political dynamic impacting the implementation of this law. b. Determination that an Individual has "Materially Contributed" or that an FFI Has "Knowingly Conducted a Significant Transaction". Moreover, both the Secretary of State and the Secretary of the Treasury have broad discretion in determining who satisfies the criteria for inclusion in the Identified Foreign Persons Report and the Identified FFI Report, respectively. The "material contribution" standard (for Identified Foreign Persons), and the "knowledge" and "significant transaction" standards (for Identified Foreign Financial Institutions) are inherently discretionary and highly fact-specific. While this raises potential risk considerations for institutions and entities considering potential coverage, it also means the Administration will have substantial policy discretion as a practical matter in its determinations regarding whether or not to include entities and individuals who could arguably be covered by the law. c. Exclusion and Removal Criteria. Even where the facts otherwise support a determination under the criteria above, the HKAA would leave the President discretion to either "exclude" or remove persons and entities from the various reports subject to certain specified criteria. In particular, these criteria require a determination that the relevant activity: (i) is not likely to be repeated in the future, (ii) has been reversed or otherwise mitigated by "positive countermeasures" taken by the foreign person or FFI in question, and (iii) "does not have a significant and lasting negative effect" on China's obligations with respect to Hong Kong under the Joint Declaration and Basic Law. As this suggests, even where a potentially covered FFI or individual has engaged in activity that could expose it to potential sanctions, it is possible in certain circumstances to take steps to manage and minimize the associated risk, including through engagement and other mitigation measures. Any determination to exclude (or remove) requires notification to Congress. d. Waiver and Termination. As noted above, the HKAA includes national security waiver authority (subject to Congressional advance notification and blocking mechanisms). The President may also terminate sanctions with respect to any Identified FFI or Identified Foreign Person with respect to which sanctions have been imposed. Notably, the criteria for termination are the same as those for exclusion from the reports as described above.
- Evaluating Potential Risks for Business. The HKAA has the potential to significantly impact the interests of any FFI entity, and potentially for other businesses, with ties to individuals in China and Hong Kong who could be viewed as making a 'material contribution' to actions by the Chinese government that undermine Hong Kong's autonomy. The designation of such individuals would have direct implications for FFIs to the extent they could be identified as engaging in "significant transactions" with such persons. Moreover, other businesses with investments or other assets in which an Identified Foreign Person has interests could also be impacted by that individual's designation as a US sanctions target. This is because the imposition of an asset-blocking order would expose all assets in which such a person has interests to an immediate asset freeze, and could severely constrain options for divestment or exit from existing financial relationships. Accordingly, any FFI doing business in Hong Kong or China, as well as investors and other businesses with potential exposure, would be advised to review existing account and asset portfolios to identify any business they are currently undertaking with any politically exposed persons in either jurisdiction who could be targeted under the HKAA in respect of, at least, the promulgation of the Hong Kong National Security Law introduced with effect from June 30, 2020 and related government actions relevant to Hong Kong autonomy.
1. For further details, please refer to:
Potential Implications If Hong Kong's Special Status Is Revoked (June 29, 2020)
HKSAR National Security Law Explained (July 2, 2020)
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