The US government has established new authorities to impose sanctions in response to China's national security law for Hong Kong, increasing the compliance risks for international banks and other companies that do business in Hong Kong, China and elsewhere.
The latest measures—the Hong Kong Autonomy Act and Executive Order 13936—expand sanctions authorities that had already been established under the Hong Kong Human Rights and Democracy Act of 2019. Together, these three measures, detailed below, establish a system of related and potentially overlapping sanctions that can be leveraged by the United States to respond to Chinese government's actions in Hong Kong that are inconsistent with US foreign policy objectives.
While the United States has not yet made any sanctions designations under the new authorities, banks and all others with actual or potential business in the region may wish to assess whether their customers and other counterparties have connections to the Chinese government officials and others who may be designated under these new authorities.
The Hong Kong Human Rights and Democracy Act of 2019
On November 27, 2019, President Trump signed into law the Hong Kong Human Rights and Democracy Act of 2019 (HKHRDA). The HKHRDA requires the Department of State to report annually to Congress whether Hong Kong is sufficiently autonomous in relation to Mainland China to justify its preferential treatment. The HKHRDA also requires the Department of Commerce to annually report to Congress any efforts by China to use Hong Kong to evade US export controls and sanctions and the extent of such violations.
Additionally, the HKHRDA requires the President to submit a report to Congress identifying each foreign person that the President determines is responsible for either the extrajudicial rendition, arbitrary detention or torture of any person in Hong Kong as well as any other gross violations of internationally recognized human rights in Hong Kong. The statute also requires the President to impose sanctions on any such person using the powers granted to the President under the International Emergency Economic Powers Act (IEEPA) to block and prohibit all transactions and property interests of such identified foreign persons as applicable under the law (blocking sanctions).
The Hong Kong Autonomy Act
On July 14, 2020, the President signed into law the Hong Kong Autonomy Act (HKAA), which establishes a framework for sanctions “with respect to foreign persons involved in the erosion of certain obligations of China with respect to Hong Kong, and for other purposes.” The HKAA requires the Secretary of State, in consultation with the Secretary of the Treasury, to identify foreign persons who are materially contributing, have materially contributed, or are attempting to materially contribute, to the failure of China to meet its obligations to ensure Hong Kong enjoys a high degree of autonomy without direct interference from Beijing. The statute also authorizes sanctions on foreign financial institutions that engage in certain transactions with such foreign persons.
Congress noted that China made certain commitments regarding the future of Hong Kong in the Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People's Republic of China on the Question of Hong Kong, done at Beijing on December 19, 1984 (Joint Declaration) and under the Basic Law of the Hong Kong Special Administrative Region of the People's Republic of China (Basic Law). Further, Congress concluded that China has contravened those obligations. We note that the Chinese government announced in 1997 that the Joint Declaration no longer had any realistic meaning.
Under the HKAA, the Department of State has 90 days from enactment to submit a report to Congress on any foreign person it determines “is materially contributing to, has materially contributed to, or attempts to materially contribute to the failure of China to meet its obligations under the Joint Declaration or the Basic Law” (State Dept. Report). Subsequently, between 30 and 60 days from the submission of the State Dept. Report, the US Department of the Treasury is required to submit a report to Congress identifying “any foreign financial institution that knowingly conducts a significant transaction” with a person identified in the State Dept. Report (Treasury Dept. Report). The statute requires that both the State Dept. Report and the Treasury Dept. Report shall be regularly updated, with the updated reports submitted with the annual report under Section 301 of the US-Hong Kong Policy Act of 1992.
Additionally, the HKAA requires the President to impose certain sanctions on the foreign persons and foreign financial institutions (FFIs, which include not only depository banks but also broker-dealers, investment banks and many others) identified in the two reports within one year after the foreign person or FFI is identified in the respective reports. With respect to foreign persons, the President is required to impose prohibitions on property transactions and exclusions from the United States and revocation of visa or other documentation within one year after the foreign person is identified in the State Dept. Report. With respect to FFIs, the statute contemplates two tranches of sanctions:
- Initially, within one year after the FFI is identified in the Treasury Dept. Report, the President is required to impose at least five sanctions on the FFI from a list of 10 sanctions.
- Within two years, the President is required to impose all 10 of the sanctions.
These sanctions include, among others, prohibitions on receiving loans or credit from US financial institutions, acting as a primary dealer in US government debt instruments, and transacting in property or foreign exchanges subject to US jurisdiction, as well as exclusions of FFI corporate officers from the United States.
Any person that violates, attempts to violate or causes a violation of the unlawful acts listed in the State Dept. Report or Treasury Dept. Report shall also be subject to civil and criminal penalties under the IEEPA to the same extent as the persons identified in the reports.
The President's Executive Order on Hong Kong Normalization
The same day the President enacted the HKAA, he issued Executive Order (EO) 13936, “The President's Executive Order on Hong Kong Normalization,” suspending or eliminating different and preferential treatment for Hong Kong to the extent permitted by law and in the national security, foreign policy and economic interest of the United States. Sections 2 and 3 of the EO direct that within 15 days, the heads of executive agencies shall take actions to end special conditions and preferential treatment for Hong Kong affecting various areas including trade, immigration and national security. Some of the necessary regulatory and administrative activity to give effect to this requirement has already commenced.
Section 4 of the EO builds on the sanctions authorized under the HKAA by targeting with blocking sanctions those responsible for, or who have engaged directly or indirectly in, (1) actions or policies that undermine democratic processes or institutions in Hong Kong; (2) actions or policies that threaten the peace, security, stability or autonomy of Hong Kong; (3) censorship or other activities that limit (a) freedom of expression, (b) assembly by citizens of Hong Kong, or (c) access to free and independent print, online or broadcast media; or (4) the extrajudicial rendition, arbitrary detention, torture, or other gross violation of recognized human rights or serious human rights abuse in Hong Kong.
The scope of the EO applies to foreign persons, including individuals, entities and leaders of entities, including any government entity, member of a board of directors or a senior executive officer of a sanctioned entity. While the EO does not have a provision specific to FFIs—unlike the HKAA—it does authorize blocking sanctions against foreign persons who materially assist, sponsor or provide financial, material or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to the EO. The EO also prohibits any transactions that evade, avoid, violate or attempt to violate the EO, as well as any conspiracies to violate the EO.
Notably the State Department and the Treasury Department may each identify sanctions targets under the EO. But, unlike under the HKAA, no State Dept. Report or other agency activity is required as a predicate for the imposition of such sanctions.
As noted above, there have not yet been any designations under these sanctions authorities, and some recent media reports indicate that President Trump “has ruled out additional sanctions on top officials for now.” However, the Trump Administration is now reportedly considering a travel ban applicable to Chinese Communist Party members and, indeed, has already imposed visa restrictions on certain employees of Chinese technology companies alleged to support human rights abuses. The Administration also recently imposed sanctions on Chinese government officials alleged to be responsible for human rights abuses in the Xinjiang region, pursuant to the Global Magnitsky Human Rights Accountability Act. But further escalation in the form of additional sanctions over Hong Kong will likely depend on domestic politics in both the United States and Hong Kong—e.g., the US presidential election in November and Legislative Council elections in Hong Kong in September—as well as US perceptions of the impact of additional sanctions on US-China relations.
Originally published 21 July, 2020
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