Release of Hong Kong Autonomy Act report paves way for sanctions against foreign financial institutions
On October 14, 2020, the US Secretary of State, in consultation with the Secretary of the Treasury, submitted a report to Congress identifying persons materially contributing to “the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law”[1] to keep Hong Kong autonomous. This report triggers a further requirement that the Secretary of the Treasury, in consultation with the Secretary of State, identify any foreign financial institution (FFI) that knowingly conducts a significant transaction with any of the persons identified in the HKAA report and may result in the imposition of significant sanctions against the FFIs. The imposition of sanctions will directly affect the FFIs as well as any third parties or customers dealing with any FFI that is targeted.
On July 14, 2020, Congress passed the Hong Kong Autonomy Act (HKAA) in response to China’s unilateral imposition of a National Security Law on Hong Kong, which the State Department has characterized as an act that “has crippled democratic institutions, human rights, judicial independence, and individual freedoms in Hong Kong.”
HKAA section (5)(a) required the issuance of the October 14 report to identify foreign persons who are materially contributing to, have materially contributed to, or attempt to materially contribute to the failure of the People’s Republic of China to meet its obligations under the Sino-British Joint Declaration, or Hong Kong’s Basic Law. The persons identified in the October 14 report are the same ten PRC and Hong Kong officials that were designated by the Treasury Department’s Office of Foreign Assets Control (OFAC) on the Specially Designated Nationals and Blocked Persons List (SDN List) on August 7, 2020, pursuant to Executive Order 13936. Both the HKAA and E.O. 13936 require blocking sanctions to be imposed on the identified or listed persons. A list of these individuals can be found here.
The issuance of this report also requires that the Secretary of the Treasury issue a second report identifying any foreign financial institution (FFI)[2] that knowingly[3] conducts a “significant” transaction with any of the 10 individuals identified pursuant to HKAA section (5)(b). The FFI report must be submitted to Congress within 30-60 days of the Secretary of State’s October 14 report (November 13-December 13).
While a “significant” transaction is not defined in the HKAA, the Treasury Department published FAQs that state:
850. How does the Treasury Department determine whether a transaction is “significant” for purposes of section 5(b) of the Hong Kong Autonomy Act (HKAA)?
For purposes of implementing section 5(b) of the HKAA, the Secretary of the Treasury may consider the totality of the facts and circumstances when determining whether transactions are “significant.” As a general matter, the Treasury Department may consider some or all of the following factors in determining whether a transaction is “significant”: (1) the size, number, and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a foreign person identified in a report submitted by the Secretary of State under section 5(a) of the HKAA or in updates to that report; (5) the impact of the transaction(s) on statutory objectives, including whether the transaction(s) (A) have a significant and lasting negative effect that contravenes the obligations of China under the Joint Declaration and the Basic Law, (B) are likely to be repeated in the future, and (C) have been reversed or otherwise mitigated through positive countermeasures taken by that FFI; (6) whether the transaction(s) involve deceptive practices; and (7) such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis. For purposes of section 5(b) of HKAA, a transaction will not be considered significant if a U.S. person would not require a specific license from OFAC to conduct or participate in the transaction.
No later than a year after the submission of the report on FFIs, HKAA section (7)(a)(1) requires the President to impose on the FFIs five of ten sanctions outlined in the HKAA. Not later than two years after the report’s submission, HKAA section (7)(a)(2) requires the imposition of all ten sanctions. The President, however, may impose sanctions required under subsection 7(a)(1) beginning on the day on which the financial institution is included in the Secretary of the Treasury’s report. The list of sanctions from which the President may choose are the following:
(1) Prohibit any US financial institutions from making loans or providing credits to the foreign financial institution
(2) Prohibit designation of the FFI as a primary dealer in US debt instruments
(3) Prohibit the FFI from serving as repository for US Government funds
(4) Prohibit any transactions in foreign exchange that are subject to the jurisdiction of the US involving the FFI
(5) Prohibit any transfers of credit or payments between financial institutions to the extent that such transfers or payments are subject to the jurisdiction of the US and involve the FFI
(6) Prohibit any US person from engaging in any property transactions in which the FFI has any interest
(7) Restrict or prohibit exports, reexports and transfers (in-country) to the FFI
(8) Prohibit any US person from investing in or purchasing significant amounts of equity or debt instruments of the FFI
(9) Exclude from the US any alien that is determined to be a corporate officer or principal of, or a shareholder with a controlling interest in, the FFI
(10) Impose on the principal executive officer or officers of the FFI, or on individuals performing similar functions and with similar authorities, any of the sanctions described in paragraphs (1) through (8) that are applicable
The President may waive the sanctions on a determination that it is in the national security interests of the United states to do so. The President may also terminate the application of the sanctions if the Secretary of State, in consultation with the Secretary of the Treasury, determines that the actions taken by the foreign person or foreign financial institution that led to the imposition of sanctions:
- do not have a significant and lasting negative impact on Hong Kong’s autonomy,
- are not likely to be repeated, and
- have been reversed or otherwise mitigated through positive countermeasures by the identified person or FFI.
We will issue a supplement to this alert once the Treasury Department issues its report on FFIs. In the interim, for additional information on the impact of the HKAA, the potential impacts on FFIs, and potential impacts on third parties dealing with any FFI that is targeted, please contact the authors:
This information does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only. No reader should act, or refrain from acting, with respect to any particular legal matter on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction.
[1] The Joint Declaration refers to 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. (December 19, 1984). The Basic Law refers to the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China.
[2] The term ‘‘financial institution’’ means a financial institution specified in section 5312(a)(2) of title 31, United States Code.
[3] The term ‘‘knowingly’’, with respect to conduct, a circumstance, or a result, means that a person has actual knowledge of the conduct, the circumstance, or the result.
