On August 7, 2020, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC)
announced the imposition of sanctions on 11 prominent Hong Kong and People’s Republic of China (PRC) officials for taking actions that, in the view of the US government, undermined Hong Kong’s autonomy and restricted fundamental freedoms of people in Hong Kong. The officials include Hong Kong’s Chief Executive Carrie Lam, Hong Kong’s Secretary for Justice, the Secretary for Security, the Commissioner of the Hong Kong Police Force, and Chinese officials responsible for Hong Kong affairs, among others.
OFAC named the officials as Specially Designated Nationals (SDNs) pursuant to
Executive Order (EO) 13936, entitled The President’s Executive Order on Hong Kong Normalization. Section 4 of the EO authorizes sanctions called for by Congress in the Hong Kong Human Rights and Democracy Act of 2019 and the Hong Kong Autonomy Act (HKAA).
As a result of the designations, all property and interest in property of the SDNs must be blocked (frozen) when in the United States or within the possession or control of a US person. US citizens and green card holders and US-domiciled companies are generally prohibited from transactions or dealings, directly or indirectly, with SDNs as well as entities owned 50% or more by one or more SDNs. This includes financial transactions processed through US banks. Note that the general prohibitions and blocking requirements under EO 13936 do not apply to foreign subsidiaries of US companies, but would apply to foreign branches of such companies.
(For a detailed summary of the sanctions provisions of EO 13936 please see our recent client advisory
here.)
Consequences for Financial Institutions
In particular, the designations could have implications for foreign financial institutions (FFIs) with relationships with the newly designated SDNs. Section 5(a) of the HKAA requires the Secretary of State, in consultation with the Secretary of the Treasury, to submit a report to Congress within 90 days of the law's enactment if they identify any foreign person who "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 with respect to Hong Kong under the Joint Declaration or the Basic Law.
Section 5(b) of the HKAA gives the Secretary of the Treasury, in consultation with the Secretary of State between 30 and 60 days to submit a second report to Congress identifying any FFI that knowingly conducts a “significant transaction” with a foreign person identified in a report under Section 5(a) of the HKAA.
FFIs identified in a report under Section 5(b) of the HKAA could face five out of a menu of 10 sanctions described in Section 7(b) of the HKAA within one year of the report. After one year, the President must impose five of the 10 sanctions, and must impose all 10 sanctions within two years.
Waiting for Treasury Guidance
While the Treasury Department has not yet issued guidance on its interpretation of the HKAA, the eleven officials designated as SDNs on August 7 are presumably likely candidates for inclusion in the first report to Congress under Section 5(a).
With that said, the administration has considerable discretion in the implementation of the HKAA. First, the Secretary of State may omit from either report to Congress a foreign person or FFI upon a determination that such person’s activities (i) do not "have a significant and lasting negative effect that contravenes the obligations of China under the Joint Declaration and the Basic Law;" (ii) are not likely to be repeated; and (iii) have been "reversed or otherwise mitigated through positive countermeasures."
Second, the Treasury Department could provide an interpretation of the term “significant transaction” with respect to FFIs, including whether basic services such as deposit accounts, credit cards, mortgages, and lending, life insurance, among others, would be considered significant transactions. While OFAC has published guidance on the term “significant” in other sanctions contexts, listing seven factors that it could consider, the agency could adopt a different interpretation for the purposes of the HKAA.
As with many sanctions-related EOs, EO 13936 authorizes blocking sanctions on foreign persons determined to “have materially assisted, sponsored, or provided 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” under Section 4 of the EO. This provision does not contain a “significant” qualifier.
Given the US government’s limited use of secondary sanctions on financial institutions under other congressionally mandated sanctions programs, it is possible that no FFIs will be identified under the HKAA in the immediate future.
Last, given that a number of the newly sanctioned officials play key roles in the Hong Kong government, US persons are advised to exercise caution to avoid transactions or dealings, directly or indirectly, with the SDN individuals, as highlighted in
OFAC FAQ 505 concerning Venezuela sanctions.
Steptoe will continue to monitor developments under OFAC’s Hong Kong-related sanctions program and provide updates as warranted.
