Hong Kong Autonomy Act: An Update

Morgan Lewis
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Morgan LewisThe US Secretary of the Treasury announced sanctions this summer on 11 individuals who the Secretary views as being involved in implementing the recently enacted Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Administrative Region (the National Security Law) and undermining Hong Kong’s autonomy. Last week, the US Secretary of State delivered a report to Congress, identifying the same foreign individuals as “materially contributing to” China’s implementation of the National Security Law, and the Office of Foreign Assets Control (OFAC) of the Department of the Treasury announced updates to its Specifically Designated Nationals List (SDN) naming those individuals.

Other than one foreign individual that was removed from the second list submitted by the Secretary of State and released by OFAC last week, the second list did not differ from the earlier list of sanctioned individuals published by the Secretary of Treasury over the summer. Along with the second list, OFAC provided additional guidance regarding foreign financial institutions or FFIs that may be named in the future by the Secretary of the Treasury and the Secretary of State under the Hong Kong Autonomy Act (H.R. 7440).

BACKGROUND

On July 2, 2020, the US Congress unanimously passed the Hong Kong Autonomy Act (H.R. 7440) (the Act), and shortly thereafter on July 14, 2020, President Donald Trump signed the Act into law and also issued Executive Order 13936, titled “The President’s Executive Order on Hong Kong Normalization” (the Executive Order or EO 13936). Together, the Act and the Executive Order represent the US government’s response to the recently enacted Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Administrative Region (the National Security Law) in China, pursuant to which China made certain regulations applicable to Hong Kong.

Under Section 5(a) of the Act, if the Secretary of State, in consultation with the Secretary of the Treasury, determines that any foreign individual or entity is “materially contributing to, has materially contributed to, or attempts to materially contribute to” China’s enforcement of the National Security Law, the Secretary of State must, within 90 days of enactment of the Act (specifically, October 13, 2020), submit to specific congressional committees and the congressional leadership the identification of that foreign individual or entity (the First Report). The Act, §5(a).

Following the submission of this First Report, the Secretary of the Treasury, in consultation with the Secretary of State, must submit to Congress a second report that identifies those FFIs that, with “actual knowledge” of the conduct, circumstance, or result, conducts a “significant transaction” with any foreign individual or entity named in the First Report (the Second Report). The Act, §5(b). The Secretary of the Treasury must deliver this Second Report to Congress not earlier than 30 days and not later than 60 days after the date of submission of the First Report by the Secretary of State. Importantly, this 30-day window would give FFIs an opportunity to withdraw from or terminate transactions or dealings with those individuals and entities who were named in the First Report.

AUGUST 7 ANNOUNCEMENT BY THE DEPARTMENT OF THE TREASURY

On August 7, 2020, the Department of the Treasury announced its imposition of sanctions on 11 individuals pursuant to the EO 13936, well ahead of the deadline for the First Report. Since the Executive Order declared a national emergency with respect to the “unusual and extraordinary threat” to US national security posed by the National Security Law, the Secretary of the Treasury wasted no time in issuing sanctions on the following individuals:

  1. Carrie Lam, Chief Executive, Hong Kong Special Administrative Region (HKSAR)
  2. Chris Tang, Commissioner of Hong Kong Police Force (HKPF)
  3. Stephen Lo, Former Commissioner of HKPF until 2019
  4. John Lee Ka-chiu, HKSAR Secretary for Security and a member of the Executive Council of the HKSAR government
  5. Teresa Cheng, HKSAR Secretary for Justice and the head of the Department of Justice in Hong Kong
  6. Erick Tsang, HKSAR Secretary for Constitutional and Mainland Affairs, in charge of relations between the HKSAR and the PRC government
  7. Xia Baolong, Director of the Hong Kong and Macao Affairs Office of the State Council
  8. Zhang Xiaoming, former Director and current Deputy Director of the Hong Kong and Macao Affairs Office of the State Council
  9. Luo Huining, Director of the Hong Kong Liaison Office and a National Security Advisor to the Committee for Safeguarding National Security in Hong Kong. He is also the leading government official from mainland China resident in Hong Kong.
  10. Zheng Yanxiong, Director, Office for Safeguarding National Security in Hong Kong, a new government agency organized pursuant to the National Security Law.
  11. Eric Chan, Secretary General, Committee for Safeguarding National Security of the HKSAR, another new government agency organized pursuant to the National Security Law, and also the director of the Chief Executive Office in Hong Kong

In imposing sanctions against these 11 individuals, Treasury Secretary Steve Mnuchin directed that all property and property interests of the sanctioned individuals, and all entities in which the sanctioned individuals own, directly or indirectly, individually or with other sanctioned persons, 50% or more interest, that are in the United States or in the possession or control of US persons be blocked immediately.[1] The Secretary of the Treasury further stated that these sanctions also prohibit any contribution or provision of funds, goods, or services by, to, or for the benefit of any of the sanctioned individuals or the receipt of any contribution or provision of funds, goods, or services from any such person, essentially blocking any and all transactions or dealings with the sanctioned individual.

This declaration by the Secretary of the Treasury is consistent with EO13936, which ordered broadly that “[a]ll property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, of the [sanctioned persons] are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.” Executive Order, §4.

OCTOBER 14 FIRST REPORT PURSUANT TO THE ACT

On October 14, 2020, pursuant to Section 5(a) of the Act, the Secretary of State submitted to Congress the First Report, identifying the foreign individuals identified as “materially contributing to” China’s enforcement of the National Security Law. Also on the same day, the Office of Foreign Assets Control (OFAC) of the Department of the Treasury announced updates to its Specifically Designated Nationals List (SDN).

The updates to the SDN list include all the sanctioned individuals who were named by the Department of the Treasury earlier this summer on August 7, except that Stephen Lo, the former Commissioner of HKPF who served on the police force until 2019, was removed from the list. Notably, there were no new individuals or entities that were identified in this First Report delivered by the Secretary of State to Congress under the Act, and other than the removal of Stephen Lo from the First Report and the SDN List, the list of sanctioned individuals in the First Report remained exactly the same as the previously list published in the August 7 announcement by the Department of the Treasury.

Because the Secretary of the Treasury must deliver the Second Report to Congress not earlier than 30 days and not later than 60 days after the date of submission of the First Report, there is an interregnum period of 30 days or until November 14, 2020 during which those affected by these sanctions may wind down transactions with the sanctioned individuals in the updated SDN list. The Secretary of the Treasury then has an additional 30 days or until December 14, 2020 to identify FFIs in the Second Report. Since the Secretary of the Treasury already announced the sanctioned individuals on August 7, FFIs will have been on notice of the sanctioned individuals much sooner than the date of the First Report issued last week and should have been reviewing their business and operations to ensure compliance with the Act, the Executive Order, and the new SDN List.

HELPFUL GUIDANCE FOR FFIS

With the announcement of the First Report, the Department of the Treasury included four questions as part of its “Frequently Asked Questions” or FAQs regarding the Act, summarizing the reporting procedure in designating FFIs under the Act. In particular, the newly added FAQs reiterate that the Second Report will identify only those FFIs that “knowingly conduct a significant transaction” with sanctioned persons named in the First Report (or any updated report) and that the Department of the Treasury will contact an FFI to inquire about its conduct before listing the FFI in the Second Report. Office of Foreign Assets Control, Sanctions Programs and Information, FAQ 848.

Additionally, the Department of the Treasury confirmed that “good-faith wind down” activity during the 30-day period following the date of the First Report would not be considered a “significant transaction” for the purposes of the Second Report, thus proffering the official clarification needed by FFIs that may have direct or indirect dealings with those individuals named in the First Report. Office of Foreign Assets Control, Sanctions Programs and Information, FAQ 848. FFIs that have active business and operations in Hong Kong or the People’s Republic of China now have the opportunity to conduct a thorough review of their transactions and ensure compliance with the Act and the Executive Order.

These FAQs also provide guidance that the Secretary of the Treasury may take into account the “totality of the facts and circumstances” to evaluate whether the relevant transaction is a “significant transaction” for the purposes of the Act. Office of Foreign Assets Control, Sanctions Programs and Information, FAQ 850. These “facts and circumstances” include:

  • the size, number, and frequency of the transaction(s);
  • the nature of the transaction(s);
  • the level of awareness of management and whether the transaction(s) are part of a pattern of conduct;
  • the nexus between the transaction(s) and a foreign person identified in a First Report or in updates thereto;
  • the impact of the transaction(s) on statutory objectives, including whether the transaction(s) have a significant and lasting negative effect that contravenes China’s obligations of China under the 1984 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 (the Joint Declaration) and the 1997 Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China (the Basic Law), are likely to be repeated in the future, or have been reversed or otherwise mitigated through positive countermeasures taken by that FFI;
  • whether the transaction(s) involve deceptive practices; and
  • such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis.

Office of Foreign Assets Control, Sanctions Programs and Information, FAQ 850.

The FAQ explains that an FFI may be excluded or removed from the Second Report or an update thereto before any sanctions are imposed on the FFI if the “significant transaction” meets all of the following requirements:

  • the transaction does not have a significant and lasting negative effect that contravenes the obligations of China under the Joint Declaration and the Basic Law;
  • the transaction is not likely to be repeated in the future; and
  • the transaction has been reversed or otherwise mitigated through positive countermeasures taken by that FFI.

Office of Foreign Assets Control, Sanctions Programs and Information, FAQ 849.

NEXT STEPS

The recent announcement by the Department of the Treasury and the updates to the SDN List on October 14 provide additional clarity regarding what businesses, investment funds, and financial institutions need to do to avoid running afoul of the Act and the Executive Order. While there was no surprise with the First Report and updated SDN List, the announcement and the additional FAQs augment the previous knowledge and understanding regarding the Act and the Executive Order. As expressed in our previous articles, there is an ongoing need to focus on due diligence and risk assessments regarding business and investments in Hong Kong and in China in the context of the Act and the Executive Order, especially for FFIs, which encompasses more than just commercial banks to include brokers or dealers in securities or commodities (whether or not registered with the US Securities and Exchange Commission), investment bankers, and investment companies. With the First Report and the updated SDN List now being made available, the path to compliance has become clearer and FFIs have more visibility into what actions are needed to comply with the Act and the Executive Order.

 

[1] Press Release, US Department of the Treasury, “Treasury Sanctions Individuals for Undermining Hong Kong’s Autonomy,” August 7, 2020.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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