On July 14, 2020, President Trump signed into law the Hong Kong Autonomy Act (“HKAA”) providing for the imposition of sanctions on foreign persons who materially contribute to the undermining of Hong Kong’s autonomy by the Government of the People’s Republic of China (“PRC”) and foreign financial institutions who engage in significant transactions with such foreign persons. During a press conference announcing the signing of the HKAA, President Trump also indicated that he had signed an Executive Order ending Hong Kong’s preferential treatment under the United States-Hong Kong Policy Act of 1992.
The HKAA is part of the US response to the new national security law imposed on Hong Kong by the PRC. The passage of the HKAA follows US Secretary of State Pompeo’s certification to Congress in May 2020, that Hong Kong is no longer sufficiently autonomous from the PRC to warrant its preferential treatment. For detailed information on these developments, please see our prior blog posts here and here.
Who Does the HKAA Target?
The HKAA provides for sanctions against (i) “foreign persons” and (ii) “foreign financial institutions” identified in reports required under the HKAA to be submitted to the US Congress by the US Secretary of State and US Secretary of the Treasury.
Specifically, the HKAA requires the US Secretary of State, in consultation with the US Secretary of the Treasury, to identify “foreign persons” that are “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[1] or the Basic Law[2]” within 90 days after the enactment of the HKAA (the “Foreign Person Report”). The HKAA contemplates that updates to the Foreign Person Report will be made at least on an annual basis. In effect, the HKAA targets foreign persons that are determined to materially contribute to undermining Hong Kong’s autonomy from the PRC by, for example, taking actions that result in the curtailment of freedom of assembly, speech, or press in Hong Kong or the inability of the people of Hong Kong to participate in democratic processes. The term “foreign person” includes any individual or entity that is not a US Person.
Separately, between 30 and 60 days after the submission of the Foreign Person Report, the HKAA requires the US Secretary of the Treasury to submit a report that identifies “any foreign financial institution that knowingly conducts a significant transaction with a foreign person identified in [the Foreign Person Report]” (the “FFI Report”). The term “significant transaction” is not defined in the HKAA. However, in the context of other US sanctions programs (see, e.g., OFAC FAQ 542), the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) has indicated that it will consider the following factors when 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 blocked person; (5) the impact of the transaction(s) on statutory objectives; (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.
The President can remove any foreign person or foreign financial institution from the Foreign Person Report or the FFI Report if the President determines that the person or financial institution has taken steps to cease or remediate the conduct that gave rise to inclusion on the Foreign Person Report or FFI Report or in circumstances where the conduct is unlikely to be repeated.
What Sanctions Can Be Imposed Under the HKAA?
The HKAA provides for two separate “menus” of sanctions that can be imposed on parties identified in the Foreign Person Report and FFI Report, respectively.
- Parties Identified in the Foreign Person Report. On or after the date a foreign person is listed in the Foreign Person Report, the President may impose the following sanctions on such foreign person:
- A prohibition on dealings in property subject to US jurisdiction in which the foreign person has an interest; and
- For individuals, denial of visas and exclusion from the United States.
The imposition of these sanctions is mandatory for any foreign person that remains listed in the Foreign Person Report for a period of one year. In effect, the President technically has discretion with respect to the immediate imposition of sanctions against parties identified in the Foreign Person Report. However, if the party has not been removed from the Foreign Person Report within a year of the party’s inclusion in the report, the sanctions described above become mandatory.
- Foreign Financial Institutions Identified in the FFI Report. The HKAA requires the President to impose at least five of ten potential sanctions described in a menu of sanctions set out in the HKAA within one year after a foreign financial institution appears in the FFI Report (the “FFI Report Parties”). If a foreign financial institution remains in the FFI Report for a period of two years, all ten sanctions measures must be imposed against the foreign financial institution. The sanctions include: (i) a prohibition on loans from US financial institutions to the foreign financial institution, (ii) a prohibition on transactions in foreign exchange involving the foreign financial institution that are subject to US jurisdiction, (iii) a prohibition on transfers of credit or payments involving the foreign financial institution where such transfers or payments are subject to US jurisdiction, (iv) a prohibition on transactions in property in which the foreign financial institution has an interest, (v) restrictions on export, reexports, and transfers to the foreign financial institution, and (vi) restrictions on dealings by US Persons in dealings in debt or equity issued by the foreign financial institution.
What Are the Likely Impacts of the HKAA?
The HKAA provides discretion to the executive branch of the US Government (the “Administration”) to identify parties that would be targeted under the statute and therefore subject to sanction. The Administration has indicated that its response to the PRC’s national security legislation for Hong Kong would be strong, potentially signaling aggressive implementation of the HKAA.
US Persons will be required to comply with the sanctions imposed on the parties identified in the Foreign Person Report and FFI Report. Although such sanctions could present substantial compliance obligations for US Persons, they do not include blocking requirements that apply to parties identified on the U.S. Department of the Treasury’s List of Specially Designated Nationals and Blocked Persons.
As a general matter, the obligation for non-US persons to comply with the sanctions imposed on foreign persons or foreign financial institutions under the HKAA is limited because transactions outside US jurisdiction with parties sanctioned under the HKAA are not targeted under the statute. However, foreign financial institutions, of course, could be identified on the FFI Report and therefore become the target of sanctions to the extent they engage in “significant transactions” with parties identified on the Foreign Person Report. The impact of the HKAA on any such foreign financial institutions will be substantial as the imposition of the sanctions described will effectively exclude institutions identified on the FFI List from the US financial system. We continue to monitor developments in the United States and responses from Hong Kong and the PRC and remain available to answer specific questions.
[1] Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the People’s Republic of China on the Question of Hong Kong, done at Beijing on December 19, 1984.
[2] Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China.
