President Trump signed the Hong Kong Autonomy Act into law late on Tuesday, July 14, 2020, enacting additional sanctions against the People’s Republic of China (PRC), this time for actions relating to Hong Kong’s autonomy. The Hong Kong Autonomy Act recently passed the U.S. Senate and House of Representatives on a bi-partisan basis, which we previously reported on.
The President also issued a new Executive Order on July 14 recognizing that Hong Kong is no longer sufficiently autonomous from the PRC, pursuant to the Hong Kong Policy Act of 1992, thereby suspending much of the preferential treatment that Hong Kong had received under U.S. law. As discussed below, the Executive Order also includes additional economic sanctions implementing the Hong Kong Autonomy Act, setting forth a potential roadmap for how the U.S. intends to enforce the Act.
Hong Kong Autonomy Act
The Hong Kong Autonomy Act could have significant implications for the financial services sector, particularly as it relates to global financial institutions. The Act provides the President with broad authority to sanction non-U.S. persons for involvement in activities that undermine Hong Kong’s autonomy. See Hong Kong Autonomy Act, Section 6. Notably, the President can sanction foreign financial institutions that engage in significant transactions with designated non-U.S. persons, which could present tremendous challenges for institutions that have a presence in Hong Kong or the PRC. See id., Section 7. Under the Act, the sanctions against foreign financial institutions could be substantial, and include prohibitions on U.S. financial institutions from making loans to sanctioned foreign financial institutions and a prohibition on serving as a repository of U.S. Government funds, among other potential penalties.
The Hong Kong Autonomy Act also sets forth certain public reporting requirements. For example, Section 5 provides that the Secretary of the Treasury, in consultation with the Secretary of State, must submit a report to Congress that identifies any foreign financial institution that knowingly conducts a significant transaction with a non-U.S. person that the U.S. has identified as having materially contributed to the failure of the PRC to meet its obligations relating to Hong Kong’s autonomy. See Hong Kong Autonomy Act, Section 5(b).
New Executive Order
Section 4 of the new Executive Order sets forth additional sanctions that can be imposed in relation to Hong Kong. Specifically, the Secretaries of State and Treasury can impose sanctions against non-U.S. persons involved in “coercing, arresting, detaining, or imprisoning” individuals under the authority of the laws of the PRC or Hong Kong. Section 4(a)(i). In addition, non-U.S. persons can be sanctioned for being responsible for, complicit in, or engaged in actions or policies that undermine democratic processes or institutions in Hong Kong, actions or policies that threaten the peace, security, stability, or autonomy of Hong Kong, or censorship or other activities that prohibit, limit, or penalize the exercise of freedom of expression by Hong Kong citizens. Section 4(a)(ii). Sanctions can also be imposed on governmental officials who have engaged in the aforementioned activities. Id.
Finally, the Executive Order authorizes a sort of secondary sanctions against non-U.S. persons that have “materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to” any person who has otherwise been sanctioned pursuant to this E.O. Section 4(a)(iv). This concept of “material assistance” exists in several other U.S. sanctions programs, and most notably has been utilized in the context of the U.S.’s sanctions against the Government of Venezuela.
In short, the Hong Kong Autonomy Act and the new Executive Order provide broad authority for the U.S. to continue to further its foreign policy objectives through the use of economic sanctions. Given the global nature of the financial system, and Hong Kong’s historical prominence in the financial services sector, these new sanctions could have a substantial impact on financial institutions and other companies with business ties in the PRC and/or Hong Kong.
China has strongly objected to the U.S.’s sanctions and has threatened further retaliation. We will continue to closely monitor developments in this space. If you have any questions or concerns about U.S. sanctions, please contact Bruce G. Paulsen (212-574-1533) or Andrew S. Jacobson (212-574-1477) at Seward & Kissel’s Sanctions Practice Group.