LDN - Business

Factbox: How financial firms in Hong Kong may be affected by U.S. sanctions

[August 10, 2020] By Alun John and Scott Murdoch

HONG KONG (Reuters) - The United States has imposed sanctions on Hong Kong Chief Executive Carrie Lam and 10 other top Hong Kong and Chinese officials over what Washington says is their role in curtailing political freedoms in the territory.

The sanctions, which came on Aug. 7, more than a month after Beijing imposed national security legislation on Hong Kong, will freeze any U.S. assets of the officials and generally bar Americans and American companies from doing business with them.

The security law, which has drawn condemnation from Western governments, was imposed in late June. Supporters said it would restore stability after a year of often-violent pro-democracy, anti-China protests.

Below are the main ramifications and concerns for financial firms in Hong Kong.

Will financial firms implementing sanctions run afoul of the national security law?

Under the law, it is a crime to receive "instructions, control or funding from a foreign country ... to impose sanctions or blockade" against Hong Kong or mainland China.

It is uncertain whether abiding by U.S. sanctions would breach this aspect of the law, legal experts say.

"Short answer is potentially yes, as the original Chinese text of Article 29(4) (of the security law) states that carrying out sanctions of a foreign government against HK or the PRC (People's Republic of China) would be a violation," said Mini vandePol, Asia Pacific head of Baker McKenzie's compliance and investigations group.

"This is an expansive interpretation and would have immense ramifications on many businesses in Hong Kong," she added. "To this day, we have not yet seen any enforcement of Article 29(4) in this way, nor has there been official guidance on this point."

The Hong Kong Monetary Authority said in a circular on Saturday the sanctions had no legal status in Hong Kong, and unlike United Nations sanctions, banks in Hong Kong were under no obligation to comply with them.

When asked by Reuters whether or not banks were prohibited from enforcing the sanctions, the HKMA said it had nothing to add to the circular.

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A general view of the financial Central district in Hong Kong, China July 25, 2019. REUTERS/Tyrone Siu

A blog post by two respected legal scholars published in late July said financial firms would not breach the law "merely by participating in the implementation of the sanctions" but they could become liable in certain exceptional circumstances.

The blog post was written by Albert Chen and Simon Young, both professors at Hong Kong University's law faculty.

Which types of financial firms are affected by the sanctions and how?

U.S. banks and asset managers operating in the United States cannot do business with any of the 11 sanctioned people or any companies those people control.

"It is likely that U.S. banks operating in Hong Kong will follow their headquarters' instructions on this on account closure," said Josephine Chung, solicitor and CompliancePlus Consulting director.

Non-U.S. firms can continue to provide banking services to the sanctioned people, but when doing so they cannot also work with the U.S. financial system, people or companies.

Is there more to come for foreign financial firms in Hong Kong?

Yes. Friday's sanctions were imposed under an Executive Order signed by President Donald Trump on July 14.

That order adds to the United States' Hong Kong Autonomy Act, which also creates a process for identifying and sanctioning foreign financial firms that knowingly engage in "significant transactions" with people who contributed to the current situation in Hong Kong.

The people on this list have not yet been named nor is there clarity about what constitutes a significant transaction.

(Reporting by Alun John and Scott Murdoch; Editing by Sumeet Chatterjee and Raju Gopalakrishnan)

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