OFAC sanctions against individuals undermining Hong Kong's autonomy.
New sanctions regime targeting China
On 14 July 2020, the U.S. Hong Kong Autonomy Act ("HK Act") was unanimously passed by the US Senate in response to the implementation of China's National Security Law ("Security Law") in Hong Kong.
The HK Act provides a structure for the potential future impositions of sanctions, and establishes a reporting process for (i) the Department of State to issue a state report where it identifies any non-U.S. person (individual or entity) who "materially contributes" to the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law*, and (ii) for the Treasury Department to issue a treasury report to identify any foreign financial institution that knowingly conducts a "significant transaction" with a foreign identified person. The president may impose sanctions on non-U.S. individuals, unless such individual is named in both state reports – in which case the president shall impose sanctions. Sanctions on financial institutions shall be imposed within a year of listing in the report, and be increased to a maximum of the possible amount of sanction measures listed in the HK Act the following year, provided that the financial institution is still listed in the report. The definition of financial institution in this sense is broad, and does not only cover deposit institutions, but a wide range of institutions dealing with deposits, loans exchange, securities and so on. The terms "material contribution" and "significant transaction" are not defined and will be based on the same set of fact-specific and discretionary factors used in other US sanction contexts.
The Department of State and the Treasury Department has yet to designate persons and financial institutions under the HK Act. The state report must be published no later than 90 days after the legislation is passed, while the treasury report shall be issued between 30 to 60 days after the publication of the state report.
On the same date (14 July 2020), a U.S. President Executive Order on Hong Kong Normalization (E.O. 13936) ("HK EO") was issued. Thee HK EO, amongst other, also creates a sanction program which provide additional designation criteria's beyond what is provided for under the HK Act. The HK EO authorises the Secretary of State or Secretary of Treasury to impose sanction on any person (i) deemed to engage in activities that undermine democracy and autonomy in Hong Kong, and (ii) certain categories of persons deemed to provide "material support" (including financial support), to such persons.
The HK Act and the HK EO, along with the recent Uighur Human Rights Policy Act and designations against Chinese companies, can be seen as a new Sanctions programme targeting China, with implications for both U.S. and non-U.S. persons.
Designations as of 7 August 2020
Pursuant to the EO, on 7 August 2020, the US Department of the Treasury’s Office of Foreign Assets Control ("OFAC") announced that 11 individuals would be added to its Specially Designated Nationals and Blocked Persons List ("SDN List"). These individuals have, according to the Treasury's Department's announcement, been designated for their role in implementing the Security Law for Hong Kong, and what is described as "undermining Hong Kong's autonomy and restricting the freedom of expression or assembly of the citizens of Hong Kong".
Implications of the new regime and designations
In accordance with the designations of 7 August 2020, U.S. persons are prohibited from engaging in any transactions or dealings with the designated individuals without authorisation from OFAC. Further, all property, and interest in property, of these 11 individuals (within the Unites States or in the possession of U.S. persons) shall be blocked and reported to OFAC. This also includes interest and property held by entities owned ,directly or indirectly, 50% or more by the designated individuals (individually or together with other blocked persons).
In addition, these new designations have potential sanctions implications for non-U.S. persons, as the HK Act and HK EO both authorize sanctions against any person with certain dealings with a designated party.
Non-U.S. entities will have to consider the possibility that any of their customers and/or counterparties become listed, and how to mitigate the associated risks. Provided that an entity continues to transact with U.S.-sanctioned parties, they run the risk of (i) being designated themselves, and (ii) pressure from banks and other parties unwilling to transact with persons transacting with U.S.-sanctioned parties.
* The reference to the "Joint Declaration" and the "Basic Law" refers to the declaration signed by China and the United Kingdom in 1984 referring to Hong Kong's autonomy after the handover of sovereignty in 1997, Hong Kong's mini-constitution.