U.S. Sanctions and Hong Kong: Summary of the Hong Kong Autonomy Act

With the promulgation of Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region (中華人民共和國香港特別行政區維護國家安全法) on 30 June 2020, attention has turned to the Hong Kong government’s implementation of national security measures.   Meanwhile, the US government has revoked Hong Kong’s special status under US laws regulating exports of dual-use goods, sensitive technologies, and military use items, and has stated that it intends to equalize the Special Administrative Region with mainland China under other laws, where their respective treatments differ.

Separate from the actions of the Trump administration, the US Congress has passed legislation, the Hong Kong Autonomy Act, which mandates the imposition of economic sanctions and travel bans against individuals, entities, and financial institutions, in connection with Hong Kong’s evolving status.

This article offers a brief overview from the legal perspective of the Hong Kong Autonomy Act as passed by the US Congress on 2 July 2020 and its potential impact on activities in Hong Kong. As of this writing, the legislation has passed both the House of Representatives and the Senate and awaits the US president’s signature to become law. 

Recent Background  

Before summarizing pertinent provisions of the Hong Kong Autonomy Act, we briefly summarize related developments over the past few weeks.  On 21 May 2020, a spokesperson for the PRC National People’s Congress announced that the body would deliberate on a resolution authorizing the adoption of national security legislation for the Hong Kong Special Administrative Region.

On the same date, two US senators introduced the Hong Kong Autonomy Act, which, among other things, authorizes sanctions against foreign persons (individuals and entities) who materially contribute, in the words of the bill, to “the failure of the Government of China to meet its obligations” under the Joint Declaration or the Basic Law and any foreign financial institution that “knowingly conducts a significant transaction” with such a person.

On 28 May 2020, the US Secretary of State submitted the 2020 Hong Kong Policy Act Report to Congress. The report, issued annually pursuant to the 2019 US Hong Kong Human Rights and Democracy Act, provides the State Department’s public assessment of the political, economic, and social climate in Hong Kong. In the current report, the Secretary of State has certified that Hong Kong “does not continue to warrant treatment under United States laws in the same manner as US laws were applied to Hong Kong before July 1997.” The Secretary’s certification carries no legal effect, however, beyond offering a recommendation of direction in US policy.

The next day, on 29 May 2020, the US President announced that his administration would “begin the process” of revoking Hong Kong’s special treatment as compared with mainland China under US laws, a status afforded to Hong Kong under the US Hong Kong Policy Act.

On 25 June 2020, the US Senate passed the Hong Kong Autonomy Act by unanimous consent, a parliamentary procedure whereby a motion may be passed without a roll-call vote barring the objection of any member. A companion bill, H.R. 7083, introduced on 1 June 2020, passed the House of Representatives on 1 July 2020, also by unanimous consent. On 2 July, the US Senate voted again on the bill, as required by congressional procedures. As of this writing, the legislation awaits the signature of the US president.

Separately, on 29 June 2020, hours before the Special Committee of the National People’s Congress unanimously approved the Hong Kong national security legislation, the US State Department announced that the United States would “end exports of US-origin defence equipment and will take steps toward imposing the same restrictions on U.S. defence and dual-use technologies to Hong Kong as it does for China.” Simultaneously, the US Commerce Department announced: “regulations affording preferential treatment to Hong Kong over China, including the availability of export license exceptions, are suspended.” The Commerce Department action was affirmed in an announcement on 30 June 2020 that “no items subject to the [Export Administration Regulations] may be exported to Hong Kong, reexported to Hong Kong, or transferred within Hong Kong-based upon an authorization provided by a License Exception except for transactions that would otherwise be eligible for a license exception if exported to the People’s Republic of China.”   

Summary of the Hong Kong Autonomy Act

The Hong Kong Autonomy Act begins with a recitation of findings by Congress regarding Hong Kong’s political development since the adoption of the Sino-British Joint Declaration of 1984 and the Basic Law of the HKSAR through to recent events in early 2020.

Section 5 – Reporting to Congress

Section 5 of the Hong Kong Autonomy Act requires the US secretary of state, in consultation with the US secretary of treasury, to submit a report to Congress within 90 days of the law’s passage identifying any foreign person who “is 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 or the Basic Law.” Then, between 30 and 60 days later, the US secretary of treasury, in consultation with the US secretary of state, must submit a report identifying any foreign financial institution (“FFI”) that “knowingly conducts a significant transaction” with a foreign person identified above.

The definitions of “foreign person” and “foreign financial institution” are not limited to Chinese or Hong Kong persons and conceivably could include persons or banks outside of mainland China or the Hong Kong Special Administrative Region.

Section 5(g) of the Hong Kong Autonomy Act clarifies that the reporting requirement applies to foreign persons who “(1) took action that resulted in the inability of the people of Hong Kong— (A) to enjoy freedom of assembly, speech, press, or independent rule of law; or (B) to participate in democratic outcomes; or (2) otherwise took action that reduces the high degree of autonomy of Hong Kong.”

Section 5(d) allows the secretary of state to exclude foreign persons or financial institutions from the Hong Kong Autonomy Act report, as explained below.

Following the first report, within 90 days after passage of the law, reports under Section 5 must be updated in an ongoing manner, and updated reports must be resubmitted with the annual Hong Kong Policy Act report (typically in late March).

Section 5(d) – Exclusions

Section 5(d) of the Hong Kong Autonomy Act allows the US secretary of state to exclude a foreign person or financial institution from a report under Section 5 if their activities (i) do not “have a significant and lasting negative effect that contravenes the obligations of China under the Joint Declaration and the Basic Law;” (ii) are not likely to be repeated; and (iii) have been “reversed or otherwise mitigated through positive countermeasures.”

Not only does this exclusion limit the universe of individuals, entities, and financial institutions that could be in-scope for sanctions, but it provides a means for them to have their names struck from future reports under Section 5.

In other words, even if a foreign person or FFI is included in a report (and therefore subject to optional sanctions), steps can be taken to avoid mandatory sanctions that would come into effect after one year.

Sections 6 and 7 – Sanctions

The Hong Kong Autonomy Act includes a combination of optional and mandatory sanctions against foreign persons and FFIs named in a report under Section 5.

For foreign persons, Section 6(b) authorizes the US president to prohibit or restrict transactions in respect of any property subject to US jurisdiction in which the foreign person named in the Section 5 report has an interest. Additionally, individuals sanctioned under the Hong Kong Autonomy Act could be subject to a US travel ban.

For FFIs, Section 7(b) authorizes a “menu” of 10 sanctions that include: (i) a prohibition on lending by US financial institutions; (ii) a prohibition on acting as a primary dealer of US government debt; (iii) a prohibition on serving as a repository of US government funds; (iv) restrictions on foreign exchange transactions; (v) restrictions on banking transactions; (vi) a prohibition or restriction on property transactions under US jurisdiction; (vii) restrictions on the export of US goods, technology, or services from the United States to the foreign financial institution; (viii) restrictions on US persons investing in debt or equity of the foreign financial institution; (ix) US travel bans against corporate officers, principals, or significant shareholders; and (x) sanctions under Section 6(b) against officers of the foreign financial institution.

With respect to foreign persons, the US president has the option of imposing sanctions under Section 6(a) “on and after the day” the foreign person is named in a Section 5 report. However, after one year, the sanctions become mandatory. In other words, the sanctions would become mandatory after 15 months of the law’s passage, in respect of any foreign person listed in the report under Section 5 (or subsequent reports).

With respect to FFIs, the US president must apply at least five of the sanctions described in Section 7(b) against a financial institution included in a Section 5 report. The sanctions may be imposed immediately or within one year of the report. After two years, the US president must apply all ten of the sanctions listed in Section 7(b).

The remainder of the Hong Kong Autonomy Act lays out standards for when the US president may waive the application of the Hong Kong Autonomy Act in the interest of US national security and terminate sanctions. Section 8 provides that Congress may pass a “disapproval resolution” nullifying a presidential decision to waive or terminate sanctions. Section 9 provides for penalties against persons who violate sanctions imposed under the Hong Kong Autonomy Act.

Implications for Hong Kong

In comparison with other congressional sanctions bills, the sanctions described in the Hong Kong Autonomy Act appear to potentially allow for sanctions that are less stringent than the typical blocking sanctions or asset freezes (as contained, for example, in the Hong Kong Human Rights and Democracy Act of 2019 and the US Uyghur Human Rights Policy Act of 2020), or correspondent account sanctions (as called for in the US Countering America’s Adversaries Through Sanctions Act of 2017). The White House may opt to further limit the scope of sanctions by adopting regulations narrowing their application to specific types of transactions. If so, the commercial impact of Hong Kong Autonomy Act sanctions may be significantly less than portended by some alarmist newspaper headlines or bellicose tweets of US officials. However, the wording in the Act is sufficiently broad to also allow for more stringent sanctions.

No US official has to date publicly expressed an intention to undermine Hong Kong’s status as an international financial centre, its currency, or its access to US financial markets. Indeed, on multiple occasions, the US Secretary of State has declined to endorse such proposals, emphasizing US policy toward Hong Kong.

US sanctions administered by the US Treasury Department’s Office of Foreign Assets Control (OFAC), including those under the Hong Kong Autonomy Act, generally apply only to “US persons,” which include US nationals and permanent residents (regardless of location), persons inside the United States (regardless of nationality), and entities organized under US laws as well as their foreign offices or branches. The definition of US person for this purpose extends to legal entities that comprise the US financial system, meaning that transactions through US-domiciled banks (but not their foreign subsidiaries) would also be captured. Payments processed through such legal entities would be subject to restrictions, unless otherwise licensed by OFAC.

Non-US persons that are not FFIs do not have day-to-day compliance obligations under the Hong Kong Autonomy Act, except to the extent that any transactions were to involve US persons or the US financial system. This means that companies in Hong Kong have wide latitude to continue transacting with persons or financial institutions sanctioned under the Hong Kong Autonomy Act, should they choose to do so. As explained above, the Hong Kong Autonomy Act does not necessarily call for blocking sanctions, which means that US persons also are able to continue their non-sanctioned activities with such persons, unless otherwise prohibited.

However, the Hong Kong Autonomy Act does authorize so-called secondary sanctions against FFIs that knowingly conduct significant transactions with any foreign person designated pursuant to the Act. This means that FFIs will need to closely monitor accounts to make sure that they are not engaging in significant transactions, regardless of currency, with designated persons or companies linked to such persons.

Partner, Steptoe & Johnson HK

Partner, Steptoe & Johnson HK 

Partner, Steptoe & Johnson HK

Of Counsel, Steptoe & Johnson HK