July 17, 2020

The Hong Kong Autonomy Act

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Background

On July 14, 2020, President Trump signed into law the Hong Kong Autonomy Act (HKAA). The HKAA provides for mandatory sanctions against individuals, entities and financial institutions in response to China’s National Security Law for Hong Kong. Together with the "President's Executive Order on Hong Kong Normalization" it is the latest in a series of US measures in response to the ongoing disagreement with China regarding China’s obligation to maintain Hong Kong’s autonomous status under the Joint Declaration and the Basic Law. As further detailed in our recent Alerts1, it follows:-

  • The May 27, 2020 certification by the Secretary of State under the Hong Kong Human Rights and Democracy Act that Hong Kong no longer enjoys sufficient autonomy in order to justify special treatment by the US,
  • The May 28, 2020 announcement by President Trump that the United States would initiate the process of revoking Hong Kong’s favorable treatment under US law and
  • The decision by the Chinese Government to introduce a National Security Law for Hong Kong, which took effect on June 30, 2020.
  • Announcements this week by the State Department of visa restrictions on Chinese government officials, and by the Commerce Department of the elimination of exceptions treating Hong Kong more favourably than China for exports of goods and technology to Hong Kong, and China’s threat of visa restrictions against US officials.   

The Major Provisions of the HKAA

Section 3 - 

This section lists a number of "findings" by Congress which conclude:-

"(16) The ways in which the Government of China, at times with the support of a subservient Government of Hong Kong, has acted in contravention of its obligations under the Joint Declaration and the Basic Law, as set forth in this section, are deeply concerning to the people of Hong Kong, the United States, and members of the international community who support the autonomy of Hong Kong."

Section 5(a) -

No later than 90 days after the legislation is passed the Secretary of State must submit a report identifying any "foreign person" that 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" (an Identified Foreign Person)


Notes:

  • The term "foreign person" includes any individual or entity that is not a US person. 
  • References to the Joint Declaration means the Joint Declaration signed between China and the United Kingdom in 1984, which referred to Hong Kong continuing to have a "high degree of autonomy" after the handover of sovereignty in 1997.
  • References to the Basic Law mean Hong Kong's mini-constitution.
Section 5(b) -

Between 30 and 60 days after the submission of the Secretary of State's report under section 5(a), the Secretary of the Treasury must submit "a report that identifies any foreign financial institution that knowingly conducts a significant transaction with a foreign person identified in [the Secretary of State's report]" (an Identified FFI).


Notes:

  • The term "financial institution" is very broadly defined to include not only depository institutions but a range of other entities engaged in the business of accepting deposits, making, granting, transferring, holding or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers or sellers thereof. A foreign financial institution is therefore very broad also (and includes any financial institution organized under any non-US law).
  • The term "significant transaction" is not defined in the law. However, we expect it will be interpreted broadly based on the same set of fact-specific and highly discretionary factors used by the Secretary of the Treasury in other sanctions contexts.
  • Notably, the law defines the term “knowingly” based on an actual knowledge standard, rather than the broader “reason to know” standard used in other sanctions legislation.
Section 6 -

The President can (and in certain circumstances shall, subject to possible waiver) impose sanctions (primarily the freezing of assets and associated prohibitions on dealings of any kind) on an Identified Foreign Person.
Section 7(a) - 

The President shall, subject to possible waiver, impose sanctions on an Identified FFI. There are 10 possible sanctions (see below) and, absent a waiver, the law would require the President to impose at least five of them within a year after an Identified FFI is named in the Secretary of the Treasury's report and then to impose all of these sanctions two years after the FFI is so named.

Section 7(b) - 

The potential sanctions are:-


  1. Refusal of credit from any US institution.
  2. Prohibition from acting as a primary dealer in US debt.
  3. Prohibition from acting as an agent of the US government for US public funds.
  4. Prohibition from participating in foreign-exchange transactions that are subject to US jurisdiction.
  5. Prohibition on the financial institution from entering into financial transactions with other financial institutions to the extent subject to US jurisdiction.
  6. Prohibition on the financial institution from holding, using or dealing with any property which is subject to US jurisdiction.
  7. Prohibition on the export of commodities or software to the financial institution where such export is subject to US jurisdiction.
  8. Prohibition on any US person from investing in equity or debt of the financial institution.
  9. Exclude officers or controlling shareholders from the US.
  10. Imposition of any sanctions (1) to (8) above on the individual officers of the financial institution.
Section 8(a) -  The President has the discretion to waive the imposition of sanctions with respect to any foreign person or foreign financial institution where such waiver is in the national security interest of the US. However, the law requires advance notice to Congress before any waiver may be exercised, and establishes a mechanism for Congress to disapprove of and to block the exercise of this waiver authority under the HKAA. 
Section 8(b) - 

The President can remove any foreign person or foreign financial institution from the relevant report where the Secretary of State and the Secretary for the Treasury determine that the relevant person or entity has taken steps to remediate the wrongdoing or that the wrongdoing is unlikely to be repeated.


Observations


  1. Broad Implementing Discretion. Notwithstanding the mandatory provisions in the legislation, the President retains important discretion in a number of respects regarding the imposition of sanctions against individuals, entities and financial institutions under the law. These discretionary factors will in practice have an important role to play in actual implementation of the law, and an understanding of these considerations could play an important part of a risk mitigation strategy for persons and entities whose activities could expose them to sanctions. 

    a. Timing. The President does not need to impose any sanctions immediately. The Secretary of State’s report on Identified Foreign Persons (Identified Foreign Persons Report) is due within 90 days of enactment, while the Secretary of the Treasury’s report on Identified FFIs (Identified FFI Report) is due within 30 – 60 days of the Identified Foreign Persons Report. In each case, the President may wait for 12 months from the issuance of those reports to impose sanctions on a person or entity identified therein. The November Presidential elections are bound to play a role in the timing of any sanctions, and the balance of power between the White House and Congress may also have an impact on the political dynamic impacting the implementation of this law.

    b. Determination that an Individual has “Materially Contributed” or that an FFI Has “Knowingly Conducted a Significant Transaction”. Moreover, both the Secretary of State and the Secretary of the Treasury have broad discretion in determining who satisfies the criteria for inclusion in the Identified Foreign Persons Report and the Identified FFI Report, respectively. The “material contribution” standard (for Identified Foreign Persons), and the “knowledge” and “significant transaction” standards (for Identified Foreign Financial Institutions) are inherently discretionary and highly fact-specific. While this raises potential risk considerations for institutions and entities considering potential coverage, it also means the Administration will have substantial policy discretion as a practical matter in its determinations regarding whether or not to include entities and individuals who could arguably be covered by the law.

    c. Exclusion and Removal Criteria. Even where the facts otherwise support a determination under the criteria above, the HKAA would leave the President discretion to either “exclude” or remove persons and entities from the various reports subject to certain specified criteria. In particular, these criteria require a determination that the relevant activity: (i) is not likely to be repeated in the future, (ii) has been reversed or otherwise mitigated by “positive countermeasures” taken by the foreign person or FFI in question, and (iii) “does not have a significant and lasting negative effect” on China’s obligations with respect to Hong Kong under the Joint Declaration and Basic Law. As this suggests, even where a potentially covered FFI or individual has engaged in activity that could expose it to potential sanctions, it is possible in certain circumstances to take steps to manage and minimize the associated risk, including through engagement and other mitigation measures. Any determination to exclude (or remove) requires notification to Congress.

    d. Waiver and Termination. As noted above, the HKAA includes national security waiver authority (subject to Congressional advance notification and blocking mechanisms). The President may also terminate sanctions with respect to any Identified FFI or Identified Foreign Person with respect to which sanctions have been imposed. Notably, the criteria for termination are the same as those for exclusion from the reports as described above.

  2. Evaluating Potential Risks for Business. The HKAA has the potential to significantly impact the interests of any FFI entity, and potentially for other businesses, with ties to individuals in China and Hong Kong who could be viewed as making a ‘material contribution’ to actions by the Chinese government that undermine Hong Kong’s autonomy. The designation of such individuals would have direct implications for FFIs to the extent they could be identified as engaging in “significant transactions” with such persons. Moreover, other businesses with investments or other assets in which an Identified Foreign Person has interests could also be impacted by that individual’s designation as a US sanctions target. This is because the imposition of an asset-blocking order would expose all assets in which such a person has interests to an immediate asset freeze, and could severely constrain options for divestment or exit from existing financial relationships. Accordingly, any FFI doing business in Hong Kong or China, as well as investors and other businesses with potential exposure, would be advised to review existing account and asset portfolios to identify any business they are currently undertaking with any politically exposed persons in either jurisdiction who could be targeted under the HKAA in respect of, at least, the promulgation of the Hong Kong National Security Law introduced with effect from June 30, 2020 and related government actions relevant to Hong Kong autonomy.

 


1. For further details, please refer to:

Trump Announces Revocation of Hong Kong’s Special Trade Status  (May 29, 2020)

Potential Implications If Hong Kong’s Special Status Is Revoked (June 29, 2020)

HKSAR National Security Law Explained (July 2, 2020)

The State of US-China Relations: Practical Implications for Hong Kong and Global Businesses (June 14, 2020)

 

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