Foreign Financial Institutions (Including Banks, Insurers, Brokers, Travel Agencies, and Others) Face U.S. Sanctions for “Significant” Transactions With Sanctioned Hong Kong Officials
Overview: On October 14, 2020, pursuant to Section 5(a) of the Hong Kong Autonomy Act (“HKAA”), the State Department issued a report to Congress (“the Report or Section 5(a) Report”) identifying ten Hong Kong officials deemed responsible for materially contributing to the erosion of the democratic freedoms and autonomy of Hong Kong. The U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”) imposed sanctions on all the individuals identified by the State Department back in August, so the Report did not create any new U.S. sanctions targets. However, the Report effectively imposed a November 13 deadline for foreign financial institutions (“FFI”) to terminate all “significant” transactions involving these officials, or face mandatory U.S. sanctions. Importantly, the term foreign financial institution is broadly defined to include not only banks, but also insurance companies, brokers or dealers in securities or commodities, investment companies, dealers in precious metals, stones, or jewels, travel agencies, businesses engaged in sales of cars, airplanes, boats, and other vehicles, persons involved in real estate closings and settlements, and others.
Detail: Under the HKAA, not less than 30 days and not more than 60 days following the Section 5(a) Report (i.e., between November 13 and December 13), the Secretary of State must:
submit a second report to Congress identifying FFI that knowingly conduct “significant” transactions with persons identified in the Report;
within one year, impose on those FFI five sanctions from a menu ranging from prohibiting foreign exchange transactions, to prohibiting all transactions with U.S. financial institutions, to prohibiting exports to the FFI, to full-blown asset-blocking sanctions on the FFI and/or its principal executive officers; and
impose additional sanctions from the menu if the FFI appears in consecutive reports (as a result of continuing to perform transactions with targets of the Hong Kong sanctions).
In a series of Frequently Asked Questions (“FAQ”) published the same day as the Report, OFAC provided the following key pieces of guidance:
OFAC will not count as “significant” any transaction that constitutes “good-faith wind down” of business with a named individual within 30 days of the Report, or any transaction for which a U.S. person would not require a specific license from OFAC (i.e., transactions that are exempt from regulation (such a personal communications) or for which OFAC has issued a general license (none at the time of publication)). See FAQ 848, 850.
In determining whether a transaction is “significant,” OFAC will consider “the totality of the facts and circumstances, including: (i) the size, number, and frequency of the transaction(s); (ii) the nature of the transaction(s); (iii) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (iv) the nexus between the transaction(s) and the sanctioned party; (v) the impact of the transaction(s) on statutory objectives, including whether the transaction(s) (a) have a significant and lasting negative effect that contravenes the obligations of China under the Joint Declaration and the Basic Law, (b) are likely to be repeated in the future, and (c) have been reversed or otherwise mitigated through positive countermeasures taken by that FFI; (vi) whether the transaction(s) involve deceptive practices; and (vii) such other factors as the Secretary of the Treasury deems relevant. See FAQ 850.
Before imposing sanctions, the Treasury Department will contact the FFI to inquire about its transactions with the sanctioned party. See FAQ 848. FFI’s may be able to avoid sanctions if the transaction(s): (a) do not have a significant and lasting negative effect that contravenes the obligations of China under the Joint Declaration and the Basic Law; (b) is not likely to be repeated in the future; and (c) has been reversed or otherwise mitigated through positive countermeasures taken by the FFI.
To the extent they have not already done so, FFIs should carefully evaluate whether they have relationships with the individuals identified in the Report and take steps to mitigate their sanctions risk, including an assessment of whether likely transactions with the individuals would be deemed “significant” under the factors described above, and termination of such transactions no later than November 13, 2020.
FFIs should also bear in mind that Executive Order 13936 authorizes imposition of sanctions at any time on additional parties participating in the suppression of democratic freedoms in Hong Kong, and the HKAA requires the State Department to provide annual updates identifying such parties. Accordingly, relationships that do not currently expose FFIs to the risk of sanctions may present risk in the future.
For ease of reference, the individuals identified in the current Report are:
|Eric Chan||Secretary General, Committee for Safeguarding National Security of the Hong Kong Special Administrative Region|
|Teresa Cheng||Secretary for Justice|
|Carrie Lam||Chief Executive of the Hong Kong Special Administrative Region|
|John Ka-chiu Lee||Secretary for Security and the head of the Security Bureau|
|Huining Luo||Director, Hong Kong Liaison Office|
|Chris Tang||Commissioner of Police|
|Erick Tsang||Secretary for Constitutional and Mainland Affairs|
|Baolong Xia||Head of the Hong Kong and Macao Affairs Office|
|Xiaoming Zhang||Deputy Director, Hong Kong and Macao Affairs Office of the State Council|
|Yanxiong Zheng||Director, Office for Safeguarding National Security in Hong Kong|
 H.R.7440 - Hong Kong Autonomy Act
 “Treasury Sanctions Individuals for Undermining Hong Kong’s Autonomy”, August 7, 2020, https://home.treasury.gov/news/press-releases/sm1088
 See HKAA Section 2, defining “financial institution” by reference to 31 U.S. Code § 5312.