The Global Impact of New U.S. Hong Kong-Related Sanctions 30th September 2020
The Impact of New US Hong Kong-related Sanctions Speaker Nick Turner Registered Foreign Lawyer (New York) Based in Hong Kong +852 5998 7559 nturner@Steptoe.com http://www.linkedin.com/in/nicholaswturner
The Impact of New US Hong Kong-related Sanctions 7 August 2020 SDN Designations ● US Office of Foreign Assets Control (OFAC) sanctioned 11 government officials in relation to Hong Kong ● Includes Chief Executive, Police Commissioner, Justice Secretary, etc. ● Specially Designated Nationals (SDNs) ● Property and interests in property blocked (frozen) ⚬ In the United States, or ⚬ Within possession or control of a US person ● US persons (and US financial system) prohibited from dealing, directly or indirectly, with SDNs without OFAC authorization ● See FAQ 840 of 25 September 2020 ● “Secondary sanctions” on foreign financial institutions (FFIs)?
The Impact of New US Hong Kong-related Sanctions Hong Kong Human Rights & Democracy Act of 2019 (P .L.116–76) Section 7 - Sanctions Asset blocking (i.e., SDN sanctions) and visa restrictions on foreign persons determined by the President to be ● responsible for: The extrajudicial rendition, arbitrary detention, or torture of any person in Hong Kong; or ● Other gross violations of internationally recognized human rights in Hong Kong. ● Timing of sanctions: 180 days after 27 November 2019 (i.e., 25 May 2020) ● Sec. 7(a)(3) – Consideration of Certain Information Directs President to consider information provided by: ● Chairperson and ranking member of each of certain congressional committees; and ● Information obtained by other countries or reputable nongovernmental organizations that monitor ● violations of human rights abuses.
The Impact of New US Hong Kong-related Sanctions Hong Kong Autonomy Act of 2020 (P .L. 116–149) Section 5 5(a) – Secretary of State to identify within 90 days 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.” 5(b) – Secretary of Treasury to identify 30 to 60 days later any foreign financial institution that has knowingly ● engaged in a significant transaction with a person identified under 5(a). 5(d) – Criteria for exclusion or removal from a 5(a) or 5(b) report ● 5(g) – Meaning of “material contribution” in 5(a): ● (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. ●
The Impact of New US Hong Kong-related Sanctions Hong Kong Autonomy Act of 2020 (P .L. 116–149) (Continued) Section 6 – Sanctions on Foreign Persons in 5(a) Report Sec. 6(b)(1) – Restrictions on Property Transactions ● Subject to such regulations as the President may prescribe, ● Prohibit (A) acquiring, holding, withholding, using, transferring, withdrawing, transporting, (B) dealing in or ● exercising any right, power, or privilege with respect to; or (C) conducting any transaction involving: Property that is subject to the jurisdiction of the United States; and ● In which a person under 5(a) has any interest. ● Compare to 7(c)(1) of Hong Kong Human Rights and Democracy Act (Asset Blocking) ● Hong Kong Autonomy Act 6(b)(1) more like Foreign Sanctions Evaders sanctions? ● But replaced by blocking sanctions in Executive Order 13936. ● Timing of sanctions: Optional at first, but mandatory after 1 year. ●
The Impact of New US Hong Kong-related Sanctions Hong Kong Autonomy Act of 2020 (P .L. 116–149) (Continued) Section 7 – Sanctions on Foreign Financial Institutions in 5(b) Report Timing of sanctions: ● First 5 sanctions, optional at first, but mandatory after 1 year; ● Remaining 5 sanctions, mandatory after 2 years. ● Section 7(b) – Sanctions described (subject to such regulations as may prescribe): ● 1. Lending by US financial institutions; 6. Property transactions under US jurisdiction; 7. Exports of US goods, technology, or services to the FFI; 2. Acting as a primary dealer of US government debt; 8. US persons investing in “substantial amounts” of debt or equity 3. Serving as a repository of US government funds; 9. Visa bans on officers, principals, or significant shareholders 4. Foreign exchange transactions; 10. Sanctions under Section 6(b) against officers. 5. Banking transactions;
The Impact of New US Hong Kong-related Sanctions Executive Order 13936 of 14 July 2020 Topic EO 13936 • Hong Kong Human Rights and Democracy Act Legal Authority (includes) • International Emergency Economic Powers Act (IEEPA) • Hong Kong Autonomy Act • 4(a)(i) Involvement in National Security Law • 4(a)(ii) Responsible or complicit in: • (A) Undermining democracy in Hong Kong; • (B) Threatening peace, security, stability, or autonomy of Hong Kong; • (C) Censorship and undermining freedoms of expression and assembly. • (D) Gross violations of internationally recognized human rights or serious human rights abuses. Sanctions Criteria • 4(a)(iii) to be or have been a leader or official of: • (A) an entity involved in 4(a)(i) or 4(a)(ii)(A)-(C) • (B) an entity sanctioned under EO 13936. • 4(a)(iv) material assistance to person sanctioned under EO 13936. • 4(a)(v) owned or controlled by, or acting on behalf of, a person sanctioned under EO 13936. • 4(a)(vi) directors and officers of an entity sanctioned under EO 13936. Type of Sanctions • Blocking sanctions (i.e., SDN sanctions) • Visa restrictions (incl. immediate family) Applicable to: • US Persons • US financial system Timing of Sanctions • Available immediately upon determination by Secretary of Treasury or State
The Impact of New US Hong Kong-related Sanctions What happens next? ● New Designations under Executive Order 13936? ● General licenses? ● Foreign Financial Institution sanctions under Secs. 5(b), 7(b) ● Timing: 5(b) report due 30-60 days after 5(a) report ● When will the 5(a) report come out? ● What could the sanctions look like? ● Treasury guidance on “significant transactions”? ● Impact of US presidential election (3 November 2020)?
The Impact of New US Hong Kong-related Sanctions Executive Order 13936 of 14 July 2020 US Persons Non-US Persons “US persons” must comply with OFAC primary sanctions all of the Non-US persons must follow OFAC primary sanctions time sometimes US Persons include: Non-US persons’ activities fall under US enforcement jurisdiction when they involve a “US Element”: ● US citizens/permanent residents (anywhere) ● US Persons ● All persons physically located in the United States – regardless of citizenship ● The US financial system (see next slide) ● Entities domiciled in the US, including their foreign offices ● US-origin goods and technology ● US-owned or controlled companies but only for Iran, Cuba, Overlap with the Commerce Department’s Export ● North Korea Administration Regulations (EAR)
The Impact of New US Hong Kong-related Sanctions What is the US financial system? 1) US banks 2) US banks’ foreign Definition: US financial institution ( e.g. , 31 CFR 560.327): “ The term US financial institution means any US entity (including its foreign branches branches that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or 3) US-based branches of purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent . . . The term includes those branches, offices, and agencies of foreign financial institutions that are located in the United states, non-US banks but not such institutions’ foreign branches, offices, or agencies. ” 4) US correspondent accounts Cuba: 31 CFR 515.329 – Definition: Person subject to the jurisdiction of the United States; person subject to US jurisdiction: “. . . (d) Any corporation, partnership, association, or other organization, wherever organized or doing business, that is owned or controlled by persons specified in paragraphs (a) or (c) of this section” (i.e., US persons). 5) Foreign subsidiaries of Iran: 31 CFR 560.215 – Prohibitions on foreign entities owned or controlled by US persons: “. . . (a) . . . an entity that is owned or controlled by a United states person and established or maintained outside the United States is prohibited from knowingly engaging in US persons or financial any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that institutions (Cuba, Iran, would be prohibited pursuant to this part if engaged in by a United States person or in the United States .” North Korea regulations) North Korea: 31 CFR 510.214 – Prohibitions on persons owned or controlled by US financial institutions “. . . any person that is owned or controlled by a U.S. financial institution and established or maintained outside the United States is prohibited from knowingly engaging in any transaction directly or indirectly with the Government of North Korea or any person designated for the imposition of sanctions with respect to North Korea .”
The Impact of New US Hong Kong-related Sanctions Q & A
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