The Situation: On July 14, 2020, President Trump signed into law the Hong Kong Autonomy Act (the "HKAA"), the U.S. government's response to China's new National Security Law for Hong Kong.
The Result: The HKAA could result in a significant disruption to global transactions, including impacting global supply chains, commercial relationships, correspondent banking relationships, and credit agreements.
Looking Ahead: The ultimate effect of the HKAA largely will depend on how the U.S. government implements it, including the scope of the individuals and entities named to the relevant reports. Therefore, banks and companies active in Hong Kong, or in broader aspects of U.S.-China trade and finance, should monitor implementation of the HKAA carefully and be mindful of the new risks and prohibitions it creates.
On July 14, 2020, President Trump signed into law the HKAA. The events leading up to the President signing the legislation had moved swiftly. On June 30, 2020, China's top legislative body unanimously passed a new national security law for Hong Kong, "Safeguarding National Security in the Hong Kong Special Administrative Region." The next day, the U.S. House of Representatives passed the HKAA unanimously, shortly after its Foreign Affairs Committee had concluded a hearing on "The End of One Country, Two Systems?: Implications of Beijing's National Security Law in Hong Kong." On July 2, 2020, the House sent the HKAA to the U.S. Senate that also passed it unanimously and without amendment. Congress presented the HKAA to the President, who signed it into law 12 days later.
The HKAA essentially creates two lists in the form of Executive Branch reports to Congress:
- The State Department, in consultation with the Treasury Department, must submit a report to Congress on an annual basis (i) identifying any non-U.S. individuals and entities that are materially contributing to, have materially contributed to, or attempt to materially contribute to "the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law"; and (ii) describing the activity on which such identification is based. See § 5(a) of the HKAA.
- The Treasury Department, in consultation with the State Department, must submit a report to Congress on an annual basis identifying any foreign financial institution that "knowingly" conducts a "significant transaction" with a person or entity identified in the State Department report. See § 5(b) of the HKAA.
The HKAA authorizes the President to impose property "blocking" sanctions and visa restrictions on any foreign person included in the State Department report as soon as that person is identified and requires the President to impose "blocking" sanctions on such persons and requires the imposition of sanctions no later than one year after such person's inclusion in the report. See § 6(a) of the HKAA.
The HKAA also requires the President to impose at least five of 10 enumerated sanctions on any foreign financial institution named in the Treasury Department report no later than one year following that institution's inclusion in the report. The President must impose all 10 of the enumerated sanctions if the institution is included in the report two years in a row. See §§ 7(a) and (b) of the HKAA.
The enumerated sanctions are similar to measures imposed through other sanctions programs and vary in terms of severity, from the relatively anodyne to the more profound, including cutting off access to the U.S. financial system.
Under the HKAA, the President may exclude a person or entity from a list in certain instances, or waive or terminate the imposition of sanctions with respect to a person or entity identified in either list. Some legal controversy has already emerged regarding the waiver and termination provisions of the HKAA. Section 8 of the HKAA states that the exercise of both of those Presidential powers is conditional on the U.S. Congress not issuing a joint resolution of disapproval. The President has noted his objection to these conditions on constitutional grounds and indicated that his administration will treat them as advisory and nonbinding.
Three Key Takeaways
- The new mechanisms created by the HKAA already are reshaping incentives and risk calculations for a range of corporate and financial actors.
- The potential consequences of being named in a report or targeted with sanctions could be severe for any company or bank, big or small, foreign or domestic. That, in turn, would create a considerable ripple effect for any and all companies and banks, including U.S. companies and banks, conducting any form of business with targeted persons or entities.
- The ultimate effect of the HKAA largely will depend on how the U.S. government implements it, including the scope of the individuals and entities named to the relevant reports. Therefore, banks and companies active in Hong Kong, or in broader aspects of U.S.-China trade and finance, should monitor the implementation of the HKAA carefully and be mindful of the new risks and prohibitions it creates.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.