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In the latest round of steps taken between the US and Mainland China, last Friday (7 August 2020) the US Department of the Treasury's economic sanctions unit, the Office of Foreign Assets Control ("OFAC"), listed eleven individuals for their role in the implementation of Mainland China's National Security Law for Hong Kong, a law which, according to the US, 'fundamentally undermines Hong Hong's autonomy and democratic processes'. The eleven individuals have been added to OFAC's list of Specially Designated Nationals ("SDNs") with immediate effect. This decision was made pursuant to Presidential Executive Order E.O. 13936 on Hong Kong Normalization dated 14 July 2020 ("EO 13936") and follows on from both the US Hong Kong Human Rights and Democracy Act of 2019 and the US Hong Kong Autonomy Act, which was signed into law the same day on which EO 13936 was issued.
Leaving aside the political ramifications, OFAC's decision has left many local and overseas businesses operating in Hong Kong scrambling to work out what their obligations and exposure might be and whether existing and new relationships, dealings and transactions, particularly those conducted in US dollars ("USD"), will be impacted. OFAC sanctions are industry-agnostic, but in this article we have briefly focused on the insurance industry and what it might mean to brokers and underwriters in the Hong Kong market.
The sanctions implications from this development are broadly set out in a related US Treasury Department press release:
As a result of today’s action, all property and interests in property of the individuals named above, and of any entities that are owned, directly or indirectly, 50 percent or more by them, individually, or with other blocked persons, that are in the United States or in the possession or control of U.S. persons, are blocked and must be reported to OFAC. Unless authorized by a general or specific license issued by OFAC or otherwise exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. The prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any blocked person or the receipt of any contribution or provision of funds, goods or services from any such person.
Thus, absent express consent from OFAC, entities and persons who are domiciled or incorporated in the US ("US persons") are effectively banned from entering into transactions with SDNs designated under EO 13936 and entities of which they own 50% or more. Moreover, all assets of such SDNs and their majority owned entities that are in the US or in the possession or control of US persons (whether within or outside the US) are frozen and cannot be returned to the sanctioned persons or otherwise dealt with without OFAC approval.
The EO 13936 SDN designations are not without impact on non-US persons. For example, non-US persons face US sanctions exposure if they cause a US person to violate EO 13936, perhaps by instructing a US person employee to deal with an SDN or his/her property, or by making payment for the benefit of an SDN through a US bank (in USD or otherwise). In addition, if OFAC determines that a non-US person has provided "material" support to or goods or services in support of an SDN or entity it majority owns, that non-US person can be designated as an SDN.
To date, the response of the HK Insurance Authority has been as follows:
“In assessing potential impact arising from the sanctions, market participants should take into account the full spectrum of legal, business and commercial risks to which they are exposed. This may involve complex operational issues, varying with the structure, size and business portfolio of an insurer or insurance intermediary as well as its overseas affiliates. Above all, the IA will expect customers to be treated fairly and transparently in the formulation of any responses to the sanctions.”
From the US law perspective, only, and assuming that these new sanctions are enforceable as the US Treasury intends them to be, what is the practical impact?
It would certainly be prudent for insurers to determine whether they provide insurance or reinsurance cover for any of the newly designated SDNs or entities of which they own 50% or more, as insureds, additional insureds, or otherwise. If so, they should determine a course of action based upon the specific circumstances involved, including (but not limited to) whether the insurer or reinsurer is a US person or has US citizen personnel, whether the policy currency is in USD, whether the nature of the policy or its limits might be considered by OFAC to be material, whether the insurer or reinsurer has US affiliates or relies on US-based service providers, and whether their own reinsurers or retrocessionaires are US persons.
According to US law, US person insurers are prohibited from providing insurance services to the EO 13936 SDNs (or entities they majority own), whether in the US, Hong Kong or elsewhere, without obtaining a specific licence from OFAC. If they have in-force policies for such SDNs those policies are now blocked, as are any funds due in respect of loss payments under those policies. In addition, related blocking reports would need to be filed within 10 days of the date of blocking. It is worth considering that OFAC enforcement actions against entities in the insurance sector have been on the rise over the past few years, and OFAC regulations call for imposition of civil penalties of up $307,922 per violation.
Again, so far as US law applies, USD wire payments are cleared by banks in the US - US persons - which are prohibited from directly or indirectly providing services to or for the benefit of the EO 13936 SDNs. Thus, USD wire payments cannot be made to or for the benefit of such SDNs, under insurance policies, investment products or otherwise. If for some reason such a USD payment occurs - perhaps because a USD clearing bank was not informed that the payment was for the benefit of such an SDN - any person determined to have caused the resulting sanctions violation will be exposed to US sanctions for having done so.
Given these developments, insurers, reinsurers, brokers and others involved in the insurance sector are advised to consider whether their US sanctions compliance programmes are up to date, and to ensure that they routinely monitor developments with respect to the SDN list and transactions that are targeted by US sanctions, particularly with SDNs, whether designated under EO 13936 or any other sanctions regime.
For further assistance and advice in managing your risk please speak to your Clyde & Co team.