Droit réglementaire et enquêtes
On 7 August 2020, the US Department of the Treasury's economic sanctions unit, the Office of Foreign Assets Control ("OFAC"), listed the HKSAR Chief Executive, Carrie Lam, and ten other individuals for their role in the implementation of a piece of newly introduced national security law which which, according to the US, 'fundamentally undermines Hong Kong'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.
From risk control prospective, it is paramount for local and overseas banks operating in Hong Kong to review their obligations and exposure under 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 banking sector 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 owns in majority, that non-US person can be designated as an SDN.
The HK Monetary Authority has said that "unilateral sanctions imposed by foreign governments are not part of the international targeted financial sanctions regime and have no legal status in Hong Kong." The HK Securities & Futures Commission has told regulated entities to carefully assess legal, business and commercial risks in this sanctions context. As dealing with SDNs can have serious consequences on one's ability to deal with the US government or US companies, access the US financial system, or transact business in USD, in formulating any response, banks should strike an appropriate balance to ensure that customers are treated fairly and transparently.
From the US law perspective only, and assuming that these new sanctions are enforceable as the US Treasury intends them to be, it would certainly be prudent for banks in Hong Kong to determine whether any of the newly designated SDNs or entities of which they own 50% or more are customers, whether they are providing any banking services in USD relating to transactions or products concerning such persons , whether the nature of the services or underlying transactions might be considered by OFAC to be material, and whether they have any US affiliates or need to reply on US-based service providers.
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 either by way of a loan, an investment product or by way of foreign exchange services. 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, banks in Hong Kong are advised to ensure that the full spectrum of legal, business and commercial risks involved be thoroughly assessed and their US sanctions compliance programmes are up to date, and to ensure that they routinely monitor developments with respect to 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.