U.S. Issues Hong Kong Business Advisory and Hong Kong-related Sanctions

U.S. Issues Hong Kong Business Advisory and Hong Kong-related Sanctions

July 20, 2021, Covington Alert

On July 16, 2021, multiple U.S. government agencies issued a Hong Kong Business Advisory (the Advisory), which highlights what the agencies describe as growing risks associated with actions undertaken by authorities in Beijing and Hong Kong that could adversely impact U.S. companies that operate in Hong Kong. On the same day, the Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury updated the Specially Designated Nationals (SDN) list by sanctioning seven Chinese central government officials in Hong Kong.

While the Advisory does not have the force of law, this release follows just days after another U.S. government business advisory on the potential legal risks associated with supply chains with links to Xinjiang, China. Set against the backdrop of other U.S. legislative and policy initiatives, these twin publications indicate that the U.S. government remains focused on Hong Kong and may engage in enforcement actions affecting entities — including U.S. companies — doing business in the region.

Background

On June 30, 2020, the Hong Kong National Security Law (HK NSL) was enacted by China’s legislature and implemented in Hong Kong. The U.S. government determined that by implementing the HK NSL, China had carried out “major structural changes that significantly reduced [Hong Kong]’s autonomy” and “dramatically undermined rights and freedoms in Hong Kong,” according to a State Department report.

Two weeks after China implemented the HK NSL, Congress passed and President Trump signed into law the Hong Kong Autonomy Act (HKAA), which authorized the imposition of sanctions and visa restrictions on non-U.S. persons that materially contribute to China’s failure to respect the autonomy of Hong Kong. It further provides for the imposition of crippling sanctions against “foreign financial institutions” found to have knowingly conducted “a significant transaction” with any of those foreign persons. The HKAA built on the 2019 Hong Kong Human Rights and Democracy Act (HKHRDA), which provided for the imposition of sanctions against non-U.S. 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. On the same day the HKAA was enacted, President Trump also issued an Executive Order on Hong Kong Normalization (E.O. 13936), which provided additional authorities to impose sanctions on non-U.S. persons involved in the development or implementation of the HK NSL. For more details on the HKAA, the HKHRDA, and E.O. 13936, please see our prior alert.

The release of this Advisory was timed to roughly mark the one-year anniversary of enactment of the HK NSL. The Biden Administration attributed many of the risks outlined in the Hong Kong Business Advisory to the implementation of the HK NSL and the U.S. sanctions authorities that were created in response.

Hong Kong Business Advisory

The Advisory warns of four categories of risk that could affect companies with exposure to Hong Kong:

1. Risks for business stemming from the imposition of the HK NSL: The Advisory notes that certain provisions of the HK NSL may apply to actions committed outside of Hong Kong by foreign companies or organizations set up in Hong Kong or by non-Hong Kong residents, noting that Hong Kong authorities have arrested foreign nationals under the HK NSL, including one U.S. citizen. Those arrested may have travel documents confiscated and may be prevented from departing Hong Kong.

2. Risks concerning data privacy: The Advisory states that under the HK NSL, Hong Kong authorities, as well as certain Chinese government agencies in Hong Kong, can collect data from businesses or individuals in Hong Kong related to any action that might violate “national security.” In addition, the Advisory emphasizes that in cases involving “national security,” the HK NSL also grants Hong Kong law enforcement authority to conduct wiretaps or electronic surveillance, search electronic devices, and requires Internet service providers to provide or delete relevant data. According to the Advisory, these authorities may be applied very broadly because the Hong Kong authorities have interpreted “national security” broadly to include activities like participating in unauthorized primary elections, posting opinions on social media, and meeting with members of the diplomatic community.

3. Risks regarding transparency and freedom of the press: According to the Advisory, Hong Kong officials have decried “fake news” and affirmed that the police would prosecute journalists who undermine national security. The Advisory mentions that the Hong Kong authorities have shut down a pro-democracy newspaper after searching its offices, arresting its senior executives, and freezing its assets. The Advisory warns that this development poses a risk for businesses that rely on a free and open press, as they may face restricted access to information.

4. Risks for businesses with exposure to sanctioned Hong Kong or mainland China persons: The Advisory warns that China may retaliate against individuals and companies that comply with sanctions imposed by the United States (e.g., pursuant to HKAA, HKHRDA, or E.O. 13936) or by other countries. Under China’s new Countering Foreign Sanctions Law (CFSL), the Advisory notes, China may impose countermeasures against individuals or organizations that directly or indirectly participate in the drafting, decision-making, or implementation of “discriminatory restrictive measures” affecting China — such as U.S. sanctions targeting Chinese citizens or entities. Specifically, if a person complies with U.S. sanctions and “thus infringes upon the legitimate rights and interests of a citizen, legal person, or other organization of China,” the latter may institute legal proceedings in China and claim compensation from the person complying with the U.S. sanctions. (For more information about China’s new CFSL and the Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures, please see our alerts here and here.)

Notably, the Hong Kong Monetary Authority’s guidance issued on August 8, 2020 did not expressly prohibit financial institutions from complying with U.S. sanctions, but stated that regulated institutions assessing whether to provide banking services to a person subject to U.S. sanctions should “carefully assess all risks involved and endeavour to treat customers fairly.” Thus, the Advisory concludes that businesses operating in Hong Kong may face heightened risk and uncertainty in connection with sanctions compliance efforts.

Update to Hong Kong-related Designations

On the same day the Hong Kong Business Advisory was released, OFAC updated the SDN List, adding seven Chinese Deputy Directors of the Liaison Office of the Central People’s Government in the Hong Kong Special Administrative Region (LOCPG). According to the State Department’s press release, the LOCPG is “the PRC’s main platform for projecting its influence in Hong Kong and has repeatedly undermined the high degree of autonomy promised for Hong Kong in the Sino‑British Joint declaration.”

Conclusion

The Advisory and the Hong Kong-related designation updates signal the Biden Administration’s continued attention to China’s policies and actions toward Hong Kong. The Advisory also suggests several ways in which the risks summarized above may be heightened further in the near future. For example, as Beijing is currently developing several pieces of data privacy legislation, the Advisory warns U.S. companies to be aware that legislation supported by Beijing could be quickly imposed on or passed in Hong Kong. In addition, as noted above, China recently enacted the Countering Foreign Sanctions Law, which authorizes the imposition of countermeasures in response to sanctions placed on Chinese individuals or entities by foreign governments. Importantly, some of the risks under that law are not limited to persons physically located in Hong Kong, but may also apply to persons engaging with Hong Kong or Chinese entities regardless of their location. Companies should continue to monitor future developments.

If you have any questions concerning the material discussed in this client alert, please contact the members of our firm.