The Hong Kong Autonomy Act and Executive Order

The U.S. Congress passed the HKAA in response to China’s new national security law, which criminalizes the activities of pro-democracy protestors. The United States has now taken the position that this new national security law violates China’s obligations to Hong Kong under the Sino-British Joint Declaration (the Joint Declaration) and the basic law of the Hong Kong Special Administrative Region (the Basic Law).  Hong Kong under the Joint Declaration and the Basic Law.

Sanctionable conduct

Foreign persons materially contributing to China’s failure to meet its obligations to Hong Kong

The HKAA authorizes sanctions on foreign persons who “materially contribute” to the failure of the Government of China to meet its obligations to Hong Kong under the Joint Declaration or the Basic Law. The HKAA states that a foreign person materially contributes to the failure of the Government of China to meet its obligations if the person takes an action that results in the inability of the people of Hong Kong to enjoy freedom of assembly, speech, press, or independent rule of law; or to participate in democratic outcomes. Actions that reduce the high degree of autonomy of Hong Kong can also constitute a material contribution.

In conjunction with signing the HKAA, President Trump issued the Executive Order which, among other things, authorizes the implementation of sanctions set forth in the HKAA. The Executive Order adds some clarity to the categories of foreign persons upon which sanctions may be imposed. Specifically, the Executive Order targets, for example, foreign persons “responsible for or involved in developing, adopting, or implementing,” the Hong Kong Security Law” and those who engage in “censorship or other activities with respect to Hong Kong that prohibit, limit, or penalize the exercise of freedom of expression or assembly by citizens of Hong Kong, or that limit access to free and independent print, online or broadcast media.” The latter will require companies, and technology companies in particular, to closely consider how to respond to requests for information from the Chinese government.

The Executive Order also contains what is commonly referred to as a “material support” provision, meaning non-U.S. persons will be exposed to a risk of sanctions if they provide financial, material, or technological support for, or goods or services in support of, a person who has been sanctioned under the Executive Order. Finally, the Executive Order targets entities owned or controlled by persons sanctioned under the Executive Order as well as senior leadership of organizations that are sanctioned.

The changes outlined in the Executive Order include:

• Ending preferential treatment for Hong Kong passport holders as compared to mainland China passport holders;
• Treating Hong Kong as part of China under the Arms Export Control Act (22 U.S.C. 275 et seq.);
• Terminating the agreement for the reciprocal tax scheme between Hong Kong and the United States in respect of international shipping operations;
• Requiring reporting of the situation with respect to Hong Kong’s autonomy (declared a national emergency in the Executive Order) to Congress;
• Covering Hong Kong under the Export Control Reform Act of 2018, meaning heightened controls of certain emerging and foundational technologies;
• Suspending extradition treaties; and
• Ending cooperation on the provision of training to Hong Kong law enforcement.

The HKAA requires the U.S. Secretary of State to submit a report to the appropriate congressional committees within 90 days of the bill’s passage that identifies the foreign persons engaged in such conduct. Thereafter, the President is authorized to impose blocking sanctions and visa restrictions on those identified in the Secretary of State’s report. The President is required to impose sanctions on foreign persons who remain on the Secretary’s report one year after the original report is submitted. Foreign persons can be removed from the report prior to the imposition of sanctions if their activities do not have a significant and long-lasting negative effect, are not likely to be repeated, and have been reversed or otherwise mitigated through positive countermeasures.

Foreign financial institutions conducting significant transactions

The HKAA also authorizes the President to impose sanctions on FFIs conducting “significant transactions” with anyone included in the Secretary’s mandated report on foreign persons who materially contributes to China’s failure to meet its obligations to Hong Kong. The term “significant transaction” is undefined, so the U.S. government will have broad discretion to  target conduct by these organizations.

These FFIs will be included in a report produced by the Secretary of State within 60 days of the report on foreign persons. If an FFI is included in that report one year after the initial report, the President will be required to impose no fewer than five of the sanctions listed below. If the FFI is still included in the report two years after the initial report, the President will be required to impose all of the sanctions listed below. If the FFI’s activity does not have a significant and long-lasting negative effect, is not likely to be repeated, and has been reversed or otherwise mitigated through positive countermeasures, the FFI can be removed from the report.

The following is the “menu” of sanctions that can be imposed on FFIs under the HKAA:

• Prohibition on obtaining loans or credits from U.S. financial institutions
• Prohibition on designation as a primary dealer for U.S. government debt instruments
• Prohibition on serving as a repository for U.S. government funds
• Prohibition on foreign exchange transactions subject to U.S. jurisdiction
• Prohibition on transfers of credit or payments between financial institutions subject to U.S. jurisdiction
• Prohibition on property transactions subject to U.S. jurisdiction
• Prohibition on exports, re-exports, and in-country transfers of U.S.-origin commodities, software, and technology to a financial institution
• Prohibition on obtaining equity or debt investment from any U.S. person
• Prohibition on the entry into the U.S. of corporate officers, principals, or controlling shareholders of the FFI
• Sanctions on principal executive officers of the FFI in the same manner as other foreign persons sanctioned under the bill

Conclusion

We encourage businesses in all jurisdictions to exercise caution when dealing with government entities in Hong Kong and mainland China. Additionally, those doing business in Hong Kong should consider whether their counterparties are among those that could be targeted by the HKAA. It is important to remember that the President is not required to immediately impose sanctions. In the context of both foreign persons and FFIs, he is permitted to refrain from imposing sanctions for one year after the respective reports are issued.

How Reed Smith can help

As a global firm, Reed Smith is particularly well positioned to provide guidance on UN, EU, and U.S. sanctions – with highly experienced sanctions lawyers from both the United States and the EU available to you 24/7. In particular, Reed Smith’s sanctions team has extensive experience representing companies before the Office of Foreign Assets Control and other federal agencies implementing U.S. sanctions, such as the U.S. Department of Commerce and the U.S. Department of State. Contact one of the authors of this article or your usual Reed Smith lawyer, and we will be more than happy to help you navigate the implications of these events on your business.