U.S. Authorizes Sanctions and Restricts Trade with Hong Kong in Response to China’s New National Security Law

The Hong Kong Autonomy Act

The HKAA requires the State Department to issue a report within 90 days after enactment (by October 12, 2020) with an identification of individuals, an explanation why the person was identified, and a description of the activity that resulted in the identification.

A foreign person “materially contributes” to the failure of the government of China to meet its obligations if the person (1) took action that resulted 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; or (2) otherwise took action that reduces the high degree of autonomy of Hong Kong.

Following issuance of the State Department report, the Treasury Department is then required to issue a report within 30 – 60 days (between November 11 and December 11, 2020) identifying foreign financial institutions that “knowingly conduct a significant transaction” with an identified foreign person. The HKAA defines the term “knowingly” based on an actual knowledge standard. The term “significant transaction” is not defined.

At any time after issuance of the State Department report, the President may impose (discretionary) sanctions consisting of blocking assets/prohibiting transactions and visa restrictions on an identified foreign person. These sanctions must be imposed (mandatory) not later than one year after the report is issued.

Further, not later than one year after issuance of the Treasury Department report, the President is required to impose 5 of 10 listed sanctions on an identified foreign financial institution. Within two years after issuance of the Treasury Department report the President must impose all 10 of the listed sanctions.

HKAA Sanctions Menu

(1) prohibit any U.S. financial institution from making loans or providing credit to the foreign financial institution;

(2) prohibit the foreign financial institution from being designated as a primary dealer in U.S. Government debt instruments;

(3) prohibit the foreign financial institution from serving as agent of the U.S. Government or serving as a repository for U.S. Government funds;

(4) prohibit any transactions in foreign exchange that are subject to U.S. jurisdiction and in which the foreign financial institution has any interest;

(5) prohibit any transfers of credit or payments between financial institutions or by, through or to any financial institution, to the extent that such transfers or payments are subject to U.S. jurisdiction and involve any interest of the foreign financial institution;

(6) prohibit any person from (a) acquiring, holding, withholding, using, transferring, withdrawing, transporting, importing, or exporting any property that is subject to U.S. jurisdiction and with respect to which the foreign financial interest has any interest; (b) dealing in or exercising any right, power, or privilege with respect to such property; or (c) conducting any transaction involving such property;

(7) restrict or prohibit exports, reexports, and transfers (in-country) of commodities, software, and technology, directly or indirectly, subject to the jurisdiction of the U.S. to the foreign financial institution;

(8) prohibit any U.S. person from investing in or purchasing significant amounts of equity or debt instruments of the foreign financial institution;

(9) deny a visa to or exclude from the U.S. any alien who is a corporate officer or principal or, or a shareholder with a controlling interest in, the foreign financial institution; or

(10) impose sanctions 1-8 above that are applicable on the principal executive officer or officers of the foreign financial institution, or on individuals performing similar functions and with similar authorities as such officer or officer.

The President may exclude or remove a foreign financial institution from the report prior to the imposition of sanctions, upon notification to Congress, if the significant transaction(s) at issue (A) does not have a significant and lasting negative effect that contravenes the obligations of China under the Joint Declaration and the Basic Law; (B) is not likely to be repeated in the future; and (C) has been reversed or otherwise mitigated through positive countermeasures taken by that foreign financial institution.

Lifting or waiving the sanctions is subject to congressional disapproval.

Executive Order on Hong Kong Normalization

On the same day, the President also issued an Executive Order on Hong Kong Normalization suspending or eliminating different and preferential treatment for Hong Kong to the extent permitted by law. The Executive Order extends and makes more specific the Secretary of State’s March 27, 2020 determination under the Hong Kong Human Rights and Democracy Act of 2019 and the President’s statement on March 29, 2020 concerning Hong Kong’s autonomy. However, agency action is still required to implement a number of actions.

Specifically, the U.S. will suspend or eliminate different and preferential treatment for Hong Kong under the following U.S. statutes:

a) Section 103 of Immigration Act of 1990 (quotas on the number of immigrant visas made available to natives of Hong Kong);
b) Sections 203(c), 212(l) and 221(c) of the Immigration and Nationality Act of 1952, as amended (allocation of visas, inadmissible aliens, and the issuance of visas);
c) Arms Export Control Act (licenses for exports of defense articles);
d) Section 721(m) of the Defense Production Act of 1950, as amended (annual reports to Congress relating to certain mergers, acquisitions, and takeovers);
e) Export Control Reform Act of 2018 (licenses for exports of dual-use technology); and
f) Section 1304 of title 19, United States Code (country of origin markings for items imported into the U.S.).

The executive order directs the heads of relevant agencies to commence taking action within 15 days to:

a) amend any regulations implementing the statutes identified above and the International Emergency Economic Powers Act (IEEPA), which provide different treatment for Hong Kong as compared to China;

b) eliminate the preference for Hong Kong passport holders as compared to PRC passport holders;

c) revoke license exceptions for exports to Hong Kong, reexports to Hong Kong, and transfers (in-country) within Hong Kong of items subject to the Export Administration Regulations that provide differential treatment compared to those license exceptions applicable to exports to China, reexports to China, and transfers (in-country) within China;

d) terminate the export licensing suspensions under section 902(a)(3) of the Foreign Relations Authorization Act insofar as such suspensions apply to exports of defense articles to Hong Kong persons who are physically located outside of Hong Kong and the PRC and who were authorized to receive defense articles prior to the date of this order.

Some of these actions, such as suspending Commerce Department license exceptions and State Department licenses for exports of defense articles, have already been taken.

Other actions include: the suspension of agreements for the surrender of fugitive persons and the transfer of sentenced persons, training the Hong Kong police force, scientific and technical cooperation, the Fulbright exchange program, taxes on income of the international operation of ships, and the admission of refugees. The Executive Order allows agencies to propose any other further actions to end special conditions and preferential treatment for Hong Kong.

Finally, the Executive Order authorizes the imposition of sanctions based on broad and open ended criteria related to the suppression of democracy in Hong Kong. These sanctions go far beyond the July 9, 2020 Global Magnitsky designations on foreign individuals and entities involved in Uighur human rights violations. Specifically, full blocking sanctions may be imposed on any foreign individuals or entities that have been determined by the Secretary of State and the Secretary of Treasury—

(i) to be or have been involved, directly or indirectly, in developing, adopting, or implementing, the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Administrative Region;

(ii) to be responsible for or complicit in, or to have engaged in, directly or indirectly, undermining democratic processes in Hong Kong; threatening the peace, security, stability, or autonomy of Hong Kong; censorship or other activities that limit the exercise of freedom of expression or assembly of citizens of Hong Kong or that limit access to free and independent media sources; or serious human rights abuse in Hong Kong;

(iii) to be or have been a leader or official of an entity, including any government entity, that has engaged in, or whose members have engaged in, the implementation of China’s national security law or in actions that relate to undermining democratic processes in Hong Kong, threatening the peace or autonomy of Hong Kong, and censorship or other similar activities, or an entity whose property and interests in property are blocked pursuant to the executive order;

(iv) to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked;

(v) to be owned or controlled by, or to have acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked; or

(vi) to be a member of the board of directors or a senior executive officer of any person whose property and interests in property are blocked.

Based on the timing of the State Department’s report under the HKAA and the broad criteria for the imposition of sanctions under the Executive Order, the last two weeks of October before the election could see significant sanctions designations that could sharply exacerbate tensions between the United States and China. Based on the timing of the Treasury Department’s report in the November – December timeframe, sanctions could be threatened or imposed on foreign financial institutions.