Typhoon Trump: Hong Kong Braces for US Sanctions

Nick Turner at Steptoe & Johnson discusses how sanctions could be imposed against Hong Kong. While current signs point to a limited US response, it’s best to be prepared.

In 2014, in response to Russia’s annexation of the Crimea region of Ukraine, US President Barack Obama adopted a series of Executive Orders creating the Ukraine-/Russia-related sanctions programme administered by the Treasury Department’s OFAC (Office of Foreign Assets Control). Among other measures, the orders imposed an embargo against US persons trading with Crimea as well as “sectoral sanctions” prohibiting US persons from dealing in specified debt or equity of companies in the Russian financial energy, and defence sectors.

The purpose of the 2014 sanctions was, in part, to impose costs on Moscow and make it more difficult to consolidate control over the Crimean territory. Now, six years later history seems to be repeating with Beijing strengthening oversight of the HKSAR (Hong Kong Special Administrative Region) through a proposed national security law.

The Next Crimea? (Probably not)

In response to the NPC’s (National People’s Congress) move, President Donald Trump announced, on 29 May, the US would sanction Chinese and Hong Kong officials “directly or indirectly involved in eroding” Hong Kong’s autonomy. The administration would also “begin the process” of rolling back Hong Kong’s separate treatment from mainland China under US laws.

Hong Kong currently enjoys special status under the Hong Kong Policy Act of 1992, the legal basis for the triangular US-China-Hong Kong relationship.

Meanwhile, the US Senate is considering the Hong Kong Autonomy Act  that would, among other things, authorise sanctions against individuals and entities that “materially contribute to the contravention” of Hong Kong’s Basic Law. A draft of the bill calls for a menu of secondary sanctions against financial institutions that engage in significant transactions with such persons. On 4 June, the Senate Banking Committee held a hearing called “Crisis in Hong Kong”, in which experts testified in favour of Hong Kong-related sanctions.

Is Hong Kong on the verge of becoming the next Crimea? Thankfully, current signs point to a more limited US response.

Forecasting Sanctions

Under the International Emergency Economic Powers Act of 1977 (IEEPA), Congress gave the President the power to make sanctions in response to an “unusual and extraordinary threat. . .  to the national security, foreign policy, or economy of the United States.” IEEPA provides the legal basis for most OFAC sanctions programmes. In 2014, President Obama used IEEPA to create the Ukraine-/Russia-related sanctions programme in response to the crisis in Crimea.

In theory, President Trump could declare a national emergency with respect to Hong Kong, invoke IEEPA, and impose a broad range of sanctions to address the situation. Many people have forgotten the sanctions imposed on Turkey in October 2019 in response to military actions in northeast Syria. (They were lifted scarcely two weeks later.) Those were IEEPA-based as well.

Although unlikely, Hong Kong-related US sanctions could consist of so-called comprehensive sanctions prohibiting almost all trade by US persons and US banks (like in the case of Crimea, Cuba, Iran, North Korea, and Syria).

More likely, they would involve targeted sanctions against specific persons or government entities (like in the case of Turkey and many other OFAC programmes). We can’t yet rule out sectoral sanctions on Chinese or Hong Kong companies—these have been used against scores of Russian companies and to a limited extent against Venezuela. The White House may even invent new sanctions tailored to the US-China-Hong Kong dynamic.

There are three other laws on the books that could be used to address US policy concerns in Hong Kong. Each is narrowly tailored. These are:

  • Section 7 of the Hong Kong Human Rights and Democracy Act of 2019, which calls for blocking sanctions and US travel bans against foreign persons determined 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.” Presumably the second prong could be stretched to apply to the current situation, although few commentators have asserted the NPC’s national security law proposal constitutes a gross violation of human rights in and of itself.
  • Global Magnitsky Sanctions, which authorise blocking sanctions and US travel bans against any foreign person determined “to be responsible for or complicit in, or to have directly or indirectly engaged in, serious human rights abuse.” The Global Magnitsky sanctions have been used to target police officials and individuals accused of undermining democratic processes, for example.
  • Section 7031(c) of the FY 2020 Department of State, Foreign Operations, and Related Programs Appropriations Act, which authorises the Secretary of State to ban entry into the US of foreign officials found to have been involved in significant corruption or gross violations of human rights. While Section 7031(c) does not impose an asset freeze, it is unique in that it can be applied to “immediate family members” of targeted officials. This could be a major headache for officials, their spouses, and children, who travel to the US.

Pressure Rising  

There is currently no indication that the US government is seriously considering comprehensive sanctions with respect to Hong Kong or that Hong Kong will lose its access to the US financial system. Instead, Secretary of State Mike Pompeo and other officials have signaled a measured approach meant to limit harms to Hong Kong’s people.

For example, on 1 June, Secretary Pompeo spoke to the American Enterprise Institute at length about the prospect of Hong Kong sanctions. According to Pompeo, if the Chinese government continues on its current course, “the United States is going to impose a cost on the decision makers.” When asked about the possibility of denying China’s ability to use Hong Kong as a financial centre, Pompeo stated that “we will do other things too. We don’t want to punish the Hong Kong people. That is not our objective.”

Pompeo made similar remarks in response to questions from the Daily Caller, a conservative news outlet, on 4 June. He said the US has “an obligation to work . . . diplomatically with the Chinese Communist Party.” Furthermore, he said the US response would be based on how the Chinese government proceeds in regard to the national security law and Hong Kong elections scheduled for September. At that point, “the tools that the President laid out on Friday [29 May] that we will use to respond will be engaged.”

In other words, it appears the US is not planning to announce sanctions or other measures imminently. And sanctions would likely focus on individuals—predominantly in China—and would not be targeted at Hong Kong as a whole.

Scanning the Horizon

As shown by the Turkey example cited above, US sanctions can be short lived. OFAC has lifted sanctions on individuals and companies on numerous occasions to incentivise changes in behaviour. Furthermore, the Hong Kong Policy Act itself contemplates the possibility of Hong Kong “regaining” its autonomy. Secretary Pompeo acknowledged this in the 2020 Hong Kong Policy Act Report, stating that “I hope that someday in the future, I will be able to recertify that the territory once again warrants differential treatment under U.S. law.” In other words, this is not a one-way street.

On 3 June 2020, the American Chamber of Commerce in Hong Kong released the results of a survey of 180 members concerning the current US-China-Hong Kong conflict. About three-quarters said they are taking a “wait and see approach,” while more than 70 percent said they were not planning to move capital, assets, or operations from Hong Kong at this time.

For companies trying to anticipate and respond to these changes, it helps to be able to filter through the noise. Some companies have established committees or tasked team members with monitoring developments and communicating with senior management and other stakeholders. Some banks have begun identifying PEPs (politically exposed persons) to size up their potential exposure should officials be sanctioned later on.

Depending on the Chinese government’s response, the US may choose to de-escalate the situation through mild sanctions or expand sanctions incrementally to apply pressure on officials and policymakers over time.

As with any typhoon, it’s best to be prepared.

Nick Turner is Of Counsel at Steptoe & Johnson in Hong Kong, where he specialises in economic sanctions, international regulation and compliance.  He is a Certified Anti-Money Laundering Specialist (CAMS). Nick also publishes a weekly summary of sanctions news and commentary on LinkedIn and Medium. The views expressed are his own and do not constitute legal advice.

 

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