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OFAC Publishes Hong Kong Sanctions Regulations: Implications for Business With Hong Kong Entities

January 29, 2021

The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) published final rules on January 15, 2021, implementing the sanctions put in place by Executive Order 13936 (EO 13936) and the Hong Kong Autonomy Act of 2020 (the Act or HKAA). In EO 13936, then President Donald Trump found that Hong Kong was no longer sufficiently autonomous to justify differential treatment in relation to the People’s Republic of China (PRC), largely in response to the imposition of China’s national security legislation on Hong Kong by the PRC government. This finding and the HKAA authorize the Department of the Treasury to issue new regulations to implement the change in status.

Background: EO 13936

EO 13936 determined that the Law of the People's Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region (the National Security Law), subjected the people of Hong Kong to: (1) life in prison for what China – rather than Hong Kong – considers to be an act of secession or subversion of state power; and (2) suspension of the right to trial by jury for acts in violation of the National Security Law. EO 13936 identified the situation as a national emergency and, under the authority of the International Emergency Economic Powers Act (IEEPA)[1] suspended and eliminated different and preferential treatment for Hong Kong under US law. The EO also authorizes the designation of, and blocking actions on, persons designated by the US Department of State and OFAC.

At a high level, IEEPA blocking actions prohibit US persons (defined as US citizens, permanent residents, entities organized under the laws of the United States or any jurisdiction within the United States, including foreign branches, and any person in the United States)[2] from dealing in property or interests in property of the blocked persons. Practically, this means that blocked persons are excluded from the US financial system, and US businesses are precluded from engaging in commercial activity with the blocked persons. When a transaction is blocked, the funds or other property at issue must be frozen and held in a blocked interest-bearing account located in the United States, and the blocked person no longer has access to it.[3]

EO 13936 authorized blocking actions under IEEPA on persons identified by the US Departments of State or Treasury as engaging in activities meant to destabilize or adversely impact Hong Kong’s historical autonomy from China. Examples of such activities targeted by the EO include

  • Direct or indirect involvement in the coercion, arrest, detention, or imprisonment of individuals under the authority of, or to be or have been responsible for or involved in the development, adoption, or implementation of the National Security Law;
  • Responsibility for, complicity in, or direct or indirect engagement in
    • Actions or policies that undermine democratic processes or institutions in Hong Kong;
    • Actions or policies that threaten the peace, security, stability, or autonomy of Hong Kong;
    • 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, or
    • The extrajudicial rendition, arbitrary detention, or torture of any person in Hong Kong or other gross violations of internationally recognized human rights or serious human rights abuse in Hong Kong;

The EO targets persons who are or have been political or administrative leaders responsible for implementation of the National Security Law, including, but not limited to

  • Officials of an entity involved in the enumerated acts; or
  • An entity involved in or supporting such enumerated actions.

The EO allows OFAC to apply its provisions to a broad array of actions by persons and entities that have engaged in or whose members have engaged in covered activities such as

  • Assisting, sponsoring, or providing support for any persons violating the Order;
  • Entities owned or controlled by, or acting or purporting to act for or on behalf of persons who engage in prohibited activities; or
  • Persons who serve as a member of the board of directors or a senior officer of an entity involved in prohibited activities.

OFAC Regulations Implementing EO 13936

In the final rule published on January 15, 2021, OFAC promulgated regulations to implement the sanctions imposed by EO 13936. These regulations follow the familiar pattern of OFAC sanctions regulations, prohibiting the range of transactions identified in EO 13936, and formalizing the inclusion of persons designated pursuant to the EO on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List).[4] The regulations also explicitly apply OFAC’s “50 Percent Rule” to persons subject to these sanctions. That rule provides that unnamed persons that are owned, 50% or more (in the aggregate), by one or more persons sanctioned pursuant to the EO, are also subject to these sanctions, regardless of whether the entity or subsidiary person is separately designated on OFAC’s SDN List.[5]

The regulations are consistent with other OFAC sanctions programs in that they broadly prohibit dealings with blocked persons but contain limited exemptions from the prohibitions for certain dealings with blocked persons, or in some circumstances authorizations (including general licenses). These include general licenses for personal communications that do not involve the transfer of anything of value, and transactions for the conduct of the official business of the US government by its employees, grantees, and contractors.[6] The general authorizations include the provision of certain legal services to or on behalf of blocked persons, payment for such services from funds originating outside the US, and the provision and receipt of emergency medical services.[7]  Any other activity must be authorized by a specific license from OFAC, as separately described in part 501, subpart E of OFAC’s sanctions regulations in Chapter V of Title 31 C.F.R.[8]

The HKAA regulations are currently somewhat limited, compared to other OFAC sanctions programs. However, OFAC noted that the regulations are being published in “abbreviated form” at this time to provide “immediate” guidance to the public, especially since the EO went into effect about six months ago. The Federal Register notice states that OFAC intends to supplement the regulations at a later date with a more “comprehensive” set of regulations that may include additional guidance, general licenses (authorizations), and statements of licensing policy. With a new administration, however, OFAC’s ability to publish the follow-on, more detailed regulations is currently on hold pursuant to President Biden’s Executive Order temporarily halting all processing of new regulations pending review by the new political appointees. See EO 13992, Revocation of Certain Executive Orders Concerning Federal Regulation (January 20, 2021) and Regulatory Freeze Pending Review Memorandum (Regulatory Freeze Memo) (January 20, 2021), instructing Executive Departments and Agencies to “propose or issue no rule in any manner ….until a department or agency head appointed or designated by the President after noon on January 20, 2021, review[s] and approves the rule.”[9]  Thus, incoming Secretary of Treasury Janet Yellen, or her designee, will need to review and approve any further rules under these regulations. This will likely have no impact on the planned timeline for OFAC to issue updated regulations, as there are several other sanctions programs in a similar status as the HKAA regulations. Regardless of the Regulatory Freeze Memo, the OFAC regulations issued as a final rule and therefore remain in effect until otherwise amended, withdrawn, or modified.

OFAC has already designated a number of individuals from China and Hong Kong under the authority of EO 13936. US and foreign persons subject to these regulations must therefore take cognizance of the prohibitions and apply appropriately tailored risk-based policies and procedures that include, at a minimum, robust and ongoing screening of third parties to mitigate the risk of dealing with a blocked party. Since the Biden administration has prioritized the use of sanctions to address human rights issues, there is a general expectation that HKAA sanctions could be used to apply additional pressure on China, based on the US view that the activities in Hong Kong and application of the National Security Law implicate human rights issues.

Practically speaking, organizations subject to OFAC restrictions should consider evaluating their existing engagements not only with persons already named as SDNs pursuant to these regulations, but also with those having significant involvement with the implementation of the National Security Law. In addition to exercising increased diligence, consideration should be given to updating commercial documentation, to address the potential impact of HKAA regulations on existing and proposed business relationships. Additional areas where changes to documentation may need to be considered include:

  • Reexamination of force majeure provisions
  • Evaluation of the impact of the newly issued Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (China Blocking Statute) on actions taken to respond to any actions taken by companies under the OFAC regulations
  • Identification of the likelihood of other reactionary actions by either Hong Kong or Chinese parties that may be impacted by the regulations

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Brian Zimbler
Heather C. Sears
Katelyn M. Hilferty
Christian J. Kozlowski
Patricia C. Cave
Jiazhen (Ivon) Guo
Charles C. Rush

Boston
Carl Valenstein




[1] 50 U.S.C. §§ 1701-1706
[2] 31 C.F.R. § 585.313.
[3] Id. § 585.203.
[4] Id. § 585.201.
[5] Id. § 585.406.
[6] Id. § 585.205.
[7] Id. §§ 585.506-585.508.
[8] Id. § 501.801(b).
[9] Regulatory Freeze Memo, Section 1.