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Hong Kong Autonomy Act: A New Chapter in US–China Relations?

July 09, 2020

The US Congress unanimously passed the Hong Kong Autonomy Act (H.R.7440) (the Act) on July 2, 2020, which now awaits signing by President Donald Trump (President), who is seen as almost certain to put the law into effect, since both houses garnered a veto-proof majority. It is expected that the Act will become law before the end of the month.

The Hong Kong Autonomy Act (H.R.7440) (the Act) authorizes the relevant US authorities to impose economic sanctions on foreign individuals, entities, and financial institutions who “materially contribute” to what the Act describes as a decrease in Hong Kong’s autonomy resulting from the recent enactment of the “Law of the People's Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region” (the National Security Law) by the Government of the People’s Republic of China (China). Unsurprisingly, China’s Foreign Affairs Committee of the National People’s Congress criticized the Act as an attempt by the United States to interfere in China’s internal affairs.

The 1997 Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China (the Basic Law) embraces the “one country, two systems” concept with respect to Hong Kong’s relationship with China. The precursor to the Basic Law, the 1984 the Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China on the Question of Hong Kong (the Joint Declaration), provides that Hong Kong “will be vested with executive, legislative and independent judicial power, including that of final adjudication” and that the “current social and economic systems in Hong Kong will remain unchanged, as so will the life-style.” Joint Declaration, ¶¶ 3(3) and 3(5); see also Article 2, the Basic Law (“The National People's Congress authorizes the Hong Kong Special Administrative Region to exercise a high degree of autonomy and enjoy executive, legislative and independent judicial power, including that of final adjudication, in accordance with the provisions of [the Basic] Law.”)

In Section 3 of the Act, which sets forth the US Congress’s position and reasons for promulgating this new legislation, Congress asserts that China has not abided by the letter and intent of the Joint Declaration and the Basic Law, citing the June 30, 2020 passage by the Chinese National People’s Congress of the National Security Law.[1]  This new National Security Law subjects to criminal punishment those individuals who engage in “secession, subversion, organisation [sic] and perpetration of terrorist activities, and collusion with a foreign country or with external elements to endanger national security in relation to the Hong Kong Special Administrative Region.” Article 1, the National Security Law (English translation version).

While the Act has as a stated purpose of supporting the benefits and protections that Hong Kong has under the Joint Declaration and the Basic Law, which traditionally has provided certainty for businesses, investment funds, and financial institutions operating in Hong Kong, the Act, and any further responses from China, may in the shorter term make the business environment in Hong Kong more challenging.

Reporting of Foreign Individuals, Entities, and Financial Institutions

Foreign Individuals or Entities

Once the Hong Kong Autonomy Act becomes effective, if the Secretary of State, in consultation with the Secretary of the Treasury, determines that any foreign individual or entity is “materially contributing to, has materially contributed to, or attempts to materially contribute to the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law,” the Secretary of State must, within 90 days, submit to specific congressional committees and the congressional leadership the identification of that foreign individual or entity and a clear explanation of why the foreign individual or entity was identified and a description of the activity that resulted in identifying the individual or entity (the First Report). The Act, §5(a). A foreign individual or entity is deemed to “materially contribute” to contravening the Basic Law or the Joint Declaration if the foreign individual or entity (1) took action resulting in the inability of people in Hong Kong to enjoy freedom of assembly, speech, press, or independent rule of law or participate in democratic outcomes; or (2) otherwise took action that reduces the high degree of autonomy of Hong Kong. The Act, §5(g).

Foreign Financial Institutions

Following the submission of the First Report, the Secretary of the Treasury, in consultation with the Secretary of State, must submit to the named congressional committees and leadership a separate report that identifies those foreign financial institutions that, with “actual knowledge” of the conduct, circumstance, or result, conducts a “significant transaction” with any foreign individual or entity named in the First Report (the Second Report). The Secretary of the Treasury must deliver this Second Report to Congress not earlier than 30 days and not later than 60 days after the date of submission of the First Report by the Secretary of State.

The Act refers in part to the Federal Deposit Insurance Act and other statutes for the definition of the term, “financial institutions,” which broadly covers all types of businesses that engage in monetary transactions, including the following:

  • An insured bank (including a foreign bank having an insured branch) whose deposits are insured by the Federal Deposit Insurance Corporation (FDIC)
  • A commercial bank or trust company
  • An agency or branch of a foreign bank in the US
  • A broker or dealer in securities or commodities and any broker or dealer registered with the US Securities Exchange Commission
  • Investment banker or investment company
  • A currency exchange
  • An issuer, redeemer, or cashier of travelers' checks, checks, money orders, or similar instruments
  • An operator of a credit card system
  • An insurance company
  • A loan or finance company
  • A licensed sender of money or any other person who engages as a business in the transmission of funds (including anyone who facilitates transfer of money domestically or internationally outside of the conventional financial institutions system such as in the fintech industry)
  • A business engaged in vehicle sales, including automobile, airplane, and boat sales or persons involved in real estate closings and settlements
  • Any business or agency determined by the Secretary of Treasury to engage in similar or related activities or designated by the Secretary whose cash transactions have a “high degree of usefulness in criminal, tax, or regulatory matters”  31 U.S.C. §5312(a)(2)(Z).

Other Aspects of Reporting

The First Report and the Second Report must be updated on an ongoing basis, and if practicable, included in the annual reports by the Secretary of State to Congress regarding conditions in Hong Kong of interest to the United States as required under the United States-Hong Kong Policy Act of 1992. See 22 U.S.C. §5731 (Reporting requirement).

Notably, unclassified versions of the First Report and the Second Report, as well as the ongoing updates, will be made publicly available. The Act, §5(f). However, the Secretary of State may submit classified annexes addressing the explanations and descriptions required to be detailed.

Exceptions and Exclusions to Reporting

The Secretary of State must not disclose the identity of the foreign individual or entity in any of these reports to the congressional committees and leadership if the Director of National Intelligence determines that the disclosure could threaten any intelligence activity or source or if the Attorney General determines that the disclosure could reasonably be expected to compromise the identity of a confidential source, jeopardize an ongoing criminal investigation or prosecution, endangers an individual’s life or safety, or cause substantial harm to physical property. The Act, §5(c).

The President also has the authority to exclude or remove a foreign individual, foreign entity, or foreign financial institution from these reports if their conduct does not have a significant and lasting negative effect that contravenes China’s obligations under the Joint Declaration and the Basic Law, is not likely to be repeated in the future, and has been reversed or otherwise mitigated through positive countermeasures taken by that foreign individual, entity or financial institution. The Act, §5(d).

Sanctions Against Foreign Individuals, Entities, and Financial Institutions

Sanctions Against Foreign Individuals or Entities

Anytime on or after the date on which a foreign individual or entity was included in the First Report or an update thereto, the President may, at his discretion, impose sanctions against those foreign individuals or entities identified in those reports. Nevertheless, within one year of the date of any of these reports, the sanctions become mandatory and the President must impose sanctions against the foreign individuals and entities once identified by the Secretary of State and reported to the congressional committees and leadership. The Act, §6(a).

These sanctions include prohibition from acquiring, holding, using, transferring, withholding, withdrawing, transporting, or exporting any property subject to US jurisdiction in which the foreign individual or entity has an interest, prohibition from dealing in or exercising any right, power, or privilege with respect to such property, and prohibition from conducting any transaction involving such property. The Act, §6(b)(1). With respect to foreign individuals, the President has the authority to direct the Secretary of State to deny a visa into the United States and to direct the Secretary of Homeland Security to exclude the foreign individual or entity from the United States. The Act, §6(b)(2).

Sanctions Against Foreign Financial Institutions

The sanctions against financial institutions apply both to foreign and US financial institutions that do business with foreign financial institutions, and in some circumstances, to US or foreign individuals or entities acquiring, holding, or using US property in which a foreign financial institution has an interest. These sanctions are also mandatory and more extensive than those against foreign individuals and entities summarized above. In general, these sanctions against financial institutions, whether US or foreign, curtail monetary transactions with any foreign financial institution that knowingly enters into a significant transaction with the foreign individual or entity identified in the First Report or any updates to the First Report.

Within one year after the date on which a foreign financial institution was included in the Second Report or an update thereto, the President must impose at least five of the sanctions enumerated below, and within two years after the date on which a foreign financial institution was included in the Second Report or an update thereto, the President must impose each of the sanctions enumerated below. The Act, §6(a). The President may impose these sanctions against foreign financial institutions beginning on the day on which the financial institution is included in the Second Report or an update thereto.

The mandatory sanctions against financial institutions are far reaching and include:

(1) prohibition against any US financial institution from making loans or providing any credit to the foreign financial institution (e.g., line of credit);

(2) prohibition on the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of New York to designate or continue any prior designations of the foreign financial institution as a primary dealer in US government debt instruments;

(3) prohibition against the foreign financial institution from serving as an agent of the US government or repository for US government funds;

(4) prohibition of any transactions in foreign exchange subject to US jurisdiction and that involve the foreign financial institution;

(5) prohibition on 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 US jurisdiction and involve the foreign financial institution;

(6) prohibition against any individual or entity (regardless of nationality or domicile) from acquiring, holding, using, transferring, withholding, withdrawing, transporting, importing, or exporting any property subject to US jurisdiction to which the foreign financial institution has an interest, dealing in or exercising any right, power, or privilege with respect to such property, and conducting any transaction involving such property;

(7) restrictions or prohibitions on exports, reexports, and transfers (in-country), directly or indirectly, of commodities, software, and technology subject to US jurisdiction to the foreign financial institution; and

(8) ban on any US individual or entity from investing in or purchasing significant amounts of equity or debt instruments of the foreign financial institution. The Act, §7(b).

Notably, unlike the sanctions against foreign individuals and entities with respect to US property, the mandatory sanctions in relation to US property in which a foreign financial institution has an interest also includes “importing” property subject to US jurisdiction. The Act, §7(b)(6)(A).

In addition, the President may direct the Secretary of State, in consultation with the Secretary of the Treasury and the Secretary of Homeland Security, to exclude from the United States any individual who is not a citizen or national of the United States and who serves as a corporate officer or principal of, or who is a shareholder with a controlling interest in, the foreign financial institution. The Act, §7(b)(9). Further, the President may impose on the principal executive officer or officers of the foreign financial institution or on any individual performing similar functions and holding similar authorities as such officers any of the mandatory sanctions described above in items (1) through (8), as applicable. The Act, §7(b)(10). Therefore, these sanctions could apply to individual executive officers or anyone acting in that capacity, including US individuals.

Exception to Sanctions

The Act specifically precludes the imposition of sanctions on imports of goods and products (but not technical data) by the sanctioned parties, distinguishing it from most other sanctions regimes, though it does authorize sanctions prohibiting exports and reexports. The Act, §8(d).

Waivers and Termination

The President may waive any of the sanctions against foreign individuals, entities, or financial institutions described above only if the President determines that the waiver is in the US national security interest and submits a report to the congressional committees and leadership citing the reasons for his determination. The Act, §8(a) However, this Presidential waiver will not be effective if Congress passes a joint resolution disapproving the waiver.

The President may also terminate the application of these sanctions on the foreign individual, entity, or financial institution if the Secretary of State, in consultation with the Secretary of the Treasury, determines that the actions by the foreign individual, entity, or financial institution do not have a significant and lasting negative effect that contravenes China’s obligations under the Basic Law and the Joint Declaration, is not likely to be repeated in the future, and have been reversed or otherwise mitigated through positive countermeasures taken by that foreign individual, entity, or financial institution. The Act, §8(b). Even if the President terminates these sanctions, Congress has the authority to override the termination if it passes a joint resolution disapproving the termination.

Before July 1, 2046, the President is required to submit to Congress a report evaluating the implementation of the Act and sanctions imposed under the Act. The Act, §8(c)(1)(A). The Act and the sanctions imposed under the Act continue to be in effect unless Congress passes a termination resolution after July 1, 2047. The Act, §8(c)(2).

Violations of the Hong Kong Autonomy Act

Any individual or entity that violates, attempts to violate, conspires to violate, or causes a violation of any of the sanctions imposed under the Act or any regulation, license, or order issued to carry out the sanctions will be subject to the penalties prescribed by the International Emergency Economic Powers Act (IEEPA). 50 U.S.C. §1705. The President also has the power to exercise all authorities granted to him under the IEEPA, including initiating any investigation of or prohibiting certain financial, banking, or currency transactions; nullifying or prohibiting any acquisition, holding, or use of or any transactions involving US property; or issuing new regulations necessary for the exercise of such authorities. 50 U.S.C. §1702.

Civil penalties will be in the amount greater of either $250,000 or twice the amount of the transaction that is the basis of the violation. 50 U.S.C. §1705(b). For example, if a US financial institution violated a sanction under the Act by granting a loan to a foreign financial institution named in a Second Report or an updated report submitted to the congressional committees and leadership and the amount of the loan was $1 million, then the civil penalties levied on the US financial institution would be $2 million, rather than $250,000.

Any individual or entity that willfully commits, willfully attempts to commit, or willfully conspires to commit, or aids or abets in the commission of, any violation or attempt to violate the sanctions imposed under the Act will be, upon conviction, be fined up to $1 million, or if the violation is committed by a natural person, then he or she may be imprisoned for up to 20 years in addition to the fine.

Please see our update to this LawFlash, Executive Order on Hong Kong Normalization: Extension and Expansion of the Hong Kong Autonomy Act

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
Patricia Cave

San Francisco
Nancy Yamaguchi



[1] Previous US laws on the topic of Hong Kong include the United States-Hong Kong Policy Act of 1992, 22 U.S.C. §5701 et seq., and the Hong Kong Human Rights and Democracy Act of 2019, 22 U.S.C. §§5725-5726, both of which affirm US policy supporting Hong Kong’s autonomy.