On October 14, 2020, the U.S. State Department submitted a report to Congress regarding non-U.S. persons involved in activities undermining Hong Kong’s autonomy. The State Department’s report was submitted pursuant to Section 5(a) of the Hong Kong Autonomy Act (HKAA) and identifies 10 individuals who the State Department alleges contributed to the People’s Republic of China (PRC) government’s failure to meet its obligations under the Joint Declaration or Basic Law.

The State Department’s Section 5(a) report is significant because it opens the door for the U.S. Department of the Treasury to now identify foreign financial institutions that could be subject to secondary sanctions for knowingly conducting significant transactions with these sanctioned individuals, many of whom are senior officials in the Hong Kong and PRC governments. This could have a significant impact on financial institutions that have operations in Hong Kong and the PRC.

Foreign Financial Institutions

On the same day as the State Department’s announcement, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) published guidance in the form of several Frequently Asked Questions (FAQs) and updated the entries to its Specially Designated Nationals and Blocked Persons List (SDN List) to now reflect that dealings with certain sanctioned individuals could be subject to secondary sanctions for foreign financial institutions. The individuals identified in the State Department’s report had already been designated to OFAC’s SDN List on August 7, 2020, pursuant to Executive Order 13936.

Under Section 5(b) of the HKAA, the Treasury Department now has between 30-60 days to submit a report to Congress identifying foreign financial institutions that knowingly conduct significant transactions with foreign persons identified in the State Department’s report. So far, no foreign financial institutions have been sanctioned under this authority; however, the Treasury Department’s pending report could identify foreign financial institutions for which secondary sanctions will be imposed.

OFAC Guidance

As noted, OFAC published four FAQs regarding the implementation of HKAA secondary sanctions. FAQ 850, for example, defines the scope of transactions that OFAC will deem to be “significant,” which OFAC will determine based on the facts and circumstances. The factors that OFAC will consider include the size, number, nature, and frequency of the transactions; level of management awareness and pattern of conduct; nexus of the transactions to a foreign person identified in the State Department’s report; impact of the transactions on the statutory objectives; and whether the transactions involve deceptive practices.

Notably, OFAC states in the new FAQ 848 that transactions with persons identified in the State Department’s report will not be deemed “significant” for the purposes of secondary sanctions if those transactions constitute a “good-faith wind down” within 30 days of the identification on the State Department report. Thus, if individuals and companies wind down their transactions with these sanctioned individuals within the next 30 days, then those good-faith wind down efforts will not be deemed “significant” for the purposes of secondary sanctions.

Finally, in FAQ 851, OFAC defines the terms “financial institution” and “knowingly.” In FAQ 849, OFAC states that foreign financial institutions can be excluded from the Treasury Department’s Section 5(b) report if certain factors are met.

Conclusion

In short, we await the Treasury Department’s Section 5(b) report to Congress, including whether any foreign financial institutions will be identified. In the meantime, foreign financial institutions that have business dealings with the individuals identified in the State Department’s report should consider whether those dealings risk secondary sanctions under the HKAA.

We will continue to closely monitor developments in this space. If you have any questions or concerns about U.S. sanctions, please contact Bruce G. Paulsen (212-574-1533) or Andrew S. Jacobson (212-574-1477) at Seward & Kissel’s Sanctions Practice Group.