IMPACT ANALYSIS: U.S. advisory warns on Hong Kong risk but vague on enforcement inclinations
HONG KONG/NEW YORK(Thomson Reuters Regulatory Intelligence) – The U.S. departments of State, Treasury and Homeland Security recently issued a joint advisory warning U.S. companies in Hong Kong of escalating financial, legal and reputational risks associated with doing business in the territory. The advisory attributes “many” of these risks to implementation of the National Security Law (NSL) and other recent legislative changes that have taken place in Hong Kong.
The NSL grants additional investigative and enforcement powers to law enforcement agencies in Hong Kong and Mainland China, a development that has stoked concerns that businesses, and their staff, could be exposed to heightened regulatory risk. In the advisory(LINK: here), the U.S. government warned businesses in Hong Kong that they are at risk of electronic surveillance without warrants, and being compelled to comply with requests from the government for sensitive corporate data and personal information of customers.
The NSL grants local law enforcement additional powers to conduct warrant-less searches, digital surveillance and property seizures in the course of national security investigations. Individuals under investigation can be restricted from leaving Hong Kong and their travel documents seized. The NSL further provides for authorities to compel “foreign and Taiwan political organizations and agents” to disclose details on local personnel, assets and sources of income.
Hong Kong chief executive Carrie Lam has said that the administration of the NSL, including any related enforcement activities, are managed in secret. News reporting of enforcement actions that have been brought thus far, could offer some insight into how the law is being enforced and the impact that it may have on the business community.
Dozens of local political activists, including former government officials and a U.S. citizen, have been arrested under the national security law over the past year(LINK: here). International banks in Hong Kong have been asked to freeze bank accounts belonging to pro-democracy activists and their relatives. At least one bank(LINK: here) has hinted it has had to undertake additional due diligence and been exposed to additional reputational risk related to NSL enforcement activity.
Shortly after the NSL was implemented, Hong Kong police raided the headquarters of Next Digital last August, a Hong Kong-listed media conglomerate owned by local media tycoon, Jimmy Lai. Next Digital was raided again in May and five executives of Apple Daily, a local pro-democracy news outlet, were arrested. Apple Daily’s CEO and chief editor were arrested with conspiracy to commit foreign collusion under the NSL. Apple Daily’s assets were frozen by authorities and the company ceased operations on June 24.
Lai himself has been charged with three NSL offences, including colluding with foreign forces to endanger national security and subversion. He is further accused of having sought sanctions against Hong Kong. Authorities have subsequently frozen all assets belonging to Lai. Reuters reported in May that Hong Kong’s security chief had written to banks to warn them that staff could be imprisoned for up to seven years for any transactions with accounts belonging to Lai.
U.S. WARNS OF POTENTIAL RETALIATION OVER SANCTIONS COMPLIANCE
News reports suggests that NSL enforcement activity has been primary limited to local pro-democracy figures, so far. Banks, including multinational financial institutions, have nonetheless had little choice but to comply with any requests to assist authorities, at the risk of their staff in Hong Kong incurring criminal liability should they refuse to cooperate.
The U.S. government has expressed concern that NSL enforcement could also expose U.S. businesses to potential retaliation for complying with U.S. sanctions. A number of government officials in Hong Kong and Mainland China, including chief executive Carrie Lam and newly installed chief of security, Chris Tang, have been under sanctions administered by the U.S. Office of Foreign Assets Control (OFAC) for what the U.S. government has described as an erosion of Hong Kong’s autonomy. The U.S. Treasury Department also recently placed additional sanctions on deputy directors at the China-Hong Kong Liaison Office.
The U.S. government also has discretion to impose asset blocking sanctions on individuals and entities under the Hong Kong Autonomy Act (HKAA)(LINL: go-ri.tr.com/dc5P0U). Effected last July, the HKAA also allows the U.S. government to impose secondary sanctions on financial institutions over business relationships with sanctioned individuals and entities(LINK: go-ri.tr.com/WRokl7).
At the same time, businesses that comply with U.S. sanctions could run afoul of the NSL. Under the law, imposing sanctions against Chinese government officials is illegal; however, the text of the legislation is silent on whether complying with regulatory requirements against sanctioned individuals and entities would fall within the definition of imposition. The NSL also allows for a scenario where compliance with U.S. sanctions laws, which financial regulators in Hong Kong have claimed “have no legal status” could be seen as endangering national security(LINK: go-ri.tr.com/kyRFTX), an act of collusion with foreign forces or otherwise regarded as subversive, all of which are potentially punishable by life in prison for individuals.
WARNING ON ENFORCEMENT
U.S businesses in Hong Kong are likely well aware of the risk factors and regulatory developments highlighted in the advisory. Corporations and professional services firms are also likely familiar with the scope of the NSL and the penalties associated with breaking the law.
Financial institutions, in particular, have been active in assessing their risk exposure to both U.S. sanctions compliance and the NSL. Banks in the region have strengthened enhanced due diligence processes and continue to monitor their risk exposure to secondary U.S. sanctions(LINK: go-ri.tr.com/dz54k0). To date, secondary sanctions have not been imposed on any financial institutions in Hong Kong under the HKAA but the annual review process established under the legislation poses and ever-present risk of that happening.
It remains to be seen whether this recent advisory is simply a recap of all the relevant risks applicable to U.S. businesses and multinationals in Hong Kong, or whether stronger enforcement may follow.
(Helen Chan is a Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence, based in Hong Kong. She can be reached at [email protected])
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This article was produced by Thomson Reuters Regulatory Intelligence – bit.ly/TR-RegIntel – and initially posted on July 22. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters