Hong Kong Autonomy Act and Executive Order on Hong Kong Status | Brunswick Group

Hong Kong Autonomy Act and Executive Order on Hong Kong Status

Trump announced actions in response to China’s enactment of a national security law for Hong Kong.

On July 14, President Trump announced actions in response to China’s enactment of a national security law for Hong Kong, including 1)  the revocation of Hong Kong’s “special status” under U.S. law through an Executive Order on Hong Kong Normalization, and 2) the establishment of new sanctions authorities through both the signing of the Hong Kong Autonomy Act (HR 7440) and the Executive Order

The Executive Order repeals Hong Kong’s special status under the U.S.-Hong Kong Policy Act of 1992. That Act provided for the continued application of existing U.S. laws to Hong Kong in the same manner as they applied prior to the return of Hong Kong to the China, and the continuation of all international agreements to which the United States and Hong Kong are members. The Act provided the President authority to end this special status if he determines “Hong Kong is no longer sufficiently autonomous to justify” the special status treatment. Describing the intent of the new EO, President Trump said “Hong Kong will now be treated the same as mainland China. No special privileges, no special economic treatment, and no export of sensitive technologies.” This change had been announced on May 29, but this EO makes that change official.

In addition, the President signed into law the Hong Kong Autonomy Act, which passed Congress unanimously earlier this month and makes many of the unique sanctions used in the context of Iran, North Korea, and Russia available to the U.S. administration to try to deter the Chinese government from further reducing Hong Kong’s autonomy. The President also created a separate, more limited, sanctions regime through the Executive Order that imposes asset freezes in response to Chinese encroachment on Hong Kong.

While it is unclear how the administration will implement the new sanctions, Tuesday’s announcements create new legal obligations and varying degrees of regulatory risk for both U.S. and foreign financial institutions in their relationships with Chinese clients and intermediaries. This note outlines the key provisions of the new sanctions and discusses some of the issues raised by the sanctions and their implementation.

Summary of New Sanctions: The Hong Kong Autonomy Act and the President’s Executive Order on Hong Kong Normalization 

Tuesday’s actions effectively created two separate sanctions regimes to address China’s actions in Hong Kong. The administration has the option to use either authority, which have some overlapping elements, to impose sanctions against Chinese individuals or entities involved in reducing Hong Kong’s autonomy. Below are the key provisions and distinguishing features of both. 

The Hong Kong Autonomy Act authorizes sanctions to be imposed on foreign persons and, notably, foreign financial institutions, for involvement in what Congress deems to be the government of China’s failure to meet its obligations under the 1984 Sino-British Joint Declaration and Hong Kong’s Basic Law. These include the promise that “the Hong Kong Special Administrative Region will enjoy a high degree of autonomy, except in foreign and defence affairs, which are the responsibilities of the Central People’s Government.” The Hong Kong Autonomy Act’s key provisions include: 

  • Creation of public lists of foreign persons and financial institutions within scope for the sanctions. Within 90 days of enactment (October 12, 2020), the Secretary of State must send a report to Congress identifying persons who are contributing to “the failure of China to meet its obligations to Hong Kong under the Joint Declaration or Basic Law.” The Act defines this as a person who “took action that resulted in the inability of the people of Hong Kong to enjoy freedom of assembly, speech, press, or independent rule of law; participate in democratic outcomes; or otherwise took action that reduces the high degree of autonomy of Hong Kong. The Secretary of the Treasury must submit a similar list to Congress of foreign financial institutions that knowingly conduct “significant transactions” with any of the persons on the list above. The Act stipulates that these lists should be public, though names may be kept confidential in some circumstances.
  • Authorization of sanctions to be imposed on listed foreign persons and foreign financial institutions. The Act requires the President to impose sanctions on the named persons within a year. The sanctions options available to the President include freezing any assets the persons hold within U.S. jurisdiction and a ban on U.S. visas for those persons.
  • Authorization of a wide range of sanctions to be imposed on foreign financial institutions. Similarly, the President must impose no fewer than five “initial” sanctions on foreign financial institutions within a year of being listed, and then escalate to impose additional “expanded” sanctions within two years of being listed. The law includes a wide range of sanctions options, including prohibitions on transactions with U.S. financial institutions, asset freezes on foreign financial institutions’ assets in U.S. jurisdictions, and a ban on U.S. persons investing in debt and equity of the financial institutions. Notably, the law also allows for the imposition of sanctions on the officers or executives of the financial institutions, including excluding them from the United States or freezing their individual assets in U.S. jurisdiction. 

The President’s Executive Order on Hong Kong Normalization creates a more straightforward and typical asset freezing sanctions regime in response to China’s actions in Hong Kong. The Executive Order freezes the assets of foreign persons (which could be individuals or entities) identified by the Secretary of State or Secretary of the Treasury who:

  • Are involved in developing, adopting, or implementing the new Hong Kong National Security Law (including specifically those who coerce, arrest, detain or imprison individuals under the law);
  • Are complicit or engaged in undermining democratic processes or institutions in Hong Kong;
  • Take actions or policies that threaten the peace, security, stability, or autonomy of Hong Kong;
  • Engage in censorship or other activities with respect to Hong Kong;
  • Participate in extrajudicial rendition, arbitrary detention, or torture of any persons in Hong Kong, or other gross violations of internationally recognized human rights or serious human rights abuse in Hong Kong;
  • Are the leaders or officials or support networks of those subject to the asset freeze;
  • Are a member of the board of directors or a senior executive officer of any of those subject to the asset freeze.

Key Sanctions Takeaways 

The sanctions in the Executive Order and Hong Kong Autonomy Act represent a significant escalation in potential consequences for multinational companies with a footprint in China. It is important, however, to understand the nuances in the law that will inform how these sanctions may be implemented by the U.S. government: 

  • There is significant discretion embedded in the Hong Kong Autonomy Act for the President to opt out of its more draconian sanctions, including the requirement to impose sanctions on foreign financial institutions. The Act is often described as creating “mandatory” sanctions, but in fact it allows the President to waive or forego the imposition of sanctions if the President determines it is in the national security interest of the United States to do so. In signing the legislation on Tuesday, the President adopted a broad interpretation of the waiver provision specifically, potentially signaling he is likely to exercise it. Similarly, the law does not define the volume, size, or types of transactions that the Secretary of the Treasury may determine are significant enough to warrant the listing of a foreign financial institution, allowing for significant flexibility in whether a foreign financial institution is named at all.
  • The administration is likely to use the Executive Order asset freezes as an alternative to the Act’s sanctions. The Executive Order gives the administration greater flexibility in imposing sanctions because it does not require any action within a specific timeframe. In addition, while the administration could impose asset freezes on a foreign financial institution under the Executive Order, it is not required to do so.
  • The Act allows for the discretion to delay or forego the imposition of sanctions, but this may not protect persons or financial institutions included in the required reports to Congress. The law allows for the President to delay the imposition of sanctions by up to a year (or waive them altogether, as previously discussed) once a foreign person or foreign financial institution is listed in the report to Congress. However, even appearing on the list may create immediate consequences for listed persons or institutions. U.S. financial institutions could decide to immediately treat those on the list as sanctioned, cutting them off from services, even though they are not yet required to do so by law, in order to avoid any potential scrutiny by regulators.
  • Any of the sanctions could extend to state-owned entities or other companies. The law allows for sanctions on “foreign persons,” which is not limited to individuals and includes by definition foreign entities. While Chinese government officials are the most likely and obvious targets of these sanctions, the sanctions could extend to Chinese state-owned enterprises or other foreign companies. 

What does it all mean?

  • The Hong Kong Autonomy Act’s bipartisan support signals that the corresponding shift in the US-Hong Kong relationship is the “new normal” for the foreseeable future. With the U.S. election looming, and the possibility of a shift from a Republican to a Democratic administration in January, there is uncertainty about the future of many areas of U.S. foreign policy. This law makes clear that concern about the reduction in Hong Kong autonomy is a rare subject of bipartisan agreement among Republicans and Democrats. A change of administration in the fall is therefore unlikely to significantly alter the U.S. approach to events in Hong Kong.
  • U.S. sanctions put financial institutions operating in Hong Kong between a rock and a hard place. Financial institutions operating in Hong Kong that comply with the sanctions may face significant conflict-of-law consequences. The national security law that China has imposed on Hong Kong prohibits “collusion with foreign countries,” and its broad wording could allow for an interpretation that complying with U.S. sanctions constitutes collusion. This could open the door to penalties for financial institutions in Hong Kong that comply with U.S. sanctions, regardless of whether they are imposed under the Executive Order or the Hong Kong Autonomy Act, and those penalties may extend to individuals working at the financial institutions to implement the sanctions.
  • Executive Branch actions that jeopardize the Phase One trade deal are unlikely before the election. Recent comments from the President and other administration officials indicate that maintaining the “success” of the Phase One trade deal remains an administration priority notwithstanding criticism of China on a variety of issues including Hong Kong. The administration will likely limit the application of this act as needed to avoid taking actions they calculate would jeopardize China’s commitment to the agreement.