The USA is attempting to pass three laws in response to the 2019 protests in Hong Kong. If enacted, these new laws will impose significant measures on export control, sanctions enforcement and financial regulatory requirements on Hong Kong and China.
BC Tan, our Head of AML Research, took a closer look at what these laws will do and how these new laws will provide provisions to apply OFAC sanctions on officials from Hong Kong and China. This is time-sensitive stuff as the first set of designations may come into force as early as November.
Why Does This Matter?
In recent weeks, three important bills have been making their way through the US legislative process. These bills, namely, the Hong Kong Human Rights and Democracy Act of 2019, Protect Hong Kong Act of 2019 and the Hong Kong Policy Reevaluation Act of 2019 will have a profound impact on the regulatory landscape when enacted.
The Hong Kong Human Rights and Democracy Act is a bi-partisan bill that passed in Congress on 15 October and now awaits a vote in the Senate. If the bill is passed in Senate without amendments, it will be sent to the US President for final approval before becoming officially enacted.
There are two particularly important sections in the Hong Kong Human Rights and Democracy Act. The first is Section 5, which puts in place a framework to assess compliance with United Nations Sanctions and US Export Control Laws in Hong Kong and specifically highlights Hong Kong’s compliance regarding the control of Dual-Use Goods.
It will also assess its enforcement of UN Sanctions and Embargoes imposed on Iran, the DPRK, Terrorism, WMD, narcotics trafficking and other persons posing a threat to the national security, foreign policy and economy of the US.
Hong Kong’s regulations comply to the United Nations Security Council through the United Nations Sanctions Ordinance and the United Nations (Anti-Terrorism Measures) Ordinance.
However, while Hong Kong regulators have in the past circulated selected OFAC sanctions designations to the regulated industries, there remains no legal provision for the application of OFAC sanctions requirements in Hong Kong.
As a result, Section 5 of the proposed Hong Kong Human Rights and Democracy Act will effectively compel Hong Kong to apply OFAC sanctions in practice.
Section 7 is the second critical section of the Hong Kong Human Rights and Democracy Act. This section will put in place procedures in the identification of entities and individuals who are deemed by the US to have undermined the fundamental freedoms and autonomy in Hong Kong, which effectively includes extrajudicial rendition, arbitrary detention, torture, or forced confession of any person in Hong Kong.
It is important to note that Section 7 provides provisions for the use of the International Emergency Economic Powers Act (IEEPA) to apply asset freezing measures; OFAC Sanctions are legally empowered by the IEEPA act.
Beyond the export control measures proposed by the Hong Kong Human Rights and Democracy Act, The Protect Hong Kong Act (Placing Restrictions on Teargas Exports and Crowd Control Technology to Hong Kong Act), has proposed a ban of all weapons sales to the Hong Kong Police Force defined under the US Arms Export Control Act, as well as specific weapons and Dual-Use items that are specific to Law Enforcement, and the Commerce Control List (CCL)/ US Dual-Use Goods List.
Finally, the Hong Kong Policy Reevaluation Act will put in place mechanisms for investigation, identification, and assessment of export control violations, sanctions violations, tariff evasion, espionage, as well as coercive actions against foreigners by officials from Hong Kong and China’s government agencies. It can be expected that the identification of these violations will then, in turn, result in further targeted sanctions designations.
The enactment of the bills will likely jeopardize the Special Status on economic and trade arrangements enjoyed by Hong Kong.
Implications to Hong Kong and the Global Financial System
The Export Control requirements of all three bills will impose more stringent application and enforcement pressures in Hong Kong.
While the Hong Kong Monetary Authority (HKMA) in conjunction with the Hong Kong Association of Banks (HKAB) issued a guidance paper in 2016 on the topic of combating trade-based money laundering which points to the trade finance aspects of the export control regimes, the application of these three bills will undoubtedly accelerate compliance by the financial industry on the prescribed requirements and further enhance measures that may be introduced.
Additionally, as international trade is cross-border, financial institutions in the 186 jurisdictions that maintain trading relationships with Hong Kong will invariably be impacted by these measures.
Export Control compliance in relation to trade finance is highly dependent on effective Transaction Monitoring capabilities supplemented by enhanced screening capabilities around Dual-Use Goods, Military Items, Vessels, Corporate Entities, etc.
With the Hong Kong Human Rights and Democracy Act expected to pass and signed into law within the next few weeks, we could see the first set of sanction designations by OFAC in early November.
The immediate reaction of the global financial system may be a preference to reduce the use of clearing and settlement facilities in Hong Kong, which may result in the increased use of other renminbi (RMB) hubs which include Macau, Taiwan, Singapore, UK, Germany, South Korea, France, Luxembourg, Qatar, Canada, Australia, Thailand, Malaysia, Chile, Hungary, South Africa, Argentina, Zambia, Switzerland, Russia and the UAE.
It’s worth noting that the USA is a significant RMB hub. However, it is not expected to be a preferred settlement hub considering the implications of the sanctions.
Along with major Hong Kong and China trading partners, these trading and RMB hubs will invariably be concerned about these emerging regulatory and sanctions implications.
Originally published October 18, 2019, updated November 17, 2021
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