Global Banks in Hong Kong Breathe Easier Over U.S. Sanctions
28 Oct 2020

U.S. sanctions over Hong Kong are likely to pose fewer headaches for international banks operating in the financial hub than first feared, lawyers say.

Banks have been on notice since July, when President Trump signed a law targeting people the U.S. sees as undermining Hong Kong’s autonomy, and those handling their finances. In a worst-case scenario, firms could effectively be cut off from the American financial system. The U.S. action followed Beijing’s imposition of a tough new national-security law in Hong Kong.

The Treasury Department has until mid-December to produce a blacklist of foreign financial institutions, after its counterparts at the State Department named Hong Kong Chief Executive Carrie Lam and nine other officials as individual targets earlier this month.

Legal experts say operating in Hong Kong has become more unpredictable and complex for banks. Still, they have drawn reassurance from the fact the U.S. hasn’t expanded on an earlier presidential blacklist of sanctioned officials, and from its advice to financial institutions.

The Treasury’s Office of Foreign Assets Control recently said it would ask banks about suspicious transactions before placing them on any blacklist, and it would give them time to end problematic banking relationships, noted Nicholas Turner, a lawyer at Steptoe & Johnson LLP.

“Banks are breathing a sigh of relief,” said Mr. Turner, who advises financial institutions on compliance and economic-sanctions issues. “The Treasury guidance suggests that a bank won’t get caught off guard by a sanctions announcement without receiving some form of communication from Treasury prior to that.”

Hong Kong is home to many international banks, investment firms and insurers. They have favored it over other Chinese cities partly because Hong Kong has a distinct legal system, and is free of the capital controls that apply in mainland China.

Benjamin Kostrzewa, a lawyer at Hogan Lovells in Hong Kong, said it was also helpful that the State Department list consisted of just 10 people, all of whom had already been named by President Trump in a separate executive order in August. That earlier move imposed U.S. asset freezes and travel bans on Ms. Lam and various other officials.

“The State Department report was good news for Hong Kong, as they didn’t add in new officials or entities,” said Mr. Kostrzewa, who was formerly a lawyer at the Office of the U.S. Trade Representative.

In practice, banks may have only needed to take a few concrete steps. For example, Citigroup Inc., which has a retail branch network in the city, has suspended one credit card as a result of the sanctions, said a person familiar with the matter.

Bankers and lawyers say Hong Kong’s financial industry isn’t necessarily out of the woods, as the Hong Kong Autonomy Act that became law in July gives Washington discretion to expand the sanctions’ scope at any time.

“A lot of it depends on the status of the U.S.-China relationship and whether the U.S. government decides to try to exert more pressure on China and Hong Kong,” said Chen Zhu, a Hong Kong-based partner at Morrison & Foerster LLP.

The U.S. has broadened other sanctions recently, adding corporate entities to a list of targets it says should be punished for human-rights abuses in China’s northwestern Xinjiang region.

All told, operating in Hong Kong has become more complex for international banks, and in some cases more politically fraught, too. HSBC Holdings PLC in particular has come in for U.S. criticism, with Secretary of State Mike Pompeo attacking it for shutting accounts “for those seeking freedom.”

Tuesday, the bank said “Geopolitical risk, particularly relating to trade and other tensions between the U.S. and China, remains heightened.”

By Frances Yoon and Jing Yang, The Wall Street Journal, 27 October 2020

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