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Source: Morgan Lewis
Published on: July 28, 2020
President Donald Trump issued Executive Order 13936 on July 14 titled “The President’s Executive Order on Hong Kong Normalization” (the Executive Order or EO 13936). On the same day, the Hong Kong Autonomy Act (HR 7440) was signed into law (the Act). Together, the Executive Order and the Act represent the US government’s response to the recently enacted Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Administrative Region (the National Security Law) in China, which outlined China’s jurisdiction over Hong Kong.
The
Act allows the Secretary of State, in consultation with the Secretary of the
Treasury, to sanction any foreign individual or entity that is “materially
contributing” or “attempts to materially contribute” to Chinese government
actions taken pursuant to the National Security Law. The Act also outlines an
extensive list of mandatory sanctions against foreign financial institutions
(FFIs) that “knowingly conduct[] a significant transaction” with an individual
or entity sanctioned under the Act. The Executive Order both implements
essential authorities under the Act and arguably extends further by declaring a
national emergency with respect to the “unusual and extraordinary threat” to US
national security posed by China’s passage of the National Security Law.
EO
13936 includes two significant components:
- It directs all agencies with relevant authorities
(i.e., the Department of Commerce, the Immigration and Customs Enforcement
agency, etc.) to take all necessary steps to eliminate Hong Kong’s special and
preferential treatment under specific US law and regulations, including, for
example, the elimination of trade, export, and customs preferences; and - It empowers the Secretaries of State and Treasury to
block US property and interests in property of individuals or entities
integrally involved in implementing the new National Security Law
ELIMINATING HONG KONG’S PREFERENTIAL
STATUS
Within
15 days of the date of the Executive Order (or before July 29, 2020), the
relevant US government agencies must commence “all appropriate actions” to
terminate Hong Kong’s preferential treatment under various US laws, including
the following:
- Amending regulations implementing the order to
eliminate or suspend preferential treatment of Hong Kong under laws related to
immigration, export controls, national security, foreign investment and customs
and under the International Emergency Economic Powers Act (IEEPA); - Revoking license exceptions that provide different
treatment of Hong Kong compared to China for exports and reexports to Hong Kong
and in-country transfers within Hong Kong of controlled items; - Terminating export licensing suspensions under the
Foreign Relations Authorization Act that apply to exports of defense articles
to Hong Kong individuals or entities physically located outside of Hong Kong
and China and who are authorized to receive defense articles before the date of
the Executive Order; - Ending training to members of the Hong Kong police or
other Hong Kong security services at the State Department’s International Law
Enforcement Academies; - Terminating the Fulbright exchange program with
respect to future exchanges for participants traveling both from and to China
or Hong Kong; - Eliminating the preference for Hong Kong passport
holders as compared to Chinese passport holders and reallocating admissions
within the refugee ceiling to Hong Kong residents based on humanitarian
concerns; - Issuing required notices of the intent to suspend or
terminate specific agreements between the US and Hong Kong related to law
enforcement, including extradition, reciprocal tax exemption, and scientific
and technical cooperation; and - Proposing any further actions deemed necessary and
prudent to end special conditions and preferential treatment of Hong Kong under
US law. §2, the Executive Order.
The Executive Order thus implements the policy
announced in June to continue the process of recasting the US relationship with
Hong Kong. These steps are designed to extend to Hong Kong the same policies
and regulations that currently apply to China. While this is expected to
significantly impact certain aspects of trade with and in Hong Kong, it is not
designed to sever all ties with Hong Kong, except to the extent that parties
relied on technology transfers in their dealings with specific Hong Kong
entities. It is also expected to impact individuals operating in Hong Kong, to the extent
that they were provided preferential immigration and related statuses. In
short, the EO accelerates the US policy shifts by 25 years that recognize the
turnover of Hong Kong to China.
SANCTIONS RELATING TO HONG KONG
Potentially
more significant than the change in trading status is the section of EO 13936
that authorizes broad sanctions against various persons and entities relating
to actions taken under the National Security Law. Section 4 of the Executive
Order authorizes the president to impose sanctions against any person who:
- Has been involved, directly or indirectly, in coercing, arresting, detaining, or imprisoning of individuals under the authority of, or to be or have been responsible for or involved in developing, adopting, or implementing, China’s new National Security Law;
- Is responsible for or complicit in, or to have engaged in, directly or indirectly, in one or more of the following:
- actions or policies that undermine democratic processes or institutions in Hong Kong;
- actions or policies that threaten the peace, security, stability, or autonomy of Hong Kong;
- censorship or other activities with respect to Hong Kong that prohibit, limit, or penalize the exercise of freedom of expression or assembly by citizens of Hong Kong, or that limit access to free and independent print, online or broadcast media; or
- the extrajudicial rendition, arbitrary detention, or torture of any person in Hong Kong or other gross violations of internationally recognized human rights or serious human rights abuse in Hong Kong;
- Is or has been a leader or official of an entity, including any government entity, that has engaged in, or whose members have engaged in, the above activities, or an entity sanctioned under the Executive Order;
- Has materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person sanctioned under the Executive Order.
The
Executive Order also allows the US government to sanction persons “owned or
controlled by,” or who “acted or purported to act for or on behalf of,” any
sanctioned person, as well as directors and senior executive officers of a
sanctioned entity.
Persons
sanctioned under EO 13936 will become Specially Designated Nationals (SDNs), or
the equivalent. This designation generally prohibits US persons and entities
from any dealings with these persons without authorization from Treasury’s
Office of Foreign Assets Control (OFAC). As with other SDNs, Treasury rarely
grants licenses and authorizations for most activities. Although OFAC may allow
for “wind down” licenses, which provide individuals and companies the
opportunity to withdraw from or terminate transactions with sanctioned
individuals or entities or divest ownership of the blocked asset, absent
compelling US interests for such wind downs, such licenses are not guaranteed
and may not be available.
Persons
subject to the EO also are likely to be prohibited from entering the US,
including having existing visas revoked. The EO also allows such entry
restrictions to be applied to “immediate family members,” which generally
includes spouses and children of any age. For sanctioned entities, entry may
also be restricted for any foreign citizens and nationals employed by, or
acting as an agent of, the sanctioned entity.
Consistent
with other sanctions-related executive orders, EO 13936 does not require prior
notice of any determination to impose sanctions under the Executive Order. In
this respect, the EO fills an important gap in the requirements and processes
envisioned by the Act, which requires first the identification of entities and
foreign financial institutions in reports to Congress. Although the Act allows
for sanctions immediately following the submission of the reports to Congress,
EO 13936 authorizes action while those reports are still in progress. Moreover,
the EO allows for a more traditional approach to sanctions.
The
EO also adds important levels of flexibility to the policy determinations
available to OFAC and/or the Department of State because it does not require
that an individual or entity be “materially contributing” to or “attempt[ing]
to materially contribute” to the Chinese government’s actions in the same
manner as the Act does. On the other hand, EO 13936 does not single out FFIs
for specific sanctions like the Act. In combination, however, the Act and the
EO continue the Administration’s trend toward a more holistic approach to
actions in certain foreign policy realms, and particularly with respect to
those relating to China.
Together,
the Act and the EO present new compliance challenges for investors,
multinational companies, financial institutions and others with business
dealings and interests in Hong Kong. These developments counsel that those
operating in this new environment exercise caution in their transactions and
investments. For example, dealings with persons or entities in Hong Kong will
require enhanced due diligence and more detailed examination of individuals and
entities (including those associated with investment funds, portfolio
companies, shareholders, directors, officers, managers and advisors), and of
assets (including securities, commodities and currencies, and derivatives
instruments related thereto) involved in transactions. This additional
analytical rigor can help entities or individuals identify information gaps
that can raise concerns under the Act or EO as well as highlight circumstances
where enhanced risks merit discussions with the US government or the need for
authorizations.
The
more detailed diligence can also be instrumental in the development of
commercial documentation, decisions on transaction structure, financing
requirements, and future engagement with parties subject to either sanctions or
other limitations under the Act or EO. Given the depth and complexity of
financial dealings in Hong Kong, parties operating in the city will need to
understand even more than previously whether their dealings involve parties who
are or could be subject to these sanctions, which can impact virtually all
transactions, including securities trades, equity or debt investments, loans
and financings, foreign exchange, and other banking activities. Deal or fund
structure and the terms and conditions of the transaction or investment will
also need to consider these sanctions. Some deal terms, such as withdrawal and
termination rights, may now carry greater weight in the negotiation process.
THE BIGGER PICTURE
Continuing
engagement with Hong Kong now requires consideration of the likelihood that
these sanctions will be aggressively implemented, and the likely targets for
these actions. As the geopolitical situation changes, exit strategies will
likely be viewed as key elements of the overall business engagement with
entities or individuals from Hong Kong. Among the factors parties may need to
consider is the likelihood that China will take its own actions in response to
any sanctions or, in some instances, as part of its own initiative to address
what it may see as changed political or economic circumstances. China’s policy
options include but are not limited to, its own sanctions, blocking actions or
more affirmative steps. This is expected to contribute to the complexity and
uncertainties related to commercial dealings in Hong Kong.
Questions
regarding the US government’s resolve to pursue these actions should consider
at least two important factors: bipartisan support and the importance of human
rights. In particular:
- The US actions have unusual bipartisan support. The
Act passed both houses of Congress unanimously and with consistent focus on the
challenges both political parties outlined as reasons for the Act. Thus,
Congress is expected to remain supportive of, and may seek to press, definitive
actions under the Executive Order. - The sanctions imposed against Chinese officials and
companies based on the situation in the Xinjiang Uyghur Autonomous Region
demonstrate the administration’s willingness to use sanctions, especially where
human rights are involved. In addition to sanctioning 37 persons and entities
previously in October 2019 and June 2020, the Commerce Department recently
sanctioned 11 Chinese companies after accusing them of human rights violations
against the Uighur people in China. More recently, the US sanctioned three
senior officials of the Communist Party, including a high-ranking member of the
politburo for actions related to the Uighurs.
CONCLUSION
Based
on the bipartisan actions taken by the administration and Congress, the passage
of the Hong Kong Autonomy Act and the issuance of EO 13963 highlight the need
for additional focus on due diligence and risk assessments related to
continuing business in Hong Kong. While manageable at this point, the
likelihood of additional US government or congressional action would not be
unexpected and parties should consider evaluating their current commercial and
deal documentation to ensure that relative risks are adequately addressed. This
can assist with both deal certainty and risk management.
CONTACTS
If
you have any questions or would like more information on the issues discussed
in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Washington DC
Giovanna M. Cinelli
Kenneth
J. Nunnenkamp
San Francisco
Nancy Yamaguchi