United States sanctions against 11 current and former Hong Kong and mainland officials clash with aspects of Article 29 of the National Security Law putting Hong Kong incorporated banks in an extraordinarily delicate position, legal experts have told Asian Private Banker.
The sanctions, announced last week, prohibit US persons or any non-US persons with US nexus to provide or receive any funds, goods or services to or from the sanctioned individuals and/or any entities which they have the majority ownership.
But while avoiding relationships with SDNs might seem to be the most prudent course of action, Rod Francis, senior managing director and Asia lead of FTI Consulting’s financial crime compliance practice, told Asian Private Banker that banks incorporated in Hong Kong should be aware of implications brought by the Hong Kong National Security Law (NSL) Article 29 from the compliance perspective.
Article 29 of the NSL considers a person guilty of an offence when he or she “directly or indirectly receives instructions, control, funding or other kinds of support from a foreign country or an institution” for imposing “sanctions or blockade, or engaging in other hostile activities against the Hong Kong Special Administrative Region or the People’s Republic of China” (Article 29 (4)).
“There are certainly different considerations for Chinese banks with US business ties and US-headquartered banks operating in Hong Kong; and for private banks, we are talking about very different assessments compared to the provision of banking services in other segments,” said Francis.
“FIs have to understand the rule and undertake an assessment on how to manage the risk depending on the context of each case. It’s too blunt to make a broad-brush statement.”
He said the usual practice for a revised list of “Specially Designated Nationals and Blocked Persons” (SDNs) would be to add the names of sanctioned individuals to filters in the bank’s system and when it comes to the situation of undertaking a transaction and/or when clients have a connection with SDNs, the system would flag those transactions for compliance team to decide whether to further action after conducting risk assessments.
The Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC) responded to the US sanctions respectively, but no comment or guidance has been issued on how to balance the US sanctions and the demands of the NSL.
The HKMA highlighted that US sanctions are foreign government unilateral sanctions and have “no legal status” in Hong Kong. The bank regulator also reminded banks of their responsibility to treat customers fairly.
The SFC expects financial institutions to make necessary and fair responses to the sanction orders having regard to “the best interests of their clients and the integrity of the market”.
While all US SDN designations have the same core prohibitions, for the most part, certain differences do exist between programmes, according to Mini vandePol, law firm Baker McKenzie’s Asia Pacific head of compliance and investigation group.
“For example, in certain circumstances, OFAC can provide general licences to carry out a certain type of transactions that may otherwise be prohibited by the sanctions program,” vandePol explained.
“And because the Hong Kong programme is new and has very few designations, we will have to wait and see if any unique features develop.”
vandePol said one area to watch would be the foreign financial institution sanctions provided for in the Hong Kong Autonomy Act. US sanctions apply to a Hong Kong branch of a US bank, which would prohibit the branch from doing any business with SDNs while at the same time to report any assets it has in its possession or control that belong to the individuals.
This requires a strong screening mechanism that catches not only the sanctioned entities and individuals but also any companies owned by them.
But for non-US based banks, the situation is much more complicated because financial institutions may be caught in the US nexus by conducting USD transactions — even if a financial institution has no business whatsoever in the US.
Meanwhile, FIs also need to ensure that any representations and warranties they gave to their contractual counterparties or banks comply with all US sanctions, vandePol continued.
“We have been assisting clients to assess and strengthen their compliance programs, to assess their unique exposure to US sanctions and to evaluate the risk level of particular “live” transactions. This is something that many of our clients across Asia, not just in HK, will need to assess carefully,” she said.
“Financial institutions will need to tread carefully in this increasingly politicized environment,” she added, referring to the old African proverb, “When the elephants fight, it is the grass that suffers”.