3 August 2020
This is the second in a series of five briefings in which we take a closer look at Hong Kong's National Security Law (NSL) and its implications for individuals and organisations operating in Hong Kong or otherwise dealing or interfacing with businesses based in the jurisdiction.
As we said in our initial bulletin in this series, it will likely take many months, if not years, to fully understand how the NSL will be implemented and assess its full impact. Our briefings in this series will analyse key aspects of the NSL from a business perspective and identify potential factors for in-house legal and compliance teams to consider as they move forward under the new law.
This second briefing examines how foreign sanctions laws could interact with the NSL. |
Chapter III, Part 4 of the NSL: Collusion with a Foreign Country to Endanger National Security |
Chapter III of the NSL (Offences and Penalties) sets out four distinct offences. The fourth offense, which is actually a category or range of offences – relating to collusion with foreign or external parties in a manner that endangers national security – is the category most likely to cause angst for international businesses. Under the NSL, it is an offence to conspire with, or receive "instructions, control, funding or other kinds of support" from "a foreign country, or an institution, organisation or individual outside the mainland” to impose "sanctions or a blockade" or engage in other hostile activities against the Hong Kong SAR or the PRC.
On its face, it appears this provision has the potential to apply to a business taking steps to comply with an economic sanctions regime or, potentially, with an export control regime of a foreign country where such measures have been taken targeting Hong Kong or the PRC. The dilemma this creates is similar to that posed by the EU blocking statute which prohibits EU citizens and companies under EU jurisdiction from complying with US sanctions against Cuba and Iran.
A similar situation could soon be created as a result of actions taken by the United States and, more recently, the European Union in response to the enactment of the NSL. |
The United States has recently taken steps to implement a framework for placing sanctions on persons and financial institutions involved in the implementation or enforcement of the NSL.
The Hong Kong Autonomy Act The Hong Kong Autonomy Act came into law on 14 July 2020. The Act requires the US State Department to submit a report to Congress identifying individuals and entities that it views as materially contributing to any perceived non-compliance by China with its commitments to Hong Kong’s autonomy. The report will be updated and re-submitted each year. The Act also requires the US Treasury Department to provide to Congress a report identifying any foreign financial institutions that carry out any significant transactions with identified individuals or entities in the State Department report. The Act authorises the US President to impose sanctions (including blocking sanctions and visa restrictions) on a person named in the State Department report, with sanctions becoming mandatory after one year of inclusion in the report. The Act also authorises the US President to impose sanctions with respect to foreign financial institutions (from an array of ten specific sanctions) identified in the Treasury Department report, with a requirement that at least five of those sanctions be imposed within one year of the institution being added to the report and all ten being imposed within two years. Executive Order 13936 This Executive Order was issued on 14 July 2020. It ended Hong Kong’s special trade status under the United States–Hong Kong Policy Act of 1992 and directed US administrative agencies to revise US regulations accordingly. In addition, the Executive Order authorises the immediate imposition of blocking sanctions and visa restrictions on persons based on their involvement in the implementation or enforcement of the NSL. There are no provisions targeting financial institutions, as in the HK Autonomy Act. The US Administration has not yet announced any designations pursuant to this Executive Order. US Administrative Actions in Relation to Trade with Hong Kong The US has taken a number of measures in recent months to increase US export controls / restrictions on Hong Kong, primarily by causing Hong Kong to be treated equivalently to China under the US Commerce Department’s Expert Administration Regulations (EAR). For instance, on 29 June 2020, The Bureau of Industry and Security issued a notice, mandating that additional export controls would be imposed on Hong Kong under the EAR. The notice provides that as of June 30, 2020, all exports, re-exports, and transfers of items subject to the EAR to Hong Kong will be treated identically to items destined for Mainland China, with only license exceptions that apply to Mainland China continuing to be available for Hong Kong There are two limited exceptions to the above, providing for a brief transition period. In addition to the above, BIS has taken further actions that may subject the export of controlled items to Hong Kong to additional licensing requirements. For instance, on June 24, 2020, the US Department of Defence announced the names of 20 companies, which include prominent Chinese technology and telecommunications companies, which have been designated under the National Defence Authorization Act of 1999 as military companies. The scope of the US response to the NSL has thus far been limited to revisions of Hong Kong’s status under US export controls, and these may significantly impact firms exporting or re-exporting into or through Hong Kong, especially technology companies. Certain key details of the announced revocation of Hong Kong’s “special status” remain unclear and clarification is expected to come in the form of further agency action. Although there have been no designations to date, the enactment of the Hong Kong Autonomy Act and the issuance of Executive Order 13936 authorize a broad range of sanctions on persons and financial institutions. |
United States measures |
European Union measures |
On 28 July 2020, the European Council adopted conclusions expressing concern over the NSL and set out various response measures, including restricting exports of specific sensitive equipment and technologies for end use in Hong Kong. There are no further details at this point. |
Interpreting Article 29 |
On its face, compliance with the above economic sanctions and export control measures could constitute receiving “instructions” or “control” “from a foreign country … to commit” the act of “imposing sanctions or blockade, or engaging in other hostile activities against the Hong Kong Special Administrative Region or the People’s Republic of China”. To be sure, the official text of the NSL is in Chinese and the English version is unofficial. That being said, the words / phrases from which sanctions (制裁), blockades (封锁) and hostilities (敌对行动) have been translated are capable of carrying the same interpretation. Although the term blockade connotes a physical barrier (as does the Chinese phrase from which this word is translated), it is also capable of bearing the meaning of an economic or legal barrier to trade. The catchall “other hostile activities” is also capable of a broad interpretation which could potentially capture periphery meanings not falling within the first two phrases. It is possible that as the measures by the US and EU are more fully implemented, this prompts guidance from the Hong Kong SAR government, the Office for Safeguarding National Security or the Central People’s Government of the PRC. Until such time, however, it is difficult to predict how this law will be applied in practice and whether it will, in effect, act as a ‘blocking statute’ |