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Monday, Jan 18, 2021

Preparing for the worst, banks in Hong Kong reviewing client lists as US preps sanctions over national security law

Client lists examined periodically as part of compliance functions, but Hong Kong Autonomy Act has accelerated reviews. Banks are examining prior American sanctions to game plan the potential path for any US actions, sources say

Global banks in Hong Kong are quietly combing through their client lists for people at risk as the United States prepares to move forward with sanctions against Chinese officials and possibly other individuals in the city over a controversial new national security law, according to people familiar with their thinking.

For big banks ranging from Citigroup and Goldman Sachs to HSBC and Standard Chartered, a lot is at stake.

If they are found to be doing business with blacklisted individuals, American lenders could face stiff penalties for running afoul of US sanctions and non-American banks could find themselves cut off from US dollar clearing and their top executives barred from travelling to the US under the recently passed Hong Kong Autonomy Act.

Those lenders also face the risk that complying with US sanctions would constitute a violation of the city’s wide-ranging national security law.

Mini vandePol, Asia-Pacific head of law firm Baker McKenzie's compliance and investigations group, said that the national security law, combined with the Hong Kong sanctions bill and a move by the US to rescind the preferred trading status of Hong Kong this week in response has led to “a significant increase in client queries”.

“The main questions are around how the different measures interact with one another, how the [national security law] will be implemented and in what circumstances will the government enforce breaches of the [law],” she said.

Even though banks routinely examine their client lists as part of “know-your-customer” compliance functions, tit-for-tat reprisals amid rising rhetoric between Washington and Beijing – and the passage of the Hong Kong Autonomy Act this month – spurred heightened scrutiny recently, said the people, who were not authorised to discuss the matter publicly.

The reviews are primarily focused around the retail and wealth management operations of lenders in the city, particularly when it comes to individuals who could be targeted, the people said.

Earlier this month, both chambers of the US Congress unanimously passed the Hong Kong Autonomy Act, which requires sanctions against individuals found to have helped end Hong Kong’s “high degree of autonomy” from mainland China, as well as foreign financial institutions that engage in “significant” transactions with them.

One of the bill’s co-sponsors said targets could range from Communist Party officials to individual police units that crackdown on protesters in the city.

On Wednesday, US President Donald Trump signed the bill into law, as well as a separate executive order that would end the city’s preferred trade status, a potential blow to Hong Kong’s status as an international financial hub.

Normally, banks who want to continue to access the American banking system would close or freeze a customer’s account if the individual was subject to US sanctions.

However, Article 29 of the city’s national security law prohibits the imposition of sanctions, blockades or other hostile actions against Hong Kong or the mainland.

That has compliance officers in banks examining whether conforming with US sanctions would then constitute a violation of the national security law or if there is a way to thread the needle to appease both governments, the people said.

A senior banking executive said lenders in the city would take their cue from the Hong Kong Monetary Authority (HKMA), the city’s banking regulator, and local rules will take precedence when dealing with customers in Hong Kong.

The HKMA itself has said little publicly about the newly enacted Hong Kong Autonomy Act, but its chief executive Eddie Yue Wai-man has said it would not change the city’s monetary or financial systems.

When asked this week about the US law, the regulator provided a statement issued by Hong Kong government on Wednesday that said that the act “violates international law” and “constitutes gross interference in Hong Kong affairs and China’s internal affairs”.

“The HKSAR Government will fully support [China’s] Central Government to adopt countermeasures and will not allow the US hegemony to succeed,” the Hong Kong government said.

Under the Hong Kong sanctions bill, US Secretary of State Mike Pompeo has 90 days from enactment to identify individuals who could face sanctions and issue a report to Congress. Treasury Secretary Steven Mnuchin has another 60 days after that to identify any financial institutions at risk.

The president would have up to a year after those reports are completed to impose sanctions, so it could be Trump’s successor who ultimately decides how to proceed.

Yuan Zheng, a lawyer at Davis Polk in Hong Kong, said Western banks or larger lenders who see sanctions as a significant risk “have already thought several steps ahead to manage their client relationships”.

“Smaller banks that have a lot of existing clients with stronger ties with Chinese government officials or Communist Party members, if that had not been an area they looked at previously, especially non-Western smaller-sized banks, I can sense there is some sense of urgency on their part to do something quickly,” she said.

Most analysts expect any sanctions to target low-level officials, such as Luo Huining, head of the Liasion Office in Hong Kong, who was recently appointed as Chief Executive Carrie Lam Cheng Yuet-ngor’s national security adviser, rather than a large swathe of business and government officials.

Only a handful of the city’s government officials have assets in the US and Lam said in a local television interview on Thursday that she was not concerned about being named by US authorities.

“I have no assets in the US, and I don’t particularly like going to the US. If they won’t grant me a visa, then I will just not go there,” Lam said in the interview on Hong Kong Open TV.

The Trump administration itself has shown reluctance in the past to impose more sweeping sanctions against Chinese and Russian officials.

On July 9, the White House, for example, sanctioned a handful of Chinese officials that it believes are responsible for human rights abuses against ethnic minority groups in the Xinjiang Uygur autonomous region (XUAR), including XUAR party secretary Chen Quanguo. China issued its own sanctions in response on Monday against US officials, including Republican Senators Marco Rubio and Ted Cruz, both China hawks.

On Wednesday, Beijing vowed to sanction American individuals and institutions in response, but did not give details.

Financial institutions have spent tens of billions of dollars to bolster their compliance functions in the past decade as the US aggressively cracked down on sanctions compliance, so client rosters and their connections are regularly reviewed.

The same goes for investment banking transactions and whether companies involved in those deals have ties to government officials – known in compliance circles as “politically exposed persons” (PEP).

American banks, such as Goldman Sachs and Morgan Stanley, have generally avoided ties with government officials globally in their private wealth operations in recent years for fears of running afoul of the Foreign Corrupt Practices Act (FCPA), which bars US citizens and companies from making payments to government officials to benefit their business.

Several lenders, including Barclays and Deutsche Bank, paid tens of billions of dollars combined in settlements related to FCPA over hiring of individuals tied to government officials in China in recent years.

JPMorgan Chase, for example, paid US$264 million in penalties and disgorgement in 2016 and admitted it violated the FCPA in connection with its so-called sons and daughters programme.

Prosecutors accused the bank of hiring candidates referred by clients and government officials to win lucrative deals with Chinese state-owned companies, generating some US$35 million in profit.

The issue of potential American sanctions against Hong Kong officials may be more complicated for lenders with larger retail and commercial banking presences in the city, such as Citigroup, HSBC and Standard Chartered, compliance lawyers and industry insiders said.

Banks contacted by the South China Morning Post declined to comment for this story.

American banks would likely sever ties with affected individuals, but non-US lenders may have a more difficult time untangling themselves depending on who is sanctioned as executives of their local subsidiaries in the mainland and Hong Kong often serve on advisory bodies to China’s leadership.

For example, Peter Wong Tung-shun, HSBC’s Asia-Pacific chief executive, is a member of the Chinese People’s Political Consultative Conference (CPPCC), a top advisory body to Beijing that includes Chinese Communist Party members, journalists and business leaders. He is one of a 124-member Hong Kong delegation to the CPPCC, which all publicly supported the national security law.

Sanctions against foreign banks who engage in “significant transactions” with blacklisted individuals include prohibitions on receiving interbank loans from American institutions, a bar from acting as a so-called primary dealer with the US Federal Reserve and other limits on access to the US financial system. The Hong Kong Autonomy Act does not define what types of transactions would constitute “significant”.

A person with knowledge of one bank’s thinking said it would unlikely apply to a credit card account if a Hong Kong official were blacklisted, but could potentially come into play if that official tried to buy property in the US.

The law firm Mayer Brown said in a July 4 client note that the law could “significantly” affect financial institutions and other businesses which have ties to at-risk individuals in Hong Kong and the mainland.

“This is because the imposition of an asset-blocking order would expose all assets in which such a person has interests to an immediate asset freeze, and could severely constrain options for divestment or exit from existing financial relationships,” Mayer Brown partners Duncan Abate and Tamer Soliman wrote in the report.

Legal experts have warned “all is on the table” when it comes to possible punitive actions against the city.

But, Hong Kong’s securities watchdog, the Securities and Futures Commission, said it saw no negative impact on fundraising in the city from the security law on Sunday.

Charles Li, the chief executive of Hong Kong Exchanges and Clearing, the operator of the city’s bourse, said the rising tensions between the US and China – and the Hong Kong Autonomy Act – has created a tremendous amount of anxiety for the city, but he has “confidence in Hong Kong’s ability to overcome its challenges”.

“We have studied this legislation [the Hong Kong Autonomy Act] in great detail, with great clarity of mind. I walk away from those deep discussions feeling while it is not something we wanted [and] it’s not something we look forward to, it is something today we have to live with,” Li said at a commodities forum on Thursday. “It is something that is not going to fundamentally change [Hong Kong].”


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