By Frances Yoon and Quentin Webb 

As the U.S. moves to punish Chinese officials involved in the clampdown on Hong Kong, international banks and other businesses have a problem: how to obey conflicting rules of both Washington's coming sanctions regime and the territory's broad new national-security law.

On Tuesday, President Trump signed into law a bill that requires sanctions against not only Chinese officials and entities materially contributing to the erosion of Hong Kong's autonomy, but also financial institutions doing business with those who will appear on the eventual blacklist.

At the same time Hong Kong's security law outlaws receiving "instructions, control, funding or other kinds of support from a foreign country" to impose sanctions against Hong Kong or China.

The issue may come to a head swiftly: the U.S. Secretary of State has 90 days to identify sanctions targets, and after that, a 30- to 60-day timetable kicks in for his counterpart at the Treasury Department to name "foreign financial institutions" which have conducted significant transactions with those people.

Mini vandePol, the Asia Pacific head of compliance and investigations at law firm Baker McKenzie, said some banks were already trying to identify likely sanctions targets and adapt accordingly.

"The most important thing institutions can do at this time is to have a thorough understanding of their business partners so that they can address any potential risks proactively," she said. However, she said she advised clients to focus more on the actual risks posed by other, already existing sanctions programs.

Last week, the Trump administration imposed sanctions on senior Chinese officials accused of carrying out human-rights abuses against Turkic Muslims in the remote Xinjiang region. The sanctions would ban travel to the U.S. and access to the U.S. financial system. China vowed to impose retaliatory measures.

In a briefing dated July 13, lawyers from Norton Rose Fulbright said the potential dilemma had "sparked considerable controversy within the financial industry in Hong Kong."

"Companies may have to choose between breaching the national security law and falling foul of U.S. sanctions. Several banks have sought clarification in this regard, however guidance from Hong Kong or Chinese authorities has not yet been received," they wrote.

Almost all international banks have some presence in Hong Kong. Some, including HSBC Holdings PLC, Standard Chartered PLC and Citigroup Inc., have sizable retail networks. The three banks all declined to comment.

The Norton Rose Fulbright team said some financial institutions with significant operations in Hong Kong had already reviewed their client base to identify potential sanctions targets. In addition, they said that while political rhetoric suggested a focus on Chinese state-owned banks, the Act's remit extended to insurers, currency exchanges, travel agents and even car dealers.

Yuan Zheng, a lawyer for law firm Davis Polk, said Chinese authorities might not enforce the national-security law provision so aggressively that standard procedures like reviewing client databases or reclassifying a client as higher-risk would count as a breach. But she said freezing accounts or ending relationships could draw more scrutiny.

For individuals, U.S. sanctions would include visa bans and asset freezes. For financial institutions, the Washington's Hong Kong Autonomy Act lists 10 possible punishments, including bans on getting loans from U.S. banks, doing foreign-currency deals in the U.S., and on their executives entering America. The president would have to introduce five of these within a year, and all 10 within two years.

Sanctions have long been a minefield for international banks, and rising tensions between the U.S. and China have already created other difficulties for some global lenders.

HSBC Holdings PLC was pilloried by pro-Beijing figures and the state media for not getting behind the security law, and then faced a backlash in the U.S. and U.K. after its Asia chief endorsed the legislation.

The bank earlier had to respond to anger in Beijing over information it provided in a U.S. criminal case against China's Huawei Technologies Co., in a case tied to sanctions on Iran.

Write to Frances Yoon at frances.yoon@wsj.com and Quentin Webb at quentin.webb@wsj.com

 

(END) Dow Jones Newswires

July 15, 2020 11:22 ET (15:22 GMT)

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