US sanctions will make everyday life a headache for Hong Kong's political leaders and their families, from closed accounts to blocked payments

Hong Kong Chief Executive Carrie Lam Cheng Yuet-ngor and other officials sanctioned by the US government over a national security law are clinging to the premise that the measures will be harmless because they do not have American bank accounts or own property in the United States.

But, the long reach of the American government - and the dominance of the US dollar as a trade currency - could throw up an array of unexpected barriers for so-called specially designated nationals (SDNs), according to former American officials and compliance lawyers.

Sanctioned individuals - and in some cases their close family members - could find overseas bank accounts closed, bank-issued credit cards cancelled and insurance coverage put on hold by financial institutions wary of running afoul of US regulators and losing access to the American financial system, compliance officials said.

US sanctions over security law an inconvenience, Hong Kong leader says

Transactions with US companies, including ordering from American websites such as Amazon.com, are likely to be blocked and even booking a staycation at a US-owned hotel chain could prove difficult, if not impossible, depending on how the company's foreign subsidiaries are structured, said Julia Friedlander, deputy director of the Atlantic Council, a Washington think tank.

"What that does is pushes an individual out of the US dollar system," Friedlander, a former senior policy adviser in the US Treasury Department's Office of Terrorism and Financial Intelligence, said. "If they want to conduct payments, they're going to have to do so using financial institutions that are cut off from the US financial system and largely will not transact in dollars."

On August 8, the US Treasury Department sanctioned 11 Hong Kong and mainland officials, including Lam, the current and former police commissioners and the head of Beijing's local liaison office, over the implementation of the national security law, which American officials claim undermines the city's autonomy and could curb freedom in the city.

They also barred those officials and close family members from travelling to the US. Three days before sanctions were enacted, Hong Kong's police chief transferred a mortgage from HSBC to Bank of China (Hong Kong), according to public records.

The Hong Kong sanctions followed a July 14 executive order by US President Donald Trump and the passage of the Hong Kong Autonomy Act, which would allow the US to sanction foreign banks and other financial institutions who engage in "significant" transactions with individuals deemed to have contributed to the erosion of the city's autonomy.

"Sanctions like these, while they of course carry a very heavy dose of symbolism, they also have some pretty practical impacts from a financial standpoint," said Scott Flicker, the chairman of Paul Hastings' Washington office and leader of the law firm's global trade controls practice. "You don't need to be present in the United States and you don't need to be dealing specifically with a US financial institution to be affected."

Violating sanctions can be costly for financial institutions and other companies that breach US sanctions, even if inadvertently.

For example, American Express agreed to pay US$204,000 to the US three years ago after a Belgian credit-card issuer processed more than 1,800 transactions in violation of sanctions against Cuba. Amex owned a 50 per cent stake in the Belgian firm's parent company.

The Hong Kong sanctions are being administered by the Office of Foreign Assets Control (OFAC), an arm of the Treasury Department. Over seven decades, the office has overseen sanctions against Cuba, Iran and North Korea and Russia.

OFAC regulations prohibit US persons and entities from providing goods or services with sanctioned individuals, entities or countries and property or assets held by those facing US sanctions are subject to freezing and potential seizure.

Depending on the sanctions programme, special licenses are required for a US citizen to meet with a SDN or for a sanctioned foreign leader to stay at a US-owned hotel overseas.

While there is a process to appeal a sanction designation, being removed from a sanctions list is difficult, lawyers said. The designations stem from the president's executive power under the US Constitution, they said.

For the most part, Hong Kong and mainland officials have mocked the measures.

Lam said in a television interview last month that she had no assets in the United States and "I don't particularly like going to the US", while Luo Huining, director of Beijing's liaison office in the city, sarcastically offered on August 8 to send US$100 to US President Donald Trump, so that it could be frozen.

To be sure, sanctioned individuals are less likely to struggle if they do not hold assets in the US and make most of their transactions in currencies other than the US dollar, such as the yuan.

The challenge, however, comes if their financial institution needs to access the US financial system regularly.

Following a series of multibillion-dollar settlements with American authorities over anti-money-laundering and sanctions breaches, banks and other financial institutions are much more cautious when it comes to doing business with so-called politically exposed persons. That includes individuals the US has not sanctioned.

As a result, financial institutions are severing ties with foreign individuals who are more likely to come under American scrutiny, as well as US clients in some cases, to avoid falling under the purview of US authorities.

Luo Huining, director of Beijing's liaison office in Hong Kong, is one of 11 officials facing US sanctions over the city's national security law. Photo: Sing Tao Daily alt=Luo Huining, director of Beijing's liaison office in Hong Kong, is one of 11 officials facing US sanctions over the city's national security law. Photo: Sing Tao Daily

"Many banks take a highly risk averse approach to these issues," said Adam Ferguson, a partner at Eversheds Sutherland in Hong Kong.

Bernard Chan, convenor of the Executive Council, said he had one of his US bank accounts closed in March unrelated to sanctions, after the lender learned of his political role in the city. Chan is one of only two members of Lam's de facto cabinet who have declared American assets.

"After the news of my account being closed in the US, I've been approached by other banks in Hong Kong, including a US bank, to open an account with them in Hong Kong," Chan said. "But I've enough bank accounts already and l don't need any more."

Chan, who is not facing sanctions, did not name the bank that closed his account. He has another account in the US that remains open.

Even ahead of the US sanctions, global banks in Hong Kong were quietly reviewing their client lists for people at risk, according to people familiar with their thinking.

Two of the city's three currency-issuing banks, HSBC and Standard Chartered, have paid a combined US$4 billion since 2012 and reached agreements with US authorities to avoid criminal prosecution for past failures in their anti-money-laundering and sanctions control programmes.

In recent days, Citigroup took steps to suspend credit-card accounts associated with some of the individuals facing US sanctions, according to a person familiar with the moves but not authorised to discuss the matter publicly.

Bloomberg reported on August 12 that the Hong Kong arms of some Chinese state-owned banks, including Bank of China (Hong Kong), are being cautious about opening new accounts for individuals facing sanctions.

Spokespersons at Citigroup, HSBC and Standard Chartered all declined to comment for this story, while Bank of China did not respond to a request for comment.

The credit union for the city's police force began moving about HK$11 billion in assets from foreign banks to China-based lenders in May over concerns about potential sanctions.

Rising tensions between the US and China threatens to trap financial institutions between the two superpowers.

Trump's executive order prohibits "the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any person whose property and interests in property are blocked" by the sanctions. The Hong Kong Autonomy Act separately includes a provision that subjects banks who engage in "significant" transactions with blocked persons to sanctions themselves.

At the same time, 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 - potentially putting banks in a bind if they abide by the US decrees.

Bankers are reluctant to discuss publicly how they will address any potential clash, saying privately they would look to the Hong Kong Monetary Authority, the city's de facto central bank, for guidance on how to proceed regarding their Hong Kong business.

"With respect to the various laws that exist and the potential conflicts between those laws, we follow the laws and regulations of all of the countries in which we operate and will continue to do that," Noel Quinn, HSBC's chief executive, said on a conference call with journalists on August 3. "It would be wrong of me to speculate on any potential conflicts between different laws between the US and China."

The HKMA said on August 8 that unilateral sanctions by foreign governments are "not part of the international targeted financial sanctions regime and have no legal status in Hong Kong", sparking confusion among some bankers.

US President Donald Trump signed an executive order on July 14 paving the way for sanctions against Hong Kong and mainland officials this month. Photo: Bloomberg alt=US President Donald Trump signed an executive order on July 14 paving the way for sanctions against Hong Kong and mainland officials this month. Photo: Bloomberg

At the same time, businesses and other entities with ties to sanctioned individuals could face their own challenges under US sanctions. Related companies in which a sanctioned individual owns 50 per cent or more can be blocked from engaging in transactions in the American financial system.

The US placed Arkady Rotenberg, a Russian businessman and a former judo partner of Russian President Vladimir Putin, and his brother Boris Rotenberg under sanctions in 2014, but Arkady Rotenberg transferred part of his business to his son Igor in an attempt to avoid sanctions. The US placed Igor Rotenberg under sanctions four years later.

One Hong Kong company already took steps last week to reduce its potential exposure because of family ties.

Engineering firm Analogue Holdings issued a statement on August 9 that Teresa Cheng Yeuk-wah, the city's Secretary for Justice and wife of Analogue's chairman, did not have an interest in the company and no rights to the shares held by her husband. She is one of the 11 officials sanctioned by the US government.

The next day, Analogue announced it had reduced its interest in New York-based Transel Elevator & Electric because of US-China tensions and no longer held a controlling stake in the American company.

Sanctioned individuals acting as signatories on contracts, such as a contract with the Hong Kong government, also can prove problematic for companies and lead to penalties.

For example, OFAC fined Exxon US$2 million in 2017, claiming agreements the energy giant signed with Russian oil company Roseft violated US sanctions because the signer of the contracts, Rosneft's president, was facing sanctions himself. A federal court vacated the penalty in December after a lengthy court fight.

Enhanced enforcement by the US in recent years is increasingly causing banks to shy away from business, even if it is technically legal, over concerns about the potential for enhanced compliance risk later, Flicker, the Paul Hastings lawyer, said.

"If you are a person on the OFAC SDN list, it is a near certainty that you're going to face difficulty in opening bank accounts or conducting bank transactions with global financial institutions that may be in that de-risking mode," Flicker said.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.