Hong Kong braces for Monday deadline as Trump's report puts HSBC, lenders back into sanctions spotlight
Hong Kong's financial sector could soon find itself again in an uncomfortable tug-of-war between China and the United States because Beijing introduced a controversial national security law for the city in late June.
The Trump administration faces a deadline on Monday to report in a report to the US Congress to identify individuals who have eased the "erosion" of Beijing's constitutional obligations. Critics argue that the far-reaching powers of the national security law undermine the long-standing freedoms guaranteed in the city's mini-constitution.
Trump issued an executive order on July 14 to end Hong Kong's special economic status, while the U.S. government passed the Hong Kong Autonomy Act to punish officials accused of restricting the city's autonomy, as well as financial institutions that do business with them. The State Department has 90 days to designate them. The banks then have 12 months to terminate all business relationships.
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HSBC, Standard Chartered and other Hong Kong financial institutions will be closely monitoring the report as they could potentially face sanctions themselves. Later this year, the law requires US officials to identify financial institutions that have made "significant transactions" with individuals named in the report.
It is the latest example of the US flexing its muscles by threatening secondary sanctions against corporations in order to put maximum financial pressure on governments to achieve diplomatic goals. The American authorities are doing risky transactions that are usually routine - and according to compliance experts, are still perfectly legal in many countries.
Global lenders with large retail stores in Hong Kong like HSBC and Standard Chartered are at particularly high risk of violating American authorities as the global flow of trade underpins their bottom line.
Since the law went into effect, HSBC has lost 15.6 percent of its market value, while Standard Chartered on the Hong Kong Stock Exchange has lost 12 percent. Both lagged an 8.8 percent decline in the index, which tracked the city's major bank stocks.
Possible sanctions against financial institutions can range from bans on executives traveling to the United States to losing access to US dollar clearing functions.
"It all comes down to the importance of the US dollar," said Bharath Vellore, managing director of Accuity risk compliance company in the Asia-Pacific region. "If you're a bank and you're cut out of the US dollar bill, it's basically a death penalty for the financial institution."
On Thursday, the US imposed sanctions on 18 major Iranian banks in an attempt to put further pressure on the Iranian government for terrorist financing and nuclear proliferation. The move would essentially cut Iran off from the global financial system and has received widespread criticism from humanitarian officials for severely affecting the country's ability to import needed food and medicines.
"Our campaign for maximum economic pressure will continue until Iran is ready to conclude a full negotiation addressing the regime's malicious behavior," US Secretary of State Mike Pompeo said in a statement.
General Manager Carrie Lam Cheng Yuet-ngor is one of 11 Hong Kong and mainland officials sanctioned by the American authorities for the city's national security law. Photo: Nora Tam alt = General Manager Carrie Lam Cheng Yuet-ngor is one of eleven officials in Hong Kong and the mainland who have been sanctioned by the American authorities for the city's national security law. Photo: Nora Tam
The U.S.'s ability to impose sanctions on bad national actors has been around for years, but American officials in recent years have increasingly used threats of secondary sanctions against corporations to try to prevent the flow of money to nations exposed to pre-existing bans such as Iran or North Korea, or forcing countries to tackle alleged human rights violations such as China and Russia.
China's Bank of Dandong was banned from the US financial system in 2017 after US authorities accused it of helping North Korea evade sanctions. Last year, a US judge despised three Chinese banks in court for violating subpoenas in an investigation into sanctions violations in North Korea.
This year, the Trump administration blacklisted dozens of Chinese companies on charges of forced labor by the Muly Uygur minority population in Xinjiang or their alleged links with the Chinese military. These companies included a unit of one of the world's largest apparel manufacturers and a supplier to Tommy Hilfiger, Patagonia and Nike.
The application of secondary sanctions has promoted US policy goals, but has created "transatlantic political divergence" between the US and its allies in Europe and increased regulatory compliance uncertainty for private sector companies, the Atlantic Council, a Washington think tank and the financial industry created trading group UK Finance said last year.
Official English version of Hong Kong's National Security Law:
"Because of the power of the US dollar, the breadth of the US market and the dominance of the US financial system, even the threat of secondary sanctions prompts many non-US companies to change their behavior to avoid the risk of such sanctions." Atlantic Council's Samantha Sultoon and Justine Walker, then director of sanctions policy at UK Finance, wrote in the September 2019 report.
"The potential of secondary sanctions has also led to further risk reduction as reputable multinational corporations adjust their risk appetite and protect themselves against possible punitive action from Washington."
At Accuity, for example, the company's customer base shifted from primarily banks and insurers to a much broader base of non-financial corporations, including retailers and casinos, five years ago as companies became increasingly concerned about violating U.S. sanctions rules, according to Vellore.
According to analysts, the risk of sanctions for companies operating in Hong Kong has increased since a broad national security law was passed for the city.
Riot police fire tear gas during an anti-government rally in Wong Tai Sing on National Day in October 2019. Photo: James Wendlinger alt = riot police fire tear gas during an anti-government rally in Wong Tai Sing on the national holiday in October 2019. Photo: James Wendlinger
Many of the heavily dependent companies like HSBC, Standard Chartered and Swire Pacific spoke out in favor of the law in hopes of bringing stability to a city plagued by months of protests against the government and the US would economic impact of the coronavirus pandemic. The move by these companies to publicly support the law has been heavily criticized by US and British politicians.
In August, the US imposed sanctions on eleven Hong Kong and mainland officials, including General Manager Carrie Lam Yuet-ngor and the city's current and former police commissioners, over the national security law. These people are likely to be included in the State Department's report to Congress.
As tensions from the world's two largest superpowers escalated earlier this year, global banks in the city checked their customer lists and severed some ties with so-called politically exposed people who could be the target of US action.
For example, Police Commissioner Chris Tang Ping-keung transferred his mortgage to the Bank of China (Hong Kong) from HSBC days before HSBC's sanction designation, and Lam said she's had problems using her credit cards since the sanctions were announced she has one called "meaningless" inconvenience.
The US has since accused HSBC of maintaining banking relationships with people facing US sanctions, while banning access to executives at Next Digital, the publisher of Apple Daily, in Hong Kong.
HSBC is heavily reliant on future growth in mainland China and Hong Kong as part of a massive restructuring plan, and CEO Noel Quinn said during his half-year results in August that the bank "follows the laws and regulations of every country" in which we operate and will continue to do so ".
American banks and other Hong Kong lenders must "carefully walk a tightrope" to comply with US sanctions and not damage their mainland businesses as China's financial services industry continues to open, according to Fitch Ratings.
They also have the potential to violate national security law, which prohibits sanctions or blockades on Hong Kong or mainland China. Nationalist tabloid Global Times said HSBC could be put on an "unreliable company" list drawn up by Beijing for helping US prosecutors investigate Chinese telecommunications giant Huawei Technologies.
"Further US sanctions against people living in China or Hong Kong could lead to reputational problems," said Fitch analysts Monsur Hussain and Grace Wu in a research report on September 22nd. "Extending the sanctions to companies with strong ties to the Chinese state or [state-owned companies] would add credit risk to reputational risk issues, which could lead these banks to tighten their credit risk to counterparties who might be affected . "
The "most problematic" scenario for lenders in Hong Kong would be if the US sanctions systemically important state-owned banks and then effectively cut them off from the US financial system.
"However, this is viewed as an unlikely course of action as the likelihood that it will affect the Chinese state is extremely high," said Fitch analysts.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative language coverage of China and Asia in more than a century. You can find more SCMP stories in the SCMP app or on 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.
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