Hong Kong braces for Monday deadline as Trump report puts HSBC, lenders in sanctions spotlight

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Hong Kong’s financial sector may soon find itself in the middle of an uncomfortable standoff between China and the United States over Beijing’s imposition of controversy national security law for the city at the end of June.

The Trump administration faces a deadline on Monday to identify, in a report to the US Congress, the people who facilitated the “erosion” of Beijing’s obligations under the Basic law . Critics argue that the extended powers under the National Security Act infringe on long-standing freedoms guaranteed in the city’s mini-constitution.

Trump issued an executive order on July 14 ending Hong Kong’s special economic status, while the U.S. government enacted the Hong Kong Autonomy Act to punish officials accused of restricting city autonomy, as well as financial institutions that do business with them. State Department has 90 days to designate them, after which the banks will have 12 months to terminate all trade relations.

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HSBC, Standard Chartered and other Hong Kong financial institutions will be following the report closely as they could face sanctions themselves. Under the ActUS authorities are required later this year to name financial institutions that have entered into “material transactions” with anyone named in the report.

This is the latest example of the United States showing force under the threat of secondary corporate sanctions to exert maximum financial pressure on governments to achieve their diplomatic goals. In the process, U.S. officials are making riskier transactions that would normally be routine – and still perfectly legal in many jurisdictions, according to compliance experts.

For global lenders with large retail operations in Hong Kong, such as HSBC and Standard charter, the risk of clashing with the American authorities is particularly acute because the flow of world trade underpins their results.

Since the law was promulgated, HSBC lost 15.6% of its market value while Standard Chartered suffered 12 percent on the Hong Kong Stock Exchange. Both underperformed an 8.8% drop in an index that tracks the city’s major bank stocks.

Potential sanctions against financial institutions can range from banning top executives from traveling to the United States to losing access to the clearing functions of the US dollar.

“It really comes down to the prominence of the US dollar,” said Bharath Vellore, managing director of Asia-Pacific risk compliance firm Accuity. “If you’re a bank and you’re cut off from settlement in US dollars, it’s basically the death knell for the financial institution.”

On Thursday, the United States issued sanctions against 18 major Iranian banks as it sought to put more pressure on the Iranian government over terrorist financing and nuclear proliferation. The move would essentially cut Iran off from the global financial system and has been widely criticized by humanitarian officials for drastically reducing the country’s ability to import the food and medicine it needs.

“Our maximum economic pressure campaign will continue until Iran is willing to enter into a comprehensive negotiation that addresses the regime’s malicious behavior, ”US Secretary of State Mike Pompeo said in a statement.

Chief Executive Officer Carrie Lam Cheng Yuet-ngor is one of 11 Hong Kong and mainland officials sanctioned by U.S. authorities for the city’s national security law. Photo: Nora Tam alt = CEO Carrie Lam Cheng Yuet-ngor is one of 11 Hong Kong and mainland officials sanctioned by US authorities for the city’s national security law. Photo: Nora Tam

The ability of the United States to impose sanctions on bad domestic actors had existed for years, but American officials have increasingly used the threat of secondary sanctions against companies in recent years to try to prevent the flow of funds to countries already facing existing bans, such as Iran or North Korea, or forcing countries to tackle alleged human rights violations, such as China and Russia.

The Chinese Bank of Dandong was banned from the American financial system in 2017, after U.S. officials accused him of helping North Korea evade sanctions. Last year an American judge held three Chinese banks in contempt of court for failing to comply with subpoenas in an investigation into North Korea’s sanctions violations.

This year, the Trump administration blacklisted dozens of Chinese companies over allegations of forced labor the Uighur Mulist minority population of Xinjiang or their alleged links with the Chinese military. These companies included a unit of one of the largest clothing producers in the world and a supplier to Tommy Hilfiger, Patagonia and Nike.

The use of secondary sanctions has advanced US political objectives, but has caused a “transatlantic political divergence” between the United States and its allies in Europe and created greater compliance uncertainty for private sector companies. , the Atlantic Council, a Washington think tank and the financial industry said the UK Finance trade group last year.

Official English version of the Hong Kong National Security Law:

“Due to the strength of the US dollar, the size 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.” , Samantha Sultoon of the Atlantic Council and Justine Walker, then director of sanctions policy at UK Finance, wrote in the report.

“The potential for secondary sanctions has also prompted further risk reduction as well-known multinationals adjust their risk appetites and hedge against possible punitive measures from Washington.”

At Accuity, for example, the company’s customer base has grown primarily from banks and insurers five years ago to a much larger base of non-financial corporations, including retailers and casinos, as businesses fear. more and more people violate US sanctions rules, according to Vellore.

The risk of sanctions for companies operating in Hong Kong has increased since the passage of a broad-based national security law for the city, analysts said.

Riot police fire tear gas at an anti-government rally in Wong Tai Sing on National Day in October 2019. Photo: James Wendlinger alt = Riot police fire tear gas at an anti-government rally in Wong Tai Sing on the National Day in October 2019. Photo: James Wendlinger

Many companies that rely heavily on the city for their bottom line, such as HSBC, Standard Chartered and Swire Pacific, have spoken out in favor of the law, saying they hoped this brought stability to a city torn apart by months of anti-government protests and the economic fallout from the coronavirus pandemic. The decision of these companies to publicly support the law has been heavily criticized by American and British politicians.

In August, the United States issued sanctions against 11 officials from Hong Kong and the mainland, including Director General Carrie Lam Yuet-ngor and former and current city police commissioners, on the National Security Law. These people will likely be included in the US State Department’s report to Congress.

As tensions have escalated this year by the world’s two largest superpowers, the city’s global banks reviewed their client lists and some have severed ties with so-called politically exposed persons who could be targets of US stocks.

For example, Police Commissioner Chris Tang Ping-keung transferred his mortgage from HSBC to Bank of China (Hong Kong) days before the sanctions designation and Lam said she had struggled to use her credit cards since the sanctions were announced, which she called “insignificant” inconvenience.

The United States has since accused HSBC of maintain banking relationships with individuals facing US sanctions, while cutting off access to the Hong Kong executives of Next Digital, the publisher of Apple Daily.

HSBC is heavily dependent on future growth in Mainland China and Hong Kong as part of a massive restructuring plan and chief executive Noel Quinn said as part of its half-year results in August that the bank follows “the laws and regulations of all the countries in which we operate and will continue to do so.”

US banks and other lenders in Hong Kong must “carefully walk a tightrope” to comply with US sanctions and not hurt their mainland business as China’s financial services sector opens up further, says Fitch Ratings.

They also risk clashing with the National Security Law, which prohibits sanctions or blockades from Hong Kong or mainland China. Nationalist tabloid Global Times said HSBC could be included on a list of “untrustworthy entities” being drafted by Beijing due to the help it provided to US prosecutors in an investigation into the Chinese telecommunications giant Huawei Technologies.

“New US sanctions against people based in Hong Kong or China could lead to reputational issues,” Fitch analysts Monsur Hussain and Grace Wu said in a September 22 research note. “Extension of sanctions to companies with close ties to the Chinese state, or [state-owned enterprises], would add credit risk in addition to reputational risk issues, which could encourage these banks to more closely manage their credit risk vis-à-vis counterparties that could be affected. “

The “most problematic” scenario for Hong Kong lenders would be for the United States to impose sanctions on systemically important state banks and effectively cut itself off from the US financial system.

“However, this appears to be an unlikely course of action due to the extremely high likelihood of direct repercussions from the Chinese state,” Fitch analysts said.

This article was originally published in the South China Morning Post (SCMP), the most official voice reporting on China and Asia for over a century. For more SCMP stories, please explore the SCMP application or visit the SCMP 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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