After China’s banking and insurance regulator claimed US financial sanctions have no “legal effect” in Hong Kong or China, analysts have warned that financial institutions might still face penalties if found providing services to sanctioned entities.
Washington has unleashed a swathe of sanctions on Chinese and Hong Kong officials and companies over the past year, potentially penalising financial institutions that do business with them. Those targeted include Hong Kong’s Chief Executive Carrie Lam Cheng Yuet-ngor, who was sanctioned alongside other top officials in August for their alleged role in curtailing political freedoms in the city.
Last month, the US also sanctioned 14 members of the National People’s Congress, the Chinese legislature, for their role in drafting the new national security law for the city.
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In a response to a media question on US financial sanctions on individuals and companies, the China Banking and Insurance Regulatory Commission (CBIRC) said it did not “acknowledge” or “accept” US financial sanctions on individuals or companies, because they are against “international law and international relations”.
“The so-called US sanctions do not have legal effect in China and the Hong Kong Special Administrative Region,” said the regulator, in a statement posted to its website last Thursday.
The regulator added that they “firmly support financial institutions to conduct business in accordance with laws and regulations, and provide fair and high-quality financial services to all customers, including citizens of Hong Kong and the mainland ”.
But while most targeted individuals and companies can still access financial services domestically, the regulator’s statement will not protect them from the long arm of the Office of Foreign Assets Control (OFAC), the US sanctions enforcement agency, if they engage in international transactions denominated in US dollars or transact with US-based entities, analysts said.
Banks with global operations – including Chinese ones – must decide whether they wish to take on the risk.
Do you want to make a point or do you want to ensure that state-owned enterprises do not come under attack by the US? Most often, individuals sanctioned are thrown under the bus so to speak, for example, Carrie Lam
“There is often a cost with flaunting US sanctions, including the possibility that those breaking sanctions may be prosecuted in the US,” said Adam Ni, director of the Canberra-based China Policy Centre research organisation.
“So it’s a balancing act. Do you want to make a point or do you want to ensure that state-owned enterprises do not come under attack by the US? Most often, individuals sanctioned are thrown under the bus so to speak, for example, Carrie Lam,” Ni said.
Lam has said she has lost access to banking services as a result of the sanctions, saying she now draws down her salary in cash and has “piles of cash” sitting at home.
US-linked firms found to be banking or transacting with officials like Lam could face monetary fines from OFAC, which polices international transactions and fines banks and companies that it determines have violated US policy.
Financial institutions or companies that do not operate in the US but which transact with US entities or in US dollars could also be subject to OFAC punitive action.
In US President Donald Trump’s executive order in November banning “any US person” from making investments in Chinese firms it says are owned or controlled by the military, it defined a US person as “any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States”.
I think most regulators would try to avoid forcing banks to take on risk they aren’t equipped to handle
So while in theory it may be possible for local institutions to continue to work with sanctioned entities, the complication and resources it requires to ensure transactions are ring-fenced from OFAC’s sphere of influence mean banks often err on the side of caution.
Nick Turner, a lawyer specialising in economic sanctions and anti-money-laundering at Steptoe & Johnson in Hong Kong, said that not every bank has the compliance infrastructure or expertise needed to handle a sanctioned customer without breaking the rules.
“For example, measures have to be put in place to keep the customer from transacting through the US financial system. I think most regulators would try to avoid forcing banks to take on risk they aren’t equipped to handle,” Turner said.
“As far as Hong Kong is concerned, there is a lot that is not affected by the sanctions. Instead, what we see is kind of an overreaction or a misunderstanding of what the sanctions do and do not do. There’s also a tendency to exit the relationship because there is just a little too much trouble. They are not worth the cost,” he said, adding that regulators should encourage banks to study the rules more closely before turning away sanctioned customers.
China’s Ministry of Commerce said over the weekend that it would take “necessary measures to resolutely safeguard the legitimate rights and interests of Chinese enterprises”, but did not specify exactly how it would do so.
The dollar’s international dominance makes it difficult for China to reciprocate on US sanctions. The yuan is less widely used in global payments, nor is its financial system widely used by foreigners.
But China can hit back by denying business opportunities or visa rights to those it identifies as opponents, said Scott Kennedy, a senior adviser on China at the Centre for Strategic and International Studies in Washington.
“Beijing can also withhold cooperation on major issues where interests seemingly overlap or where China’s cooperation is necessary to make meaningful progress globally or regionally. We’ve seen that response with regards to tracing the origins of the pandemic,” he added.
Dan Harris, a partner at Seattle’s Harris Bricken law firm and co-author of the China Law Blog, used the example of Huawei Technologies Co. Technologies executive Meng Wanzhou to illustrate how carefully international companies have to tread with US financial sanctions.
Meng, the daughter of Huawei’s founder Ren Zhengfei, is currently battling extradition from Canada to the US on charges that she misled HSBC into clearing transactions that potentially violated US sanctions on Iran.
“US financial sanctions are incredibly powerful because the dollar – though weakened – is still very powerful. Companies that operate internationally do not want to be on the wrong side of US financial sanctions. Look what Huawei is accused of having done to try to avoid them,” Harris said.
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