Hong Kong, Caracas, Sevastopol: Are Sanctions Here to Stay?

Earlier this month, the Office of Foreign Assets Control (OFAC), the agency within the US Treasury Department charged with issuing and enforcing economic sanctions, announced the addition of 11 Hong Kong and People’s Republic of China (PRC) government officials to its List of Specially Designated Nationals (SDNs). OFAC’s targets included Hong Kong’s Chief Executive Carrie Lam, the Commissioner of the Hong Kong Police Force, the Director of the Hong Kong Liaison Office (the PRC’s top official in Hong Kong), as well as the city’s Justice and Security Secretaries, among other key government figures.

Digging In

OFAC’s announcement followed the President Donald Trump’s adoption of Executive Order (EO) 13936, on 14 July 2020, which authorises the US Treasury and State Departments to sanction foreign persons whose actions ‘fundamentally undermine Hong Kong's autonomy’ from mainland China. This includes involvement in ‘developing, adopting, or implementing’ the Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the National Security Law or NSL).

Two weeks after the issuance of EO 13936, on 30 July 2020, the Hong Kong government barred 12 pro-democracy candidates from running for seats in Hong Kong’s Legislative Council, originally scheduled for September 2020, but postponed for one year.

In Washington, the sanctions enjoy broad, bipartisan support, as evidenced by the swift passage of the Hong Kong Autonomy Act, signed into law the same day as EO 13936. Proponents say the sanctions are designed to hold Hong Kong and PRC officials ‘accountable’ for their roles in promulgating the NSL.

Shortly after being named as an SDN, Carrie Lam took to Facebook, a US-based social media network, to chide OFAC for listing her address incorrectly on its public notification. On 10 August 2020, the Monday following OFAC’s announcement, Hong Kong police arrested the publisher of a popular daily newspaper, who was charged with violating the NSL, and raided the tabloid’s offices.

Mutually Assured Inconvenience

In OFAC parlance, the ‘SDN List’, as it is known, creates ‘blocking sanctions’ meant to prevent sanctioned persons from accessing resources and services under US control. The property of individuals and entities on the list is frozen in the US or when it falls under the control of a US individual or company anywhere in the world. SDNs are also prohibited from a wide range of dealings with US persons globally and effectively cut off from the ubiquitous US financial system, US-based online market places, and payment platforms.

Financial institutions in Hong Kong, many of which are legally permitted to offer services to the SDN officials, could face financial penalties for inadvertently breaching OFAC restrictions on using the US financial system to process transactions with the SDNs. Meanwhile, the Hong Kong Autonomy Act threatens ‘secondary sanctions’ against financial institutions that knowingly engage in ‘significant transactions’ with them. The word ‘significant’ has no official definition.

Americans in Hong Kong – individuals and companies – could violate the OFAC sanctions through interactions with the SDN officials. This risk is encapsulated in a FAQ section published by OFAC under its Venezuela-related sanctions programme which notes that a government is not sanctioned by virtue of having an SDN official, but ‘… US persons should be cautious in dealings with the government to ensure that they are not engaged in transactions or dealings, directly or indirectly, with an SDN, for example by entering into contracts that are signed by an SDN, entering into negotiations with an SDN, or by processing transactions, directly or indirectly, on behalf of the SDN, absent authorization or an applicable exemption’.

Given the SDN officials’ responsibilities in and around key agencies of the Hong Kong government with which US officials and businesses frequently engage – the Hong Kong Police, the Department of Justice, Immigration, the Independent Commission Against Corruption, the Joint Financial Intelligence Unit, Hong Kong University, to name a few – contact with some of the 85,000 American citizens and 1,200 American companies in Hong Kong is likely unavoidable.  

The risk to Americans is not entirely hypothetical. On 11 August 2020, OFAC announced a settlement with an unnamed, former US government employee accused of giving gifts and other favours to an SDN with whom he or she had a personal relationship while stationed at the US embassy in Bogota, Colombia. In its public statement about the settlement, OFAC warned:

‘All US persons, including members of the military and civil service stationed abroad, should exercise caution before voluntarily engaging in relationships with foreign persons that the US person knows, or reasonably should know, may have a sanctions nexus, as any financial transaction or exchange of goods or services with a designated person — even in the context of a personal relationship — may constitute a violation of US sanctions’.

Caracas, Sevastopol, Hong Kong?

The SDN List has historically been used as a form of international law enforcement tool by the US to freeze assets of terrorists, narcotics traffickers, proliferators of weapons of mass destruction, war criminals, and other international pariahs, often in cooperation with the UN and allies. Since Russia’s annexation of Crimea, OFAC has increasingly used blocking sanctions to ‘impose costs’ on governments – and their elites – whose actions threaten US national security, foreign policy, or the economy, often in the context of an intractable political conflict.

In addition to imposing a comprehensive embargo on Crimea, OFAC placed numerous Russian, Ukrainian, and Crimean individuals, including so-called oligarchs, on the SDN List and barred US persons from dealing in debt or equity of certain Russian companies. More than six years later, these ‘Ukraine-/Russia-related’ sanctions remain in place, with no sign of reverse. Indeed, they have expanded through a series of congressional and administrative actions.

A year after Russia’s annexation of Crimea, OFAC inaugurated the Venezuela-related sanctions programme under EO 13692, which targeted the ‘Government of Venezuela’s erosion of human rights guarantees, persecution of political opponents, curtailment of press freedoms, use of violence and human rights violations and abuses in response to antigovernment protests, and arbitrary arrest and detention of antigovernment protestors’, among other activities. This language is not far off from the Hong Kong-related EO 13936.

OFAC’s Venezuela sanctions accelerated rapidly after the controversial Constituent Assembly elections of July 2017 and now include blocking sanctions against the entirety of the Venezuelan government and Venezuelan state-owned enterprises. Supporters of the Maduro government inside and outside of Venezuela have found their way onto the SDN List, accused of corruption, money laundering, and other offenses.

What will OFAC’s Hong Kong-related sanctions look like five years from now? If recent history is a guide, the programme will have expanded to include more designations and a wider range of prohibitions. US allies may adopt their own measures too.

The great unknown is how China will respond. China’s announcement of unspecified counter-sanctions against US lawmakers and leaders of pro-democracy organisations generated headlines, but little else. Unlike the US, the PRC lacks a well-defined framework for implementing OFAC-style sanctions to regulate commercial actors, and companies are unsure what to do about them. A likelier outcome will be the continued push for alternatives to the US financial system, an aspiration shared with Russia, Venezuela, and others. The US government’s latest salvos against TikTok and WeChat could accelerate that trend.

If parallel, non-US systems develop, fewer activities in Asia will be directly subject to US sanctions and traditional legal enforcement mechanisms. Blocking sanctions, like those announced by OFAC on 7 August, may have less impact and the scope for US influence may decline. One thing is certain. For businesses and countries that rely on activities with both the US and China, life is only going to get more complex.

Nick Turner is a lawyer based in Hong Kong.

The views expressed in this Commentary are the author's, do not constitute legal advice and do not represent those of RUSI or any other institution.