Podcast - Decoding the Hong Kong-Related Sanctions programme

Decoding the Hong Kong-Related Sanctions programme
Podcast - Decoding the Hong Kong-Related Sanctions programme

In this podcast, we're in talk with Nick Turner, a sanctions attorney at Steptoe & Johnson here in Hong Kong, as tells us what are the most common questions that his clients ask about Hong Kong-Related Sanctions and its effects on the Hong Kong-US Dollar clearing.


Protiviti Podcast Transcript Transcript

Josh Heiliczer
Josh

I'm Josh Heiliczer, Greater China Risk and Compliance leader in Asia Pacific financial crime compliance subject matter expert for Protiviti. This podcast will seek to bring interesting perspectives to critical risk and compliance issues facing financial institutions in Greater China and across the region. The goal is to provide these viewpoints to you in a concise manner, likely alternating between a guest Q&A format and Protiviti adds some of the insights. The views expressed do not necessarily represent the views of Protiviti or its guest. The information is not intended to be legal analysis or advice. Listeners should consider the unique circumstances of their own companies and consult with council before taking any decisions.

Connect with me on LinkedIn if there is a topic you would like the podcast to focus on in the future. I’m looking forward to beginning this journey with you today and our first guest, Nick Turner, a sanctions attorney at Steptoe & Johnson here in Hong Kong.

Nick, thanks for joining us here on the podcast here with Protiviti. What are some of the key questions your clients are asking about the Hong Kong related sanctions?

Nick Turner
Nick
Hi, Josh. Thanks for having me here today. This is a really good question. We’ve had a couple of weeks now since the sanctions were announced against 11 Hong Kong and PRC government officials. These are what we call “blocking sanctions,” which means they result in an asset freeze of any property or interest in property of the designated individuals when that property is in the United States or within the possession or control of a US person. So, that’s the first key question. What do we do with property or interest in property of these 11 officials? The answer is if you’re a non-US financial institution, you have to ensure that when you deal in that property, for example, a wire transfer, it might be landing a deposit account, or another kind of financial service, you’re not involving US persons or the US financial system, which basically means US banks. If you do that, it could be a violation of the OFAC prohibitions. The other thing people are very concerned about is the Hong Kong Autonomy Act. Because the Hong Kong Autonomy Act in Section 7, provides for what we call “secondary sanctions” against foreign financial institutions that “knowingly engage in significant transactions with individuals who are identified under the Hong Kong Autonomy Act.” Now, what’s interesting is that the executive order that was used for these sanctions and the Hong Kong Autonomy Act are two separate documents. So, what we’re really waiting for is another report to come out under the Hong Kong Autonomy Act, and on the basis of that report, financial institutions will know who the individuals or entities are that could lead to secondary sanctions. So, you can see there’s a lot of moving parts and it’s pretty complicated, but I think most banks in Hong Kong have great advice and have done a good job so far of responding.
Josh Heiliczer
Josh
Great. That’s really a lot of information actually to take in just in that question. One of the questions we’re getting from a lot of our clients right now is, what effect it would have on the Hong Kong US dollar clearing? So, the local interbank clearing of US dollars.
Nick Turner
Nick

This is one of the biggest misperceptions about OFAC sanctions. A lot of people think that OFAC sanctions apply to US dollar transactions globally, but that’s actually a little bit misleading. OFAC sanctions are focused on US persons and that includes US companies, US financial institutions for example, but they apply regardless of currency. So, you could have a Hong Kong dollar transaction which takes place in Hong Kong but is processed by the branch of a US financial institution, and that would be subject to OFAC sanctions even though it’s in Hong Kong dollars. If we flip that on its head and we imagine that we have a transaction in US dollars, but it takes place entirely outside of the US financial system without the involvement of US persons, that actually is not subject to the executive order or to most OFAC sanctions. There are some exceptions, but this isn’t one of them. So, when we look at local clearing in Hong Kong, the question we have to ask is not what the currency is, but who are the banks involved and the persons involved. If we have US persons, that’s something that OFAC has enforcement jurisdiction over. If we don’t, then it falls outside of that jurisdiction.

Josh Heiliczer
Josh
Great. So, it sounds like there are some limitations around the sanctions. I would assume a lot of your clients are coming to you for some advice right now. Once you get some of that legal advice and once you provide some of that clarification, how is it getting implemented? I mean for example, when we’re talking about the sanction names, a lot of banks will go for a Big Bang approach and say, “Okay, names on the list,” and so, it doesn’t matter where the transaction is or how it’s occurring, it’s going to flag an exception.
Nick Turner
Nick

Right, and that’s one of the things that’s challenging about this particular sanctions program. So, we know that when OFAC issues sanctions under some programs like the North Korea or the Iran program, you’re right. A lot of banks will just look at the names on the list and make an easy decision to do no business with them. That’s more complicated with the Hong Kong sanctions and some other sanctions programs where companies are more likely to have business with those individuals or even want to continue doing business with those individuals for one reason or another. In that case when it comes to implementing the advice, it really requires a financial institution or any other company to understand from an operational perspective where their touchpoints are with the US financial system and with US persons, and to make sure that they have excellent controls to manage that risk. It’s a level of operational understanding that some companies don’t have yet, but I think they’re going to have to develop it as US sanctions become more complicated and apply it more and more in Hong Kong. It’s just something we’re going to have to learn.

Josh Heiliczer
Josh

We’re getting a lot of questions from clients around how to operation-wise, some of the advice that they’re getting from attorneys like yourself or internal council that they might have. I think one of the key areas is really around or handling given the additional volume of exceptions particularly for those types of banks going through a Big Bang approach. Being secondly, what we’re also seeing is reviews of customer information for potential nexus, and while some banks have digitized a lot of this information, we’re still seeing a lot of paper valid reviews. I think finally, we’re also seeing can you ringfence some of the relationships from some of the potential transactions that might be prohibited or even maybe closer to the line. I guess one other factor that we’re seeing now is how can you plan ahead? You mentioned initially is sort of another report coming out around the sanctions in terms of how they’re going to be implemented, but how can you plan for some of the new potential sanctions where the potential risk that might come out of these sanctions in the future once they’re clarified?

Nick Turner
Nick

Well, you’re right that there’s a lot of uncertainty about sanctions. I think a great example has to do with the WeChat executive order that was released surprisingly on August 14th. We’re still waiting to find out what that means. What it demonstrates is that the White House and the US government in general have a lot of authority to create sanctions and other kinds of restrictions virtually out of thin air in order to respond to international developments. So, one thing that you have to watch, if you want to try to predict where sanctions are going, is developments. You have to be very sensitive to politics and to international relations, you have to pay close attention to the US-China relationship and try to listen to what both sides are saying.

There is some good news though. This administration, in particular, has been very good about signaling where it’s going. A lot of the things that have happened in recent weeks weren’t really surprises because we had some advance notice. Sometimes, months or weeks of notice, that some of these things were going to happen. While we didn’t know the specifics, we were at least able to start thinking ahead, planning, and mapping out for our clients where they needed to have certain controls. So, there is something that you can do even if you don’t know all of the details today.

Josh Heiliczer
Josh
I think one of the things we’re seeing with a lot of our clients, we’re advising a lot of clients, is really first and foremost, conducting a risk assessment looking for some potential exposures. I know a number of banks who are looking through their large corporate books, looking at things like suppliers, where it could there be some impacts, and whether or not there might be a need for a potential look back on some transactions, or additional backlogs in terms of sanctions exceptions, and needing to do some backlog clearance, so we’re actively talking to clients who are on that as well. So I guess, maybe just to sum up, Nick, I mean, where do you think things are going and what are you looking in terms of your clients’ advice and how they are handling it?
Nick Turner
Nick
I think what we’re watching for above all is for information to come from the US Treasury Department on some of the key terms in the Hong Kong Autonomy Act, how they plan to handle those reports that I mentioned, and how financial institutions in Hong Kong can demonstrate a certain level of compliance with the US sanctions that will help reduce the likelihood that they’re going to be targeted for secondary sanctions by the administration. Of course, we’re all watching to see what happens with the US election. If we have a new administration, there might be some changes to some of these policies. Although, I think the general expectation is that the US-China relationship will remain largely where it is today, but hopefully, there will be some developments on the diplomatic front.
 
By the way, on Monday, the 31st of August, there’s going to be a webinar hosted by Dow Jones with me and Josh. We’re going to be talking about a lot of these issues, plus a lot of other things. So, I would encourage your listeners to tune in. It’s on Monday, the 31st of August.

 

Josh Heiliczer
Josh
Nick, I really appreciate you joining us. Also, I look forward to seeing you on the webinar next Monday.
Nick Turner
Nick
Thanks, Josh.
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Josh Heiliczer
Joshua Heiliczer
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