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.
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?
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.
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.
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?
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.