Hong Kong braces for Monday deadline as Trump’s report puts HSBC, lenders back into sanctions spotlight
- Trump administration has a Monday deadline to issue report to Congress in a follow up to Hong Kong Autonomy Act passed in mid-July
- HSBC and other lenders in the city could face new restrictions for engaging in “significant transactions” with sanctioned officials
It is the latest example of the US flexing its muscle through the threat of secondary sanctions on businesses to put maximum pressure financially on governments to achieve diplomatic goals. In the process, American authorities are making more risky transactions that would normally be routine – and still perfectly legal in many jurisdictions, according to compliance experts.
Potential sanctions against financial institutions can range from bans on senior executives travelling to the US to losing access to US dollar clearing functions.
“It comes down primarily to the prominence of the US dollar,” said Bharath Vellore, a managing director for Asia-Pacific at risk compliance firm Accuity. “If you are a bank and you are cut out of US dollar settlement, that’s basically a death knell for the financial institution.”
On Thursday, the US issued sanctions against 18 major Iranian banks as it seeks to further pressure the Iranian government over terrorism financing and nuclear proliferation. The move would essentially cut off Iran from the global financial system and has been widely criticised by humanitarian officials as it would greatly reduce the country’s ability to import needed food and medicines.
The ability of the US to place sanctions on bad national actors existed for years, but American officials have increasingly used the threat of secondary sanctions on businesses in recent years to try to stave off the flow of funds to nations already facing existing bans, such as Iran or North Korea, or force countries to address alleged human rights abuses, such as China and Russia.
The use of secondary sanctions has furthered US policy goals, but caused a “transatlantic political divergence” between the US and its allies in Europe and created greater compliance uncertainty for private-sector companies, the Atlantic Council, a Washington think tank, and financial industry trade group UK Finance said last year.
Hong Kong national security law official English version:
“The potential of secondary sanctions has also prompted further de-risking as reputable multinational firms adjust their risk appetite and hedge against possible punitive action from Washington.”
At Accuity, for example, the company’s client base moved from mostly banks and insurers five years ago to a much broader base of non-financial companies, including retailers and casinos, as firms are increasingly worried of breaching US sanctions rules, according to Vellore.
The sanctions risk for companies operating in Hong Kong rose since the adoption of a broad-based national security law for the city, according to analysts.
American banks and other lenders in Hong Kong must “carefully walk a tightrope” to comply with US sanctions and not damage their businesses in the mainland as China’s financial services industry further opens up, according to Fitch Ratings.
“Further US sanctions on Chinese or Hong Kong-based individuals could lead to reputational issues,” Fitch analysts Monsur Hussain and Grace Wu said in a September 22 research note. “Extension of sanctions to corporates with strong links to the Chinese state, or [state-owned enterprises], would add credit risk in addition to issues of reputational risk, which might incentivise these banks to manage their credit risk more tightly towards counterparties that could be affected.”
The “most problematic” scenario for Hong Kong lenders would be if the US imposes sanctions on systemically important, state-owned banks and effectively cuts then off from the US financial system.
“However, this is felt to be an unlikely course of action due to the extremely high likelihood of tit-for-tat repercussions from the Chinese state,” the Fitch analysts said.
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