On Wednesday, October 14, 2020, the U.S. Department of State (“State”) submitted a report to the U.S. Congress, as required under section 5(a) of the Hong Kong Autonomy Act (“HKAA”), identifying foreign persons materially contributing to the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law concerning Hong Kong’s relative independence. The State report (the “Section 5(a) Report”) named 10 prominent Chinese and Hong Kong Government officials – all of whom are already subject to U.S. sanctions maintained by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). Now, the Treasury Department is required, within 30 to 60 days from the date of State’s Section 5(a) Report, to provide its own report, pursuant to Section 5(b) of the HKAA, identifying foreign financial institutions engaged in “significant transactions” with the named individuals (the “Section 5(b) Report”). Any institutions named in the upcoming Treasury report will be expected to face not only strong public criticism from the Trump Administration, members of Congress, and other China critics, but also could become subject to future OFAC “secondary sanctions,” targeting their continued access to the U.S. financial system, in whole or in part, if they continue dealing with any of the 10 sanctioned officials.

Key Takeaways

  • Report Required Under HKAA. Since the enactment of the HKAA in July, financial institutions worldwide, particularly those operating in Hong Kong, have been anticipating the issuance of the Section 5(a) Report identifying those the U.S. Government views as undermining the independence of Hong Kong. It is not surprising that the list of 10 individuals largely tracks OFAC’s Specially Designated National and Blocked Persons (“SDN”) List designations on August 7, 2020, under Executive Order (“E.O.”) 13936, which already required global banks to block all assets of those SDNs that are subject to U.S. jurisdiction.[1]
  • Secondary Sanctions Implications. The Section 5(a) Report warns foreign financial institutions of the risks of dealing with the named individuals even outside of U.S. jurisdiction – doing so could trigger U.S. secondary sanctions. OFAC issued guidance at the same time as the Section 5(a) Report, giving global banks 30 days (i.e., until November 13, 2020) to find ways to minimize their exposure to the 10 Chinese and Hong Kong officials to avoid being identified in the Treasury Department’s upcoming Section 5(b) Report – which, notably, is due midway between the upcoming U.S. Presidential election in early November and the Presidential inauguration slated for late January.
  • The List. The biggest news arising from the Section 5(a) Report involves what it did not include – sanctions on additional Chinese or Hong Kong officials or entities. Financial institutions worldwide had feared that the U.S. Government would use the opportunity of the Section 5(a) Report to impose sanctions on other senior Chinese or Hong Kong government officials – beyond those sanctioned by OFAC in August – as well as government entities that would make the ability of global banks to continue operating in Hong Kong increasingly difficult.
  • A Bit of Relief. Alongside State’s Section 5(a) Report, OFAC issued four FAQs that assured foreign financial institutions that (1) only “significant transactions” after the date of the Section 5(a) Report would be considered in assessing listings for Treasury’s Section 5(b) Report; (2) good-faith wind-down activities with sanctioned parties within 30 days would not be considered significant for purposes of compiling the Section 5(b) Report; and (3) foreign financial institutions will get advance notice, and presumably a chance to cure, before being named in the Section 5(b) Report.
  • High U.S. – China tensions. State’s Section 5(a) Report, and sanctions on Hong Kong in general, come at a time when relations between the world’s two largest economies are as tense as they’ve been in recent decades due to clashes over a host of issues related to trade, international peace and security, and the COVID-19 pandemic.

State’s Section 5(a) Report

On July 14, 2020, alongside issuance of E.O. 13936, President Trump signed the HKAA into law after it received overwhelming bipartisan support in Congress. The twin actions were a direct response to the U.S. Government’s concerns over the passage of Beijing’s new National Security Law for Hong Kong and police handling of associated public protests that drew international attention and condemnation. Section 5(a) of the HKAA calls on the Secretary of State to submit a report to the appropriate congressional committees identifying foreign persons that the Secretary of State, in consultation with the Secretary of the Treasury, determined are materially contributing to, have materially contributed to, or attempt to materially contribute to the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law.

State identified the following senior Chinese and Hong Kong government officials in its report to Congress:

  • Eric Chan – Secretary General, Committee for Safeguarding National Security of the Hong Kong Special Administrative Region
  • Teresa Cheng – Secretary for Justice
  • Carrie Lam – Chief Executive of the Hong Kong Special Administrative Region
  • John Ka-chiu Lee – Secretary for Security
  • Huining Luo – Director, Hong Kong Liaison Office
  • Chris Tang – Commissioner of Police
  • Erick Tsang – Secretary for Constitutional and Mainland Affairs
  • Baolong Xia – Director, Hong Kong and Macao Affairs Office of the State Council
  • Xiaoming Zhang – Deputy Director, Hong Kong and Macao Affairs Office of the State Council
  • Yanxiong Zheng – Director, Office for Safeguarding National Security in Hong Kong

As Section 6 of the HKAA outlines, the identified individuals are subject to blocking sanctions, but, as noted above, all of the individuals identified in the report already were sanctioned (with their assets subject to U.S. jurisdiction “blocked” or frozen) by OFAC on August 7 pursuant to E.O. 13936. Thus, the Section 5(a) Report carries no additional sanctions for these 10 individuals, but simply serves as a precursor to threaten sanctions against any foreign financial institutions that continue to engage in significant transactions with them.

Pursuant to Section 7(a) of the HKAA, within one year of a foreign financial institution’s inclusion in the Treasury report, five out of 10 of the sanctions set out in Section 7(b) of the HKAA must be imposed on that institution. Not later than two years after a foreign financial institution has been included in the Section 5(b) Report, all 10 of the following sanctions set out in Section 7(b) must be imposed:

  • Prohibition on obtaining loans or credits from U.S. financial institutions
  • Prohibition on designation as a primary dealer for U.S. government debt instruments
  • Prohibition on serving as a repository for U.S. government funds
  • Prohibition on foreign exchange transactions subject to U.S. jurisdiction
  • Prohibition on transfers of credit or payments between financial institutions subject to U.S. jurisdiction
  • Prohibition on property transactions subject to U.S. jurisdiction
  • Prohibition on exports, re-exports, and in-country transfers of U.S.-origin commodities, software, and technology to a financial institution
  • Prohibition on obtaining equity or debt investments from any U.S. person
  • Prohibition on the entry into the United States of corporate officers, principals, or controlling shareholders of the foreign financial institution
  • Sanctions on principal executive officers of the foreign financial institution in the same manner as other foreign persons sanctioned under the bill

OFAC’s Actions

In conjunction with the issuance of State’s Section 5(a) Report, OFAC updated its SDN List to note the following for the 10 identified officials: “Secondary sanctions risk: pursuant to the Hong Kong Autonomy Act of 2020 – Public Law 116–149.” Additionally, OFAC published four FAQs to provide guidance as to the implications of the State report.

  • FAQ 848: To the great relief of many observers, Treasury indicated that, as a general matter, transactions with identified officials that constitute a good-faith wind-down within 30 days of the official’s identification will not be considered “significant.” Moreover, Treasury plans to reach out to foreign financial institutions to inquire about their conduct (and presumably giving them a chance to explain and “cure” their behavior) before identifying them in a Section 5(b) Report and subjecting them to secondary sanctions.
  • FAQ 849: Treasury noted that a foreign financial institution, having been included in Treasury’s report, may subsequently be removed if its significant transaction with a named official (A) does not have a significant and lasting negative effect that contravenes the obligations of China under the Joint Declaration and the Basic Law; (B) is not likely to be repeated in the future; and (C) has been reversed or otherwise mitigated through positive countermeasures taken by that foreign financial institution.
  • FAQ 850: Treasury detailed how it will identify “significant” transactions with the identified individuals – the totality of the facts and circumstances will be considered. As a general matter, Treasury may consider some or all of the following factors in determining whether a transaction is “significant”: (1) the size, number, and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a foreign person identified in a report submitted by the Secretary of State under section 5(a) of the HKAA or in updates to that report; (5) the impact of the transaction(s) on statutory objectives, including whether the transaction(s) (A) have a significant and lasting negative effect that contravenes the obligations of China under the Joint Declaration and the Basic Law, (B) are likely to be repeated in the future, and (C) have been reversed or otherwise mitigated through positive countermeasures taken by that foreign financial institution; (6) whether the transaction(s) involve deceptive practices; and (7) such other factors that the Secretary of the Treasury deems relevant on a case-by-case basis.
  • FAQ 851: Treasury clarified that it will utilize the definitions of “financial institution” and “knowingly” as detailed in the HKAA.


There is never a dull moment these days when it comes to U.S. – China relations. Even among all of the recent developments, the October 14 Section 5(a) Report issued by State is particularly notable in that it clearly identifies secondary sanctions risks for foreign financial institutions. The upcoming Treasury report provides a continuing threat for global financial institutions to wind down any activities with the officials named in the Section 5(a) Report – or else face the consequences. While the OFAC FAQs provide some comfort, the risks are quite clear now: engage in significant transactions with one of the named individuals, and your bank might find itself in the crosshairs of OFAC and the broader U.S. Government.