The US Treasury Department, or presumably, its Office of Foreign Assets Control (“OFAC”), is expected to issue a report by mid-December under Section 5(b) of the Hong Kong Autonomy Act (“HKAA”) identifying “foreign financial institutions” (“FFIs”) that have knowingly conducted significant transactions with “foreign persons” previously identified by the US State Department under Section 5(a) of the HKAA on 14 October 2020. FFIs identified in the Section 5(b) Report will face a menu of ten sanctions, ranging from prohibitions on serving as a repository of US government funds to travel bans against corporate officers.
Prior to identification in the Section 5(b) Report and imposition of those sanctions, OFAC “will reach out to an FFI to inquire about its conduct,” according to FAQ 848 issued by OFAC in conjunction with the State Department’s 5(a) report.
While awaiting issuance of the Section 5(b) Report, and in addition to identifying any connection to individuals previously identified by the State Department, FFIs should consider how to respond if they receive an outreach from OFAC. Such an outreach, like any inquiry or request for information from OFAC, must be handled expeditiously and strategically. Inaccuracies or omissions in the response or the failure to respond at all could form the basis of enforcement action separate and apart from the conduct OFAC is reviewing under the HKAA. It will certainly set the tone for interactions with OFAC going forward.
In this note, we provide guidance on how to handle requests from OFAC under the HKAA, and more broadly to other informational outreach, based on our considerable experience in managing similar US government requests for clients in Asia.
HKAA Section 5(b) directs the Treasury Department to identify any FFI “that knowingly conducts a significant transaction with a foreign person identified” in the US State Department’s Section 5(a) report. As of 18 November 2020, there are ten individuals identified in the 5(a) report as “foreign persons” who “are materially contributing to, have materially contributed to, or attempt to materially contribute to the failure of the PRC to meet its obligations under” the Sino-British Joint Declaration of 1984 or Hong Kong’s Basic Law.
Given that the Treasury Department’s 5(b) report is expected mid-December, we expect that OFAC will reach out to FFIs in the interim, as indicated in FAQ 848.
Based on past experience, we anticipate that this outreach by OFAC may come as a formal Administrative Subpoena or as a Request for Information (“RFI”) in the form of a letter or an email.
An Administrative Subpoena is issued under OFAC’s regulatory authority under Section 602 of OFAC’s Reporting, Procedures and Penalties Regulations. In relevant part, Section 602(a) states:
“Every person is required to furnish under oath…from time to time and at any time as may be required by the Director, Office of Foreign Assets Control, complete information relative to any transaction, regardless of whether such transaction is effected pursuant to license or otherwise, subject to the provisions of this chapter or relative to any property in which any foreign country or any national thereof has any interest of any nature whatsoever, direct or indirect.”
The term “every person” is not limited to US persons but there is some question as to whether and under what conditions OFAC can subpoena information from anyone in the world. There are formal procedures under various mutual legal assistance agreements (“MLAA”) to obtain information located overseas, but the Hong Kong-US MLAA is no longer in force so OFAC is unlikely to attempt a subpoena directly on an FFI for purposes of the HKAA.
Instead of directly approaching an FFI overseas, OFAC may reach out to the FFI’s US branches and operations (if any) to obtain information held overseas and over which their subpoena authority does not clearly extend. The ability to enforce subpoenas requiring provision of information located overseas and subject to disclosure restrictions under local law has been challenged in litigation.
Alternatively, the RFI letter is a seemingly less formal and less confrontational method, which uses more conciliatory language, e.g., “requests” as opposed to “directs.” Do not be misled by the tone or format, however. The RFI may be the first indication that OFAC is looking at the FFI as a Section 5(b) target and all that portends.
Regardless of the form used by OFAC for its outreach, a failure to respond or an incomplete or inaccurate response may have consequences, beyond those specified under section 7 of the HKAA. OFAC is a federal agency and responses deemed to be evasive, misleading or untrue can be the basis for a federal prosecution under 18 USC § 1001. Moreover, even if there are no federal charges, an unsatisfactory response can cause unnecessary contentiousness, unfounded suspicion, escalation, and collateral consequences (or the threat thereof).
On the other hand, there are competing considerations every time the United States seeks to assert extraterritorial jurisdiction, without a legal basis and particularly, if there are conflicting local laws that prohibit disclosure of protected information to foreign law enforcement. There are data privacy and, in some jurisdictions, state security laws that must be considered to avoid liability under local laws.
Consequently, a response to OFAC (or any other US agency) must be carefully approached. Handled properly, a subpoena or information request can result in no further action or can mitigate any action taken in light of a company’s cooperation. In the context of the HKAA, rather than an answer restricted to the exact question asked, the company can craft its response to make its case that it does not meet the criteria for the Section 5(b) Report (as specified in Section 5(d) of the HKAA) or that it otherwise qualifies for exclusion from the Report.
- Forward the subpoena or RFI to your legal department or external counsel to handle to ensure consistency with company policy and an appropriate response.
- If there are any questions about the scope of the request, contact the agency or enforcement officer to resolve any uncertainty.
- Ask for additional time to respond, if necessary. It is of the utmost importance that the response is accurate and complete and that you understand what OFAC believes to be the basis on which it would be listed.
- Ensure that the response is accurate and complete to avoid § 1001 charges for the responses alone. Carefully consider the implications of what information is being provided as it could, under some circumstances, a) lead to further requests for information and/or b) form the basis for substantive charges for violations of OFAC regulations.
- Use the response as an initial chance to advocate, anticipating OFAC’s analysis of the Section 5(b) criteria and the bases for exclusion under Section 5(d), i.e., that the relevant activity: (i) is not likely to be repeated in the future, (ii) has been reversed or otherwise mitigated by “positive countermeasures” taken by the foreign person or FFI in question, and (iii) “does not have a significant and lasting negative effect” on China’s obligations with respect to Hong Kong under the Joint Declaration and Basic Law.
In general, responses to OFAC’s RFIs and subpoenas should always endeavor to present the facts explicitly analyzed against OFAC’s enforcement guidelines or other relevant guidance in order to proactively influence the case from the outset. That approach is recommended in this context as well in order to establish an atmosphere of cooperation rather than adversity.
The form, direction, and scope of the HKAA outreach OFAC will take under Section 5(b) is not yet known. But if OFAC does reach out, its inquiry should be addressed in light of experience with responding to OFAC administrative subpoenas and RFIs more generally. Approaching OFAC’s outreach strategically could mitigate the risk of adverse consequences under the HKAA and beyond.