On June 30, 2020, China’s national legislature passed a new national security law (NSL) for Hong Kong. The law establishes four broad categories of criminal offenses: secession, subversion, terrorism, and collusion with foreign forces, and creates new powers to support enforcement of the law.
For US companies in Hong Kong, the NSL (as well as responses from foreign powers) alters, sometimes dramatically, the calculation of legal risk. Continued uncertainty around the NSL’s meaning and reach creates new operational risks in Hong Kong’s commercial environment and threatens its historical status as a stable, go-to international business hub. Officers and directors of these US companies must assess the rising cross-border risks that the NSL has brought, and proactively plan for potential political and legal pressure from both Hong Kong and US authorities, as well as concerned commercial partners and opportunistic adversaries.
Five Months In: Many US Companies Continue to “Wait and See”
While certain technology and media companies quickly relocated their data, operations, and employees out of Hong Kong, most international companies have opted for a “wait and see” approach before deciding whether and how to respond to this new legal environment.
Some of the NSL’s most visible immediate impacts have been an array of arrests and charges under NSL-specific offences, though only two have been officially charged as of late-November. Beyond what is taking place on Hong Kong’s streets, however, international companies must understand the NSL’s potential extraterritorial reach; the law criminalizes certain conduct outside of Hong Kong, regardless of an individual’s nationality or a company’s place of incorporation. Being mindful of only Hong Kong-based actions and speech, or even reducing or closing a physical presence in Hong Kong will not completely eliminate NSL-related risks. In August, the Hong Kong police issued an arrest warrant based on alleged NSL violations for a US citizen who has lived in the in the United States for more than two decades.
The Hong Kong judiciary and key financial regulators have tried to reassure concerned international companies. In September, Chief Justice of the Court of Final Appeal Geoffrey Ma issued an 18-page statement reiterating the Hong Kong courts’ dedication to judicial independence and underscoring the importance of principles “fundamental to the concept of justice and fairness in Hong Kong…irrespective of the crime involved…” These include the right to a fair trial and presumption of innocence, among others. In a November speech at the International Bar Association conference, Ma confirmed his view that the courts would approach NSL cases in the same way as all other cases. When an Australian judge resigned from his post as a foreign-appointed judge on Hong Kong’s highest court citing the NSL, the government effectively replaced him with the deputy president of the Supreme Court of the United Kingdom, perhaps signaling a continued commitment to the rule of law based on the English common law system.
The financial industry has also sought guidance from two important Hong Kong regulators – the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC). From a risk perspective, however, the regulators’ messaging has been mixed. On one hand, they assured companies that they can carry on business-as-usual, but on the other, new requirements for businesses to report on suspected NSL breaches have given rise to new questions about compliance obligations.
The reactions and warnings from many Western countries have been more dire. Many (including the United States, UK, Australia, Canada, and others) suspended extradition agreements with Hong Kong. The Hong Kong response (at the Central People’s Government’s instructions) was to go a step further and suspend bilateral Mutual Legal Assistance Treaties (MLATs) with these governments, weakening once robust mechanisms for cross-border information sharing and joint investigations.
The NSL is taking shape against the backdrop of a US-China geopolitical environment that remains highly uncertain, and how the Biden administration chooses to navigate China relations will undoubtedly play a role in the evolution of the NSL and the complex risk factors companies must calculate in Hong Kong. Prudent companies are deeply engaged in contingency plans for an uncertain tomorrow. These companies would be wise to factor into their plans three new enforcement and disputes risks:
- The NSL complicates previously routine cross-border cooperation with foreign governments
US companies operating in Hong Kong (and other overseas locations) have long recognized and considered the extraterritorial reach of many US laws and adjusted risk calculations and compliance programs accordingly. However, rarely has compliance with those US laws come into direct conflict with compliance with Hong Kong laws. The NSL, as well as the US response, potentially changes that.
For example, as part of international enforcement actions or investigations, agencies like the Department of Justice or Securities and Exchange Commission routinely seek cooperation from US companies abroad, often requesting certain documents or information. Sometimes these requests are
backed by court order, compelling compliance. However, US companies must now carefully consider whether, in certain circumstances, such cooperation or compliance might violate the NSL as purported collusion with a foreign government. Adding to the risk, companies holding information that might be considered PRC “state secrets” will face substantial risk of criminal exposure in Hong Kong if asked to provide that information to a US authority, even if the request is backed by a US court order. This could leave some directors and officers with two unattractive options: violate either US law or what is now Hong Kong law.
Faced with this dilemma, US companies may be tempted to look to the respective governments to negotiate with each other on a resolution (as has been the case in some disputes involving conflicting US court orders and mainland Chinese secrecy laws). But whether this is practical may depend on the prevailing political winds. Therefore, companies may need to pursue novel solutions to fit novel circumstances.
- The US government’s response compounds the risk exposure
The US response to the NSL (and the circumstances leading up to it) has added its own pressures. Beyond suspending the US-Hong Kong extradition treaty, the US government has also rescinded Hong Kong’s special preferential status under US law. This means extending to Hong Kong a range of export control restrictions once reserved for mainland China. In addition, many Hong Kong export license applications now likely face a stringent “presumption of denial” standard. These abrupt changes may seriously disrupt supply chains passing through Hong Kong, and companies caught violating these new regulations and restrictions face significant enforcement risks.
Additional enforcement risks arise from new US economic sanctions against officials and organizations identified by the US government as responsible for undermining Hong Kong’s autonomy. Companies dealing with sanctioned persons or entities, even inadvertently, where there is a US nexus such as the involvement of a US person or a US financial institution, could be subjected to restrictions on their business activity, substantial civil fines, and criminal exposure. Even non-US companies engaged in significant transactions with sanctioned persons and companies could have exposure via secondary sanctions, even when the transaction has no tie to the United States.
An August declaration made by Hong Kong’s bank regulator, the HKMA, that unilateral sanctions imposed by foreign governments “have no legal status in Hong Kong” added another layer of complexity. The declaration foreshadowed a potential legal interpretation that would be highly unsympathetic to a financial institution or other service provider that took steps to comply with US sanctions restrictions, suggesting that doing so may be considered in Hong Kong to be illegal collusion under the NSL. Although the SFC has reportedly assured financial institutions in private that this extreme interpretation is unlikely, it has not yet been tested in court. To date, the limited number of designations under the Hong Kong sanctions has kept this dilemma mostly theoretical for US companies. But the list is expanding and the risk broadens as it does. Again, companies may need creative approaches to resolve potentially contradictory pressures from both governments, all while balancing those against commercial needs.
- Commercial disputes may naturally follow
Finally, the current layers of uncertainty coupled with the possibility of sudden, unexpected shifts in the application of either the NSL or responsive US laws may give rise to more private commercial disputes, which could in turn increase the costs of doing business in Hong Kong. With the NSL and new US laws in place, companies may consider renegotiating contractual terms, re-adjusting commercial plans, or altogether pulling out of Hong Kong. Breach of contract disputes, company dissolution or insolvency considerations, and disrupted financial transactions may follow. Together, these changes create conditions conducive to more litigation and arbitration – which can be both time-consuming and expensive.
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US companies with Hong Kong business have recognized that they cannot rely on outdated risk playbooks when evaluating the legal uncertainties arising from the NSL and US response. Businesses are already undertaking a comprehensive overview of their operational and risk assessment programs to account for this new environment. As part of this process, with the help of innovative cross-border counsel, directors and officers should take a serious look at their exposure to new cross-border enforcement and disputes risks and strategize accordingly.
About the Authors
A former US Department of Justice (DOJ) prosecutor, Wade Weems counsels corporations and individuals with Asia ties in cross-border criminal cases and internal investigations stemming from US government enforcement actions, particularly those alleging bribery or Foreign Corrupt Practices Act violations, theft, fraud and money laundering. Mr. Weems also advocates for clients affected by export control restrictions and sanctions issued by the US Department of Treasury’s Office of Foreign Assets Control (OFAC) and the US Department of Commerce. Mr. Weems offers China and other Asia-based clients a deep understanding of the US federal and regulatory landscape, with a two-fold DOJ career that includes prosecutorial roles in both the Criminal Fraud Section and National Security Division.
Calvin Koo focuses his practice on representing clients in high-stakes, cross-border government enforcement actions. He regularly advises clients throughout Asia in international investigations by government and regulatory agencies, including the US Securities and Exchange Commission; the US Department of Justice; the Hong Kong Independent Commission Against Corruption; and the Hong Kong Securities and Futures Commission. Mr. Koo also counsels victims of fraud or other misconduct on cross-border asset tracing and judgment enforcement strategies.
Abigail Chen, under the supervision of the firm’s lawyers, provides support on matters involving cross-border instances of fraud and misconduct, often with a nexus to Greater China. Ms. Chen received her BA from Cornell University.