Reed Smith Client Alerts

Do you have a business in Hong Kong?

Do you do business with persons in Hong Kong?

Is your business caught up in the China/US trade tensions?

If any of the answers to the above is “yes”, you should read about the Hong Kong Autonomy Act which President Trump signed into law on July 14, 2020.

What is the Hong Kong Autonomy Act?

On July 14, 2020, President Trump signed into law the Hong Kong Autonomy Act (the "HKAA"), unanimously passed by the U.S. House of Representatives on July 1, 2020 and by the U.S. Senate on July 2, 2020.

Section 5 of the HKAA requires that the U.S. Secretary of State submit a report within 90 days1 of the bill’s passage on persons and entities that materially contribute to the contravention of China’s obligations to Hong Kong under the Joint Declaration and the Basic Law. The report should also include “a clear explanation for why the foreign person was identified and a description of the activity that resulted in the identification.” These persons/entities, however, do not need to be included in the report if their actions do not have a significant and lasting negative effect that contravenes those obligations, their actions are not likely to be repeated in the future, and their actions have been reversed or otherwise mitigated through positive countermeasures taken by themselves.

By virtue of the HKAA and executive order issued by the U.S. president on July 14, 2020 (the “Executive Order”), the U.S. president has the ability to impose sanctions on individuals and entities who assist China in the implementation of the HK Security Law (defined below). In addition to requiring sanctions on foreign persons directly involved in repressing Hong Kong’s autonomy, the HKAA also requires the U.S. president to impose sanctions on foreign financial institutions engaging in significant transactions with such foreign persons.

What led to the introduction of the HKAA?

The HKAA was introduced in response to the implementation of the “The Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region” (the “HK Security Law”) on June 30, 2020. To understand what the HKAA is trying to address, we therefore have to undertake a short recap of some of the historical milestones in Hong Kong's political development.

Hong Kong has been, and continues to be, a territory of another sovereign state. It has never been a country. Save for a short period during the Japanese Occupation during World War II, Hong Kong had been a colony of Britain for more than a century from 1841 to 1997. During that time, as with the state of some colonies, business thrived but there was no democracy. The Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People's Republic of China (the “PRC” or “China”) on the Question of Hong Kong (the “Joint Declaration”) was signed on December 19, 1984. The Joint Declaration sets out, among other things and subject to the provisions therein, the basic policies of China regarding Hong Kong. Under the principle of "One Country, Two Systems", the socialist system and policies shall not be practised in Hong Kong and Hong Kong's previous capitalist system and life-style shall remain unchanged for 50 years (i.e. until 2047). The Joint Declaration provides that these basic policies shall be stipulated in a Basic Law of Hong Kong. The Basic Law was adopted on April 4, 1990 by the Seventh National People's Congress of China and it came into effect on July 1, 1997. From that time, Hong Kong has reverted to Chinese sovereignty but is a “special administrative region” with, among other things, the rule of law (as it has evolved under the British common law) enshrined in its Basic Law.

Article 23 of the Basic Law (in its existing form since the Basic Law came into effect in 1997) stipulates that Hong Kong “shall enact laws on its own to prohibit any act of treason, secession, sedition, subversion against the Central People’s Government, or theft of state secrets, to prohibit foreign political organizations or bodies from conducting political activities in the Region, and to prohibit political organizations or bodies of the Region from establishing ties with foreign political organizations or bodies.” The Government of Hong Kong did try to pass implementing regulations for Article 23 in 2002 but the attempt resulted in protests which led to the Government of Hong Kong abandoning such proposal.

The widely reported protests in Hong Kong in 2019 were sparked by a legislative proposal in early 2019 from the Government of Hong Kong which would have permitted the extradition of persons to jurisdictions with which Hong Kong did not have extradition agreements, including China and Taiwan. This led to concerns that Hong Kong residents and visitors would become subject to the legal system of China through their extradition, thereby undermining Hong Kong’s autonomy and infringing civil liberties. Notwithstanding the withdrawal by the Government of Hong Kong of the proposed legislation in September 2019, the protests continued and calls for the independence of Hong Kong began to increase. The Hong Kong government’s reaction and the concern from Chinese authorities evolved as well in response.

On May 21, 2020 and following demonstrations and protests for almost a year, China’s state media announced that the Government of China would begin drafting a new law that covers "secession, foreign interference, terrorism and subversion against the central government" into the Annex III of the Basic Law. This meant that the law would come into effect through promulgation and bypass the local legislative council of Hong Kong. The HK Security Law came into effect at 11pm (Hong Kong time) on June 30, 2020.

As stated in the Executive Order, the U.S. interprets the HK Security Law as:

“…a series of actions that have increasingly denied autonomy and freedoms that China promised to the people of Hong Kong under the 1984 Joint Declaration of the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China on the Question of Hong Kong (Joint Declaration). As a result, on May 27, 2020, the Secretary of State announced that the PRC had fundamentally undermined Hong Kong’s autonomy …and that Hong Kong no longer warrants treatment under United States law in the same manner as United States laws were applied to Hong Kong before July 1, 1997.”

Hong Kong will now be treated like China – what does this mean? The Executive Order released just over 24 hours ago implements several of the steps President Trump outlined in a recent press conference. The changes outlined in the Executive Order include:

  • Ending preferential treatment for Hong Kong passport holders as compared to PRC passport holders;
  • Treating Hong Kong as part of China under the Arms Export Control Act (22 U.S.C. 275 et seq.);
  • Requiring reporting of the situation with respect to Hong Kong’s autonomy (declared a national emergency in the Executive Order) to Congress;
  • Covering Hong Kong under the Export Control Reform Act of 2018, meaning heightened controls of certain emerging and foundational technologies;
  • Suspending extradition treaties;
  • Terminating US cooperation with a treaty covering reciprocal exemption with respect to taxation of shipping;
  • Ending cooperation on provision of training to Hong Kong law enforcement.