On July 16, 2021, several U.S. government agencies issued a business advisory highlighting for U.S. companies the risks of doing business in Hong Kong. The advisory, which was issued by the Departments of Commerce, Homeland Security, State, and the Treasury, stated that companies operating in Hong Kong face potential regulatory, financial, legal, and reputational risks due China’s recently enacted National Security Law (NSL) in Hong Kong.  The NSL states that “an incorporated or unincorporated body, such as a company or organization” that breaches the law may be subject to a criminal fine and suspension of operations. Notably, the NSL also states that provisions may apply to companies set up in the region even if an offense takes place outside the region.  As a result, the advisory notes that the NSL could adversely affect businesses and individuals operating in Hong Kong.

The U.S. government advisory outlines for individuals, business, research providers, and investors the following potential risks:

  • Heightened risk for businesses and individuals operating in Hong Kong:  Under the NSL, businesses operating in Hong Kong and individuals conducting business in Hong Kong on their behalf are subject to the NSL.  According to the advisory, foreigners, including one U.S. citizen, have been arrested under the NSL.  The advisory explains that under the NSL, protected rights and freedoms in Hong Kong have been substantially curtailed, and individuals have been arrested under the NSL for publishing news articles and attending public gatherings.  Punishments under the NSL can include criminal fines and imprisonment, including life imprisonment in certain situations.  Under the NSL, business can be subject to criminal fines and can have their operations or license suspended.  Individuals who are arrested may have their travel documents confiscated and may be prevented from leaving Hong Kong.
  • Heightened risk regarding data privacy, including warrantless electronic surveillance, and surrender of data. The NSL also expanded the Hong Kong and People’s Republic of China (PRC) authorities’ ability to collect business and individual data for actions that may violate “national security.”  Hong Kong authorities have interpreted “national security” to include participating in elections, political advocacy, and posting on social media.  Hong Kong law enforcement are permitted under the NSL to conduct searches of electronic devices and to require Internet services providers to either provide or delete data for national security cases.
  • Access to business information and open press. Since the NSL’s introduction to Hong Kong, authorities have increased pressure on freedom of expression – primarily freedom of the press. Recently, Hong Kong authorities have exercised powers under the NSL to pursue journalists and a print media company.
  • Exposure to U.S. sanctioned persons and entities. Businesses operating in Hong Kong should be aware of potential consequences of engaging with individuals and/or entities subject to U.S. sanctions. U.S. individuals and entities are prohibited from engaging in certain transactions with blocked persons without a general or specific license from the Treasury Department’s Office of Foreign Assets Control (OFAC), or other exemption. Violations of U.S. sanctions may result in civil or criminal penalties.  Companies should also be aware that Hong Kong has been removed as a separate destination under the Export Administration Regulations (EAR) and items subject to the EAR destined for Hong Kong, including reexport or transfer, will be treated as exports, reexports, or transfers to or from the PRC. Similarly, companies operating in Hong Kong could face retaliation from the Chinese government for complying with U.S. sanction laws.

The PRC Anti-foreign Sanctions Law (enacted June 10, 2021) (the “ASL”) provides China with the legal basis for retaliating against foreign actions deemed to be “restrictive discriminatory” – a vague and nebulous term that provides China with an incredibly broad tool to counter a wide range of actions that it views as counter to its sovereign interests (ranging from foreign sanctions programs to politically sensitive positions such as geopolitical flash points involving Taiwan, South China Sea or Senkaku Islands to the US Withhold Release Order aimed at addressing allegations of forced labor in Xinjiang).  Not only does the ASL give the Chinese government the ability to penalize foreign subsidiaries operating in China, but it also gives aggrieved Chinese parties and entities a private cause of action in Chinese courts to recover losses incurred.  Further, the ASL contains a “catch-all” that allows China to determine what practices are “restrictive discriminatory.” Since many Hong Kong businesses are historically linked with mainland China operations, it is very important that companies review carefully the potential impact of the ASL when entering into new business as well as deciding to terminate businesses as to avoid actions  that could be perceived as “restrictive discriminatory” from a PRC perspective and be subject to retaliation by China or private parties.

The recent advisory comes days after the U.S. government agencies released an updated version of its Xinjiang Supply Chain Business Advisory and following a separate announcement to add 14 Chinese companies to the Department of Commerce’s Entity List for their direct involvement in human rights abuses in Xinjiang.

A link to the advisory is available here.

For more information on actions regarding China as well as actions addressing U.S. sanctions, human rights, and export controls, contact our team and see previous posts below.

Government Releases Updated Version of Xinjiang Supply Chain Business Advisory | International Trade Law (cmtradelaw.com)

Commerce Adds 23 Companies to Entity List Citing Forced-Labor, Military Technology, and Sanctions Concerns | International Trade Law (cmtradelaw.com)