On October 14, 2020, the U.S. State Department issued a much-anticipated report pursuant to Section 5(a) of the Hong Kong Autonomy Act (HKAA), identifying ten individuals who were determined by the State Department to be “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.

Under Section 5(b) of the HKAA, the U.S. Treasury Department is now given 30 to 60 days to release a report identifying any foreign financial institution (FFI) “that knowingly conducts a significant transaction with a foreign person identified” in the October 14 report. This report could be released by mid-November or December. Within one year of this Section 5(b) report, the Treasury Department could impose secondary sanctions on the FFIs identified therein, based on a menu of 10 sanctions laid out in Section 7 of the HKAA.

In conjunction with the State Department’s report, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued four Frequently Asked Questions (FAQs) providing additional guidance on how the agency intends to implement the secondary sanctions.

For additional background on this issue and a description of the secondary sanctions under the HKAA, see our blog post of July 15, 2020, “U.S. Executive Order Implements, Strengthens Hong Kong Sanctions.”

Section 5(a) Report

The State Department’s October 14 report under Section 5(a) of the HKAA outlines “a number of recent actions by the PRC that have undermined the autonomy of Hong Kong,” in the State Department’s view, in addition to describing the specific actions taken by each of the 10 individuals identified in the report.

All of the individuals were previously designated by OFAC on August 7, 2020, as Specially Designated Nationals (SDNs), pursuant to Executive Order (EO) 13936. As a result of the August 7 sanctions, all property and interests in property of the individuals is blocked when in the United States or within the possession or control of a U.S. person. U.S. persons are generally prohibited from dealing, directly or indirectly, with the individuals.

OFAC also updated the entries in the SDN List for each of the 10 individuals to specify that transactions with them could expose an FFI to secondary sanctions risk under the HKAA.

One individual—a former Hong Kong government official—who was sanctioned on August 7 was not included in the 5(a) report, but continues to be an SDN and is subject to blocking sanctions under EO 13936.

For more information about the August 7 designations, see our blog post of August 7, 2020, “Financial Institutions Watch and Wait as OFAC Sanctions Top Hong Kong Officials.”

Summary of OFAC’s FAQs

FAQ 848 addresses the implications of the State Department’s October 14 report, including the potential for secondary sanctions on FFIs that conduct significant transactions with the ten individuals. Of note, FAQ 848 clarifies:

  • In its report under Section 5(b), the Treasury Department “will only identify FFIs that knowingly conduct a significant transaction . . . following the person’s listing in the Section 5(a) Report.” In other words, transactions before October 14 would not be captured.
  • “As a general matter, transactions with persons identified in the Section 5(a) Report that constitute a good-faith wind down within 30 days of a person’s identification on such report will not be considered ‘significant.’”
  • The Treasury Department “will reach out to an FFI to inquire about its conduct before identifying it in a Section 5(b) Report.”

FAQ 849 summarizes the three criteria in Section 5(d)(2) of the HKAA under which an FFI could be excluded or removed from a report under Section 5(b). Exclusion or removal would be considered if a significant transaction that merited inclusion in the report “(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 FFI.”

FAQ 850 provides guidance on the meaning of the term “significant transaction” as used in Section 5(b) of the HKAA. As with other sanctions programs, OFAC lays out seven factors that could be considered in determining that a transaction is significant. These are:

  • The size, number, and frequency of the transaction(s);
  • The nature of the transaction(s);
  • The level of awareness of management and whether the transaction(s) are part of a pattern of conduct;
  • The nexus between the transaction(s) and a foreign person identified under Section 5(a) of the HKAA;
  • The impact of the transaction(s) on statutory objectives under the HKAA, 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 FFI;”
  • Whether the transaction(s) involve deceptive practices; and
  • Other factors deemed relevant on a case-by-case basis.

FAQ 850 notes that “a transaction will not be considered significant if a U.S. person would not require a specific license from OFAC to conduct or participate in the transaction.” At this time, OFAC has not issued any general licenses under the HKAA or EO 13936, so the scope of this carve out is limited in practical terms.

FAQ 851 reiterates definitions of the terms “financial institution” and “knowingly” provided in the HKAA. The term financial institution is the same as in 31 USC 5312(a)(2) and captures most companies offering services of a financial nature. The term knowingly is defined to mean actual knowledge. (This differs from some other US primary and secondary sanctions where knowingly is defined more broadly to include that a person “should have known” of the conduct, circumstance, or result.)


OFAC states in FAQ 848 that an FFI that conducts a significant transaction with an individual in a report under Section 5(a) of the HKAA “is potentially subject to mandatory secondary sanctions under the HKAA.” (Emphasis added.) A number of questions remain about how the Treasury Department will go about preparing its report under Section 5(b), including the information that will be relied upon to identify significant transactions occurring in Hong Kong or elsewhere. For instance, in reaching out to financial institutions, as suggested in FAQ 848, OFAC could inquire about potentially significant transactions or seek information about transactions about which the agency has partial information.

Given that the ten individuals were previously named as SDNs on August 7, FFIs have had ample time to perform name screening and identify customer relationships involving the individuals. FFIs that continue to maintain those relationships are advised to consider whether their transactions could be deemed significant and expose the FFI to the risk of secondary sanctions under the HKAA, in anticipation of communication from OFAC prior to the issuance of a report under Section 5(b) within 30 to 60 days of October 14, 2020.

FFIs that are later included in a report under Section 5(b) may seek to fulfill the criteria in Section 5(d)(2), as summarized in FAQ 849, to avoid the imposition of secondary sanctions which would become mandatory within one year of the report’s issuance.