Banks in Hong Kong grade clients for US sanction risk

HONG KONG -- Global banks in Hong Kong are screening through client lists to identify those most likely to face U.S. sanctions under a new law signed by President Donald Trump to punish those seen as responsible for undermining the city's autonomy.

"The rules are being set and we are racing against time to finish the preparatory work," a senior compliance manager at a U.S. bank said. "So when the list [from Washington] comes out, we can map entities or individuals dealing with those sanctioned quickly."

Some non-American banks are expected to consider segregating sensitive accounts in bank subsidiaries that do not transact with the U.S. financial system as an alternative to closing accounts.

The move follows an abrupt escalation of U.S.-China tensions toward targeting individuals. Washington last week named Chen Quanguo, a Politburo member and Communist Party secretary for the Xinjiang region, as well as three other officials for sanction under the Global Magnitsky Act, which provides for the freezing of assets in the U.S. and the denial of visas.

Beijing responded Monday by listing three members of the U.S. Congress and a diplomat who it said would face unspecified "corresponding sanctions."

The Hong Kong Autonomy Act, which moved quickly through Congress before winning Trump's approval on Tuesday, requires Washington officials to identify those "materially contributing" to Hong Kong's loss of autonomy within 90 days and then two months after, to identify banks knowingly conducting business with those named.

Penalties under the law include loss of access to the U.S. financial system, crucial for most dollar-based transactions.

Beijing on Wednesday morning said it would retaliate with its own new sanctions, without giving details. Under China's national security law for Hong Kong imposed June 30, anyone "imposing sanctions or blockades, or engaging in other hostile activities against" against Hong Kong or mainland China could face penalties -- a worry for banks implementing the Autonomy Act.

"While we have some time to ensure compliance, the regulatory lens is already focusing on the banks," said an official at a U.S. bank in Hong Kong, who declined to be identified given the sensitivity. "We have to prepare to ensure compliance with both nations' [rules]."

Officials at three banks told the Nikkei Asian Review that they started to classify clients into four baskets, graded by risk, beginning in mid-June. They are relying on existing databases including what is known as their politically exposed persons lists, compiled as part of anti-money laundering practices.

"Some firms may ultimately need to consider offboarding accounts that could expose them to new regulatory risks," said Benjamin Quinlan, chief executive of financial services consultancy Quinlan & Associates in Hong Kong.

The stakes are high for the banks. Britain's Standard Chartered Bank, which has a major presence in Hong Kong, paid about $1 billion in U.S. fines in 2019 for breaching sanctions against nations including Iran, Sudan and Syria.

Fellow British bank HSBC Holdings, an even bigger player in Hong Kong, reached a $1.92 billion settlement in 2012 over U.S. Department of Justice charges it overlooked Mexican drug-money laundering and violated sanctions against Iran. BNP Paribas was fined $8.9 billion by the U.S. in 2014 for transactions with Sudan and other blacklisted nations.

Asset managers in Hong Kong will likely also have to review their client lists for exposure to those who might be named for sanction under the Autonomy Act. In sum, Hong Kong hosts 163 licensed banks and over 1,600 fund managers.

"Based on the Trump administration's past practices, it could come down to a small number of people who ultimately will be targeted," said Nick Turner, a lawyer specializing in sanctions and anti-money laundering at Steptoe and Johnson in Hong Kong. "Banks are preparing, but to my knowledge, they aren't preemptively exiting relationships because there is no basis for doing so at this time."