Hong Kong bankers move to suspend accounts on U.S. sanctions

Banks operating in Hong Kong are stepping up scrutiny of their customers and at least one U.S. bank is moving to suspend accounts to avoid running afoul of U.S. sanctions slapped on city officials, putting them at risk of violating the controversial security law imposed by China.

Asking not to be named discussing clients, people familiar with the decision said on Monday that one U.S. bank is taking steps to suspend accounts linked to some sanctioned officials. Two major Chinese banks are assessing what needs to be done based on their risk tolerance and compliance requirements, people party to those discussions said, suggesting they wouldn’t entirely brush off the sanctions.

The U.S. on Friday sanctioned 11 officials, including Chief Executive Carrie Lam and China’s top enforcers in the financial hub, over their role in imposing the security law. The sanctions forbid banks from doing business with the penalized individuals. But complying with that order could put lenders directly at odds with the security law, which spells out that no sanctions or hostile actions can be applied against the city and mainland China.

“The ball is now in the banks’ court,” said Kevin Lai, a chief economist for Asia excluding Japan at Daiwa Capital Markets in Hong Kong. “They are in a particularly difficult situation as they also have to take the national security law into consideration.”

The steps add to preparations that have been going on since the security law and the U.S. Hong Kong Autonomy Act, which enabled the sanctions, were passed last month. Additional levels of screening will be done now to cope with potentially further sanctions on politically exposed people, the people said. Bankers and their lawyers from Hong Kong to Washington have been poring over the fine-print to reconcile how they can dodge major consequences from being squeezed between the two laws. Running afoul of the legislations put companies at risk of fines or losing their license to do business.

Lenders including Citigroup Inc. and HSBC Holdings Plc are walking a tightrope between the two world powers given their operations in Hong Kong and ambitious plans to expand in China. Chinese lenders such as Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. could also be ensnared, with their crucial access to dollar funding at risk.

Bank of China and ICBC didn’t immediately respond to requests seeking comments. Spokespeople at Citigroup and HSBC declined to comment.

The latest U.S. order doesn’t include a wind down period, suggesting banks will be subject to the law immediately. Foreign financial institutions that don’t operate within the U.S won’t be caught up as long they don’t help sanctioned individuals with transactions linked to U.S. dollars, the people said.

Hard Pressed

“The banks here would be hard pressed to cut off some of these names as their customers,” said Benjamin Quinlan, chief executive officer of Quinlan & Associates, a strategy consultant in Hong Kong. “At the end of the day, even if you go from a U.S. bank to the likes of HSBC, they all have an international footprint that straddles the U.S., Hong Kong, and mainland China.”

Hong Kong authorities over the weekend brushed off the sanctions, saying the unilateral move won’t force banks to comply under Hong Kong law. The Hong Kong Monetary Authority, the city’s de facto central bank, said local lenders have no obligation to follow and the lenders should treat customers fairly in assessing whether to continue to provide services to an individual.

The assertions by the Hong Kong authorities did little to calm concerns at banks since they still will need to comply with laws in other jurisdictions, the people said.

China on Monday retaliated by sanctioning 11 Americans, including Senators Marco Rubio and Ted Cruz and Human Rights Watch Executive Director Kenneth Roth and Michael Abramowitz, the president of Freedom House.

The individuals sanctioned by the U.S. also include Xia Baolong, director of the Hong Kong and Macau Affairs Office of China’s State Council, and Chris Tang, commissioner of the Hong Kong Police Force. The targeted officials will have any property and assets in the U.S. frozen.

“The scale looks small for now as only 11 individuals are affected but more people could be added to the list and the banks may face secondary sanctions,” said Daiwa’s Lai.