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New national security law in Hong Kong unveils certain costs, compliance risks

Helen Chan  Regulatory Intelligence Expert

Helen Chan  Regulatory Intelligence Expert

A recently implemented national security law in Hong Kong introduces new compliance obligations and could expose businesses near and far to criminal prosecution by Chinese authorities.

The legislation has significant risk and compliance implications for corporations, despite prior assurances from government officials that business activity would be unaffected.

Implications for businesses

The ” Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region” (NSL) applies to corporate entities incorporated in Hong Kong, including multinationals that operate locally incorporated subsidiaries in the territory. Certain provisions have been written with extra-territorial application, meaning corporations and individuals such as senior managers at group levels, could be exposed to criminal liability.

The text of the legislation defines four punishable offenses, namely, secession, subversion of state power, terrorism and collusion with “foreign forces.” The definitions of these offenses are fairly broad and could cover a range of circumstances pertinent to business operations. In addition to the punishable offenses, the NSL imposes a “common responsibility” on institutions, organizations and individuals in Hong Kong to “safeguard the sovereignty, national unification, and territorial integrity” of China. Individuals and entities that fail to uphold this obligation could be subject to criminal prosecution on national security grounds.

The law explicitly provides for fines to be levied on businesses for non-compliance, in addition to the imposition of up to life imprisonment for individuals convicted of offenses in the legislation. Individuals such as employees who are convicted of “minor” offenses could be sentenced to up to 3 years in prison. The legislation also provides for authorities to revoke business licenses for regulatory violations, although specific industry licenses have not been named.

Grasping risks related to “national unification” has proven to be an especially hazardous area for businesses. Previous incidents involving multinational firms in retail, aviation, and financial services have courted controversy and at times, inflicted reputational and financial damages. The wording of the NSL suggests some of these scenarios could now attract criminal corporate liability and jail sentences for employees on national security grounds.

The law explicitly provides for fines to be levied on businesses for non-compliance, in addition to the imposition of up to life imprisonment for individuals convicted of offenses in the legislation.

Financial services firms could face heightened financial crime risks related to the offense of subversion under the NSL. The offense is defined broadly and there is uncertainty over whether its application extends to political dissent. Local lawmakers have not clarified whether government officials from opposition parties who are currently in office would be considered subversive, as defined in the law, and, moreover, whether financial institutions could be held liable for business dealings with government entities run by opposition officials, in addition to trade unions and district councils. Representatives in these lower-level councils, which are elected by the local populace, are presently dominated by members from various opposition parties.

Sanctions compliance could also get complicated. Imposing sanctions against Hong Kong or China is defined as a punishable act under the offense of “collusion with foreign forces to endanger national security.” The U.S. government has said it intends to impose financial sanctions against Chinese and Hong Kong officials for breaches of the United States-Hong Kong Policy Act. Should specific sanctions against entities or individuals in Hong Kong materialize, it is unclear whether banks that comply with sanctions laws could be prosecuted under the NSL for collusion.

Of particular note, this offense has been drafted with extra-territorial application, meaning that entities outside of Hong Kong and China could still be exposed to prosecution by Chinese authorities.

Businesses react

Uncertainty and anticipation of heightened risks have prompted some businesses to consider diversifying their operations to Singapore or Tokyo or exiting Hong Kong altogether. Others are doubling down — a handful of multinationals publicly pledged to support the new law even before the legislation was disclosed to the public.

Since the implementation of the NSL, US-headquartered technology and social media companies have suspended reviews of data requests from Hong Kong authorities, a move that could expose them to liability, including employee arrests, should they receive requests from law enforcement during this time. In the financial sector, audits of individuals and entities that could be targeted by US sanctions are underway at some firms that are headquartered in the US or the European Union.

It is difficult to assess the degree of risk businesses are exposed to, as well as how companies could mitigate their risk exposure. Extra-territoriality provisions, though strongly worded, are untested and thus hard to evaluate in terms of risk exposure for multinationals. Prior to the enactment of the NSL, Hong Kong chief executive Carrie Lam repeatedly said the law would not affect investment or business activity in the region, despite admitting that she had not seen or reviewed the legislation beforehand.

Based on the full text of the law, however, businesses should assume that they, at minimum, are required to operate consistently with principles of sovereignty and national unification as determined by Chinese authorities. Additional obligations, particularly for financial services firms, could arise as regulators take action to enforce the law.

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