Page 3 of 3

Multiple legal experts told finews.asia that the real worries about the latest sanctions are perhaps not in its actual contents – its reach, for example, is far less expansive than other country-based programs like in Iran or Cuba – but in the existing nature between the banking industry and the second-largest economy in the world.

«Financial institutions engage in far more transactions with China than any other country subject to sanctions,» according to a response co-authored by Mayer Brown’s Washington-based partners Andrew Olmem and Tamer Soliman. «This means that intermediary financial institutions have to be very vigilant with their know-your-customer rules and customer due diligence.»

Full Compliance: Mission Impossible

Global banks have had a long track record of operating in complex jurisdictions, sometimes even with the most nefarious entities – such as major drug cartels or authoritarian weapons developers – which allows for a wealth of knowledge and experience when dealing with U.S. sanction risks.

But with the simultaneous existence of national security law in Hong Kong, the industry is confronted with an unprecedented dilemma: test Beijing’s tolerance by complying with sanctions or be potentially responsible for the loss of access to the U.S. financial system.

«Most financial institutions have long-standing procedures and controls in place to manage compliance with OFAC sanctions. However, those procedures generally weren’t built with these circumstances in mind,» added Mayer Brown’s Olmen and Soliman. «They are now having to re-calibrate to manage a quickly evolving legal and political landscape.»

Full Compliance: One Possibility

There is, in fact, actually one scenario where financial institutions can comply with both regimes while retaining relationships with sanctioned individuals. This can occur in the event that a financial institution only assists sanctioned entities in transactions that are not deemed «significant».

According to Baker McKenzie's vandePol, no explicit definition has been provided but based on other existing sanction programs, OFAC has indicated that factors considered include:
- the size, number, and frequency of the transactions;
- the nature of the transactions;
- the level of awareness of management and whether the transactions are part of a pattern of conduct;
- the nexus between the transactions and a blocked person;
- the impact of the transactions on statutory objectives;
- whether the transactions involve deceptive practices;
- and such other factors that the U.S. Secretary of the Treasury deems relevant on a case-by-case basis