At the EU summit this week, negotiators from the UK and EU continued trade deal talks in advance of the transition period expiration on December 31, 2020. The sides have so far failed to find common ground, reaching an impasse mainly around a “level playing field provision” limiting the UK from relaxing certain social, environmental and other regulatory standards as well as alignment on policies regarding state aid and competition. Other issues include the dispute resolution procedure and quotas for fisheries. Following the latest negotiations, the EU indicated that it wishes to continue talks in the coming weeks but urged its member states to step up preparations for no deal. Earlier today, UK Prime Minister Boris Johnson complained that the EU has refused to negotiate seriously and said the UK should get ready to trade with the EU without a new agreement but added that the UK is willing to listen if there is a fundamental change in approach from the EU.
With only two-and-a-half months until the end of the transition period, negotiations have stalled as both sides refuse to meaningfully budge on key issues. The UK has found itself on the ropes, with Prime Minister Johnson’s administration already struggling with dismal polling numbers regarding his handling of the current crisis. Now facing the undesirable prospect of adding a further economic hit, restrictions on movement and long customs lines at the border if a deal is not reached in time, the pressure is on to act. Further complicating the UK’s position is the fact that its plan B - a free trade agreement with the US - could be in jeopardy if Joe Biden wins the upcoming election as he may wish to strike a closer relationship with the EU and protect Ireland’s interest in avoiding a hard border. To reach a deal, both sides need to quickly reevaluate where they have room to move. For a deal to be ratified before the end of the year, the EU Parliament must review and approve it, so the ultimate deadline for the negotiations is likely early in December.
On Wednesday, the White House submitted to Congress a report containing a list of individuals that have materially contributed to the “erosion of Hong Kong’s autonomy.” The Administration was required to produce the report by the Hong Kong Autonomy Act (HKAA), which was signed into law last July. The HKAA is intended to block individuals named in the report from participating in the US financial system and restricts them from obtaining visas to enter the US. Notably, the report is substantially similar to a previous list issued by the Treasury Department’s Office of Foreign Assets Control (OFAC) and does not impose any sanctions on new individuals.
Going forward, the White House now has 60 days under the HKAA to produce a second report identifying foreign financial institutions that have knowingly engaged in significant transactions with individuals sanctioned in the report after its publication. These financial institutions will be subject to “secondary sanctions,” which would cut them off from the US financial system as a result of dealing with prohibited entities. In a series of FAQs, Treasury explained that it will only identify foreign financial institutions that have entered into transactions with the sanctioned individuals after the report has been issued and that it does not consider transactions made to wind down relationships to be “significant.” They also explain that the Treasury will reach out to financial institutions to inquire about their conduct before making the decision to include them in the second report. For firms that have been added, the FAQs note that they can be removed depending on the overall impact of their transactions, whether they are likely to be repeated in the future, and whether the firm has implemented any mitigating countermeasures.
In contrast to the headline-grabbing actions taken this summer - implementing the HKAA, restricting certain Chinese social media apps and recommending the delisting of certain companies from US stock exchanges - this week’s report arrived with more of a whimper as it refrained from imposing any new sanctions. Further softening the blow is the FAQs’ explanation that the Treasury will liaise with foreign financial institutions and provide some flexibility around permissible transactions. While this may come as a relief to foreign financial institutions with significant China-related business, we would not read into these actions as long-term policy stances, especially given the unpredictability surrounding the Administration’s approach to sanctions policy and US-China relations as a whole. As such, considering the significant risk of being cut off from the US financial system due to secondary sanctions, financial institutions should carefully evaluate their customer network for any potential nexus to sanctioned individuals or entities owned 50% or more by them. Despite the apparent flexibility Treasury is offering, firms will need to tread carefully through the minefield of potential violations.
For more on the HKAA and other recent US-China issues, see PwC’s Policy on Demand: US-China relations and impact on financial institutions
These notable developments hit our radar over the past week:
Financial Services Leader, PwC US