Secondary Sanctions, Higher Fines Needed to Curb Hong Kong-Russia Trade, Group Says

The U.S. should start designating Chinese banks under a December executive order that authorizes secondary sanctions on foreign financial institutions that help facilitate Russia-related transactions, a group advocating for democracy in Hong Kong said in a new report this month.

The report, published by The Committee for Freedom in Hong Kong Foundation, said Hong Kong’s “value as a hub for sanctions evasion has grown significantly in recent years,” and the U.S. should take “comprehensive and decisive measures to stem this trend.” One recommendation asks the Biden administration to begin sanctioning banks under a new authority granted to the Treasury Department last year that allows it to target foreign entities for helping to facilitate transactions of dual-use exports to Russia (see 2401120051 and 2312220023).

The foundation noted that the U.S. has “repeatedly threatened to use this power against Hong Kong and Chinese financial institutions, but so far has not done so.” National Security Adviser Jake Sullivan suggested this month that the U.S. may soon begin sanctioning Chinese banks under the authority (see 2407220027).

“Only by sanctioning financial institutions involved in financing sanctions evasion can the U.S. genuinely curtail the flow of illicit goods and funds to sanctioned regimes,” the report said.

The report also calls on the U.S., the E.U. and their allies to increase penalties against manufacturers and distributors of controlled, sensitive technologies whose products are ending up in Russia, Iran and North Korea through Hong Kong and other transshipment hubs.

The report said the governments should raise penalties against those companies that “fail to conduct sufficient due diligence and take account of red flags,” especially for shipments of semiconductors and other similar technologies. The governments should impose especially “strict” penalties on companies that “knowingly or negligently allow their products to be diverted to sanctioned entities,” the report said.

BIS has sent letters to U.S. distributors of microelectronics and other items on its list of common high priority items, warning them that some of their foreign customers are sending their items to Russia (see 2406060041 and 2407100027).

Between August and December 2023, Hong Kong consignors shipped $1.973 billion worth of goods to Russia, the report said, citing data compiled by the nonprofit C4ADS. Many of those goods were semiconductors, including data receivers listed under Harmonized System Code 851762, computer processors and controllers under HS Code 854231, digital storage and input/output units under HS Code 847150, and “other integrated circuits” under HS Code 854239.

“Greater enforcement activity and increased civil penalties would encourage firms to invest more in compliance and reduce the risk of their goods being used for prohibited purposes,” the report said. “Increasing the costs of inaction is the best way to get companies to take their compliance obligations seriously.”

Another recommendation calls on Congress to award more funds to government agencies responsible for sanctions and export control enforcement. The Bureau of Industry and Security has made several pleas for more money, but it has been mostly rebuffed (see 2406250035).

Resources available to BIS and the Office of Foreign Assets Control are “insufficient to respond and enforce the vast proliferation of sanctions evaders in Hong Kong and elsewhere,” the report said. Congress should give both agencies enough money for more enforcement officers, data and analytical tools, and other help so they can “conduct thorough investigations and take swift enforcement actions against violators.”