HSBC Has a Xinjiang Problem
A transaction with a concentration camp operator probably didn't violate US sanctions, but is a significant--and likely intentional--ethical departure for HSBC
Is the UK’s largest bank trying to send a message to the Chinese government about where its loyalty lies?
According to a report in the Sunday Times by Gabriel Pogrund and Jack Hazlewood, HSBC Hong Kong purchased and continues to hold 2.2 million GBP (23.3 million HKD) in shares of Xinjiang Tianye, a subsidiary of Xinjiang Production & Construction Corps (XPCC), on behalf of an anonymous client. XPCC is a sprawling state-owned enterprise that effectively operates as a government and paramilitary organization in Xinjiang, and is believed to be a key player in the construction and operation of Xinjiang’s concentration camps and forced labor programs.
The US Government has imposed economic sanctions on XPCC, prohibiting any “US Person” from doing business with the company. The UK and EU have sanctioned certain XPCC affiliates and individual personnel, but have stopped short of blanket sanctions on XPCC itself.
HSBC, which is the UK’s largest bank but whose profits are mostly made in Asia, bought the shares on behalf of an anonymous client last year, just as other global banks were conducting wide-ranging compliance health checks and divesting from any entities potentially affiliated with XPCC or the Xinjiang camps.
While not a large transaction by international banking standards, the purchase is a clear statement about where HSBC thinks its future will be made—and it’s not the West.
I used to represent banks like HSBC as a sanctions lawyer in Hong Kong. While global banks are often content to ignore any number of human rights abuses, most in the corporate world recognize the danger of failing to act when the US focuses its sanctions enforcement infrastructure on a particular abuse. Thus, in recent years most global banks have worked to divest from Xinjiang clients and investments that might have any hint of association with forced labor or concentration camps. Yet, HSBC appears to be moving in the opposite direction.
HSBC said in a statement to the Times that it has “complied with all relevant rules and sanctions legislation” in undertaking the transaction. They probably did: As I detail below, the US sanctions on XPCC are limited in their reach and the transaction was small by HSBC standards, so it is possible to take steps internally to comply with US law. But for several compelling reasons, most banks still quickly divest from sanctioned entities, even if they legally are not required to do so.
Ultimately, HSBC’s statement misses the point: US person or not, HSBC risks being seen as supporting ethnic cleansing and forced labor, and so long as the bank remains headquartered in the UK, that has potential consequences for its brand.
To whom do US sanctions apply?
The US has a range of economic sanctions programs that target individuals, entities and countries that it wishes to penalize by cutting them off from the US financial system. With the exception of certain sanctions against Iran, North Korea and Russia, US sanctions programs apply only to “US persons.” A US person is defined as any US citizen/permanent resident, entity organized under US law, or person physically in the US.
That means that most sanctions, including all current China sanctions, don’t apply to companies organized outside the US unless they are conducting the prohibited activity from US soil or involve US citizens abroad. It also means that the sanctions don’t apply to foreign subsidiaries or affiliates of US companies.
This is, you might be thinking, a big loophole, and you’re right—it is relatively easy for large companies with multiple affiliates to structure transactions to avoid violating US sanctions. To use the quintessential American company as an illustration, Apple’s Headquarters in California cannot do business with XPCC through its US parent company or from US soil, but if Apple Computer Trading (Shanghai) Co. Ltd. wants to do business with XPCC, it can—so long as Apple California doesn’t participate in the decision-making or involve any of its own people or computer servers, and so long as any US Citizen employees in China are walled off from the transactions.
Most global banks still apply US sanctions to all their global transactions
Yet, even though most US sanctions only apply to their US entities, most global banks apply US sanctions to all transactions they conduct across the world. There has been some move away from such blanket policies, particularly in Europe where US overreach in penalizing European banks under the Iran sanctions program over the years has caused much anger and frustration. But generally, even non-US banks will avoid doing business with sanctioned entities. There are several reasons for this.
First, just because there are no criminal consequences to ignoring US political will on sanctions doesn’t mean there are no consequences at all. When a firm is discovered to be doing business with a Chinese company that builds concentration camps, or one that’s helping Iran obtain nuclear weapons, or one providing weapons to the military routinely killing protesters in Myanmar, it’s not going to be sufficient from a PR or political standpoint to simply say “We met our legal obligations under US sanctions laws.” There will be PR consequences that can hurt business in the US or other countries, including potentially via boycotts. CEOs can be called in front of Congress and other legislatures for a tough round of questioning. And where the political will is strong enough, the sanctions may even be tightened in response to such activity.
Second, it is still illegal for a US person to “facilitate” a transaction by a non-US person, which means US persons must be completely segregated from the potentially illicit transaction. For global corporates, this is not an easy task and carries an often-unacceptable level of risk. If a company’s headquarters is in the US, most executive leadership teams don’t want to be walled off from the transactions of one of their subsidiaries, with no ability to supervise or intervene to change direction. Further, most global companies have a large number of US citizen employees abroad, all of whom would have to be walled off from the transactions. Even having casual chats about the transactions in the break room with co-workers may need to be restricted, lest they risk giving direction or providing ideas seen as “facilitating” a prohibited transaction. IT programs must also be segregated to wall off file systems and emails so that US persons can’t accidentally end up with access. It’s complicated, and one slip-up can mean criminal liability.
Third, financing such transactions can be challenging. Other countries have sanctions programs, but given the US’ current dominance of the global financial system, it has an outsize ability to exert its will abroad via economic sanctions. The US Dollar is the world’s reserve currency, used in the vast majority of global transactions. According to the US Federal Reserve, from 1999-2019 the US Dollar accounted for 96 percent of trade invoicing in the Americas and 74 percent in Asia-Pacific. While it is possible to exchange, or “clear” US Dollars abroad without involvement of the US, it is very difficult if the amount of money involved is high—there simply isn’t enough available supply outside the US. Alternative currencies are often more expensive to use due to interest rates and fees, and are less convenient for the parties (though the Euro is sometimes a viable alternative).
Fourth, foreign banks are reluctant to take even the smallest risk that their supply of US Dollars will be cut off, which they see as a potential death penalty for their global business. In Hong Kong, we saw this principle in effect when the US sanctioned Carrie Lam, the much-loathed Chief Executive of the region, and a number of other officials responsible for the crackdown on the city’s freedoms. When the sanctions were first announced, the government told reporters that the sanctions would have little effect, as Lam and most other sanctioned officials had no “declared American assets.” Yet within weeks of the sanctions taking effect, Lam admitted that she was unable to get a bank account or credit card, that she had “piles of cash at home,” and that no bank would allow her to have an account—which meant, notably, that even Chinese banks were refusing to do business with her, risking the ire of their own government in order to protect their access to US Dollars.
Finally, sanctions usually raise serious ethical concerns, which can cause internal discontent or even revolt. While sanctions are a political tool and there are disagreements as to how widely they should be used, most sanctioned persons are inarguably bad actors. Whatever the individuals that make up the C-Suite of a European bank think of US hegemony, most can agree that it’s ethically problematic to be doing business with the slave mongers, terrorists, dictators and kleptocrats that make up the bulk of the US sanctions lists. Banks and global corporations are creatures of the capitalist system for whom profits come first, but they are made up of individual employees, each of whom has an ethical limit before they will begin balking at what they’re being asked to do (or so we hope).
HSBC’s holdings in XPCC probably did not violate US sanctions, but do represent a stark divergence from the ethical practices of most global banks
Nothing in the Times article about HSBC suggests that any US Persons were involved, including HSBC’s US affiliate. There is no information about the funds used to purchase the stock, but it is quite possible for such a small transaction that no US Dollars were involved, or if they were, that no US clearing was needed. Absent any new information coming out that reveals such involvement, HSBC probably did not commit a crime under US sanctions.
But as a sanctions lawyer, it surprises me that HSBC would have permitted this transaction to go forward. It is unlikely that they simply missed the transaction or that there was a breakdown in software. Automated systems run all new clients and transactions across US and other sanctions lists and flag any hits to human reviewers. So most likely, someone fairly senior made the decision to proceed with this transaction. At that point, special procedures would been arranged as I’ve described above, including excluding from involvement all US Persons in the Hong Kong and Mainland China offices, along with the US-based entities and employees; ensuring the transaction was structured to avoid US Dollars; and segregating email and network traffic to ensure it would not be available to US Persons. Outside legal advice may have been obtained.
Most other banks have divested from XPCC and other Xinjiang high-risk companies. Even though they could likely structure some transactions to avoid violating US sanctions, the risks, complexities, and ethical problems are too high. But HSBC not only went the other way, they likely went through a complex internal process involving a large number of employees and made a conscious choice to proceed with a transaction involving a key propagator of concentration camps and forced labor.
HSBC likely violated its own internal compliance policies
HSBC does, however, appear to have violated its own policies with this transaction. According to the bank’s global sanctions policy, “all HSBC Group Entities must comply with” the requirement of “prohibiting or restricting customer relationships or transactions/business activity involving” parties on UN, UK, HK, EU, and US sanctions lists. In case there was any doubt, the document emphasizes that “the Policy seeks, subject to the primacy of local law, to establish a globally consistent standard to effectively manage sanctions compliance risk across all HSBC” legal entities. Its restrictions thus apply to US and non-US Persons alike.
It is difficult to see how HSBC could, therefore, have permitted such a transaction to take place under its policies.
The conflicts between China and the West will continue to be a headache for global businesses
Most likely, this transaction is just the latest in a string of decisions at HSBC showing its inability to navigate the often conflicting demands of the UK, where it is based, and China, where it makes most of its money. It is increasingly difficult for the company to please both. During the past two years, HSBC has come under fire for freezing accounts of Hong Kong pro-democracy leaders and legal defense funds at the request of Hong Kong Police, publicly backing the repressive Hong Kong National Security Law, and publishing an ad during the 2019 Hong Kong protests stating its concern about “challenges” threatening “social stability.” CEO Noel Quinn has been forced to testify to the UK Parliament in response to outrage over its actions. Yet all of its sucking up to China has amounted to little: The Chinese government appears to still view the bank as a potential foreign threat to its national security.
Nonetheless, HSBC’s financial interests in China are too great, and will ultimately win the day. When faced with a choice between outraging the West yet again or potentially being the subject of a China boycott, it will most likely choose China.
I have mixed feelings about both the effectiveness and wisdom of most economic sanctions as a policy tool (and I’m not just saying that because I can face life in prison in Hong Kong for “requesting a foreign country to…impose sanctions or blockade” against China). Unilateral sanctions are usually ineffective or even counterproductive as coercive policy tools. But the offense here by HSBC is not a criminal one—it is an ethical one. Any company that would spend so much effort and expense to arrange transactions involving a company that they know is responsible for forced labor and concentration camps should, at the least, be held accountable by the public.
There have long been discussions of whether—or perhaps the question should be when—HSBC will pull the plug on its London nerve center and move its Headquarters to China, or at least Asia. If that happens, HSBC’s Western business may end up being one of the most prominent early casualties of the rapid decoupling of Chinese authoritarianism and Western liberalism.