17 August 2020

In this note, we provide a preliminary review of the new Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region (the “National Security Law” or the “Law”) and how it might impact on general insurers, reinsurers and intermediaries. We also set out some steps that businesses should be considering now to mitigate the risk of contravention.

Summary and recommendations

The National Security Law is not directed at the financial services industry and is not intended to adversely affect its operation. However and notwithstanding this, there remains a risk to insurance market participants. The two areas where Hong Kong general insurance market participants appear most likely inadvertently to contravene the National Security Law relate to:

• the provision of assistance to clients for the commission of the crimes of secession and/or subversion; and

• foreign lobbying activities relating to Hong Kong and China.

Any conviction for breach of the National Security Law will result in a fine and mandatory suspension or revocation of a business licence or permit. This would be potentially catastrophic for a general insurance market participant’s Hong Kong business.

General insurance market participants should be undertaking a risk assessment of their client portfolios and, if necessary, taking action to mitigate their risks of liability.

Participants would also be well-advised to review their own – and if relevant their parent and sister companies’ – lobbying activities and trade association memberships to assess and manage any risks arising from these matters.

We are developing benchmarking processes to assist with these categorisations and risk analyses together with assessments of risk adjusted options (i.e. taking into account reputational, legal contract risk and regulatory risk vs and criminal/regulatory exposure). We can assist you through this processes.

Introduction

The National Security Law came into effect on 30 June 2020.[1] It criminalises four broad activities:

• Secession (Art. 20);
• Subversion (Art.22);
• Terrorist Activities (Art.24); and
• Collusion with a foreign country or with external elements (Art.30).

The law does not operate retrospectively “for the purpose of conviction and imposition of punishment”.[2]

Creation of new bodies relating to the Law

Article 48 of the Law also provides for the creation of the “Office for Safeguarding National Security of the Central People’s Government in the Hong Kong Special Administrative Region” (the “National Security Office”). The National Security Office has four national security functions: advisory, oversight, intelligence gathering and analysis, and case handling.

Article 12 provides that the HKSAR shall establish a “Committee for Safeguarding National Security”, chaired by the Chief Executive (the “National Security Committee”). A secretariat will be established under the National Security Committee and headed by a Secretary-General appointed by the Central People’s Government, after being nominated by the Chief Executive.[3]

Under Article 16, the Hong Kong police force is required to establish a department “for safeguarding national security law with law enforcement capacity” (“National Security Police”). The National Security Police, in handling national security cases, are granted the same investigative powers as other law enforcement authorities (including the HK police) under HKSAR laws and, in addition, further broad and unqualified investigative powers as set out in Article 43.

Jurisdiction and adjudication

The Law grants jurisdiction for handling cases to the HKSAR,[4] save for where Article 55 of the Law applies, in which case the National Security Office may exercise jurisdiction.  Where the HKSAR exercises jurisdiction, HKSAR criminal procedures are applicable to cases.

Article 44 provides that the Chief Executive shall designate judges to handle national security cases, for a term of office of one year.[5] Judges shall be designated from each of Hong Kong’s courts and may also include deputy judges or recorders. The Secretary for Justice may disallow trial by jury in the High Court on the grounds set out in Article 46.

The Law has extra-territorial application and applies to equally to natural persons, unincorporated and incorporated bodies.[6] 

Offences

In the section below, I set out a summary of the offences of the offences under the new law. In the subsequent section, I provide a preliminary analysis of the potential impact of the law on the insurance industry.

Secession

The offence of secession is set out in Article 20 and 21. It criminalises “a person who organises, plans, commits or participates in any of the following acts, whether or not by force or threat of force, with a view to committing secession or undermining national unification”.

It is notable that the acts need not be limited to Hong Kong and may relate to any part of the PRC.[7] The acts in question are:

• separating the Hong Kong Special Administrative Region or any other part of the People’s Republic of China from the People’s Republic of China;

• altering by unlawful means the legal status of the Hong Kong Special Administrative Region or of any other part of the People’s Republic of China; or

• surrendering the Hong Kong Special Administrative Region or any other part of the People’s Republic of China to a foreign country.

The punishments for breach are distinguished by reference to whether the offence is of a “grave nature” (10 years’ to life imprisonment), whether a person “actively participates in the offence” (three to 10 years’ imprisonment) and “other participants” (no more than three years’ imprisonment).

Article 21 sets out the provisions relating to accessory liability. This arises if a person “incites, assists in, abets or provides pecuniary or other financial assistance or property for the commission by other persons of the offence under Article 20”.  The punishments range from five to 10 years’ imprisonment for offences “of a serious nature” or “imprisonment of not more than five years, short-term detention or restriction” for offences of a “minor nature”.

Subversion

The offence of subversion is set out in Article 22 and 23. It criminalises “A person who organises, plans, commits or participates in any of the following acts by force or threat of force or other unlawful means with a view to subverting the State power”.

• overthrowing or undermining the basic system of the People’s Republic of China established by the Constitution of the People’s Republic of China;

• overthrowing the body of central power of the People’s Republic of China or the body of power of the Hong Kong Special Administrative Region;

• seriously interfering in, disrupting, or undermining the performance of duties and functions in accordance with the law by the body of central power of the People’s Republic of China or the body of power of the Hong Kong Special Administrative Region; or

• attacking or damaging the premises and facilities used by the body of power of the Hong Kong Special Administrative Region to perform its duties and functions, rendering it incapable of performing its normal duties and functions.

The punishments are set out in similar terms to those under Article 20.  The accessory liability provisions are also in similar terms to those under Article 21.

Terrorist activities

The offence of terrorist activities is set out in Articles 24 and 25. It criminalises a “person who organises, plans, commits, participates in or threatens to commit any of the following terrorist activities causing or intended to cause grave harm to the society with a view to coercing the Central People’s Government, the Government of the Hong Kong Special Administrative Region or an international organisation or intimidating the public in order to pursue political agenda”. The relevant activities are:

• serious violence against a person or persons;

• explosion, arson, or dissemination of poisonous or radioactive substances, pathogens of infectious diseases or other substances;

• sabotage of means of transport, transport facilities, electric power or gas facilities, or other combustible or explosible facilities;

• serious interruption or sabotage of electronic control systems for providing and managing public services such as water, electric power, gas, transport, telecommunications and the internet; or

• other dangerous activities which seriously jeopardise public health, safety or security.

The punishments are: “A person who commits the offence causing serious bodily injury, death or significant loss of public or private property shall be sentenced to life imprisonment or fixed-term imprisonment of not less than ten years; in other circumstances, a person who commits the offence shall be sentenced to fixed-term imprisonment of not less than three years but not more than ten years”.  There are further offences in Article 25 relating to the taking charge of a terrorist organisation (which is defined to mean an organisation which commits or intends to commit the offence under Article 24 or participates or assists in the commission of the offence).

The provisions relating to accessory liability appear less likely to be inadvertently contravened by insurance market participants.  These criminalise a “person who provides support, assistance or facility such as training, weapons, information, funds, supplies, labour, transport, technologies or venues to a terrorist organisation or a terrorist, or for the commission of a terrorist activity”.  However, although it seems unlikely that an insurance market participant would inadvertently fall foul of this provision, it is notable that if it did, it would arguably itself fall within the definition of “terrorist organisation” and its CEO (and possibly others) would be guilty of taking charge of such an organisation.

Collusion with a foreign country or with external elements

Article 29 sets out the provisions relating to foreign collusion. These break down into several distinct categories of mean to commit prohibited acts:

• A person who steals, spies, obtains with payment, or unlawfully provides State secrets or intelligence concerning national security for a foreign country or an institution, organisation or individual outside the mainland, Hong Kong and Macao of the People’s Republic of China (“spying”);

• a person who requests a foreign country or an institution, organisation or individual outside the mainland, Hong Kong and Macao of the People’s Republic of China, or conspires with a foreign country or an institution, organisation or individual outside the mainland (“requesting assistance”); and

• a person who… directly or indirectly receives instructions, control, funding or other kinds of support from a foreign country or an institution, organisation or individual outside the mainland, Hong Kong and Macao of the People’s Republic of China (“receiving assistance or direction”),

The prohibited acts are:

• waging a war against the People’s Republic of China, or using or threatening to use force to seriously undermine the sovereignty, unification and territorial integrity of the People’s Republic of China;

• seriously disrupting the formulation and implementation of laws or policies by the Government of the Hong Kong Special Administrative Region or by the Central People’s Government, which is likely to cause serious consequences;

• rigging or undermining an election in the Hong Kong Special Administrative Region, which is likely to cause serious consequences;

• imposing sanctions or blockade, or engaging in other hostile activities against the Hong Kong Special Administrative Region or the People’s Republic of China; or

• provoking by unlawful means hatred among Hong Kong residents towards the Central People’s Government or the Government of the Region, which is likely to cause serious consequences.

The punishments range from 3 years’ to life imprisonment. The foreign institution, organisation or individual is also liable to the be convicted and punished for the same offence.

Potential impact upon general insurers, reinsurers and intermediaries

A question that has been raised with increasing concern by the industry since the National Security Law’s enactment is the impact it will have upon its business.

Hong Kong remains one of the key global insurance hubs and represents a significant portion of the Hong Kong economy. The Insurance Authority recently has, together with other authorities, taken various steps to promote the development of the industry. Various statements made by the Hong Kong government make clear that it is not the intention to target or adversely affect the financial services industry with the National Security Law. Notwithstanding this intention, there are risks for insurance market participants that need to be appreciated and managed.

For insurance industry participants, the National Security Law may – for practical purposes – take effect in way somewhat similar to a sanctions regime. This is because of the risk of accessory liability for participants in dealing with those at risk of committing primary offences under the new law.

A separate area of risk arises in respect of foreign lobbying activities by market participants relating to HKSAR or the PRC.

Accessory liability

The most likely area where insurance industry participants might find themselves subject to investigation under the National Security Law is accessory liability. This arises in respect of the offences of Secession and Subversion.

However, as accessory liability is necessarily parasitic on the underlying primary offences, it is necessary first to consider relevant situations where basic primary liability might arise. This would appear to include (but not be limited to):

• Pro-independence political parties or groups;

• Pro-independence media organisations;

• Certain activities of “pro-democracy” political parties or groups;

• Certain taught courses or research activities at universities or other educational establishments;

• Certain publications by media organisations.

 The accessory liability provisions relating to the offences of secession and subversion are worded in similar terms: “incites, assists in, abets or provides pecuniary or other financial assistance or property for the commission by other persons of the offence…”. 

The provision of insurance (or reinsurance) could reasonably be interpreted to fall within the words “provides pecuniary or other financial assistance”. Similarly, the arranging of such insurance or reinsurance by brokers or agents, may also be found to fall within such words.

However, such assistance must also be provided “for the commission by other persons of the offence…”. It is not clear what nexus there must be between the assistance and the commission of an offence and whether this wording imports a requirement that such assistance must be given knowingly and, if so, exactly what knowledge would be required. It seems likely that, to be guilty of an accessory offence, an insurance industry participant would need to know that the other party intended to undertake the activity that constituted the offence[8] or at least that it would be foreseeable that it might undertake such activities.

On that basis, the following would appear to carry a material risk of accessory liability:

• Insuring or arranging insurance for a pro-independence opposition party (Article 21, Secession; Article 23, Subversion);

• Insuring or arranging insurance for a pro-independence media organisation (Article 21, Secession); and

• Entering into or arranging a facultative reinsurance agreement of (a) or (b) above (Article 21, Secession; Article 23, Subversion).

The position is less clear in relation to persons or entities that, whilst their purpose or position on certain matters does not necessarily mean that they will contravene the new law, specific activities undertaken by them may be found to do so. This may be the case with pro-democracy political parties or universities/schools or media organisations or associations. The level of risk attached to providing or arranging insurance for such persons will likely depend upon the historical record of such persons in taking action or making statements that might now be considered to contravene the law and any relevant conduct subsequent to the law’s enactment (such as disavowing or reaffirming such statements or actions).

Lobbying or other foreign activities

Under Article 29, it is an offence to request “a foreign country or an institution, organisation or individual outside the mainland, Hong Kong and Macao of the People’s Republic of China… to commit any of the following acts…

• (2) seriously disrupting the formulation and implementation of laws or policies by the Government of the Hong Kong Special Administrative Region or by the Central People’s Government, which is likely to cause serious consequences…

• (4) imposing sanctions or blockade, or engaging in other hostile activities against the Hong Kong Special Administrative Region or the People’s Republic of China”.

Sub-paragraph (2) of Article 29 is somewhat unclear in its scope. However, it is possible that, to the extent that an Hong Kong insurance market participant, or one of its group companies, seeks to lobby a foreign government with regard to the National Security Law or any other law or seeks to influence trade policy with regard to Hong Kong or China, that this might be seen to fall foul of Article 29.  At the extremes, the participant’s, or one of its group companies’, membership of a chamber of commerce that undertakes such activities could also raise questions for a Hong Kong insurance market participant.

Specific penalties for companies

Article 31 sets out specific penalties for incorporated or unincorporated associations. The penalties and consequences are:

• A criminal fine;

• The suspension or revocation of its licence or business permit; and

• The confiscation of any proceeds obtained from the commission of an offence.

It appears that the suspension or revocation of a licence or business permit is mandatory under Article 31 following a conviction under the new law. Therefore even a minor contravention of the law which attracted only a low level fine would likely be accompanied by, at least, a suspension of an insurer’s or intermediary’s operations in Hong Kong. Even a brief suspension of an insurer’s licence would likely give rise to serious regulatory consequences under the Insurance Ordinance (Cap. 41).

How should general insurers, reinsurers and intermediaries manage the new law?

The interpretation and application of the National Security Law will likely be uncertain and dynamic for a significant period of time. Insurance industry participants will therefore need to be nimble in understanding and reacting to developments as they happen. We will continue to post updates on developments.

In the immediate term, participants would be well advised to undertake a risk assessment of their businesses and client portfolios:

• first, identifying categories of clients and assessing them by way of risk;

• secondly, undertaking more detailed assessments of those clients in the higher risk categories;

• thirdly, analysing the scope and extent of services provided to the client and determining if they present an acceptable risk to the business; and

• fourthly, determining what steps – if any – need to be taken to mitigate the identified risks and whether these should be immediate steps or can wait until the renewal of accounts. These need to be weighed against reputational, contract and other regulatory risks (including treating clients fairly).

Participants would also be well-advised to review their own – and if relevant their parent and sister companies’ – lobbying activities and trade association memberships to assess and manage any risks arising from these matters.

We are developing a benchmarking processes to assist with these categorisation and risk analysis together with assessments of risk adjusted options (i.e. taking into account reputational, contract and regulatory risk vs criminal/regulatory exposure). We can assist you through these processes.

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[1] Chinese official version here: https://www.gld.gov.hk/egazette/pdf/20202444e/cs220202444136.pdf. Xinuanet.com has published an English translation of the law at http://www.xinhuanet.com/english/2020-07/01/c_139178753.htm. This note is based upon the English translation.

[2] Article 39. This leaves open the question of whether other powers in the law, including investigative powers, maybe exercised in respect of acts that took place prior to law coming into effect.

[3] Article 13.

[4] Article 40.

[5] The law is silent on whether the term can be renewed or extended.

[6] Articles 36 – 39.

[7] Assumedly, that this would be interpreted to include Taiwan.

[8] However, under general common law principles there is no requirement for a person to know that a particular act constitutes a breach of the law for a person to be criminally liable – ignorance of the law is not a defence (“ignorantia juris non excusat”).