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One year of Hong Kong security law: companies under scrutiny

By Dennis W.H. Kwok

On 30 June 2020, the National People’s Congress in Beijing promulgated the so-called National Security Law for Hong Kong. Many observers interpreted this unilateral act as a fundamental departure from the “one country, two systems” principle promised for Hong Kong under the Sino-British Joint Declaration signed in 1984.

With regards to the economy, laws such as Hong Kong’s Security Act are usually perceived as being primarily aimed at political dissent. However, this is a dangerous assumption. In the People’s Republic of China, national security concerns can also affect every aspect of the economy, from finance to energy to technology and infrastructure. Thus, the international community can expect further, far-reaching changes to the status quo in Hong Kong as well – especially as the Chinese leadership is currently massively expanding its absolute authority in the private economic sector, in mainland China as well as in Hong Kong.

According to Hong Kong’s Security Law, the central government in Beijing has the responsibility for Hong Kong’s national security affairs. Hong Kong’s Chief Executive Carrie Lam is accountable to the central government on all matters of national security. Given the broad and extensive nature of the concept of national security, this represents a fundamental change in the legal landscape in Hong Kong.

New challenges and risks posed by the Security Act

The Hong Kong Security Law does not offer a definition of “national security”. Individuals and companies that continue to operate in Hong Kong and mainland China, therefore, need to understand the definition of “national security” within the legal framework of the People’s Republic. This is because the Hong Kong “security law” must be understood and interpreted in the context of the broader legal framework of the People’s Republic.

The legal framework of the People’s Republic allows for a broad definition of national security and does not limit the concept to traditional issues such as terrorism, separatism, or extremism. Rather, the leadership in Beijing requires all actors to protect key industries vital to the national economy, including the financial industry, the energy sector, food safety companies, culture, technology, cybersecurity, ecological and environmental protection, nuclear technology, and the exploration and utilization of outer space.

This expansive definition of national security and its cross-industry application has been embraced by senior Hong Kong government officials, including Chief Secretary John Lee, who is a member of the National Security Commission. Security laws of the People’s Republic and the Hong Kong Special Administrative Region apply to both government and private entities.

Extraterritorial effect of the law

International companies with business and interests in the People’s Republic and the Special Administrative Region face new risks and challenges in light of the Hong Kong Security Law. First, the extraterritorial effect of the law means that individuals and companies may be held criminally liable for documents, work or activities conducted outside Hong Kong but which “jeopardize” the national security of the People’s Republic. This could include obtaining information about meetings if they are attributed to a key industry.

As could the purchase of documents that are at a later point classified as state secrets, or hosting of a website or server outside Hong Kong whose contents violate Hong Kong security law. In addition, given the variety of industries under Beijing’s leadership that are linked to national security concerns, intellectual property claims to technologies could be at risk.

The recent crackdown on the Hong Kong newspaper Apple Daily, including the freezing of HK $18 million in assets, the suspension of trading in shares of Apple Daily’s parent company, and the arrest of senior staff, illustrate the broad powers of the authorities under the new law, as well as the potential penalties that the Hong Kong Security Law allows. “Apple Daily” eventually ceased operations entirely on June 24. Many Hong Kong citizens still managed to get a hold of the last edition of the newspaper. International media outlets operating outside mainland China and Hong Kong are also affected by the security law.

In the People’s Republic, trade secrets often overlap with state secrets, particularly in the context of state-owned enterprises or Beijing’s economic development strategy or the country’s competitiveness in the international market. The alleged “unlawful” disclosure of state secrets to a foreign institution, organization or individual outside Hong Kong or the People’s Republic, can be punished by life imprisonment.

The Hong Kong Security Law could provide an important procedural advantage to a state-owned enterprise or Chinese conglomerate that raises the national security issue in litigation. In addition, commercial disputes may arise from the merger or acquisition of companies if their businesses are now covered by national security, unlike at the time the contract was signed.

Due to the interpretation of the Hong Kong Security Law, which is determined by the Standing Committee of the National People’s Congress together with the Chinese government, the question of whether or not a matter is in fact a matter of national security is no longer a legal decision, but a political one.

Security issues in more areas than before

Geopolitical tensions also play a role in determining whether a commercial matter is of national security. Other laws passed by the central government in Beijing further suggest that commercial entities may be playing a role in national security matters. For example, the People’s Republic Data Security Law, passed on June 10, 2021, categorizes data and data flows as national security issues and gives authorities broad powers to punish companies and their employees for illegal data transfers. In addition, the Standing Committee of the National People’s Congress recently revised the Criminal Law to target corporate espionage and punish anyone who “steals, spies on, buys, or illegally supplies trade secrets to foreign institutions, organizations, and individuals.”

Finally, the Chinese government issued new measures to expand the national security screening of foreign investment, which took effect in January 2021. As tensions between China and other countries continue to rise, it is foreseeable that national security issues will arise in many more areas than before. When relocating businesses, individuals and international companies should pay close attention to inadvertent disclosure of state and trade secrets or intelligence information to foreign companies, which could constitute a violation of Hong Kong’s security law.

According to China’s Data Security Law, companies face harsh penalties if they transfer “sensitive” data outside China’s borders. This means if companies are asked to hand over data by foreign judicial or law enforcement authorities, they cannot transfer that data without the permission of the Chinese authorities. In light of these legal and regulatory changes, it is becoming increasingly difficult for international companies to simultaneously comply with laws and regulations in the People’s Republic and elsewhere. Under the recent amendment to Hong Kong’s Immigration Ordinance, Hong Kong’s authorities can impose exit bans on anyone.

As the Chinese government continues to aggressively “reclaim” its role as a global leader in social, political and economic terms, Hong Kong is likely to move even further away from its past liberal traditions. It is imperative that the international community understands this paradigm shift and considers these new risks in its future operations and business in Hong Kong and the People’s Republic.

Dennis W. H. Kwok served as a member of the Hong Kong City Council (Legislative Council), chairing the “Committee on Judicial Administration and Legal Services” and the “House Committee”. In July 2020, he was excluded from new elections along with other representatives of the democratic opposition.

This article is a summary of a paper published by the ASH Centre for Democratic Governance and Innovation at the Harvard Kennedy School as part of a series of articles. It appeared first in the China Bulletin of Friedrich Naumann Foundation.

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