(Bloomberg) — Global banks risk being caught between Beijing-backed penalties and sanctions being debated in the U.S. as Hong Kong’s autonomy becomes a volatile point of friction between the two superpowers.

The vast scope of the new security law imposed on the city has taken businesses by surprise, but perhaps no part is more worrying for global lenders than Article 29. It forbids sanctions, blockades or hostile activities against the financial hub and China at a time when the U.S. is inching closer to enacting rules that would require banks to comply with sanctions against Chinese officials and entities. Running afoul of the legislations put companies at risk of fines or losing their license to do business.

There’s concern on the “risk of becoming a political football,” said Tamer Soliman, a Washington-based partner and global head of the Export Control & Sanctions practice at law firm Mayer Brown. “We’re currently advising a number of clients who are concerned with how broadly certain aspects of the National Security Law could be construed, and how that may come into play in local implementation of the HKAA generally,” he said, referring to the U.S.’s Hong Kong Autonomy Act.

Article 29 is part of a package of legislation enforced by Beijing to reign in criticism of its rule. The law is upending how justice is administered in the financial hub and has further raised tension between the U.S. and China. Hong Kong was returned to China in 1997 on a “one country, two systems” framework to maintain its freedom of expression, capitalist financial system and independent judiciary for at least 50 years.

The crackdown in Hong Kong has drawn criticism from Washington, including the legislation that provides for sanctions against financial institutions working with Chinese officials who are determined by the U.S. to be interfering with Hong Kong’s limited autonomy.

”This is designed to target officials in the government of China or others who’re collaborating in undermining democracy in Hong Kong,” Senator Chris Van Hollen, who co-sponsored the bill, said in a Bloomberg Television interview.

The bill “will also then sanction any banks who do business with those individuals. The idea being that those individuals who are complicit, we want to cut off their financial lifeline,” he said.

Banks including Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. are walking a tightrope between the two world powers given their operations in Hong Kong and ambitious plans for China this year. HSBC Holdings Plc is especially under fire after it voiced support for China’s security law, under intense pressure because of its dominant role in Hong Kong.

Spokespeople at the banks all declined to comment on Article 29 and the sanctions.

Bankers and their lawyers from Hong Kong to Washington are poring over the legislation to reconcile how they can dodge major consequences, according to people familiar with the matter who asked not to named discussing internal deliberations.

Banks are assessing ways to mitigate the risks of a potential breach of Hong Kong’s security law and how to implement potential U.S. sanctions without exposing staff in the city, including having offshore entities rather than local units implement the sanctions, the people said. Still, that could bring little relief since the Hong Kong legislation also claims extraterritorial rights, which is likely to be one main point of legal contention.

State Secrets

Retail and corporate banks with a big presence in Hong Kong such as Citigroup and HSBC could be more exposed to the risks from the bills especially on sizable transactions done through local units, one of the people said. Another issue causing concern among the banks is Article 29’s provision on state secrets, which they could breach if they provide information to a foreign government on high-level clients, two of the people said.

Global banks are reviewing their client base to identify people who may be exposed to sanctions under the U.S. act and looking over agreements to make sure that they have clauses that allow them to ditch customers without penalty.

The U.S. sanctions bill is currently awaiting the signature of the president, who hasn’t indicated whether he will sign it or not. The bill was passed with broad veto-proof support in the Senate and the House.

Still, the initial fallout may be limited to the most senior Chinese officials since the U.S. is unlikely to take action that will significantly disrupt trade or hurt the global economy, estimate bank executives, who asked not to be identified discussing internal analysis.

Pompeo’s Ire

China’s response will also be guided by its desire to maintain Hong Kong as a global financial center, a status that will be eroded if foreign companies are put in a bind by a heavy-handed implementation of the law. Article 29 also focuses on the country and territory level, so implementing sanctions against individuals may not constitute a breach, one of the people said.

If the U.S. enacts its bill, the State Department has 90 days to submit a report on whether any individuals or companies merit sanctions. Reports on financial institutions must be submitted within 60 days after that. The president has the leeway to wait one year before imposing sanctions.

U.S. authorities are also mulling a move that would punish banks and destabilize Hong Kong’s currency peg to the dollar, with HSBC named as a specific target after drawing the ire of Secretary of State Mike Pompeo, people familiar said earlier. A move to strike against the peg is part of broader discussions among advisers to Pompeo and hasn’t been elevated to the senior levels of the White House, suggesting it hasn’t gained serious traction yet, the people said.

“This is part of a broader trend of potential conflicts of law between the U.S. sanction measures and potential Chinese countermeasures,” Soliman said. “It puts companies who view the U.S. and China as important to their long term business in a very difficult position.”

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