• On Friday, the U.S. Treasury Department imposed sanctions on 11 Chinese and Hong Kong officials
  • Under such sanctions, banks are prohibited from doing business with the sanctioned individuals
  • Two major Chinese banks are also “assessing what needs to be done based on their risk tolerance

Banks in Hong Kong are keeping a close eye on the accounts of local government officials who have been slapped with U.S. sanctions -- and are researching whether they must suspend the accounts to comply with the orders.

At least one U.S.-based bank has pledged to suspend the accounts to abide by the Treasury Department's directive, Bloomberg reported Monday.

The sanctions, imposed Friday, prohibit banks from doing business with 11 Chinese and Hong Kong officials who support China’s new national security law in Hong Kong. Treasury officials also froze the officials' assets in the U.S.

The officials include Hong Kong Chief Executive Carrie Lam, Hong Kong's chief executive; Xia Baolong, director of the Hong Kong and Macau Affairs Office of China’s State Council; and Chris Tang, commissioner of the Hong Kong Police Force.

“The scale looks small for now as only 11 individuals are affected but more people could be added to the list and the banks may face secondary sanctions,” Kevin Lai, a chief economist at Daiwa Capital Markets in Hong Kong, told Bloomberg.

Two major Chinese banks also are “assessing what needs to be done based on their risk tolerance and compliance requirements,” suggesting they won't ignore the sanctions, Bloomberg noted. The outlet didn't identify the banks.

“Most foreign banks in Hong Kong have been working internally for the last few weeks to prepare a list of people who will [be] the main target of the U.S. sanctions,” a senior European banker in Hong Kong told Reuters.

Another banker told Reuters that banks in Hong Kong will now “forensically examine the networks of the people named on the sanctions lists and see if there are any banking relationships which would put the banks at risk.”

However, complying with U.S. sanctions would surely place banks in violation of the Chinese security laws, which specify no sanctions can be imposed upon Hong Kong or mainland China by foreign parties.

“The ball is now in the banks’ court,” said Lai of Daiwa. “They are in a particularly difficult situation as they also have to take the national security law into consideration.”

Banks will now likely screen accounts both new and old in preparation for more sanctions in the future. As banks find themselves stuck between Washington’s sanctions and Beijing’s laws, they may be a greater risk of fines or losing their license to operate in Hong Kong.

Bloomberg indicated that overseas-based banks Citigroup (C) and HSBC Holdings (HSBC) could be especially vulnerable given their deep presence in Hong Kong

Chinese banks including Bank of China Ltd. and Industrial & Commercial Bank of China Ltd. could also find themselves in awkward positions.

“The banks here would be hard pressed to cut off some of these [sanctioned individuals] as their customers,” Benjamin Quinlan, chief executive officer of Quinlan & Associates, a strategy consultant in Hong Kong, told Bloomberg. “At the end of the day, even if you go from a U.S. bank to the likes of HSBC, they all have an international footprint that straddles the U.S., Hong Kong, and mainland China.”

Over the weekend, Hong Kong authorities sought to calm local fears about the U.S. sanctions.

The Hong Kong Monetary Authority, essentially the city-state’s central bank, said the sanctions would not impact local lenders since they are not obligated to follow U.S. sanctions.

Hong Kong’s Securities and Futures Commission also said it was “not aware of any aspect of the (security law) or the U.S. sanctions ... that would affect the way in which firms carry on their normal operations in Hong Kong.”

On Monday, China retaliated against the U.S. by sanctioning 11 Americans, including two senators -- Marco Rubio of Florida and Ted Cruz of Texas.