Wary of new security law, foreign firms in Hong Kong bolster contingency plans

By James Pomfret and Greg Torode

HONG KONG (Reuters) - Vague provisions in Hong Kong's new national security law around state secrets and links to foreign entities have put on edge many global businesses in the financial hub, with some consultants and hedge funds updating contingency plans and seeking legal advice in a bid to counter this political risk.

Several corporations, worried about data security, are now treating Hong Kong, once a major Asian base for multinationals, in the same way as mainland China and shielding information about the rest of the company from teams there, said an executive with decades of experience as an advisor to international firms.

Another executive said his hedge fund was seeking legal advice on how to deal with regulators and other government officials because of the state secrets provisions.

"It boils down to a lack of trust in the Hong Kong government, that is beholden to China," said a foreign executive who attended a recent meeting with senior Hong Kong officials.

The three executives, like the more than a dozen businesspeople Reuters spoke to, declined to be identified due to the sensitivity around security issues.

On Tuesday, Hong Kong's legislature unanimously approved the law, which updates a broader national security law imposed by China four years ago and comes with stiffer punishments for crimes including sedition and external interference.

The law takes effect on Saturday, March 23. The Hong Kong General Chamber of Commerce, among other business associations, has said it would make Hong Kong "a safer destination for local and foreign businesses and professionals operating there."

Citing national stability, Hong Kong and Chinese government officials have also defended the law from foreign criticism, saying it was no more severe than legislations in other countries including the United States, Britain and Singapore.

Some lawyers, however, said the sweeping definitions for several crimes around interference by so-called external forces, espionage and what constitutes a state secret, among others, had created uncertainty.

CONCERNS ABOUT IMPLEMENTATION

The businesspeople interviewed said the law potentially diminishes Hong Kong's international role as it appears to hew closer to the tighter national security regime of Chinese President Xi Jinping.

"For the international business community and financial investors, Hong Kong's common law tradition and rule of equity are as important as the free information flow and currency convertibility," said Weiheng Chen, senior partner at U.S-based law firm Wilson Sonsini.

"So how this legislation will be implemented within the existing common law system shall be closely monitored and assessed," said Chen, who also heads the Greater China practice.

The lack of clarity around the terms and the implementation of the law was precisely what drove a hedge fund to update their contingency plans, an executive said.

"We're urgently seeking advice on two key points - does our research of companies and individuals stray into risky areas, and how can we safely manage any relationships with foreign government-linked wealth funds. That includes how we share and store that research," the executive said.

"We'd like to stay in Hong Kong, but Singapore is our back-up if need be," they added.

Last year, the Chinese authorities tightened access to information including what's available on Chinese corporate databases, and clamped down on due diligence firms, arresting 5 executives at the Beijing office of U.S.-based Mintz Group.

A corporate investigator in Hong Kong for around 20 years said work that might no longer be viable could include looking into fraud or due diligence cases, as these discreet probes often scrutinize assets and companies.

These potential risks, three due diligence executives said, were already driving some consolidation in the sector, with some executives leaving the city.

"China's security reach will increasingly extend into Hong Kong, including data regulations," said the corporate advisor.

"And while Hong Kong is still more open, the broader direction is clear."

(Additional reporting by Kane Wu, Xie Yu, Clare Jim, Anne Marie Roantree and Hong Kong newsroom; Editing by Miral Fahmy)