Italy: banking, pension, insurance and financial regulators consult to fight arms producers funding | Hogan Lovells

On 28 April 2023, the Bank of Italy, COVIP, IVASS and the Italian Ministry of Economy and Finance (hereafter the “Supervising Authorities“) launched a joint public consultation on draft instructions for the exercise of enhanced controls on the business of a wide range of supervised entities in their respective sectors in order to counter the financing of companies producing antipersonnel mines, cluster munitions and submunitions (hereafter the “Draft Instructions“).

Background

Law No. 220 of 9 December 2021 (hereafter the “Law“) introduced in Italy the prohibition for intermediaries operating in the banking, pension, insurance and financial sectors to finance companies, whether incorporated in Italy or abroad, which are directly or indirectly (through controlled or linked companies) engaged in certain activities (including but not limited to the production, storage, sale, transportation and distribution) related to antipersonnel mines, cluster munitions and submunitions. Pursuant to the Law, foundations and pension funds are also prohibited from investing their assets in the abovementioned activities.

The Law is part of the initiatives taken by Italy to comply with the broader international obligations enshrined in the Ottawa Convention of 3 December 1997 and the Oslo Convention of 30 May 2008.

Scope

The Draft Instructions would apply to supervised entities as defined under the Law (hereafter the “Obliged Entities“), i.e.

• Italian investment firms (SIMs), banks, asset managers, e-money institutions, payment institutions, entities enrolled in the list referred to in Article 111 of the Italian Banking Act (micro-credit operators), financial intermediaries, insurance and reinsurance undertakings, stockbrokers, banking foundations, pension funds, Poste Italiane S.p.A. for the Bancoposta business, Cassa Depositi e Prestiti S.p.A.; and
• Italian branches of SIMs, asset managers, banks, e-money institutions, payment institutions, insurance and reinsurance undertakings, with registered offices in another EU member State or in a third country.

Duties for Obliged Entities

Pursuant to the Draft Instructions, Obliged Entities would be required to adopt procedural safeguards codified in internal regulations aimed at ensuring compliance with the prohibition to finance businesses involved in activities related to the abovementioned weapons (financing meaning any form of financial support including but not limited to, the granting of credit in any form, the issuance of financial guarantees, the acquisition of shareholdings, and the purchase or subscription of financial instruments issued by said companies). Such safeguards shall include at least: (i) the obligation to consult publicly available lists of companies producing antipersonnel mines, cluster munitions and submunitions before granting the financing and (ii) procedures for assessing the risk of involvement of the potential borrower in said activities in light of, for example, the activity carried out, the registered office and place of business. In the case of financing to entities considered to be high risk, enhanced control measures shall be adopted.

Further obligations are set out with respect to, inter alia, (i) information flows to grant the internal bodies of Obliged Entities full knowledge and governance of the organisational safeguards adopted to assess the compliance with the funding prohibition and any breach thereof; (ii) definition of the safeguards at group level; and (iii) duties and responsibilities in case the management of resources is entrusted to third parties.

When the control procedures lead to determine that the potential borrower is involved in the activities said above, Obliged Entities shall implement the measures needed to ensure the prohibition of financing, e.g. by denying the funding. When a breach of the prohibition is found, a timely communication of the outcome of the controls carried out and of the remedies adopted shall be sent to the competent Supervising Authority.

Powers of Supervising Authorities

For the purpose of verifying compliance with the financing prohibition, the Supervising Authorities may – among other things – request data, news, deeds and documents from the Obliged Entities and carry out inspections at their premises. With respect to potential sanctions, it is worth mentioning that Obliged Entities, as well as the members of their administrative, management and controls bodies who fail to observe the financing prohibition and the Draft Instructions are subject to an administrative fine by the competent Supervising Authority, unless the act constitutes a criminal offence.

Next steps

The public consultation is open until 12 June 2023 and the Supervising Authorities will analyse the observations and comments received from the market to prepare the final text of the instructions, which will be published in the Italian official Gazette.

According to the Draft Instructions, Obliged Entities will have to comply with them within four months from their entry into force