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Session 2008 - 09
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Public Bill Committee Debates

The Committee consisted of the following Members:

Chairman: Mr. Jim Hood
Breed, Mr. Colin (South-East Cornwall) (LD)
Dhanda, Mr. Parmjit (Gloucester) (Lab)
Dorrell, Mr. Stephen (Charnwood) (Con)
Duddridge, James (Rochford and Southend, East) (Con)
Farrelly, Paul (Newcastle-under-Lyme) (Lab)
Hesford, Stephen (Wirral, West) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Hoey, Kate (Vauxhall) (Lab)
Hoon, Mr. Geoffrey (Ashfield) (Lab)
Lilley, Mr. Peter (Hitchin and Harpenden) (Con)
McCarthy-Fry, Sarah (Exchequer Secretary to the Treasury)
Mudie, Mr. George (Leeds, East) (Lab)
Naysmith, Dr. Doug (Bristol, North-West) (Lab/Co-op)
Pugh, Dr. John (Southport) (LD)
Smith, Mr. Andrew (Oxford, East) (Lab)
Taylor, Mr. Ian (Esher and Walton) (Con)
Gosia McBride, Committee Clerk
† attended the Committee

Fourth Delegated Legislation Committee

Wednesday 28 October 2009

[Mr. Jim Hood in the Chair]

Financial Restrictions (Iran) Order 2009
Mr. Mark Hoban (Fareham) (Con): On a point of order, Mr. Hood. Will you advise the Committee what the quorum is? Would the Committee be quorate if Opposition Members were not here?
The Chairman: Yes, I can answer that question—it is not a point of order. I need to see five Members in front of me for the Committee to be quorate, and we now have seven.
Mr. Hoban: At the moment.
2.30 pm
The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): I beg to move,
That the Committee has considered the Financial Restrictions (Iran) Order 2009 (S.I. 2009, No. 2725).
It is a pleasure to serve under your chairmanship, Mr. Hood. On 12 October, HM Treasury laid before Parliament the Financial Restrictions (Iran) Order 2009, under its powers in schedule 7 of the Counter-Terrorism Act 2008. The order contained a direction to the financial sector, requiring it to cease all business with two Iranian entities and all their branches, wherever located: Bank Mellat and the Islamic Republic of Iran Shipping Lines.
In keeping with the undertakings given to Parliament during the passage of the 2008 Act, I would like to set out the reasons for the action, provide some details on the specifics of the direction and, finally, outline the work that we have done to ensure that the measures are well understood by the UK financial services industry. Due to the nature of the material that informed the decision to take the action, hon. Members will understand that there are limits on what can be shared. I will, of course, provide as much information as possible within those constraints.
The direction in the order was given on the basis of the Treasury’s belief that activity in Iran that facilitates the development or production of nuclear weapons poses a significant risk to the national interests of the UK. As I highlighted in the written statement to Parliament that I issued alongside the order on 12 October 2009, Iran continues to fail to meet its international obligations. Most notably, its nuclear programme presents an immediate challenge to the global non-proliferation regime. Work carried out as part of Iran’s nuclear programme would facilitate the development or production of nuclear weapons. The International Atomic Energy Agency, the UN body charged with monitoring Iran’s activities and ensuring that no nuclear material is diverted to non-civilian applications, is being refused the access it seeks by Iran, and Iran also declines to answer questions put to it by the agency’s staff about alleged studies indicative of a military aspect to Iran’s programme. As a result, the IAEA director general has stated that he is unable to verify that Iran’s nuclear programme is for exclusively peaceful purposes.
Iran’s ongoing improvement of its ballistic missile capabilities also continues to cause international concern. Iran’s failure to answer questions from the IAEA about possible military dimensions to its nuclear programme increases concerns that its ballistic missile programme represents a potential nuclear delivery system.
The Government consider the requirement to cease business relationships and transactions with Bank Mellat and IRISL to be a proportionate response to the threat, as the direction focuses on two entities that, according to evidence we have, have been engaged in activities of concern. Bank Mellat has provided banking services to a United Nations listed organisation connected to Iran’s proliferation-sensitive activities, and was involved in transactions relating to financing Iran’s nuclear and ballistic missile programmes. IRISL has transported goods for Iran’s ballistic missile and nuclear programmes, and both entities have links to the UK financial sector. As such, this is a targeted action against two Iranian entities that have been identified as facilitating proliferation-sensitive activity in Iran, rather than a sanction against Iran.
To protect this country’s national interests, and the integrity of its financial sector, the direction prohibits any financial or credit institution from providing services that benefit the entities and thereby support their activities. The action was taken under schedule 7 of the 2008 Act, which provides the Treasury with powers to issue a range of directions to UK financial and credit institutions, in response to certain risks to the UK’s national interests. The direction to cease business relationships and transactions is the most stringent direction that can be employed under those powers in relation to the two targeted entities. The direction to cease business relationships and transactions with Bank Mellat and IRISL therefore addresses the risk that UK financial firms are inadvertently or otherwise used to facilitate activities of concern.
Now let me provide some further information on the operation of the restrictions. The requirement contained in the direction came into force on Monday 12 October 2009. Shortly after the restrictions came into effect, the Treasury published a series of documents on its public website to alert the financial sector to the restrictions and provide detailed guidance on their implementation. These documents were also e-mailed to more than 8,000 subscribers to our e-mail alert system. In addition, we have asked various supervisors, such as the Financial Services Authority and Her Majesty’s Revenue and Customs and trade organisations such as the British Bankers Association, to publicise the direction and provide information to firms on its requirements. The Treasury has also met those firms most affected by the direction to ensure that they are in a position to comply with those requirements.
The documents published by the Treasury on 12 October included three general licences exempting specific acts from the restrictions which were issued by the Treasury under powers in schedule 7. These general licences enable financial and credit institutions with existing business relationships or transactions with the entities concerned to manage the cessation of business in an orderly and controlled way. Further licences, whether general or individual, may be granted by the Treasury to manage the impact of the requirements on third parties.
Mr. Hoban: Has the Minister received any applications for exemption for specific transactions?
Sarah McCarthy-Fry: I understand that we have received 17 applications for licences and to date two temporary licences have been granted. The rest are still being considered in discussions with the organisations concerned. This approach is similar to that used in asset freezing.
The direction applies requirements to persons operating in the UK financial sector and this includes FSA-authorised firms, money services businesses and credit institutions. Firms are required to establish whether any current or future business relationships or transactions are affected and to take steps to comply with the requirements of the direction. In this case firms will review their business dealings, cease any business relationships and transactions that are prohibited by the direction and ensure that their systems and controls are adequate for ongoing compliance with the direction.
The use of existing procedures and systems that firms will have in place to meet obligations relating to financial sanctions and anti-money laundering should assist in minimising the burden of compliance. All institutions operating in the financial sector will need to ensure they do not undertake new transactions or enter into new business relationships with the two entities. It is expected that compliance costs for the sector as a whole will be moderate, although any institution with significant links to Bank Mellat or IRISL will face larger costs. As set out during the passage of the Counter-Terrorism Act, supervision of the financial sector’s compliance with this direction will form part of the existing supervisory regime.
Alongside work with our financial sector to implement the restrictions, the Government have also taken steps to ensure that other jurisdictions are vigilant about the risks posed by Iran. We have lobbied a wide range of international partners to highlight the action we have taken and strongly encouraged them to take steps to prevent any business displaced from the UK from being picked up by their financial sector. We have worked with the Crown dependencies and overseas territories to develop legislation equivalent to the Counter-Terrorism Act to address these risks. All the Crown dependencies and overseas territories have recognised the importance of tackling these risks and have made progress in this regard. I am pleased to report that the Isle of Man has already put equivalent powers in place and issued a direction mirroring the UK’s on 12 October. We will continue to pursue this important work with the other Crown dependencies and overseas territories.
The order was issued by the Government to address risks to the UK’s national interests. We continue, of course, to ensure that any action taken by HM Treasury against Iranian entities is consistent with the wider foreign policy strategy towards Iran and we have worked closely with the Foreign and Commonwealth Office on the issuing of these directions. As such, I am sure the Committee will agree that we cannot and will not ignore specific activities undertaken by Iranian companies which we believe to be facilitating activity identified by the UN as being of concern and where such activities have the potential to affect the UK’s interests. Therefore it is right, indeed crucial, that we take such action. For these reasons I commend the order to the Committee.
2.40 pm
Mr. Hoban: It is a pleasure to serve under your chairmanship once again, Mr. Hood. We recognise the importance of the statutory instrument, which is why we helped the Government Whip to maintain quorum in today’s proceedings. The action involved, particularly against IRISL, is long overdue. Indeed, my right hon. Friend the Member for Richmond, Yorks (Mr. Hague) wrote to the Foreign Secretary in September 2008 asking him to take action against IRISL. We therefore support the action being taken, but had hoped that it would have been taken sooner.
I have a series of questions about the statutory instrument and how it will work. How will the Government assess the order’s impact on Iran’s proliferation activities? The explanatory memorandum states that that there is no specific information available on the United Kingdom’s financial services sector’s exposure to IRISL and Bank Mellat. It appears from the Minister’s earlier answer that the Treasury is much more aware of the impact that the order will have, but will she expand on the sort of areas in which people are seeking exemption from it, and what indication does that give about the extent of engagement between UK businesses and the two institutions?
Can the Minister confirm that the order covers UK-based subsidiaries of IRISL and Bank Mellat? Has any assessment been made of the number of subsidiaries of those two organisations operating in the UK?
Apart from the direct exposure of the UK financial services sector to Iran’s ballistic missile and nuclear programmes, what assessment have the Government made of any indirect exposure through, for example, being part of a payments chain between the two institutions and any potential suppliers? What further action can the Government take to prevent the UK financial services sector from contributing indirectly to the Iranian missile programmes through chains of payment or transactions with foreign subsidiaries? Is there anything we can do to prevent indirect transactions that might support the proliferation programme by being in some way linked to Bank Mellat and IRISL?
Turning specifically to the two institutions involved, when were the Government first aware that IRISL vessels had transported goods for Iran’s ballistic missile and nuclear programmes? We have acted on that, and the Minister has talked about the way in which she is working with the Crown dependencies to introduce the restrictions. I also welcome the fact that the Isle of Man has already acted on this. However, are the restrictions being replicated across the European Union, and what discussions has the Minister had with her counterparts in other EU member states to ensure that similar restrictions are introduced across the EU?
In her written ministerial statement, the Minister said that
“vessels of the Islamic Republic of Iran Shipping Lines (IRISL) have transported goods for both Iran’s ballistic missile and nuclear programmes.”—[Official Report, 12 October 2009; Vol. 497, c. 2WS.]
On how many occasions were IRISL vessels detected transporting such goods through UK territory or waters?
Is the Minister satisfied that the order’s scope is sufficiently broad? I understand that when the United States acted last year in connection with IRISL, it also designated 18 affiliated companies. Can she confirm whether any of those companies operate within the UK, and if so, whether they have been fully investigated?
IRISL is not the only transport company that could be used to facilitate the transfer of goods to Iran as part of the ballistic missile and nuclear programmes. Have any concerns been raised about the possible use of Iran Air Cargo to facilitate the shipment of illicit goods to Iran? Can she assure us that a robust inspections system is in place to ensure that no such shipments pass through the UK or that, if they did, they would be detected? That is, of course, a requirement of UN resolutions. Have any violations been detected as a result of such inspections?
I note from the response to a written parliamentary question tabled by my right hon. Friend the Member for Richmond, Yorks that the direction does not require the IRISL office in the UK to be closed. Why does it not require that closure? What level of activity is the office permitted to conduct?
On Bank Mellat, when were the Government first aware that it provided banking services to a UN-listed organisation connected to Iran’s ballistic missile and nuclear programmes, and which organisation is it? Has any action been taken against that organisation by the Government?
We have long called for action against Iranian state-owned banks, where there is evidence that they have been used to facilitate transactions relating to the nuclear and ballistic missile programmes. Given the seriousness of taking action against any bank on the grounds that it has facilitated nuclear proliferation, will the Minister say any more about the nature of the transactions that Bank Mellat has been found to be involved in?
The explanatory notes say that
“Individuals or companies involved in or intending to undertake transactions with Bank Mellat may have to find alternative means to undertake transactions”.
What does that mean? Does that refer to the three general licences issued by the Treasury in conjunction with this order, or does it imply that there are other ways to continue transactions and business relations with Bank Mellat?
The Minister commented on freezing orders. Does the order involve the freezing of any of Bank Mellat’s assets in the UK? Will Bank Mellat be required to close its offices in the UK? What discussions has she had with her European counterparts to replicate the order on a pan-European basis? On the European dimension, what evidence is there of Iranian banks based in the UK and the EU shifting assets out of Europe in order to avoid the impact of sanctions?
Finally, can the Minister assure the Committee that the Government are raising their concerns about the Iranian banking sector with countries in the Gulf, and elsewhere, that have strong commercial links with Iran? It is important that we take action to prevent the proliferation of nuclear weapons, and obviously there is a great deal of focus on Iran. We want to ensure that on our part, the Government are taking all possible steps to ensure that UK financial institutions are not, directly or indirectly, enabling the proliferation of nuclear weapons.
2.46 pm
Dr. John Pugh (Southport) (LD): Mr. Hood, I apologise to you and to the Committee for arriving two minutes late.
Clearly, my party will support the statutory instrument, as will all people of sound judgment. The world is in a dangerous corner, the Iranian nuclear programme worries all of us, and financial instruments have a place in arresting it. We can argue about how effective they are actually going to be, but I welcome the Government’s approach, which is a stiletto approach—intelligence-led, if I can put it like that—rather than a bludgeon approach of banning all kinds of transactions. I am aware that in the past, when simple bars were put on, many innocent, perfectly legitimate transactions—simple trading with Iran by small companies—were caught up. My worry in this case is that Bank Mellat—having a number of customers, not all of whom are distinctly suspicious—will, in no longer dealing with the UK, generate problems for small businesses in the UK that have no party to this issue.
I know that efforts have been made by the Treasury to alert clients of, or people dealing with, the bank—via the website and by advertisements—to the problems they will subsequently have, which will be severe. However, I do not know the extent to which some of those companies trading with Iran via Bank Mellat will be able to access those efforts. Can the Minister say a little more about what attempts are being made to inform clients or customers of the bank, who are trading in Britain perfectly legitimately, that they are going to have a pretty insuperable problem? I would like the Minister to enlarge on the efforts being made by the Treasury.
Will the Minister expand her explanation of what efforts are being made so that this legislation cannot be circumvented or avoided by allowing third party transactions to replace a direct transaction and so escape the net, or by putting a sequence of parties in a chain of commercial transactions? I assume that the Treasury is ever vigilant. I assume that its approach is intelligence-led and that the net being put in place is effective. The Minister said a little about that. She also said that she was heartened by the fact that the Isle of Man has come into line. The statutory instrument applies only to the UK and not necessarily to Crown dependencies. Clearly, the Treasury is aware that the use of Crown dependencies can be a route to circumvent the order. Is the Minister satisfied that there are no such loopholes or back doors through which transactions of which the Treasury disapproves can take place?
Clearly, the targeting of this particular bank and shipping company is an intelligence-led process, in the sense that people have collected evidence. One assumes that evidence continues to be collected and selected by the Treasury on transactions with Iran. I want to know—perhaps the Minister can give a flavour of this—whether there will be further statutory instruments of this ilk. In other words, is the problem bigger than that encompassed by the two bodies that are the object of the order?
2.51 pm
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