Protecting Against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2019 Debate

Full Debate: Read Full Debate
Department: Department for International Trade

Protecting Against the Effects of the Extraterritorial Application of Third Country Legislation (Amendment) (EU Exit) Regulations 2019

Lord Purvis of Tweed Excerpts
Tuesday 26th March 2019

(5 years ago)

Lords Chamber
Read Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Fairhead Portrait The Minister of State, Department for International Trade (Baroness Fairhead) (Con)
- Hansard - - - Excerpts

My Lords, EU Council regulation 2271/96, which protects,

“against the effects of the extra-territorial application of legislation adopted by a third country, and actions based thereon or resulting therefrom”,

is commonly known as the EU blocking regulation. It seeks to protect UK and EU businesses from the harmful effects of the extraterritorial application of legislation adopted by another country.

Extraterritorial application of legislation refers to a situation where a country has enacted certain laws, regulations and other legislative instruments which purport to regulate activities of natural and legal persons outside its jurisdiction who are not its citizens or legal persons incorporated in that jurisdiction. This could, for example, result in penalties against a UK citizen for carrying out activities in the UK which we consider to be fully legitimate under our law. The UK and EU have long opposed the extraterritorial effect of sanctions legislation on our businesses and the dissuasive impact that this can have on legitimate trade. In fact, the UK’s opposition to such actions predates the blocking regulation. We have had regulations on our statute book since 1980.

The blocking regulation seeks to protect UK businesses in two key ways. First, Article 4 of that regulation guarantees that courts in EU member states will not recognise or allow the enforcement of judgments against EU businesses for fines that they incur in a third country for breaching sanctions with extraterritorial effect. Secondly, its Article 6 enables businesses to seek damages through the courts in any member states, should they be negatively impacted by the application of extraterritorial legislation in scope of the regulation.

Of course, there may be occasions where compliance with third-country sanctions regimes is necessary. Where these instances arise, the EU has the power to issue authorisations for businesses to comply with third-party sanctions regimes. Such compliance can include seeking permission from a third country to continue doing business with countries affected by that third country’s sanctions, such as approaching OFAC for a licence to continue operating in Iran. This form of compliance preserves and increases trade, although without such authorisation it is technically illegal under the blocking regulation. For this reason, compliance authorisations may need to be issued by Her Majesty’s Government after Brexit. Currently, requests for such authorisations are considered by the EU Commission in accordance with the process and criteria set out in Commission implementing regulation 2018/1101 of 3 August 2018, referred to as the implementing regulation.

This SI amends the blocking regulation and the implementing regulation as retained in UK law, using powers under Section 8 of, and paragraph 21(b) of Schedule 7 to, the EU withdrawal Act 2018, and fixes it for the UK-only context. It ensures that the UK statute book on leaving day remains equivalent to that on the day before we leave. The SI, generally speaking, transfers the functions of the European Commission to the Secretary of State, as would be expected of SIs made under the EU withdrawal Act 2018. For instance, once the SI enters into force, UK businesses will be able to apply to the Secretary of State for permission to comply with extraterritorial sanctions, and the Secretary of State will be able to grant this permission if he or she judges the application to be consistent with the criteria set out in legislation.

Currently, the Commission defines the scope of the blocking regulation—which specific pieces of legislation it applies to—through tertiary legislation amending and updating the annexe to the blocking regulation. The SI transfers this power to the Secretary of State through the mechanism of laying of a negative SI. As we leave the EU we must ensure that we continue to protect UK businesses from the effect of extraterritorial legislation. We firmly believe that our operators should be able to continue legitimate trade free from the harmful effects of the extraterritoriality that we consider illegal under international law. This statutory instrument is a key part of this policy stance and is particularly relevant given our foreign and trade policy stances on Cuba and Iran. I welcome the opportunity for scrutiny of it and I look forward to hearing the contributions of noble Lords.

Lord Purvis of Tweed Portrait Lord Purvis of Tweed (LD)
- Hansard - -

My Lords, I do not think there will be any difficulty on these Benches about ensuring the continuity we will require in order that there is certainty for British businesses that they can operate on the correct side of international law. The only areas that I hope the Minister will clarify—her introductory remarks were quite helpful—concern, first, the application process that will be required if we are to have a stand-alone position outside European regulations. The applications for authorisations will have to be made to the Secretary of State, as the regulations state. Will the Minister indicate what process such applications will involve?

The second area, which the noble Baroness will not be surprised that I raise, concerns the matter of another judiciary within the United Kingdom. While, as part of Scottish criminal law, this will be a reserved power, nevertheless the criminal penalties that may well apply on the potential breach of some of these things by Scottish businesses would have to be prosecuted by the Scottish courts. One of the examples the Minister raised, that of Iran, is very relevant for the very large Scottish oil and gas industry that trades across the whole region, including within Iran. It is a relevant point, given the not-so-subtle threats from the United States that it will consider breach of its sanctions policy by those British businesses that continue to trade with Iran under a perfectly legal framework. If we are to have a stand-alone approach, absolute certainty, clarity and reassurance would be very helpful. The Government indicated that no consultation was necessary in bringing forward the statutory instrument. I was slightly surprised about that, given that we have two distinct judicial systems in the UK.

The Government also indicated that before the UK leaves the EU, guidance on how a blocking regulation would apply to the UK would be published. Given that when this instrument was drafted the intention was that, potentially, we would leave on Friday without an agreement, can the Minister say whether this guidance has been published? If it has not, when will it be, to offer that reassurance?

Finally, the Explanatory Memorandum states:

“The Blocking Regulation currently provides that the Commission is to regularly report on the effects of the extraterritorial third country legislation. This will become a requirement on the part of the Secretary of State in the retained version”.


Through what mechanism do the Government intend to do that? Will it be through Written Statements to Parliament, or will a public document be laid before Parliament to provide that transparency? I hope that the Minister can clarify all those aspects.

Lord Stevenson of Balmacara Portrait Lord Stevenson of Balmacara (Lab)
- Hansard - - - Excerpts

I, too, am very grateful to the Minister for her very full introduction to this SI. It took us into areas new to me, such as the intersection between foreign policy and trade policy. That is an interesting issue and the noble Lord, Lord Purvis, was right to focus his remarks on how these things will work in practice. I look forward to the Minister’s response.

When the Minister introduced the SI, she pointed out that much of the regulation that has been transposed was originally introduced in 1996 in response to the extraterritorial reach of certain sanctions imposed by the US in relation to Cuba in the 1990s. Obviously, it has been updated since then, particularly with reference to Iran. It set a train of thought in my mind about how exactly our current foreign policy meshes with these regulations. With particular reference to Iran, the commentary I have been reading seems to suggest that the package of measures that is being transferred across would encourage the European Investment Bank and banks in the UK—possibly even the Bank of England—to finance activities in Iran and to strengthen ongoing sectoral co-operation and assistance to Iran. That would include financial assistance through development corporation or partnership instruments, and encouraging the UK to explore the possibility of one-off bank transfers to Iran’s central bank, which would allow Iranian authorities to receive oil-related revenues.

I suppose this is all right—I do not really understand very much of this; it is way above my head—but when the Minister responds perhaps she could explain exactly how that meshes with our current policy towards Iran, which I understand is not as sympathetic or supportive as might be suggested by the rather large cash transfer opportunities which were being discussed.

This statutory instrument follows on from activities that have been going on in Europe for a number of years in relation not just to Cuba but to the other countries that were mentioned. It requires companies to notify the Commission within 30 days whenever renewed US extraterritorial sanctions directly or indirectly affect the economic or financial interests of the company in question. Various other things apply. EU companies can recover damages in EU courts from persons causing damage as a result of the sanctions, and it nullifies the effect of any court judgments or decisions of administrative bodies that are based on the reinstated US sanctions. My question here is: has anything happened in that regard? Do we have details on the number of companies that have notified the Commission within 30 days, as required? How much money has been recovered, and how many times have the courts been subject to recovery requests? I am sure that it will not affect the way in which we respond to the SI, but it would be interesting to have on the record whether this has been an active process or one that is more observed in the absence of activity than in the reality.

My attention was drawn to a quote from what is in some senses a rather unusual source, since I do not often quote this person. The UK Foreign Secretary at the time that this instrument was brought in, Boris Johnson, said that he thought it was rather difficult to protect European businesses due to the extraterritorial effect of US sanctions and the difficulties companies have when they touch the live wire of the American financial network—they find themselves sanctioned almost immediately. So my third request for more information is to ask whether the former Foreign Secretary is right that this has been rather difficult for companies to access and use.

I suppose I am leading to this question: what rationale do the Government give for continuing this transfer? It would clearly be inappropriate to have a situation in which an EU regulation had legal effect in the UK when we had not properly transferred it. If the ends do not justify the means, I am rather surprised that the Government are taking this step forward, so could the Minister reassure me when she comes to respond that this is a necessary instrument, that it fits with our current foreign policy operations and thoughts and that there is no concern in that respect?

--- Later in debate ---
Baroness Fairhead Portrait Baroness Fairhead
- Hansard - - - Excerpts

I do not deny that other issues are at play. For the purpose of this debate, the question is whether the blocking regulation supports our approach to the JCPOA, and I think it absolutely does.

Lord Purvis of Tweed Portrait Lord Purvis of Tweed
- Hansard - -

I thank the Minister for giving way. On the JCPOA, the core members of the EU, including the UK, have established a financial mechanism which will effectively protect British businesses conducting business with Iran. If we are moving to having a distinct system outside that mechanism, which is protected through the European process, if the SI is passed and we leave without a deal, where will British businesses be with regard to that mechanism set up through the aegis of the European Union? If British businesses cannot have the reassurance that they will have that European Union protection, they will feel vulnerable and be in a weaker position than they are now.