That the Grand Committee do report to the House that is has considered the Financial Restrictions (Iran) Order 2009.

Relevant Document: 22nd Report from the Joint Committee on Statutory Instruments.

On 12 October, Her Majesty’s Treasury laid before Parliament the Financial Restrictions (Iran) Order 2009 under its powers in Schedule 7 to the Counter-Terrorism Act 2008. This order contained a direction to the financial sector requiring it to cease all business with two Iranian entities—Bank Mellat and the Islamic Republic of Iran Shipping Lines—and all their branches, wherever located.

In keeping with the undertakings given to Parliament during the passage of the Counter-Terrorism Act 2008, today I shall set out the reasons for this action, provide some details on the specifics of the direction and finally outline the work that we have done to ensure that these measures are well understood by the UK financial services industry. Due to the nature of the material that informed the decision to take this action, noble Lords will understand that there are limits on what can be shared. I will, of course, provide as much as is possible within these constraints.

The direction contained in this order was given on the basis of the Treasury’s belief that the activity of Iran that facilitates the development or production of nuclear weapons poses a significant risk to the national interests of the UK. As the Exchequer Secretary to the Treasury highlighted in her Written Statement to Parliament issued alongside the order on 12 October, 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 being carried out as part of Iran’s nuclear programme would facilitate the development or production of nuclear weapons.

The International Atomic Energy Agency is being refused the access that it seeks by Iran, which also declines to answer questions put to it by the agency’s staff about alleged studies indicative of military aspects 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 give rise to international concern. Its 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. This is because the direction focuses on two entities that we have evidence have been engaged in activities of concern. Bank Mellat has provided banking services to a UN-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 both Iran’s ballistic missile and nuclear programmes. Both 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 the national interests of this country and the integrity of our financial sector, this direction prohibits any financial or credit institution from providing services that benefit these entities and thereby support the activities in which they are engaged. This action was taken under Schedule 7 to the Counter-Terrorism Act 2008, 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 these 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.

Let me now provide 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 over 8,000 subscribers to our e-mail alert system. In addition, we have asked various supervisors—for instance, the FSA and HMRC—and trade organisations, such as the British Bankers’ Association, to publicise the direction and provide information to firms on the requirements in the direction. The Treasury has also met with those firms most affected by the direction to ensure that they are in a position to comply with the 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. This approach is similar to that used in asset freezing.

Bless you.

I hope that Hansard caught that: it might be the highlight of my parliamentary career as far as the noble Baroness is concerned.

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 that on 12 October it issued a direction mirroring that of the UK. We will continue to pursue this important work with the other Crown dependencies and overseas territories.

I conclude by emphasising that 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 that noble Lords will agree that we cannot and will not ignore specific activities undertaken by Iranian companies that we believe to be facilitating activity identified by the United Nations as being of concern and where such activities have the potential to affect the United Kingdom’s interests. It is right, indeed crucial, that we take such action. For these reasons, I commend the order to the Committee.

My Lords, I thank the Minister for introducing the order. I should state at the outset that we support the Government in their endeavour to impair the ability of Iran to pursue its dangerous nuclear and ballistic missile programmes.

I start with some of the background to the order. My honourable friend Mark Hoban asked the Minister in another place when the Government first became aware that IRISL vessels had transported goods for Iran’s ballistic weapons and nuclear programmes. He reminded the Minister that my right honourable friend William Hague wrote to the Foreign Secretary in September 2008 asking him to take action against IRISL. I fear that the Minister did not give a straight answer last week, so I am hoping that the Minister today will take the opportunity of our Grand Committee to set the record straight.

When were the Government first aware that IRISL was involved in transporting goods for Iran’s nuclear and ballistic weapons programmes? When were the Government first aware that Bank Mellat had provided banking services to UN-listed organisations connected to Iran’s proliferation-sensitive activities and involved in transactions related to the financing of Iran’s nuclear and ballistic missile programmes? The Written Ministerial Statement made on 12 October made categorical statements that these activities had taken place. The Minister was similarly clear today. When did those transactions take place and when were the Government aware of them? What, if any, delay was there between the Government’s knowledge of the transactions and their action by way of the order before us this afternoon? To put that another way, how can the Minister reassure this Committee that the Government have acted in the most expeditious way?

I ask these questions because my right honourable friend William Hague raised questions with the Government about IRISL more than a year before this order. Furthermore, the US acted in relation to IRISL last year. The Minister in another place tried to avoid answering these questions on security grounds, but I am asking not about the source or nature of the intelligence but about the timing and timeliness of action by the Government, given that the involvement of IRISL was clearly not a secret.

As to the impact of this order, the Explanatory Memorandum states that no specific information was available on the exposure of the UK’s financial sector to IRISL and Bank Mellat. That may well have been the case prior to the making of the order—and I imply no criticism by raising this today—but it is now over three weeks since the order was made and the Treasury must by now have gained some understanding of the transactions that are prohibited by the order and their impact on our financial services sector. The Minister in another place did not answer this question straightforwardly and I hope that our Minister will be more forthcoming. For example, can he tell us the volume and value of transactions with the two organisations that are now prohibited?

Last week, the Minister in another place said that the Treasury had received 17 applications for licences and that two had been granted on a temporary basis. Is that still the position? What is the value of transactions covered by the applications for licence? What sorts of transactions are now being conducted under temporary licence and what is their value? Are these for transactions with IRISL or with Bank Mellat? I hope that the Minister can give more information.

I wish to probe another area that the Minister did not answer very illuminatingly last week. My honourable friend Mark Hoban asked whether any subsidiaries or affiliates of IRISL or Bank Mellat should have been covered by the order and noted that the US Government included IRISL affiliates when they acted against IRISL last year. The Minister in another place said that there was no evidence in respect of other companies in the IRISL or Bank Mellat groups—I use that term colloquially. However, that seems to beg the question: what is the effectiveness of an order against one company if UK financial services firms can carry on similar transactions with affiliates or subsidiaries? It seems to me that that places the Government in a position of for ever playing catch-up. Is that indeed the effect of the powers created by the Counter-Terrorism Act 2008? Can the Minister explain the rationale of the approach to subsidiaries and similar bodies? Alternatively, he might wish to explain to the Committee if the Government’s powers to deal with threats to the UK are in some ways deficient. I would be surprised if that were the case given the zeal with which the Government have used the time of Parliament over the past decade to pass counterterrorism and similar legislation.

I would also like to ask the Minister about supervision and enforcement. The Explanatory Memorandum states that the impact on the FSA’s work is expected to be minimal. Does that imply that the FSA will do no more than ask questions? Will it take no specific action to assure itself that the transactions prohibited by this order are not taking place? On the other hand, HMRC estimates that it will spend upfront costs of £20,000 and ongoing costs of two officers costing around £65,000 in total. If we assume that that cost includes the full employment cost of those two individuals, we are probably not talking about very senior staff. What are these officers intended to do in relation to the programme? Will they carry out individual inspections? How and when will they do this? In what ways are they qualified to do such work?

The order will last for only one year and it is clearly important that Parliament should be given an opportunity to assess its impact, especially if the Government seek to extend it for a further period. The impact assessment notes that a report is made annually to Parliament on the use of the Counter-Terrorism Act powers generally. Will the Minister explain the way in which such a report will deal with this order? Will it be confined to the impact on UK financial services organisations or will it go more widely and assess its impact on Iran’s proliferation activities? I am aware that the order is but one in a series of actions taken globally in relation to Iran, which may make the ultimate impact difficult to identify. However, I hope that it will have the effect of prohibiting specific transactions and that the Minister will share with the Committee how Parliament can expect to receive information on what the order has stopped and the costs imposed in achieving that.

We do not oppose the aims of the order—far from it. If anything, our instincts are that action could and should have been taken earlier. However, while we stand shoulder to shoulder with the Government on the fight against Iran’s nuclear and missile ambitions, the Minister will not expect us to accept explanations of the Government’s actions and the impact of the order that are less than forthcoming. In that light, I hope that he can enlighten us further.

My Lords, I am grateful to the Minister for explaining the background to the order. We agree with the Government that sanctions of this kind are worth while in attempting to rein in Iran’s nuclear proliferation activities. Whether they have an impact on Iran’s nuclear ambitions more generally is rather moot, but it is clear that making it more difficult for Iran to carry them out must be in the national interest.

I have only two questions. One is about any other operations that the Islamic Republic of Iran Shipping Lines might be undertaking in the UK that are not covered by the order, as the order covers relations with the financial services body. Shipping lines are likely to be working with other bodies that are not covered within the remit of financial restrictions, such as other shipping lines and customs bodies. Is there anything to stop the IRISL carrying on relations with other, non-financial bodies in the UK?

The second question has to do with international action against the two organisations. The Minister spoke about efforts to ensure that overseas territories and Crown dependencies were taking similar action, and he mentioned some of them, but is he aware of any action being taken within the rest of the EU? The Explanatory Memorandum mentions other Iranian banks—for instance, Bank Saderat, Bank Sepah and Bank Melli—which are clearly covered by an EU prohibition. Nothing in the documentation explains whether that applies here, or whether, for some reason, this is a unilateral move by the EU. It is not clear to me without having read EU regulation 1110/2008—for which I apologise to the Committee—where this action fits in relation to it. Is there any reason to believe that the organisations are actively engaged in trade elsewhere in Europe and that equivalent action is being taken to stop such trade continuing? With those two minor caveats, however, we support the order and look forward to the Minister’s explanation.

My Lords, this has been an interesting and informative debate. I thank all noble Lords for their attendance and questions today. I hope that all noble Lords will agree that the decision to issue this direction is a proportionate and reasonable response to the threat of proliferation and that this action mitigates the risk of the UK financial system being used to facilitate proliferation-sensitive activities in Iran. It is vital that the UK takes action to ensure that its financial sector is not employed in this manner and the Government are committed to putting in place all necessary steps to ensure that that is the case. I welcome the support expressed by both the noble Baroness, Lady Noakes, on behalf of the Conservative Opposition, and the noble Lord, Lord Newby, for the actions that are being taken by the Government in connection with Iran. We are greatly encouraged by the fact that there is unanimity on the need to take a robust line.

The noble Baroness asked when we first became aware that there were problems with the involvement of Bank Mellat and IRISL in activities related to terrorism and nuclear proliferation. I am afraid that details of the sensitive information underlying the restriction cannot be provided since, in the Government’s view, disclosure would be contrary to the public interest. However, I can assure the Committee that we took action as quickly as was appropriate, given the young age of the legislation.

Members will be aware that the Counter-Terrorism Act came into force in November 2008. Immediately following its enactment, HM Treasury initiated discussions with the Foreign and Commonwealth Office to consider the most appropriate cases for this use. As noble Lords will appreciate, before we decided to issue this direction under the Act, it was crucial to follow a robust process to gather and analyse relevant intelligence and to ensure a sound legal basis for any action. Furthermore, it was important to ensure that Parliament had sufficient opportunity to consider the direction. I assure noble Lords that the Treasury laid this direction at the earliest appropriate opportunity.

The noble Baroness asked about the level of engagement between UK financial institutions and the two targeted entities. A small number of financial institutions had significant existing business relationships with the two targeted entities. We are working closely with the affected parties to ensure that they are implementing the restriction and that their previous relationship is wound down in an orderly fashion. The majority of UK financial sector companies voluntarily withdrew from business with Iran over the last two or three years.

In answer to a further question from the noble Baroness, since the announcement that 17 applications for licences had been granted, two further licences have been granted. The Treasury continues to work with affected parties to issue licences of exemption where appropriate. It is not possible at this point to place a value—

I think that the Minister said that 17 licences had been granted. Does that mean 17 applications or 17 licences granted? I believe that the Committee in another place was told last week that two temporary licences had been granted out of a total of 17 applications. It is interesting if 17 licences have now been granted.

Seventeen applications were received; two further applications have been received since. It is not possible, as I was saying, to place a value on these transactions.

The noble Baroness also asked about subsidiaries of Bank Mellat and IRISL. The powers under which the direction was made address specific risks to the UK national interest posed by activities carried out by the Government or persons resident or incorporated in a third country. Subsidiaries are separate legal entities, not subject to the requirements of the direction. We are confident that the direction, as far as it applies to Bank Mellat and IRISL, will be sufficient in itself to achieve the objective that we have in seeking these orders.

The noble Baroness asked about the impact on business volumes and values. As I said, the majority of British financial institutions have already terminated their business activities, that particularly being the case with any UK institution having substantial business activities in the United States of America. We therefore expect the aggregate impact on the UK financial services sector to be quite modest. However, some firms will be more affected than others, which is why we are working closely with those firms to ensure an orderly wind-down of their existing business. We will publish updated impact analysis to include estimated volumes and values when the position is clearer.

The noble Baroness also asked about enforcement. The indication that I have given of the quantum of activities likely to be covered by the order would be consistent with the relatively modest costs that the FSA and HMRC believe are necessary for supervision and enforcement. It is important to recognise that these are estimates. If, during the course of their work, the FSA and HMRC form the view that they are required to be more engaged and searching and the issues that surface are more complex, I have no doubt that they would devote more resources to the task—that is to say, they will not be resource-constrained in their ability to monitor and enforce these orders.

The order will last for one year. If the Government wish to come back to Parliament with a request for a renewal or a new order, that will no doubt be supported by a much fuller report to Parliament on the experience of the existing order. It is difficult to contemplate the precise form and content of that statement, as it will depend on the experience during the 12-month period. However, it will be entirely reasonable and proper for Parliament to expect as full as possible an explanation at that time of the experience to date, as would be consistent with national security interests.

The noble Lord, Lord Newby, asked about the engagement of UK bodies outside the financial services sector with Bank Mellat and IRISL. That is a perfectly reasonable question, but the scope of this legislation is very specific and focused on financial institutions. Noble Lords can rest assured that the appropriate bodies in the UK are monitoring closely our engagement with those two organisations. No doubt, the order as proposed will lead others to reflect on whether Bank Mellat and IRISL are organisations with which they would wish to continue to conduct business. Importantly, we need to continue to work hard to ensure that other jurisdictions are as determined as the UK is in this respect. I am thinking here of IRISL in the field of reinsurance and insurance, when clearly it would not achieve our ultimate purpose if the business currently transacted through P&I institutions in the UK simply rotated to P&I institutions or insurers elsewhere. Hence, there has to be an element of significant international co-operation.

That takes me to address the specific questions raised by the noble Lord, Lord Newby, in connection with the European Union. These orders are a specific response to a threat to the UK. We will discuss the issue with our EU partners and will support those member states that wish to take similar action. It is clear from the evidence that, inasmuch as we can argue that these two organisations represent a threat to UK national interests, they similarly represent a threat to the national interests of other EU states.