Opinion of the European Central Bank of 28 April 2022 on prohibiting the financing of companies producing anti-personnel mines, cluster munitions and submunitions (CON/2022/17)

OPINION OF THE EUROPEAN CENTRAL BANK of 28 April 2022 on prohibiting the financing of companies producing anti-personnel mines, cluster munitions and submunitions (CON/2022/17) Introduction and legal basis

On 9 December 2021 the Italian Parliament adopted the Law on measures prohibiting the financing of companies producing anti-personnel mines and cluster munitions and submunitions (hereinafter the ‘Law’) . The European Central Bank (ECB) would like to draw attention to the national authorities’ obligation to consult the ECB on draft legislative provisions that fall within its field of competence. The ECB has decided to deliver an own initiative opinion on the Law, since it has not been formally consulted . The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of Article 2(1) of Council Decision 98/415/EC , as the Law relates to the Banca d’Italia. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the Law

1.1 The Law implements the 1997 Ottawa Convention on the Prohibition of the Use, Stockpiling, Production and Transfer of Anti-Personnel Mines and on their Destruction and the 2008 Oslo Convention on Cluster Munitions (hereinafter the ‘Ottawa and Oslo Conventions’). It introduces a total ban on the financing of any company involved in, inter alia, the production, use, sale, distribution, import, export or transfer of anti-personnel mines, cluster munitions and submunitions, except as expressly permitted by the Ottawa and Oslo Conventions. This ban applies to all licensed intermediaries, which include Italian, Union and non-Union credit institutions, as well as a range of other financial institutions, including banking foundations, investment firms and companies, asset management companies, financial intermediaries, stockbrokers and pension funds.

1.2 The Law confers certain tasks on supervisory bodies , including the Banca d’Italia, the Istituto per la vigilanza sulle assicurazioni (Institute for the Supervision of Insurance) and the Commissione di vigilanza sui fondi pensione (Pension Funds Supervisory Committee). In particular, within six months of the date of entry into force of the Law, the supervisory bodies are required to (1) issue, in agreement with each other, specific instructions for the exercise of enhanced controls on the work of licensed intermediaries in order to counter the financing of, inter alia, the production, use, sale, distribution, import, export or transfer of anti-personnel mines, cluster munitions and submunitions, and (2) draw up and publish a list of companies involved in those activities. In addition, financial flow controls performed by the Unità di informazione finanziaria per l’Italia (UIF, Financial Intelligence Unit for Italy), which was set up at the Banca d’Italia, are extended to such companies. Furthermore, the Law requires the Banca d’Italia to supervise, in the context of its inspections and controls of the supervised entities, compliance with the financing ban. The Law does not contain any provision on the remuneration of the Banca d’Italia for the performance of these tasks.

2. Conferral of new tasks on the Banca d’Italia

2.1 Tasks of the Banca d’Italia in relation to the Law 2.1.1 Besides extending the UIF’s control of financial flows to companies involved in the production, use, sale, distribution, import, export or transfer of anti-personnel mines, cluster munitions and submunitions, the Law tasks the Banca d’Italia with the supervision of the compliance of supervised entities with the prohibition on the financing of such companies . In addition, the Law requires the Banca d’Italia to draw up and publish a list of these companies . 2.1.2 The Law does not extend the current supervisory mandate of the Banca d’Italia. The Banca d’Italia is responsible for supervising credit institutions. The ECB understands that the Banca d’Italia is responsible for checking whether supervised entities have internal procedures in place to ensure compliance with a broad range of rules on their lending activities . It follows that the Law does not confer a genuinely new supervisory task on the Banca d’Italia, but rather specifies certain new powers that the Banca d’Italia must exercise when carrying out the same category of tasks already discharged in accordance with the Italian Consolidated Banking Law. Consequently, it is not necessary to assess whether the conferral of a new task on a national central bank (NCB) complies with the prohibition of monetary financing in this case. In contrast, the task of drawing up and publishing a list of companies is a new task of the Banca d’Italia. 2.2 New task of the Banca d’Italia under the Law 2.2.1 This section covers the task, as conferred on the Banca d’Italia by the Law, of drawing up and

publishing a list of companies involved in the production, use, sale, distribution, import, export or transfer of anti-personnel mines, cluster munitions and submunitions. 2.2.2. The ECB underlines that a conferral of new tasks on an NCB in the European System of Central Banks (ESCB) must be assessed against the prohibition on monetary financing laid down in Article 123(1) of the Treaty. For the purposes of that prohibition, Article 1(1)(b)(ii) of Council Regulation (EC) No 3603/93 defines ‘other type of credit facility’, inter alia, as ‘any financing of the public sector’s obligations vis-à-vis third parties’. 2.2.3 Ensuring that Member States implement a sound budgetary policy is one of the key objectives of the monetary financing prohibition, which may not be circumvented . Therefore, the task of financing measures, which are normally the responsibility of the Member States, and which are financed from their budgetary sources rather than by the NCBs, must not be entrusted to NCBs. To decide what constitutes financing of the public sector’s obligations vis-à-vis third parties, which can be translated as the provision of central bank financing outside the scope of central bank tasks, it is necessary to carry out, on a case-by-case basis, an assessment of whether the task to be undertaken by an NCB is a central bank task or a government task, i.e. a task within the responsibilities of the Member States. 2.2.4 As part of its discretion in the exercise of its duty, on the basis of Article 271(d) of the Treaty and Article 35.6 of the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’), to ensure that NCBs honour the obligations laid down by the Treaty, the Governing Council has endorsed criteria for determining what may be seen as falling within the scope of a public sector obligation within the meaning of Article 1(1)(b)(ii) of Regulation (EC) No 3603/93 or, in other words, what constitutes a government task as follows: First, central bank tasks are in particular those tasks that are related to the tasks that have been conferred on the ECB and the NCBs by the Treaty and the Statute of the ESCB. These tasks are mainly defined in Article 127(2), (5) and (6) and Article 128(1) of the Treaty, as well as Article 22 and Article 25.1 of the Statute of the ESCB. Second, as Article 14.4 of the Statute of the ESCB allows NCBs to perform ‘other functions’, new tasks, i.e. tasks that are not related to tasks that have been conferred on the ECB and the NCBs, are not precluded per se. However, new tasks that are undertaken by an NCB and which are atypical of NCB tasks or which are clearly discharged on behalf of, and in the exclusive interest of the government or of other public sector entities should be considered government tasks. Third, an important criterion for qualifying a new task as atypical of an NCB task or as being clearly discharged on behalf of and in the exclusive interest of the government or other public sector entities is the impact of the task on the institutional, financial and personal independence of that NCB. In particular, the following aspects should be taken into account: (a) whether the performance of the new task creates conflicts of interest with existing central bank tasks, which are not adequately addressed, and does not necessarily complement those

existing central bank tasks. If a conflict of interest arises between existing and new tasks, sufficient safeguards to mitigate that conflict should be in place. The complementarity between a new task and existing central bank tasks should not be interpreted broadly, so as to lead to the creation of an indefinite chain of ancillary tasks. Such complementarity should be examined in relation to the financing of those tasks; (b) whether without new financial resources the performance of the new task is disproportionate to the NCB’s financial or organisational capacity, and may have a negative impact on the capacity to properly perform the existing central bank tasks; (c) whether the performance of the new task fits into the institutional set-up of the NCB in the light of central bank independence and accountability considerations; (d) whether the performance of the new task harbours substantial financial risks; (e) whether the performance of the new task exposes the members of the NCB decision-making bodies to political risks that are disproportionate and may also have an impact on their personal independence and, in particular, on the guarantee of term of office set out in Article 14.2 of the Statute. 2.2.5 Based on the criteria set out in paragraph 2.2.4 above, the following paragraphs assess whether the conferral on the Banca d’Italia of the new task of drawing up and publishing a list of companies is in line with the prohibition on monetary financing. 2.3 Tasks related to the tasks conferred on the ECB and the NCBs by the Treaty and the Statute of the

ESCB

The new task of drawing up and publishing a list of companies is not related to the tasks conferred on the ECB and the NCBs by the Treaty and the Statute of the ESCB. 2.4 Tasks which are atypical of central bank tasks The new task of drawing up and publishing a list of companies is atypical of central bank tasks. The ECB notes that the list drawn up by the Banca d’Italia will include companies that are not entities that the Banca d’Italia supervises as part of its typical central bank tasks, nor do the listing criteria in the Law refer to any financial attributes of the relevant companies. The drawing up and publishing of such a list requires expertise that does not typically exist in an NCB; it appears to require insights on a business sector that is not the banking or financial sector. In addition, the ECB highlights that no other NCB in the ESCB has been tasked with similar tasks as result of the implementation of the Ottawa and Oslo Conventions in its respective jurisdiction. Against this backdrop, this task appears atypical of NCB tasks. 2.5 Tasks clearly discharged on behalf of and in the exclusive interest of the government The new task of drawing up and publishing a list of companies appears to be discharged on behalf of and in the interest of the Italian government, as the purpose of the list is strictly related to defence and foreign policy reasons. In this regard, it is worth noting that the Italian legislator has already entrusted the Ministry of Defence, the Ministry of Foreign Affairs and the Ministry of Economic Development with specific tasks in relation to the ratification and implementation of the Ottawa and

Oslo Conventions . 2.6 Extent to which the performance of the new task creates conflicts of interest with existing central

bank tasks

The performance of the task of drawing up and publishing a list of companies is unlikely to give rise to any conflicts of interest in connection with the Banca d’Italia’s existing central bank tasks. 2.7 Extent to which the performance of the new task is disproportionate to the financial or organisational

capacity of the Banca d’Italia

The Banca d’Italia should have sufficient financial and human resources at its disposal for the performance of its new task, so that its capacity to perform its ESCB-related tasks is not affected. The Law does not cover the funding of the Banca d’Italia’s new task of drawing up of a list of companies. The ECB notes that the list drawn up by the Banca d’Italia will include companies that are not supervised entities and thus appears to necessitate expertise beyond that which is currently available at the Banca d’Italia. Against this backdrop, the ECB invites the Italian legislator to consider the impact of the Law on the Banca d’Italia’s resources and to consider whether current financing arrangements would sufficiently cover the costs associated with the new tasks under the Law. 2.8 Extent to which the performance of the new task fits into the institutional set-up of the Banca d’Italia, in the light of central bank independence and accountability considerations The performance of the task of drawing up and publishing a list of companies appears to conflict with the Banca d’Italia’s institutional set-up in terms of the scope of its supervisory mandate. 2.9 Extent to which the performance of tasks harbours substantial financial risks The Law does not contain any provision on the Banca d’Italia’s liability for damage in the exercise of its new task. The Law entrusts the Banca d’Italia with the new task of drawing up a list of companies without equipping it with the powers and legal instruments necessary to carry it out. The ECB notes that: (1) the performance of the task requires technical knowledge and skills other than those typically required for the performance of central banking tasks by the Banca d’Italia; (2) the list will include companies that are not supervised entities; (3) inclusion in the list of companies with registered offices in Italy would require ascertaining that they carry out activities forbidden and criminally sanctioned under Italian law – however, the Law does not specify whether the Banca d’Italia decides on inclusion in the list of companies based on a prior and final judicial decision, or based on an independent assessment by the Banca d’Italia itself, which might differ from any judicial finding; and (4) the inclusion in the list of companies with registered offices abroad poses additional challenges related to the identification of the sources of information, facts and circumstances that occur in other legal systems. Furthermore, the Law does not address the Banca d’Italia’s potential liability in the event of legal

action, application or other legal proceeding for damages in relation to the exercise of (or failure to exercise) its powers regarding the drawing up of a list of companies under the Law. The risk of legal action could materialise, for instance, if a company challenges its inclusion in the list or if a nongovernmental organisation brings a claim because of the non-inclusion of one or more companies in such a list. In the absence of any provision in the Law excluding the Banca d’Italia’s liability when performing the tasks under the Law, the Banca d’Italia would ultimately be liable for damages in accordance with Italian state liability rules. Thus, the new task of drawing up a list of companies conferred on the Banca d’Italia would entail substantial financial risks for the Banca d’Italia. 2.10 Extent to which the performance of the new task exposes members of the decision-making bodies of the Banca d’Italia to disproportionate political risks and impacts on their personal independence The ECB understands that it is the Banca d’Italia’s decision-making bodies that are tasked by the Law with the drawing up and publishing of a list of companies. If this is the case, and if the content of the list is perceived to be politically sensitive, it may expose the members of the Banca d’Italia’s decision-making bodies to a potential and disproportionate political risk. 2.11 Conclusions on monetary financing considerations The performance of the task of drawing up and publishing the list of companies is essentially a government task. It is discharged on behalf of and in the interest of the Italian government, as its purpose, as noted in paragraph 2.5 above, strictly relates to defence and foreign policy reasons. It cannot be regarded as a typical central bank task. Consequently, to ensure compliance with the monetary financing prohibition, the Banca d’Italia should be fully and adequately remunerated when carrying out the task of drawing up and publishing the list under the Law . In addition, in view of the political sensitivity associated with the performance of such a task and the Banca d’Italia’s lack of expertise in this area, the ECB strongly recommends that further consideration should be given to the conferral on the Banca d’Italia of the task of drawing up a list of companies involved in the production, use, sale, distribution, import, export or transfer of anti-personnel mines, cluster munitions and submunitions under the Law.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 28 April 2022.

[signed]

The President of the ECB

Christine LAGARDE