Key considerations for lenders and investors in the defence sector. Complexities of a new set of domestic measures and its still debated potential impacts.
In a landscape where defence investments are increasing sharply due to escalating geopolitical conflicts1, navigating the regulatory framework governing restrictions on weapons-related investments is key for lenders and investors. However, this may remain a challenging task, as the applicable regulations are often ambiguous and unclear, and the regulatory costs of errors can be significant.
The Italian regulatory framework, has banned on any form of financing of and investment in companies engaged in activities related to anti-personnel mines, munitions, and cluster submunitions (the “Ban”)2. However, several critical issues and application uncertainties persist.
Here are some key takeaways to better understand the scope and impact of the new rules.
First, the Ban has an extremely broad scope – even compared to the provisions of international conventions that inspired it – as it:
(i) covers any form of financial support and investment, whether in the form of equity or debt, including transactions carried out in the primary and secondary markets or on behalf of third parties, granted either directly or through companies based in Italy or abroad (the “Financing”);
(ii) applies to all authorized intermediaries, whether headquartered in Italy or abroad, when conducting their activities in Italy through a branch (thus excluding foreign entities operating in Italy under the freedom to provide services regime)3; and
(iii) applies to any invested or financed entity (the “Recipient”) – whether based in Italy or abroad – engaged in a wide spectrum of activities related to anti-personnel mines, munitions, and cluster submunitions4, either directly or through subsidiaries or affiliated companies.
In this regard, particular difficulties arise from the fact that the intermediaries’ controls should also be carried out on the subsidiaries and affiliated companies of the Recipient, even where they are not the direct beneficiaries of the Financing, and without clear limits or criteria for the “look-through” process to verify the underlying activities directly or indirectly carried out by the Recipients.
Second, the procedural safeguards that authorized intermediaries are required to formalize in their internal regulation – although based on a risk-based and proportionality approach, considering the type of activity carried out, as well as the size and operational complexity of the intermediary – are particularly burdensome and must include at least:
(i) consultation of publicly available lists of companies involved in the manufacture of anti-personnel mines and cluster munitions and submunitions prior to providing any Financing; such obligation proves particularly challenging, given the lack of official lists and the resulting responsibility of intermediaries to identify reliable sources, which leads to serious uncertainties as to whether Financing can be granted to certain Recipients;
(ii) control procedures to assess the risk of the Recipient being involved in the activities triggering the Ban, based on factors such as the nature of the Recipient’s business, its registered office, and place of operation; in this regard, the Bank of Italy has clarified that the Recipient’s registered office and/or place of operation in countries that have not ratified the Ottawa and the Oslo Conventions should be carefully considered;
(iii) enhanced ongoing due diligence measures in case of Financing granted to Recipients considered to be high-risk by the intermediary, aimed at monitoring possible evolutions of the business activities of such Recipients and any material changes in their operational models; and
(iv) appropriate internal reporting flows to ensure that governing bodies have full knowledge and oversight of the organizational safeguards adopted to verify compliance with the Ban, as well as timely awareness of any potential violations.
Where control procedures identify the involvement of potential Recipients in the activities triggering the Ban, authorized intermediaries are required to adopt the necessary measures to ensure compliance with laws (e.g., denial of Financing, inclusion of the Recipient in internal “blacklists”). In instances of detected violations involving Financing already disbursed, intermediaries are required to promptly report the outcome of their assessments and the remedial measures adopted to Supervisory Authorities, which evaluate them and, if necessary, request the adoption of further actions.
Against this backdrop, compliance is crucial for intermediaries. On the one hand, this is monitored by Supervisory Authorities as part of their ordinary supervisory activities. On the other hand, such Supervisory Authorities may impose – in accordance with their respective procedures – the specific sanctions provided under the Law. Specifically, in the event of a violation of the Ban and the Instructions, Article 6 allows for the imposition of: (i) an administrative monetary sanction ranging from €150,000 to €1,500,000 to authorized intermediaries liable under Article 5 of Legislative Decree No. 231 of June 8, 20015; and (ii) provided that the violation does not amount to a criminal offence, an administrative monetary sanction ranging from €50,000 to €250,000 to individuals performing administration, management, and control functions within the intermediaries in breach of the Law.
The imposition of monetary sanctions under (i) and (ii) also entails the temporary suspension of the integrity requirements necessary to hold positions in management, direction, or control within authorized intermediaries for a period of no less than two months and no more than three years. Auditors, financial advisors, and legal representatives of listed companies may face temporary disqualification from holding such positions in listed companies and in companies belonging to the same group.
The Ban’s far-reaching scope — extending to both equity and debt across primary and secondary markets, and triggering “look-through” obligations on subsidiaries and affiliates — demands rigorous upfront screening and clear documentation of decision-making processes.
Intermediaries should formalize robust internal procedures, from sourcing and regularly updating reliable lists of proscribed manufacturers to embedding enhanced due-diligence checkpoints for high-risk counterparties.
1 Consider that, according to S&P Global Market Intelligence data, the announced value of private equity and venture capital-backed investments in aerospace and defense between January 1 and March 16 totaled $4.27 billion globally, nearly equaling the $4.31 billion invested in such deals in all of 2024.
2 Italian Law No. 220 of December 9, 2021 (the “Law”) and the implementing instructions adopted by Banca d'Italia, COVIP, IVASS e MEF (the “Instructions”)
3 Specifically, the category of “authorized intermediaries” includes: (i) Italian investment firms (SIM); (ii) Italian banks; (iii) Italian asset managers; (iv) Italian electronic money institutions; (v) Italian payment institutions; (vi) Entities registered in the list referred to in Article 111 of Legislative Decree No. 385 of 1 September 1993; (vii) Financial intermediaries registered in the register referred to in Article 106 of the Consolidated Banking Law, including credit guarantee consortia (confidi); (viii) Poste Italiane S.p.A., for its Bancoposta activities; (iv) Cassa Depositi e Prestiti S.p.A.; (x) Branches established in Italy of investment firms, asset managers, banks, electronic money institutions, and payment institutions having their registered office in another EU Member State or in a third country; (xi) Insurance and reinsurance companies, and secondary establishments in Italy of insurance and reinsurance companies having their registered office and central administration in another EU Member State or in a third country; (xii) Italian stockbrokers (agenti di cambio); (xiii) Italian banking foundations; (xiv) Italian pension funds.
4 Specifically, Article 1, para. 1 of the Law, includes the engagement in activities of “construction, production, development, assembly, repair, maintenance, deployment, use, storage, stockpiling, possession, promotion, sale, distribution, import, export, transfer, or transport of anti-personnel mines and cluster munitions and submunitions, of any kind or composition, or of their components”. The Law also prohibits to carry out “technological research, manufacture, sale, and transfer by any means, as well as export, import, and possession of cluster munitions and submunitions, of any kind or composition, or of their components”.
5 The Article provides that: (1) the entity is liable for crimes committed in its interest or to its advantage: (a) by individuals who hold representative, administrative, or managerial positions within the entity or within one of its organizational units with financial and functional autonomy, as well as by individuals who, even de facto, manage or control the entity; (b) by individuals under the direction or supervision of any of the persons referred to in letter (a) ; and (2) the entity is not liable if the individuals mentioned in para. 1 acted exclusively in their own interest or in the interest of third parties.
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