The Week Ahead in the European Parliament – Friday, March 19, 2021

Next week will be a mixed week with committee meetings and plenary sessions in the European Parliament.  Members of the European Parliament (“MEPs”) will gather virtually and in person in Brussels.  Several interesting votes and debates are scheduled to take place.

On Tuesday, the Committee on Economic and Monetary Affairs (“ECON”) will have a debate on digital taxation.  In an (non-legally binding) Own-Initiative Report, MEPs Andreas Schwab (DE, EPP) and Martin Hlaváček (CZ, RE) argue that digital businesses and services need to pay their fair share of taxes.  They consider that there is a clear need to address the under-taxation of the digital economy by moving from a tax model based on permanent establishment towards a model that is based on sales, or on a to-be-defined “virtual permanent establishment.”  The Rapporteurs prefer a multilateral solution and a quick conclusion of the negotiations within the Inclusive Framework of the G20/OECD.  However, they insist that the EU should stand ready to introduce its own system of taxing the digital economy by the end of 2021.  In preparation of this scenario, they call on the Commission to introduce a proposal that anticipates any reform stemming from the G20/OECD negotiations.  The draft report is available here.

In addition, the Rapporteurs also call on the Commission to intensify discussions with their U.S. counterparts, as the digital services tax has caused tensions in the trans-Atlantic relationship since its inception.  In January 2021, the United States Trade Representative (“USTR”) issued a status update on its Section 301 investigations into, among other things, the EU’s Digital Services Tax with preliminary conclusions that the tax could be discriminatory, unreasonable and burdensome for U.S. businesses.  The update is available here.

On Wednesday, the plenary will debate an Own-Initiative Report on marine litter and plastics.  Rapporteur MEP Catherine Chabaud (FR, RE) stresses that unnecessary plastic and packaging need to be phased out and call on the Commission to draft an Action Plan at the EU level to tackle marine litter by, among many other measures, cutting down the use of plastic.  Furthermore, the draft report contains many suggestions to improve the monitoring and data collection of (marine) waste management to enhance the circular economy.  The draft report does not call for the introduction of new (restrictive) regulations on the use of certain materials.  It does suggest that more research should be done, for example, on the impact of nano and micro plastics.  The draft report is available here.

For the complete agenda and overview of the meetings, please see here.

Employees Running for Public Office: Political Law Compliance Considerations

Even corporations with careful political law compliance practices can be caught off guard when they learn that an employee is running for public office. The corporation may have a good understanding of what the corporation’s obligations and restrictions are in the political arena, but not fully know how to handle the compliance issues stemming from an employee’s personal candidacy. This alert describes three practical steps that corporations should take to ensure they are complying with the relevant campaign finance and ethics rules.

Key Takeaways from China’s National People’s Congress

Public Policy

The recently concluded legislative session of China’s National People’s Congress (NPC) sheds light on the policies and programs that will affect international businesses with operations and investments in China over the coming year and beyond. This year’s meeting, which concluded on March 11, was particularly significant because the NPC reviewed and approved the country’s five-year plan for 2021 to 2025 and a document that outlined long range objectives through 2035. The annual NPC sessions are largely ceremonial events, but they are nevertheless indicative of the Chinese Government’s priorities.

Chinese officials are formally evaluated for their effectiveness implementing these plans, so whole-of-government and industry efforts will be undertaken to ensure they are met. Companies with exposure to China should understand how the year’s goals and the plan’s targets may affect their businesses. This article discusses the top lines from the legislative session. Future articles will examine in further detail policy initiatives, including in specific sectors, relevant to clients with China-related business activities.

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The Financial Services Sector: ESG and the UK

Given increasing public and investor focus on ESG disclosures and the growing recognition that managing ESG risks effectively can be effective in creating long-term value, there is significant and growing (internal and external) pressure on companies to make some form of ESG disclosure.  Some companies already view voluntary comprehensive ESG disclosure as a way of marking them out from their peers and competitors and thus creating investor value.

However, it is not only a recognition of its potential market value that has driven ESG disclosure, but also a determination on the part of regulators (including the FCA and the ESMA) to prevent ‘greenwashing’ – re-labelling of existing or ‘normal’ financial products to make them seem ‘green’.

ESG Disclosure in the EU

The EU Regulation on sustainability (environmental, social and governance) disclosures for certain financial services sector firms (the SFDR) came into application on 10 March 2021. The SFDR requires financial market participants and financial advisers to disclose certain ESG-related information in relation to the provision of their services and the marketing of financial products, using mandatory disclosure templates.

How does Brexit Affect ESG regulation in the UK?

Initial drafts of the Financial Miscellaneous Amendments (EU Exit) Regulations 2020, provided for parts of the SFDR to apply in the UK after departure from the EU.  However, in the end, the UK government elected not to implement the SFDR or the Taxonomy Regulation in UK legislation, opting instead to establish its own domestic green taxonomy and ESG disclosure regime.

In practice, many firms will continue to comply with the EU’s SFDR as a form of insurance pending the new UK taxonomy. Indeed, depending on their activity, some UK firms may still be subject to the requirements in the SFDR – for example, if they market certain financial products in the EU, or act under a delegation agreement with an EU fund manager.

The UK’s decision not to copy across the EU’s SFDR should be seen in the context of the UK’s wider ‘Global Britain’ strategy – characterized by a determination to move away from EU-centric policies towards a broader international approach.  This policy decision is reflected in the UK’s choice to apply instead the standards set by the Financial Stability Board’s Task Force for Climate-related Financial Disclosures (TCFD).  In addition, with COP26 high on its policy agenda, the Government also views ESG reporting as an opportunity to support the UK’s green economy.

The UK’s Legislative Maze

In November 2020, the Government announced its intention for the UK to become the first country in the world to fully mandate TCFD for companies and financial institutions. At the same time, the Joint Government and Regulator TCFD Taskforce published a roadmap for implementing mandatory disclosures. That roadmap set a timetable for cross-sector full disclosure reporting:

  • Pension schemes of over £5 billion, banks, insurance companies and building societies will be expected to comply with TCFD recommendations;
  • Smaller pension schemes, asset managers and life insurers will be subject to disclosure requirements from 2022;
  • Life insurers, FCO-regulated pension providers and other UK-authorised asset managers will be subject to disclosure requirements from 2023;
  • All other occupational pensions schemes and UK financial services firms will be subject to mandatory climate-related financial disclosures by 2025;
  • The UK will also implement its own green taxonomy (based on the EU Taxonomy).
  • The UK Government will provide an update on progress in the 2022 refresh of the Green Finance Strategy.

As the rollout progresses, it seems likely that some refinement will be required to the UK’s oversight structure.  Currently, the FCA, the PRA, the Department for Work & Pensions and BEIS all share some degree of oversight responsibility.

The FCA’s December 2020 Policy Statement (20/17) obliges all commercial companies with a premium listing to include a statement in their annual financial report of whether their disclosures are consistent with TCDF recommendations and to provide an explanation if they are not. These new rules will be implemented by Listing Rule 9.8 and the requirement applies to accounting periods that begin on or after 1 January 2021. The FCA also published a new Technical Note, clarifying existing ESG disclosure obligations.

The Pensions Act, which governs the specific timetable for implementation of the above roadmap received Royal Assent in February 2021.  One of its provisions is that the date for pension schemes of over £5 billion to comply with TCFD provisions is 1 October 2021.

The Consultation on the Regulations implementing the UK Government’s November announcement for occupational pension schemes closed on 10 March 2021.

The UK’s Green Taxonomy – Another Complexity?

The UK has not yet released any information on the content of its green taxonomy, but has established a Green Technical Advisory Group, which will analyse the EU Taxonomy Regulation’s metrics for technical screening standards with the aim of assessing their suitability for the UK market.  Although this leaves open the scope for the UK’s new system to align closely with the EU’s, it also opens up the opposite outcome.  Additional UK divergence from EU systems would create extra (and potentially burdensome) reporting requirements for firms and further complicate EU/UK regulatory alignment.

….Or a Competitive Advantage?

However, a UK taxonomy which was rigorous and robust could help set a new global high standard which would encourage other countries to introduce stretching green taxonomies.  For the UK, there is a potential competitive advantage in this approach.  Many financial services companies are keen to demonstrate their attachment to ESG as a USP (this trend in itself could create a new Ratings Market to ensure common standards are applied to ESG claims and to prevent ‘Greenwashing’).

In becoming the first country to mandate the TCFD’s standards, the UK is effectively making the case that, by setting the bar high, the UK will attract new financial service companies to the UK with the opportunity to burnish their green and wider ESG credentials under the highest global standards.  Such an objective is in keeping with the UK’s green agenda and fits well with its ambition for COP26.

Covington will continue to monitor developments in this area and would be delighted to help and advise clients as the UK’s taxonomy and ESG reporting requirements develop.

Understanding H.R. 1 (Part 4): Conflict-of-Interest and Revolving-Door Issues

With a growing chorus of support across the progressive landscape, the For the People Act of 2021 has emerged as a key legislative priority for congressional Democrats in the 117th Congress.  Envisioned as a “transformational anti-corruption and clean elections reform package,” the bill would enact sweeping changes to federal election laws along with important changes to federal campaign finance, lobbying, and government ethics laws.  Taken together, these changes would have significant implications for private parties engaged in all manner of political activity.

After House Democrats relied on their slim majority to pass the For the People Act, the bill now faces more uncertain prospects in the evenly divided Senate.  Nonetheless, Democratic leaders are sure to continue to press aggressively to move the bill through the upper chamber.  Likewise, even absent passage of the entire package, Democrats may look for opportunities to pass key elements of the broader bill on a bipartisan basis.

To assist clients in understanding how the For the People Act would affect their existing activity and compliance obligations, this alert is the fourth of several that will provide insights into key elements of the bill and what they mean for our clients.  This alert addresses the bill’s proposed changes to the federal conflict-of-interest and revolving-door provisions.

The Week Ahead in the European Parliament – Friday, March 12, 2021

Next week will be a committee week in the European Parliament.  Members of the European Parliament (“MEPs”) will gather virtually and in person in Brussels.  Several interesting votes and debates are scheduled to take place.

On Monday, during a meeting of the Committee on Environment, Health, and Food Safety (“ENVI”), Commission Deputy Director-General for Health Pierre Delsaux will present the new European Health Emergency Preparedness and Response Authority (“HERA”) Incubator, a public-private initiative of the Commission to anticipate and counter threats of COVID-19 variants.  Run by the Commission, HERA Incubator will facilitate the continuous exchange and operational cooperation among Member States, regulators and the industry.  It must deliver on several key measures, such as identifying promising candidates for the next generation vaccines and scaling up industrial production.  During the same meeting, MEPs will ask questions regarding the efficacy of vaccines against COVID-19 mutations to representatives of the European Medicines Agency, the European Center for Disease Prevention and Control and the World Health Organization.  The Commission’s HERA communication is available here.

Later that afternoon, the MEPs of ENVI will have an exchange of views with Commission officials on controls on agri-food products between the EU and the UK.  On March 4, 2021, the European Commission said it was preparing an infringement procedure against the UK for unilaterally extending the grace period for customs checks on agri-food in Northern Ireland, the Scheme for Temporary Agri-food Movements to Northern Ireland (“STAMNI”).  In a statement, the Commission claims this amounts to a violation of the relevant substantive provisions of the Protocol on Ireland/Northern Ireland.  This adds to the already tense relation which led Northern Ireland to cease the construction of permanent customs inspection facilities.  According to the latest figures of the new UK Office of National Statistics, EU food and live animals exports to the UK have fallen by 21% in January 2021, compared to January 2020.  The statement of the EU on the unilateral extension of STAMNI is available here.

Also on Monday, the Subcommittee on Security and Defense (“SEDE”) will have an exchange of views with NATO’s Secretary General Jens Stoltenberg.  The MEPs will likely discuss opportunities for closer cooperation between NATO and the EU regarding, e.g., military mobility and hybrid threats, such as tackling disinformation and cyberattacks.  However, with the EU’s ambition to pursue its open strategic autonomy, questions remain regarding the way forward related to the EU-NATO cooperation.  MEP David McAllister (DE, EPP), Chair of the Foreign Affairs Committee (“AFET”), of which SEDE is a subcommittee, and other MEPs, such as Tonino Picula (HR, S&D), have stressed that the EU’s work in this area is complementary and not contradictory to NATO.  Yet, close EU-NATO relations may be difficult for certain Member States that are not NATO members, such as Austria, Finland, Ireland, and Sweden.

For the complete agenda and overview of the meetings, please see here.

 

Brexit and The UK: A New, Independent Foreign Policy?

In 1962 the then US Secretary of State Dean Acheson famously commented that the UK had ‘lost an Empire and not yet found a role’. EU membership appeared to have created that role – as the US/EU hinge US. But Brexit brings that period to an end, forcing the UK to once again define its role.

Global Britain?

Part of the UK’s answer to the question of what it should play is ‘Global Britain.’ Easily derided as an empty political slogan, it is intended as a statement of intent that, far from the departure of the UK from the EU being a moment at which the UK turned inwards and became more insular, Brexit will see the UK re-double its engagement with the wider world community beyond the EU.

Giving substance to that intention, the UK will publish its long-awaited “Integrated Review” on 16 March 2021.  Billed as ‘the largest review of its kind since the Cold War’ it is designed to reset the UK’s foreign and defence policy priorities in a world outside the EU, where the comfortable post-Cold War consensus appears to be breaking down.

The UK government is, understandably, keen to demonstrate that the UK’s EU departure signals a major foreign policy shift.  But, with public finances under severe post-Covid pressure; the IR likely to confirm a further significant Armed Forces cut; and a new public sector wage and investment freeze on the horizon, too much ambition could see the UK spread itself too thinly across the globe.

There is an urgency to fleshing out ‘Global Britain’.  Trade volumes with the EU have dropped noticeably already this year.  To prosper outside the EU, the UK will need to build dynamic commercial relationships with new partners.  Those new relationships will entail difficult decisions about prioritization of limited resources. And wherever the UK looks, it will find well-ensconced competitors.

The UK’s renewed interest in Africa is evident from the four new trade deals it has already signed in 2021 and its ambition to be the largest G7 investor in the Continent by 2022. But that ambition will be juxtaposed with the UK’s recent significant foreign aid reduction, and the reality that China’s investment in Africa is currently more than four times that of the UK (France invests twice as much).  The UK’s new focus on Asia/Pacific will bring an overstretched (and possibly under-resourced) UK into closer contact with China – with whom tensions are already simmering.  Attempts to deepen relations in the Middle East, will risk running into a resurgent Russia.

The UK and China

The UK stance on China is closer to the US position than the EU’s. The UK, which has become increasingly vocal in criticizing China over Hong Kong, Tibet and Xinjiang, will have noted, with some satisfaction, the Biden Administration’s irritation with the EU for pushing through the Comprehensive Agreement on Investment with China days before his inauguration.

UK attitudes towards China have been hardening for some time. The UK public views China with distrust and its global rise with unease.  Large sectors of society in the UK blamce China for the Covid-19 pandemic. Members of the Houses of Parliament have been increasingly strident in criticizing China, pushing the Government to include genocide provisions in its Trade Bill. The UK has revoked CGTN’s broadcasting licence; will convert the G7 into a D10 to counter-balance Chinese influence; and is sending its new aircraft carrier into the S. China Seas on its first overseas deployment.

China is unavoidable for the UK – its fourth largest trading partner; increasingly dominant in Africa; and the major economic power in a region where the UK’s Trade Deal with Japan and its application to join the CPTPP signal concrete determination to increase its presence.  The UK’s China policy will have to strike a very delicate balance between criticism of China over human rights and the need for a stable bilateral and trading relationship.

The UK and Russia

Russia has played its hand well on the global scene. Opportunism in the Middle East has forced the ‘traditional’ players to pay attention. Pandemic diplomacy has resulted in exports of its highly effective vaccine to Africa.  Its increasingly close relationship with China and Turkey and its sidelining of the EU, signal a burgeoning confidence.

But the UK’s relationship with Russia has been increasingly difficult for a decade and a half. Although Russia is the UK’s 21st largest trading partner, both sides agree the bilateral relationship is now ‘essentially frozen.’ The poisoning of Alexander Litvinenko in London in 2006 was a clear inflection point and the downwards trend in the bilateral relationship can be charted through the Russian invasion of the Crimea; allegations of interference in the 2016 Brexit referendum; and the Salisbury poisoning in 2018.  The UK will need to work out how to handle Russian adventurism in the Middle East and its growing presence in Africa.

Human Rights and Sanctions

In his speech to the UN Human Rights Council, the UK Foreign Secretary stated ‘the promotion and protection of human rights [is] at the very top of [the UK’s] list of international priorities’ – highlighting abuses in Russia, Myanmar, Belarus and China. In coordinating with Canada in imposing sanctions on Myanmar and designing a Magnitsky sanctions regime which differs (apparently intentionally) from the EU’s system, the UK is underlining that its departure from the EU will lead to a different emphasis on human rights.

Whilst commendable, placing human rights at the top of a foreign policy agenda carries risks and may make for uncomfortable bilateral relations. Turkey and Egypt, for example, are both important strategic and commercial partners for the UK, which will have to decide how to balance its emphasis on human rights against the need for increased trade. The 26 February 2021 US report naming Muhammed Bin Salman as having approved the murder of Jamal Khashogggi and placing sanctions on 76 Saudi officials highlights another difficult example.  The UK, with its significant Saudi trade links, has not yet responded to the US report.

The UK’s new role in the world outside the EU will inevitably be partly constrained by pre-existing relationships and its economic, political and military limitations. The UK will continue to: look to the USA for security; trade extensively with the EU – as third country trade deals will not compensate for existing EU trade; and balance its bilateral tensions with Russia and China with its economic and commercial relationships with them. And too much hostility towards the EU could leave the UK trailing in the wake of a revitalized US/EU partnership – especially on climate change.

As the UK looks to define its place and move away from the EU, its traditional geopolitical relationships could be prone to rapid shifts of direction.  Trade Deals will continue to open new markets; and the UK will no longer be held back in dealing with third countries by the need to find common positions with its EU partners.  That may mean the UK finds its voice on human rights or corruption issues in South America and Asia as it asserts its support of the rules-based international system.

These changes may be unsettling for investors and will almost certainly create new risks.  But they will also create genuine new opportunities for companies.  Covington’s team of international relations and public policy experts looks forward to working with clients to help navigate these choppy international relations waters.

Understanding H.R. 1 (Part 2): Changes to the Lobbying Disclosure Act and Foreign Agents Registration Act

With a growing chorus of support across the progressive landscape, the For the People Act of 2021 has emerged as a key legislative priority for congressional Democrats in the 117th Congress. Envisioned as a “transformational anti-corruption and clean elections reform package,” the bill would enact sweeping changes to federal election laws along with important changes to federal campaign finance, lobbying, and government ethics laws. Taken together, these changes would have significant implications for private parties engaged in all manner of political activity.

After House Democrats relied on their slim majority to pass the For the People Act, the bill now faces more uncertain prospects in the evenly divided Senate. Nonetheless, Democratic leaders are sure to continue to press aggressively to move the bill through the upper chamber. Likewise, even absent passage of the entire package, Democrats may look for opportunities to pass key elements of the broader bill on a bipartisan basis.

To assist clients in understanding how the For the People Act would affect their existing activity and compliance obligations, this alert is the second of several that will provide insights into key elements of the bill and what they mean for our clients. This alert addresses the bill’s proposed changes to the Lobbying Disclosure Act (“LDA”), the main federal law regulating lobbyists, and to the Foreign Agents Registration Act (“FARA”), a statute that requires the “agent” of a foreign “principal” to register and disclose certain political, lobbying and public relations activities.

LDA’s Registration Threshold Increases By $1,000

Under the federal Lobbying Disclosure Act (“LDA”), an organization or lobbying firm must register if it employs an individual who meets the definition of a “lobbyist” and if its total expenses or income for lobbying activities meet certain monetary thresholds.  The two non-monetary thresholds determining when an individual becomes a “lobbyist,” discussed below, are usually the main factors driving when an organization or lobbying firm must register.  However, the monetary thresholds, one of which was recently increased from $13,000 to $14,000, may affect the registration obligations of entities engaged in only a de minimis amount of lobbying.

Under the LDA, the test for determining if an employee of an organization or lobbying firm qualifies as a lobbyist is two-pronged:

  1. Has the individual made two or more federal lobbying contacts on behalf of the organization (for in-house employees) or a firm client (for lobbying firms) at any time? and
  1. Has that individual spent 20% or more of his or her work time for the organization (for in-house employees) or that particular client (for lobbying firms) engaged in federal lobbying activities during any three-month period?

If both prongs of the test are satisfied, the individual qualifies as a “lobbyist” for LDA purposes and the organization or lobbying firm likely must register under the LDA, listing that lobbyist and the organization/client on its registration and disclosure reports.

Although employing a lobbyist usually leads to registration by the employer, the LDA provides an exemption from registration for organizations employing in-house lobbyists that spend no more than $14,000 (recently increased from $13,000) on lobbying activities in a quarterly period.  For lobbying firms, this threshold is $3,000 (unchanged from previous levels) in income from a client for lobbying activities in a quarterly period.  These thresholds are indexed for inflation every four years and rounded to the nearest $500.  The new $14,000 threshold for organizations is effective as of January 1, 2021.

Because these monetary thresholds are low, compensation associated with employees who meet the relatively high threshold of becoming a “lobbyist” will almost always cross these thresholds.  But for certain smaller organizations or non-profits, this threshold may be a factor in the LDA registration decision, as it may be for lobbying firms with a de minimis amount of activity on behalf of a particular client.  In addition, it is these monetary thresholds that exempt lobbying firms from triggering registration on behalf of certain pro bono clients.

The application of the LDA’s registration thresholds and triggers involves a detailed analysis of the activities of an organization or a firm, which must consider the broad and multi-factored definition of a “lobbying contact,” and the even broader definition of “lobbying activities.”  Covington has advised numerous clients on LDA registration requirements as applied to those clients’ activities.  If you have any questions on whether your organization is required to register under the LDA, please reach out to a member of our Election and Political Law Group.

Brazil Ratifies the Nagoya Protocol

On March 4, 2021, Brazil deposited with the United Nations its ratification of the Nagoya Protocol (“Protocol”) (see here the announcement of Brazil’s Ministry of Foreign Affairs).  This represents Brazil’s formal commitment to be bound by the Protocol.

On August 6, 2020, the Brazilian Senate passed a Decree that ratifies the Nagoya Protocol. The Protocol complements Brazil’s existing access and benefit sharing rules relating to Brazil’s genetic heritage and associated traditional knowledge (“ABS Framework”).  One important effect of this ratification is that other countries parties to the Protocol will have to ensure that users of Brazilian genetic heritage and associated traditional knowledge comply with the Brazilian ABS Framework.  However, the inverse is also true.  Brazil will need to ensure that Brazilian users of foreign genetic heritage and associated traditional knowledge comply with the access and benefit sharing regime of the country of origin.

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