In the middle of an iteration, the product owner tells the agile team that thegovernment...

In Agile project management, the product owner is responsible for managing the product backlog, which includes assessing and incorporating changes as needed. When a change in requirements occurs, such as an update in legal requirements, the product owner should assess these changes and adjust the backlog accordingly. The team should continue their work while this assessment is taking place. This approach allows the team to maintain their focus on the current iteration’s work, while the product owner ensures that future work aligns with the updated requirements12. References: 

https://www.epicflow.com/blog/changing-requirements-in-project-management-how-to-stay-on-track/

https://www.izenbridge.com/blog/accept-requirement-changes-within-a-sprint/