BILL ANALYSIS AB 1650 Page 1 Date of Hearing: February 16, 2010 ASSEMBLY COMMITTEE ON JUDICIARY Mike Feuer, Chair AB 1650 (Feuer and Blumenfield) - As Introduced: January 13, 2010 SUBJECT : Public Contracts: Energy Sector Investments in Iran KEY ISSUE : should businesses that invest IN the energy sector of Iran be prohibited from entering into, or renewing, contracts with state and local public entities in California? FISCAL EFFECT : As currently in print this bill is keyed fiscal. SYNOPSIS Subject to the enactment of federal enabling legislation, this bill would prohibit the state, or any of its subdivisions, from entering into or renewing contracts with businesses with significant interests or investments in Iran's energy sector. The United States and much of the international community has condemned the Government of Iran for its human rights violations, its support of international terrorism, and its efforts to develop nuclear weapons under the guise of developing nuclear power for domestic energy uses. The Iran Sanctions Act expresses U.S. policy to work with international organizations to pressure the government of Iran to cease its illicit nuclear activity, and it authorizes the President, by Executive Order, to impose sanctions and limit the ability of U.S. persons and business from engaging in business activities with the Government of Iran and other designated groups. In light of recent confrontations between the Government of Iran and the international community over its nuclear activity, its support of international terrorism, and its suppression of civil rights and liberties, legislation is currently pending in Congress that would strengthen existing sanctions and, more importantly for purposes of this bill, enable state and local governments to adopt restrictions consistent with federal policy. This bill, consistent with pending federal legislation, would prohibit a company from bidding on, submitting a proposal for, or otherwise entering into a contract with a public entity for goods or services if the person or company (1) had investments of $20 million or more in Iran's energy sector; (2) provided products related to the development or transport of oil or natural gas in AB 1650 Page 2 Iran; or (3) was a financial institution that extended $20 million or more in credit that will be used to invest in Iran's energy sector. This bill would also require companies seeking to enter into contracts with the state to certify that they do not engage in the prohibited activities, and provides civil penalties for persons or entities that file false certifications. The bill is supported by several human rights groups, and there is no registered opposition. SUMMARY : Prohibits new contracts or contract renewals between the state, including any of its subdivisions, and companies with substantial business activities in Iran's energy sector. Specifically, this bill : 1)Prohibits any person or entity that engages in investment activities in the energy sector of Iran, as specified, from bidding on, submitting a proposal for, or entering into a contract with a public entity for goods or services. 2)Specifies that, for purposes of this bill, a person engages in investment activities in the energy sector of Iran if any of the following is true: a) The person or entity has an investment of twenty million dollars ($20,000,000) or more in the energy sector of Iran. b) The person provides oil or liquefied natural gas tankers, or products used to construct or maintain pipelines used to transport oil or liquefied natural gas, for the energy sector of Iran. c) The person or entity is a financial institution that extends twenty million dollars ($20,000,000) or more in credit to another person, for 45 days or more, if the person will use the credit to invest in the energy sector in Iran. 3)Requires a public entity to require a person that submits a bid or proposal to, otherwise proposes to enter into a contract with, a public entity with respect to a contract for goods and services, that currently or within the previous three years has had business activities or other operations outside of the United States, to certify that the person is not engaged in investment activities in the energy sector of Iran, as specified. 4)Provides that, if the public body awarding the contract AB 1650 Page 3 determines that a person has submitted a false certification pursuant to 3) above, the person shall be subject to civil penalties, termination of existing contracts, and ineligibility to bind on contracts for the next three years. Specifies procedures by which a person shall be notified of any of the forgoing and requires the awarding body to give the person an opportunity to demonstrate that they are not engaged in investment activities in the energy sector of Iran. 5)Provides that the provisions in this bill will only become operative if federal legislation is enacted authorizing states to adopt and enforce contracting prohibitions of the type provided for in this bill. 6)Makes declarations and findings relating to federal and international responses to Iran's well-documented human rights abuses, support for international terrorism, and efforts to develop its nuclear capacities. EXISTING LAW : 1)Requires the President of the United States, under the federal Iran Sanctions Act of 1996, as subsequently amended, to impose specified sanctions on foreign companies that make substantial investments in Iran's energy sector. 2)Prohibits California Public Employees' Retirement System CalPERS and the State Teachers' Retirement System (CalSTRS) from investing public employee retirement funds in a company with active business relations in Sudan or that has invested or engaged in business operations with entities involved in the development of petroleum or natural gas resources of Iran. (Government Code Sections 7513.6 and 7513.7.) 3)Authorizes contracting between state agencies and private contractors and sets forth the requirements for the procurement of goods and services and for the solicitation and evaluation of bids and the awarding of contracts by public entities. 4)Prohibits companies involved in specified business activities in Sudan from entering into a contract with a state agency for goods and services and requires a prospective bidder for a state contract to certify that the company is not engaged in such activities. Specifies penalties for submitting a false AB 1650 Page 4 certification. (Public Contract Code Sections 10475 to 10481.) COMMENTS : For more than a decade both the United States and the international community have condemned the Government of Iran for its support of international terrorism, its human rights violations, and its efforts to develop nuclear weapons in defiance of international comity. Since the United States enacted the first Iran Sanctions Act in 1996, most experts would seem to agree that the threat posed by Iran has only increased. In only the past week, Iran has announced that it will begin enriching uranium to the thresholds needed to develop nuclear weapons. Although Iran claims that its program is designed for medical and domestic energy purposes, it recently rejected a proposal by the International Atomic Energy Agency which would have provided for shipment of its low-enriched uranium to other countries for further enrichment, to ensure that its development is indeed for peaceful purposes. President Obama has called Iran's action "not acceptable" and has vowed to work "over the next several weeks in developing a significant regime of sanctions that will indicate to them how isolated they are from the international community as a whole." (See ""U.S. ready to offer Iran alternative to nuclear plan," and "Iran uranium enrichment course 'not acceptable,' Obama says," available at www.cnn.com/2010/POLITICS /02/09/us.iran.nuclear/index.html and links to related articles at http://topics.edition.cnn.com/topics/Iran ) According to the authors, AB 1650 will support federal and international efforts by precluding private companies from entering into state contracts if they have substantial business dealings in Iran's energy sector, thereby "ensuring that California's tax dollars do not support companies whose investments either directly or indirectly support Iran's nuclear or terrorist activities." Background on Federal Legislation: The Iran Sanctions Act of 1996 through Pending Congressional Amendments : The Iran Sanctions Act (ISA), which was originally called the Iran and Libya Sanctions Act, was enacted in 1996 in response to Iran's effort to step up its nuclear program and at a time when Iran was also allegedly increasing its support of terrorists organizations, including Hezbollah and Hamas. (Libya was subsequently removed from the scope of the legislation.) Although federal law can prohibit American companies from AB 1650 Page 5 engaging in specified business practices with Iran, it has no similar power to ban the actions of foreign companies. However, the United States does have the power to penalize foreign companies by denying them certain advantages of U.S. law. The key provisions of the ISA require the President to impose two of seven possible sanctions on foreign persons or companies that make an investment of more than $20 million in Iran's energy section. Sanctions primarily include denial of access to certain forms of credit, denial of licenses for the export of certain U.S. military technologies, and various prohibitions relating to dealing in U.S. bonds, acting as a repository of U.S. funds, or securing certain government procurements. In light of increasing tension between the United States and Iran relating to Iran's defiance of international efforts to monitor its nuclear activity, its continued support of international terrorism, and its generally disruptive effect on peace and stability in the Middle East, there are currently four measures pending in Congress - two initiated in the House, and two in the Senate - that seek to strengthen existing federal sanctions and enable state and local governments to divest from companies that do substantial business with Iran. Two of these bills - HR 2194 (Berman) and S. 908 (Bayh) - express Congress' intent to continue supplementing diplomatic efforts toward Iran with effective economic sanctions, on the assumption that diplomacy alone has proven to be ineffective with a nation like Iran, which openly defies international agreements and rules of international comity. Both bills would enact the Iran Refined Petroleum Act, which would amend the ISA to direct the President to impose sanctions on any person, entity, business, or corporation that has knowingly made an investment of $20 million or more that directly or significantly contributes to Iran's ability to develop its petroleum resources. Persons or companies could also face sanctions for providing refined products or goods, services, technology or information worth $200,000 or more. The legislation targets the energy investments because that sector provides Iran with the bulk of its revenue and is highly dependent upon foreign investments. Federal Enabling Legislation: More relevant to this bill are two pieces of enabling legislation now pending in Congress. H.R. 1327 (Frank) and S. 1065 (Brownback) would enact the Iran Sanctions Enabling Act. Each measure would expressly state that it is the policy of the United States to support the decision of state and local governments to prohibit the investment of assets AB 1650 Page 6 that they control in any person or company with substantial investments in Iran's energy sector. Specifically, the enabling legislation authorizes a state or local government to divest assets from, or prohibit the investment in, any person or entity that (1) invests $20 million or more in Iran's energy sector; (2) provides oil or liquefied natural gas tankers, or products used to construct or maintain pipelines used to transport oil or liquefied natural gas, for that energy sector. The federal enabling legislation also expressly authorizes state and local governments to divest its assets from any financial institutions which extends $20 million or more in credit to another person, for 45 days or more, if that person will use the credit to invest in Iran's energy sector. Finally, the proposed federal enabling legislation specifies that the Act will cease 30 days after the President certifies to Congress that the government of Iran has ceased (1) providing support for acts of international terrorism; and (2) the pursuit, acquisition, and development of nuclear, biological, and chemical weapons and ballistic missile technology. This bill is carefully crafted to align with the proposed federal enabling legislation. As noted in the bill's declarations and findings, the bill seeks to align California policy with national and international efforts to effectively respond to the serious threat posed by Iran, a threat that would be exponentially increased if Iran had nuclear weapons. Specifically, under this bill any entity of the State of California - including any of its subdivisions - would be prohibited from making new contracts or renewing contracts with companies that have investments of $20 million or more in Iran's energy sector. Companies seeking to bid or renew contracts with state or local governments or government agencies would be required to certify that they are not engaged in the specified activities. The bill also offers procedural protections for bidders. For example, companies would be given written notice of their right to challenge their designation as a "scrutinized person." Companies that ceased the prohibited investment activities would be fully eligible to contract with the state and its subdivisions. Companies that submit a false certification, however, would face civil penalties and would be ineligible to bid on government contracts for three years. Precedents Promoting Responsible State Investing : This bill is AB 1650 Page 7 consistent with prior legislation that limited state investments or contracting in order to prevent the use of state taxpayer dollars to support repressive regimes. For example, in 2007 the Governor signed AB 221 (Anderson), which prohibited CalPERS and CalSTRS from investing public employee retirement funds in a company that had active business operations in Iran's defense or energy sectors. The previous year the Governor signed AB 2941 (Koretz), which similarly prohibited CalSTRS and CalPERS investments in Sudan. More recently, the Governor signed AB 498 (Hernandez), which prohibited companies with business operations in Sudan from bidding on state contracts for goods and services. Preemption: Although state policies that touch upon foreign affairs typically raise questions of preemption, there does not appear to be such an issue raised here. To begin with, this bill will only become effective if enabling legislation now pending in Congress becomes law, and it will cease upon the expiration of that law. In addition, even in the absence of federal enabling legislation, it is not entirely clear that this measure would be preempted under "field preemption" or a "conflict preemption" test. That is, independent of any desire to impede upon foreign affairs, the state arguably has an independent interest in ensuring that Californians' taxpayer dollars do not support regimes that the majority of citizens find morally reprehensible. Moreover, such a statute would not arguably be preempted under a "conflict preemption" standard since the statute is fully consistent with long-standing federal policy to discourage business investment in Iran's energy sector. ARGUMENTS IN SUPPORT : The Anti-Defamation League (ADL), like all supporters, believes that Iran, through its nuclear activities and its support of state-sponsored terrorism, "is a grave threat not only to the United States but also to the rest of the world." Assembly Bill 1650, ADL contends, sends a strong message that California supports the efforts to prevent Iran from developing nuclear weapons and takes a strong stand against state sponsors of terrorism." Furthermore, ADL argues that this bill will give Californians assurance that their tax dollars are not being channeled "through foreign companies into the Iranian regime's coffers and from there into its nuclear program and terrorist activities." The American Jewish Committee (AJC) contends that if Iran AB 1650 Page 8 continues to defy the international community and develop its nuclear capacity, it will "significantly threaten U.S. interests, forces, and allies across the Middle East and Europe." As a "leading sponsor of state terror," AJC adds, Iran "could share nuclear technology or material with such proxy groups as Hezbollah, or with violent radical forces such as Hamas that rely on Iranian support." Noting that Iran depends upon foreign companies to provide it with 40 percent of its domestic gasoline demand, this legislation would "send a strong message to companies that have substantial business in Iran's energy sector that they must choose between doing business with the State of California or with the rogue regime in Iran." Finally, AJC points to the pending federal enabling legislation and urges the state to take action now to register our support for a U.S. policy of supplementing diplomatic efforts with the pressure of effective economic sanctions. In addition to the arguments made by ADL and AJC, other groups, including United Against Nuclear Iran (UANI), The Center for the Promotion of Democracy and Human Rights (CFPD), and 30 Years After, and Iranian-American Jewish civic organizations, stress Iran's abysmal human rights record. 30 Years After, for example, points out that even with Iran's violent suppression of human rights, millions of Iranians "have marched courageously throughout the streets of Iran calling for reform, democracy, and freedom." AB 1650, 30 Years After believes, will express the states support for the aspirations of the Iranian people and will be consistent with California history of "socially responsible investing." REGISTERED SUPPORT / OPPOSITION : Support American Jewish Committee Anti-Defamation League Center for the Promotion of Democracy and Human Rights Museum of Tolerance 30 Years After United Action Against Nuclear Iran Opposition AB 1650 Page 9 None on file Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334