BILL ANALYSIS                                                                                                                                                                                                    

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          Date of Hearing:   February 16, 2010

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
            AB 1650 (Feuer and Blumenfield) - As Introduced:  January 13,  
          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.


          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  


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          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  


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            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  

          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  


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            certification.  (Public Contract Code Sections 10475 to  

           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   
  /02/09/us.iran.nuclear/index.html  and  
          links to related articles at  

          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  


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          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  


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          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  

          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  

          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  


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          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  

           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  


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          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." 


          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



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          None on file
          Analysis Prepared by  :    Thomas Clark / JUD. / (916) 319-2334