BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1650
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          Date of Hearing:   April 20, 2010

              ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER  
                                     PROTECTION
                                 Mary Hayashi, Chair
                    AB 1650 (Feuer) - As Amended:  April 13, 2010
           
          SUBJECT  :   Public contracts: state and local contract  
          eligibility: energy sector investment activities in Iran. 

           SUMMARY  :   Prohibits persons with business activities in Iran's  
          energy sector, as specified, from bidding or entering into  
          contracts with a public entity for goods or services.   
          Specifically,  this bill  :  

          1)Prohibits a scrutinized person from bidding on, submitting a  
            proposal for, or entering into a contract with a public entity  
            for goods or services with the public entity.

          2)Requires a public entity to require a person who has engaged  
            in business outside the United States in the previous three  
            years to certify that he or she is not a scrutinized person  
            when bidding or entering into a contract. 

          3)Requires that, if the public body awarding the contract  
            determines that a person has submitted a false certification,  
            the person be subject to all of the following: 

             a)   A civil penalty of $250,000 or twice the amount of the  
               contract involving the false certification, whichever is  
               greater; 

             b)   Termination of existing contracts with the awarding  
               body, at the awarding body's discretion; and, 

             c)   Ineligibility to bid on contracts for the next three  
               years from the date the scrutinized person submitted the  
               false certification. 

          4)Requires an awarding body to report the names of scrutinized  
            persons who have submitted false certifications, together with  
            information as to the false certification, to the Attorney  
            General (AG), and requires the AG to determine whether to  
            bring a civil action against the person. 









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          5)Allows an awarding body to report the names of scrutinized  
            persons who have submitted false certifications, together with  
            information as to the false certification, to the city  
            attorney, county counsel, or district attorney. 
           
          6)Requires a scrutinized person to pay all reasonable costs and  
            fees incurred by the awarding body, AG, city attorney, county  
            counsel, or district attorney if civil action is taken. 

          7)Requires an awarding body that determines a scrutinized person  
            has an existing contract or has submitted a bid proposal, to  
            provide 90 days' written notice of its intent not to enter  
            into or renew a contract for goods or services, and to inform  
            the scrutinized person that he or she may become eligible for  
            public contracts upon ceasing to be a scrutinized person. 

          8)Requires an awarding body to provide a person it determines to  
            be a scrutinized person with an opportunity to demonstrate  
            that they are not engaged in investment activities in Iran's  
            energy sector, and if the awarding body subsequently  
            determines that person is no longer a scrutinized person, he  
            or she shall be eligible to enter into or renew a contract for  
            goods or services.

          9)Becomes operative contingent upon the enactment of federal  
            legislation authorizing states to adopt and enforce  
            contracting prohibitions provided for in this bill. 

          10)Requires the Legislature to submit to the AG a written notice  
            describing this bill within 30 days after it becomes  
            operative. 

          11)States the validity of this bill's provisions are severable. 

          12)Ceases operation contingent upon the enactment of federal  
            legislation ceasing to authorize states to adopt and enforce  
            contracting prohibitions provided for in this bill.

          13)Defines "scrutinized person" to mean a person who engages in  
            the following investment activities in Iran's energy sector:

             a)   The person has an investment of $20 million or more in  
               Iran's energy sector; 

             b)   The person provides oil or liquified natural gas  








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               tankers, or products used to construct or maintain  
               pipelines used to transport oil or liquified natural gas,  
               for Iran's energy sector; or 

             c)   The person is a financial institution that 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.

          14)Defines "awarding body" to mean a department, board, agency,  
            authority, or officer, agent, or other authorized  
            representative of the public entity awarding a contract for  
            goods or services.

          15)Defines "energy sector" to mean activities to develop  
            petroleum or natural gas resources or nuclear power. 

          16)Defines "financial institution" to mean the term used in the  
            Iran Sanctions Act of 1996.

          17)Defines "Iran" to include any agency or instrumentality of  
            Iran.

          18)Defines "person" to mean any of the following:

             a)    A natural person, corporation, company, limited  
               liability company, business association, partnership,  
               society, trust, or any other nongovernmental entity,  
               organization, or group;

             b)    Any governmental entity or instrumentality of a  
               government, including a multilateral development  
               institution, as defined in the International Financial  
               Institutions Act; or, 

             c)   Any successor, subunit, parent company, or subsidiary  
               of, or company under common ownership or control with, any  
               entity described above.

          19)Makes legislative declarations and findings.

           EXISTING LAW  :

          1)Requires the President of the United States, under the federal  
            Iran Sanctions Act of 1996, as subsequently amended, to impose  








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            specified sanctions on foreign companies that make substantial  
            investments in Iran's energy sector. 

          2)Prohibits the 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  
            certification.  (Public Contract Code Sections 10475 to  
            10481.) 

           FISCAL EFFECT  :   Unknown

           COMMENTS  :   
           
          Purpose of the bill  .  According to the author's office, "The  
          U.S. has imposed sanctions on Iran, determining that Iran's  
          illicit nuclear activities, combined with its support of  
          international terrorism, represent a serious threat to the  
          security of the U.S., Israel, U.S. allies in Europe, the Middle  
          East, and around the world.

          "Congress is advancing bipartisan federal legislation,  
          co-sponsored by more than one third of the members of the U.S.  
          Senate and more than half of the House of Representatives, that  
          would authorize state and local governments to divest and  
          otherwise disassociate themselves from companies operating in  
          Iran's energy sector that support Iran's efforts to achieve a  
          nuclear weapons capability.  

          "The International Atomic Energy Agency has called attention  








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          repeatedly to Iran's unlawful nuclear activities, leading the  
          United Nations Security Council to adopt a range of sanctions  
          designed to encourage Iran to cease those activities and comply  
          with obligations under the Nuclear Non-Proliferation Treaty.

          "AB 1650 would preclude all public entities in California from  
          renewing or entering to contracts with companies that have  
          substantial business in Iran's energy sector, ensuring that  
          California's tax dollars do not support companies whose  
          investments either directly or indirectly support Iran's nuclear  
          program or terrorist activities."

           Background  .  Current pending federal legislation on Iran  
          sanctions was introduced in response to concern over Iran's  
          engagement in nuclear proliferation.  There are four measures  
          pending, two 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 engaging in business in  
          Iran's energy sector.  

          Most relevant to this bill are two pieces of legislation now  
          pending in Congress.  H.R. 1327 (Frank) and S. 1065 (Brownback)  
          would enact the Iran Sanctions Enabling Act (Act).  Each measure  
          would expressly state that it is U.S. policy to support the  
          decision of state and local governments to prohibit the  
          investment of assets 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.  








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           False Certification  .  The current language in the bill requires  
          a person who signs a bid proposal or contract to certify that he  
          or she is not engaged in business activities in Iran's energy  
          sector.  This individual can be a representative signing on the  
          company's behalf, who, if unknowingly incorrect, is subject to  
          penalty of perjury at a minimum of $250,000, in addition to  
          contract termination and ineligibility to bid with a public  
          entity for three years.  For example, an individual investor,  
          company, or financial institution may not know that its business  
          partners have made investments in Iran and may unknowingly make  
          a false certification.  This bill would require such a contract  
          to be cancelled and result in additional costs to the  
          governmental entity to re-bid and award the contract.

           Existing Contracts  .  The current language in the bill captures  
          existing contracts, requiring individuals that currently or  
          within the previous three years have had business activities or  
          operations outside the U.S., to certify that the person is not a  
          scrutinized person.  As drafted, this bill could penalize and  
          financially affect companies and individuals involved in ongoing  
          contracts that were not previously prohibited.  Further, the  
          termination of an existing contract would negatively impact the  
          awarding body financially because the awarding body would need  
          to find a replacement to complete the remainder of work under  
          the contract.  In addition, there could be potential lawsuits on  
          the dissolution of a contractual agreement between the awarding  
          body and the contractor.  The author may wish to clarify that  
          this bill applies to prospective contracts and persons who are  
          scrutinized persons at the time of a bid proposal's submission  
          and not prior to that submission. 

           Support  .  According to United Against Nuclear Iran, "Iran has  
          defied the United Nations and the International Atomic Energy  
          Agency by pursuing an illegal nuclear program?.  If Iran obtains  
          a nuclear weapon, the already volatile Middle East will likely  
          see the start of a regional nuclear arms race.  Needless to say,  
          a nuclear arms race in the Middle East is a clear threat to  
          American national security.  Unfortunately, at the same time  
          that Iran diverts billions of dollars to its illicit nuclear  
          weapons program, a slew of multinational corporations are doing  
          business with Iran for short-term economic gain.  In doing so,  
          these corporations are providing the last crutch for the  
          faltering Iranian economy, facilitating the regime's diversion  
          of funds to its illicit nuclear program and ultimately  








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          endangering the U.S. and its allies."

          According to the American Jewish Committee (AJC), "The Iranian  
          regime depends on foreign companies to provide it with 40% of  
          its gasoline to meet domestic demand.  [AB 1650] 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?.

          "In conjunction with federal [legislation, AB 1650] would  
          substantially constrain Iran's access to refined petroleum  
          products, and heighten economic pressure on Tehran to comply  
          with repeated Security Council resolutions and cease threatening  
          regional and global security.  Even as the Obama Administration  
          explores direct diplomatic approaches, AJC believes that it is  
          critical that there be a simultaneous increase of sanctions on  
          Iran." 

           Oppose  .  Opponents express concerns that the term "scrutinized  
          person" is not used in federal legislation.  The term "actual  
          knowledge" is used in federal legislation to imply that  
          individuals or companies are subject to civil penalties if they  
          intentionally falsified a certification.  Opponents argue that  
          without reference to "actual knowledge," innocent individuals or  
          companies would be liable to a minimum of $250,000 penalty, for  
          the actions of others, even though they have little or no  
          influence or knowledge of their business activities. 

          Opponents would like to see the bill provisions apply  
          prospectively, include a statute of limitations, and ensure that  
          the absence of a certification form does not invalidate a  
          contract.  In a joint letter, opponents write, "The  
          certification requirement laid out in AB 1650 should be  
          prospective only.  That is, it should apply to contracts that  
          are signed on or after the effective date of the law?. Similar  
          legislation passed in Arizona, and Florida is expressly  
          prospective." 

          "The bill [should] not be retrospective in examining assets held  
          before the effective date of the bill.  For example, a company  
          that has divested from Iran two years would still be captured by  
          this bill because of the three-year retrospective examination.   
          This is not clear in AB 1650 and should be clarified. 









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          "AB 1650 is premature, considering that implementation of the  
          bill is contingent on federal legislation.  The two pieces of  
          federal legislation have yet to go through reconciliation, so  
          the final form of a federal bill is uncertain.  It would be  
          prudent to wait for a final version of the federal bill before  
          moving forward with AB 1650?. It is important that the bill does  
          not overreach or go beyond the purview of the federal  
          legislation."

           Previous Legislation  .  AB 961 (Krekorian) of 2009 prohibits a  
          scrutinized company, as defined, from entering into a contract  
          with a state agency for goods or services.  This bill was held  
          in the Assembly Appropriations Committee. 

          AB 498 (Hernandez), Chapter 272, Statutes of 2008, prohibited  
          companies with business operations in Sudan from bidding on  
          state contracts for goods and services.

          AB 221 (Anderson), Chapter 671, Statutes of 2007, prohibited  
          CalPERS and CalSTRS from investing public employee retirement  
          funds in a company with active business operations in Iran's  
          defense or nuclear sectors, petroleum or natural gas resource  
          development, or with companies that engage in business with an  
          Iranian organization labeled as a terrorist group by the U.S.  
          government.            

          AB 2941 (Koretz), Chapter 442, Statutes of 2006, prohibited  
          CalPERS and CalSTRS from investing public employee retirement  
          funds in a company with business operations in Sudan, and  
          requires the boards of these retirement systems to sell or  
          transfer any investments with these companies and report to the  
          Legislature regarding these investments, as specified. 

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          30 Years After 
          Anti-Defamation League 
          American Jewish Committee - Los Angeles 
          Center for the Promotion of Democracy and Human Rights
          City of Beverly Hills 
          City of West Hollywood 
          Jewish Labor Committee, Western Region   
          Jewish Public Affairs Committee of California 








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          Los Angeles County Board of Supervisors
          Simon Wiesenthal Center 
          United Against a Nuclear Iran
          
           Opposition 
           
          American Council of Engineering Companies, California 
          Associated General Contractors of California 
          Association of California Life & Health Insurance Companies 
          California Bankers Association
          California Chamber of Commerce 
          California Manufacturers and Technology Association 
          Western States Petroleum Association 
           
          Analysis Prepared by  :    Joanna Gin / B.,P. & C.P. / (916)  
          319-3301