BILL ANALYSIS Ó
SB 861
Page 1
Date of Hearing: July 6, 2011
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel Pérez, Chair
SB 861 (Corbett) - As Amended: May 31, 2011
SENATE VOTE : 33-2
SUBJECT : Public contracts: Ineligibility of scrutinized
companies
SUMMARY : Prohibits specified companies from bidding on or
submitting a proposal for a contract with a state agency to
provide goods or services if said companies have had a final
judgment filed against them by the U.S. Securities and Exchange
Commission (SEC) related to the Democratic Republic of Congo
(DRC) and conflict minerals disclosure. Specifically, this
bill:
1)Makes legislative findings and declarations, which, among
other things state:
a) The DRC was devastated by a civil war (1996 and 1997)
and a war (1998 and 2003) which resulted in widespread
human rights violations and the intervention of multiple
armed forces or armed non-state actors from other countries
in the region. Despite the signing of a peace agreement,
the eastern region of the DRC has continued to suffer from
high levels of poverty, insecurity, and a culture of
impunity, in which illegal armed groups and military forces
continue to commit widespread human rights abuses.
b) A report released by the U.S. Government Accountability
Office (GAO) in December 2007 describes how the
mismanagement and illicit trade of extractive resources
from the DRC supports conflict between militias and armed
domestic factions in neighboring countries.
c) According to a study by the International Rescue
Committee released in January 2008, conflict and the
related humanitarian crisis in the DRC have resulted in the
deaths of an estimated 5,400,000 people since 1998 and
continue to cause as many as 45,000 deaths each month.
Sexual violence and rape remain pervasive tools of warfare
used to terrorize and humiliate communities.
SB 861
Page 2
d) In February 2008, the United Nations Group of Experts on
the DRC stated, "Individuals and entities buying minerals
from areas of the eastern part of the DRC with a strong
rebel presence are violating the sanctions regime when they
do not exercise due diligence to ensure their mineral
purchases do not provide assistance to illegal armed
groups."
2)Prohibits a scrutinized company, as defined, from bidding on a
state goods or services contract. This prohibition is limited
to products or services related to the reason the company was
found to be a scrutinized company by the SEC.
3)Defines "scrutinized company" to mean a person found to be in
violation of Section 13(p) - Disclosures relating to Conflict
Minerals Originating from the DRC of the Securities Exchange
Act of 1934 (DRC Act) by final judgment or settlement entered
in a civil or administrative action brought by the SEC and the
person has not remedied or cured the violation in a manner
accepted by the SEC on or before final judgment or settlement.
4)Deems that a person is no longer regarded as a scrutinized
company when the person is no longer in violation of the DRC
Act, or three years from the date of final judgment or
settlement, whichever is earlier.
5)Specifies that the provisions of this bill become inoperative
upon the termination of the conflict mineral disclosure
requirements.
EXISTING FEDERAL LAW :
1)Establishes the 2006 Democratic Republic of Congo Relief,
Security, and Democracy Promotion Act (DRCRSDP Act). The
DRCRSDP Act stated that it is the policy of the U.S. to work
for peace and security throughout the DRC by supporting
efforts to protect civilians, disarm illegal armed groups, and
hold accountable individuals and entities working to
destabilize the country.
2)Establishes the 2010 Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act), pertaining to the
trade of minerals associated with the DRC conflict. The
Dodd-Frank Act was signed into law adding, amongst other
SB 861
Page 3
things, Section 13(p) to the Securities Exchange Act of 1934,
known as the DRC Act, which directs the SEC to publish new
disclosure rules by April 17, 2011, for publically traded
companies reporting to the SEC for whom "conflict minerals"
are necessary to the functionality or production of a product
manufactured by such persons.
EXISTING STATE LAW :
1)Authorizes contracting between state agencies and private
contractors and sets forth requirements for the procurement of
goods and services by state agencies, and the various
responsibilities of state agencies and the Department of
General Services (DGS) in implementing state contracting
procedures and policies.
2)Prohibits persons engaging in investment activities in Iran's
energy sector, as specified, from bidding or entering into
contracts with a public entity for goods or services.
3)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.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's purpose : According to the author's office, "Greed
for the Congo's mineral wealth has been a prime cause of
atrocity and conflict. Multiple armed groups use mass rape as
a strategy to intimidate and control communities as they
profit from the illicit trade of the Congo's conflict
minerals, such as tin, tungsten, and tantalum. Many of these
same conflict minerals end up in our electronic devices, such
as cell phones, laptops, and digital cameras.
"Secretary of State Hillary Clinton called the situation
'truly one of mankind's greatest atrocities.' The United
Nations (U.N.) has recorded at least 200,000 cases of sexual
violence in the eastern Congo? California is home to many
computer and cell phone companies. The State of California
SB 861
Page 4
should not spend tax dollars on companies that fail to comply
with federal law.
"In order to encourage compliance with federal law, SB 861
prohibits publicly traded companies that have been found to be
in violation of the reporting requirements under the
Dodd-Frank Act by final judgment from obtaining procurement
contracts with the state through the DGS until they comply
with the law."
2)Background on DRC: The DRC is Africa's third largest nation
(71.7 million people), located in Central Africa, northeast of
Angola, with a narrow strip of land that controls the lower
Congo River and is the only outlet to the South Atlantic
Ocean. For comparison, the country is slightly less than
one-fourth the size of the U.S. Key exports include diamonds,
gold, copper, cobalt, wood products, crude oil, and coffee.
China is the largest foreign market for DRC goods,
representing 46.75% of all DRC exports, followed by the U.S.
at 15.35%, Belgium at 10.68%, and Zambia at 5.78%.
According to the World Fact Book, the DRC's economy has the
potential of generating substantial wealth based on its
reserves of natural resources. The country has, however,
experienced decades of economic decline brought-on by long
standing internal conflicts and systemic corruption since its
independence in 1960. While the economic conditions began to
improve in late 2002 with the withdrawal of a majority of the
invading troops from neighboring African nations, progress has
been slow. Renewed activity in the mining sector is the
source of most DRC export income, temporally increased the
country's fiscal position between 2006-2008, however, the fall
in world market prices for key mineral exports in 2009 again
weakened mineral exports. The world recession reduced overall
economic growth in the DRC in 2009 to half of that in 2008,
although 2010 GDP growth is estimated at 6%. The current
government presides over what the GAO describes as "an
unstable security situation, weak governance, mismanagement of
its vast natural resources, and lack of infrastructure are
major interrelated challenges that impede efforts" to address
key domestic issues.
3)Impact of the social and economic unrest on communities : For
more than a decade, various federal and international
government and nongovernmental organizations (NGOs) have
SB 861
Page 5
expressed concern that the DRC is the site of one of the
world's worst humanitarian crises. Since 1998, an estimated 5
million have died as a result of the conflict. Sexual
violence and rape are reported as being widely used to
terrorize and control communities in the eastern region of the
DRC in order to keep the mineral trade flowing and financing
illegal armed groups and military forces.
As recently as September 2010, the GAO published a new report
that examined the connection between minerals trade and human
rights abuses. In its work, the GAO reviewed documents and
interviewed officials from the U.S. Department of State, other
U.S. agencies, the U.N., and foreign governments, as well as
representatives from NGOs and industry.
In its report, the GAO traces the similar supply chains of
tin, tantalum, and tungsten (key minerals mined in eastern
DRC), which are mined by hand, sold to small-scale traders,
carried by porters, transported by truck or airplane to the
border, and sold to trading houses for export. From there,
the minerals travel to neighboring African nations, such as
Rwanda, and most are processed in Asia for use in technology
products, such as mobile telephones. In contrast, gold,
another important DRC mineral, is smuggled directly out of the
DRC and is ultimately used by the jewelry and manufacturing
industries.
The GAO report affirms that "illegal armed groups and some
Congolese national military units commit human rights abuses
and are involved in the mineral trade." The report suggests
that the mineral trade, however, is not the root cause but one
of many factors perpetuating the long-standing conflict. The
GAO report criticizes the U.S. and the international
community's efforts to address the extreme situation in the
DRC as still being in preliminary action stages. As an
example, the GAO report cites that the U.S. State Department's
"white paper" on the DRC lacks concrete, actionable steps
regarding the U.S.'s contribution to help control the conflict
mineral trade. The provisions in the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 are, however,
highlighted as one of the few significant and concrete steps
U.S. agencies are undertaking to address the situation.
4)Conflict minerals : The term "conflict minerals" for purposes
of the DRC Act includes columbite-tantalite (coltan),
SB 861
Page 6
cassiterite, gold, wolframite or their derivatives, or any
other mineral or its derivative determined by the U.S.
Secretary of State to be financing conflict in the DRC or an
adjoining country.
Conflict minerals are used widely by many industries. For
example, wolframite is the main source of the metal tungsten,
which is used to make cutting tools for various industries.
Tungsten is also used to make filaments in light bulbs,
turbine engines for aircraft and energy generation and in
various electronic components. Cassiterite is used in the
production of tin, which, in turn, is used in the solder that
joins electronic components together and as an alloy for other
metals to prevent corrosion. Columbite-tantalite is used
mainly in the manufacture of condensers and micro-electronic
technology (chips and processors), cell phones and nuclear
reactors. It is also used in the production of certain
varieties of steel. Gold is used for both industrial and
commercial purposes including such products as jewelry,
electronics, communications and aerospace equipment.
5)Federal Act and regulations : The DRC Act requires new
disclosures by companies concerning their potential use of
conflict minerals that originated in the DRC. More
specifically, the DRC Act, requires companies to disclose
annually whether they use "conflict minerals," which are
"necessary to the functionality or production" of a product
that they either manufacture, or contract to be manufactured,
that originate from the DRC or adjoining countries.
In December 2010, the SEC released draft rules of the
implementation of DRC Act. The DRC act uses the terms
"person" and the proposed rule uses the term "issuer,"
referring to any entity that issues a security, such as
publically held stock. For the purposes of this analysis, the
term "company" will be used as it more appropriately applies
to the prohibition in SB 861 against contracting with certain
scrutinized companies. Among key elements of the proposed SEC
rule, not already discussed, are the following:
a) The requirements of the proposed rule applies equally to
domestic and foreign companies.
SB 861
Page 7
b) This disclosure is required to be based on a reasonable
inquiry into the country of origin of potential conflict
minerals.
i) If a company concludes that the minerals it uses did
not originate in the DRC or neighboring countries, the
company would disclose this determination and the due
diligence efforts it undertook in reaching this
determination. This "DRC conflict free" disclosure would
then be hosted on the company's Internet website making
the information easily known to the public including
government entities such as DGS.
ii) If the company concludes that its minerals did
originate in the DRC or an adjoining country, or the
company is unable to conclude that its minerals did not
originate in the DRC or adjourning country, the company
is required to disclose these conclusions. This
disclosure must be hosted on the company's website, be
made as an exhibit to the company's annual report, and A
Conflict Minerals Report, as described below, is required
to be submitted to the SEC.
c) The Conflict Minerals Report is required to include a
description of the measures the company has taken to
exercise due diligence on the source and chain of custody
of its conflict minerals, including a certified independent
private sector audit of the Conflict Minerals Report that
identifies the auditor. The Conflict Minerals Report is
also required to include a description of products
manufactured or contracted to be manufactured containing
conflict minerals and the facilities used to process those
conflict minerals.
The SEC has authority to take action against companies that
fail to comply with the DRC Act for the period covering the
first full fiscal year following the promulgation of the rule.
Although due in April 2011, the final regulations have not
been filed by the SEC.
SB 861 would prohibit a state agency to contract with a
SB 861
Page 8
company that has been found to be a company in violation of
the DRC Act by final judgment or settlement, and the company
has failed to remedy or cure the violation in a manner
acceptable to the SEC. The bill has no known opposition,
including the business community directly impacted by the
provisions of the measure. This is, in part, because of the
seriousness of some mineral extraction activities financially
supporting paramilitary and illegal military activities which
has led to extreme acts of violence against the innocent. In
addition, the author has chosen a trigger mechanism for state
sanctions that does not take effect until a company has had an
opportunity to fully exercise all appeals before the SEC.
6)Power of disclosure : In an increasingly violent world where
drug cartels, terrorist groups and unauthorized paramilitary
directly challenge government controls and the safety of
individuals, coordinated actions by a broad-base of
international players can be effective. At one time, the
actions and influence of these groups were isolated to
specific regions. Today, however, given the ease of travel
and global supply chains for even simple products, such as
light bulbs, geographic boundaries have become less important.
In the specific case of the DRC, minerals essential to the
production of advanced technology devices (including for
military/national security purposes) have been documented as
being controlled by groups of violent individuals engaged in
ongoing illegal activities. This situation results in
providing both a protected location for the nurturing of
illegal military "safe havens," as well as providing a
lucrative funding source for continuing the
terrorists/paramilitary activities. SB 861 leverages SEC's
mandate to bring greater transparency to the extraction and
movement of conflict minerals. Collectively, these measures
and others across the world change the financial risk/reward
system for using conflict minerals by creating added value for
utilizing legitimate mineral extraction facilities and
potentially opening new markets and opportunities for "DRC
conflict free" products.
7)Amendments : Staff understands that that the following
amendments will be proposed at the hearing:
o Modify section 10490 (c) relating to the point at which
a person will no longer be regarded as a "scrutinized
SB 861
Page 9
company" to include when the person files an amended or
corrective filing with the SEC that corrects the specified
violation(s).
o Clarify that the prohibition applies to state contracts
relating to information technology and communication
contracts.
In addition, the committee may wish to include direction to
the DGS to include procedures for implementing this measure
within the State Administrative Manual and the State
Contracting Manual in order to ensure the measure is
implemented in a cost-effective manner. The SEC will have a
public list of companies that have been found to be in
violation of the DRC Act and that a final judgment, settlement
or administrative action has been brought by the SEC. State
contracting staff will need to be directed on how to quickly
access that information and check on whether the company has
subsequently remedied or cured the violation.
1)Related Legislation : The following is a list of related
legislation:
a) SB 1231 (Corbett) - Sweatfree Procurement Policy : This
bill would have enacted various substantive and clarifying
changes to existing provisions of the Public Contract Code
(Section 6108) related to the "sweatfree" procurement
policy and code of conduct. Status: The bill was vetoed
by the Governor, 2010.
b) SB 657 (Steinberg) - California Transparency in Supply
Chains Act of 2010 : This bill requires, beginning January
1, 2012, retail sellers and manufacturers doing business in
the state to disclose their efforts to eradicate slavery
and human trafficking from their direct supply chains for
goods offered for sale in the state. Status: Signed by
the Governor, Chapter 657, Statutes of 2010.
c) AB 1650 (Feuer) - Procurement Prohibition on Iran Energy
Section Related Companies : This bill prohibits persons
engaging in investment activities in Iran's energy sector,
as specified, from bidding or entering into contracts with
a public entity for goods or services. Status: Signed by
the Governor, Chapter 573, Statutes of 2010.
SB 861
Page 10
d) AB 498 (Hernández) - Procurement Disclosure for Sudan
Related Companies : This bill requires a company that bids
or submits a proposal for a contract for goods and services
with a state agency to self-certify that it is not a
scrutinized company engaged in specified activities in
Sudan. Status: The bill was signed by the Governor,
Chapter 272, Statutes of 2008.
e) AB 1089 (Hernández) - Procurement Prohibition on Sudan
Related Companies : This bill would have required DGS to
identify a list of companies that the state has, or could
have, a contract with that also conducts business
operations in Sudan. Also, would have prohibited state
agencies from entering into contracts with such companies.
Status: The bill was held in Senate Appropriations
Committee, 2008.
REGISTERED SUPPORT / OPPOSITION :
Support
The International Corporate Accountability Roundtable (sponsor)
Enough! (sponsor)
Amnesty International
Boston Common Asset Management
California Province of the Society of Jesus
Calvert Asset Management
Catholic Health East
Christian Brothers Investment Services
Congregation of Sisters of St. Agnes, Fond du Lac, WI
Dominican Sisters of San Rafael
EarthRights International
Global Witness
Human Rights First
Human Rights Watch
Individual, Starr King School for Ministry
Interfaith Center on Corporate Social Responsibility
Investor Environmental Health Network
Marianist Province of U.S.
Midwest Coalition for Responsible Investment
Midwest Coalition for Responsible Investment
PaxWorld Management LLC
Responsible Sourcing Network
Sister of the Holy Family
Sisters of St. Francis of Philadelphia
SB 861
Page 11
Sisters of St. Joseph of Springfield, MA
Social Responsibility Coordinator JOLT
Spring Water Asset Management
The Social Equity Group
The Sustainable Group at Loring, Wolcott & Coolidge
Trillium Asset Management
Tri-State Coalition for Responsible Investment
US Social Investment Forum
Zevin Asset Management, LLC
The International Corporate Accountability Roundtable (sponsor)
Enough! (sponsor)
Amnesty International
Boston Common Asset Management
California Province of the Society of Jesus
Calvert Asset Management
Catholic Health East
Christian Brothers Investment Services
Congregation of Sisters of St. Agnes, Fond du Lac, WI
Dominican Sisters of San Rafael
EarthRights International
Global Witness
Human Rights First
Human Rights Watch
Individual, Starr King School for Ministry
Interfaith Center on Corporate Social Responsibility
Investor Environmental Health Network
Marianist Province of U.S.
Midwest Coalition for Responsible Investment
Midwest Coalition for Responsible Investment
PaxWorld Management LLC
Responsible Sourcing Network
Sister of the Holy Family
Sisters of St. Francis of Philadelphia
Sisters of St. Joseph of Springfield, MA
Social Responsibility Coordinator JOLT
Spring Water Asset Management
The Social Equity Group
The Sustainable Group at Loring, Wolcott & Coolidge
Trillium Asset Management
Tri-State Coalition for Responsible Investment
US Social Investment Forum
Zevin Asset Management, LLC
Opposition
SB 861
Page 12
None known
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090