BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 861
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          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. 








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             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 








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            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 








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            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 








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            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), 








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            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. 









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             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 








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            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 








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               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.









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              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








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          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 
           








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          None known

           Analysis Prepared by  :    Toni Symonds / J., E.D. & E. / (916) 
          319-2090