BILL ANALYSIS Ó
AB 978
Page 1
Date of Hearing: April 9, 2013
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
Jose Medina, Chair
AB 978 (Blumenfield) - As Introduced: February 22, 2013
SUBJECT : Financial Institutions: Iran Sanctions
SUMMARY : Requires the Commissioner of Financial Institutions (CFI) to
prescribe regulations for licensees that maintain a correspondence
account or a payable-through account with a foreign institution for
the purpose of compliance, as specified, under the federal
Comprehensive Iran Sanctions, Accountability, and Divestment Act of
2010 (Iran Sanctions Act). Specifically, this bill :
1)Makes findings and declaration that, among other things, state:
a) The U.S. has determined that the Government of Iran's
continued development of unconventional weapons and ballistic
missiles and its support of international terrorism represent a
serious threat to the U.S., Israel, and other U.S. allies around
the world.
b) The federal Iran Sanctions Act strictly limits the ability of
foreign financial institutions to open or maintain correspondent
accounts or payable-through accounts with U.S. financial
institutions, if they are found to be assisting the Government of
Iran in acquiring weapons of mass destruction, supporting
terrorist organizations, subverting U.N. Security Council
sanctions on Iran, launder money for the Government of Iran, or
provide financial services for Iran's Revolutionary Guard Corp.
These limits include civil and criminal penalties on U.S.
financial institutions found to be assisting in Iran Sanctions
Act violations.
c) It is within California's best interest to not engage in
business with foreign companies that have business activities
that benefit foreign states that commit egregious human rights
violations, aid nuclear weapons proliferation, and supports
terrorism.
d) In 2010, California enacted statute that prohibits companies
with certain investments in Iran from entering into contracts for
goods and services with state or local governments.
AB 978
Page 2
2)Requires the CFI to develop regulations that require certain
licensees to establish due diligence policies, procedures, and
controls that will assist them in recognizing when the Secretary of
the U.S. Treasury has determined that the foreign financial
institution is knowingly engaged in activities that are subject to
sanctions under the Sanctions Act. These regulations would apply to
licensees that maintain correspondence accounts and payable-through
accounts with a foreign financial institution.
3)Requires licensees that maintain a correspondence account or a
payable-through account with a foreign financial institution to
annually certify that, to the best of their knowledge, the foreign
institution is not knowingly engaged in activities that are subject
to sanctions under the Iran Sanctions Act.
4)Includes a crimes and infractions disclaimer.
EXISTING FEDERAL LAW , the Iran Sanctions Act, requires the U.S.
Department of the Treasury to prohibit, or impose strict conditions
on, the opening or maintaining in the U.S. of a correspondent account
or a payable-through account for a foreign financial institution which
the U.S. Department of the Treasury finds knowingly facilitates the
efforts of the government of Iran to acquire or develop weapons of
mass destruction, or provide support for organizations designated as
foreign terrorist organizations. This includes the efforts of the
Central Bank of Iran or any other Iranian financial institution,
Iran's Islamic Revolutionary Guard Corps, and other individuals or
third parties. In enforcement of this law against U.S. persons
(including corporations), the law requires that the person accused
knew or should have known that they were violating the act.
EXISTING STATE LAW :
1)Specifies that the CFI is responsible for the regulation and
supervision of financial institutions licensed by the Department of
Financial Institutions.
2)Defines a licensee to mean any bank, savings association, credit
union, transmitter of money abroad, issuer of payment instruments,
issuer of traveler's checks, insurance premium finance agency, and
business and industrial development corporation that is authorized
by the commissioner to conduct business in this state.
FISCAL EFFECT : Unknown
AB 978
Page 3
COMMENTS :
1)Author's Purpose : According to the author, "California continues to
aid Congress in its efforts to increase economic pressure on Iran to
cease its pursuit of nuclear weapons - one of the gravest threats to
security in the Middle East and the world. In 2012, the Legislature
passed AB 2160 which that became law to disallow investments in Iran
from assets that would otherwise contribute to the evaluation of
financial solvency of insurers operating in California. In 2010,
the Legislature passed AB1650 that became law to prohibit state and
local governments from contracting with companies known to be doing
restricted business in Iran's energy sector, ensuring that
California tax dollars do not support companies whose investments
support Iran's nuclear program.
AB 978 would codify into state law the federal requirement that all
state financial institutions certify that they have adopted
policies, procedures and controls in accordance with rules
established by the Office of Financial Regulation to detect and
assure the financial institution does not knowingly maintain any
correspondent accounts or payable-through accounts with any
financial institution that does business with Iran or any other
terrorist organization designated by the US Government. By requiring
state-chartered financial institutions to follow a state
certification process, California would continue to aid Congress in
sanctions against Iran."
2)Framing the Policy Issues : This bill directs the CFI to develop
regulations requiring licensees to establish policies to prevent the
maintenance and opening of correspondent accounts and
payable-through accounts with foreign financial institutions that
knowingly assist Iranian institutions subject to sanctions under the
Iran Sanctions Act. As increasingly sophisticated techniques are
used by Iran to subvert economic sanctions, it is important that
California establish a sufficient regulatory environment to address
this matter of international concern, without disrupting legitimate
commerce.
In making the case for higher scrutiny, the author states that
subversion of U.S financial sanctions by Iran is a recognizable
threat to national and international security. This analysis
provides background on the scope of economic sanctions imposed on
Iran and their enforcement procedures, and details on techniques
used by foreign financial institutions to subvert financial
sanctions.
AB 978
Page 4
3)Resolution 1929 and the Iran Sanctions Act : In June of 2010, the
United Nations Security Council adopted Resolution 1929, the fourth
in a series of resolutions imposing sanctions on Iran for nuclear
activities. Among its measures, Resolution 1929 calls on nations to
prevent any financial service and to freeze any asset that could
contribute to Iran's nuclear activities. More specifically, nations
are also called upon to prohibit new banking relationships with
Iran, including correspondent banking relationships, if there is a
suspected link to proliferation. Since the adoption and
implementation of the recommendations in Resolution 1929 by the
European Union, U.S., Canada, Japan, South Korea, and others, Iran's
access to the international financial system has been significantly
limited.
One month following the approval of Resolution 1929, President Barak
Obama signed the Iran Sanctions Act (July 2010), which further
strengthened U.S. sanctions against Iran by specifically targeting
its energy and financial industries.
4)Economic and Financial Sanctions : Under the Sanctions Act, imports
of goods and services of Iranian origin into the U.S. (either
directly or through a third country) are generally prohibited, with
limited exceptions for personal items. Exports from the U.S. of
goods, technologies, or services (either directly or indirectly) to
Iran are also generally prohibited, unless licensed by the Office of
Foreign Assets Control (OFAC). Exceptions are made for articles
intended to relieve human suffering, such as clothing, food, and
medical supplies. U.S. persons are also prohibited from
facilitating any transactions with the intent of subverting the Iran
Sanctions Act.
Financial transactions between U.S. and Iranian financial
institutions are also generally prohibited. In some cases, funds
transfers through third-country banks are permitted for several
types of underlying instances, including: noncommercial family
remittances, travel-related remittances, and transactions authorized
by OFAC. U.S. persons are prohibited from engaging in any
transactions with banks OFAC has identified for their involvement in
the financing of either weapons of mass destruction or terrorism.
5)Use of Correspondent and Payable-Through Accounts : While targeted
and coordinated efforts among nations have severely limited legal
access to the international financial system, Iranian financial
institutions continue to gain illegal access to U.S. financial
AB 978
Page 5
institutions. OFAC has identified several evasive practices
including the use of third-country exchange houses and trading
companies and the use of correspondent accounts and payable-through
accounts.
Lawful uses of correspondent accounts are important for
international and foreign businesses because they allow these
businesses to take advantage of services that may be performed more
economically or efficiently by U.S. banks, which ultimately
facilitates international trade and commerce. Though important to
the international finance structure, these types of accounts are
also susceptible to abuse because the end users of these accounts
are not necessarily subjected to the same level of scrutiny that a
U.S. financial institution would use on its own customers.
OFAC has found specific instances where Iranian institutions have
accessed the U.S. financial system through the use of third-party
financial intermediaries and other evasive practices. Examples
include omitting references to an Iranian address, omitting Iranian
persons from the originator or beneficiary fields, and through
transferring funds through a third-country institution on behalf of
an Iranian institution without referencing their involvement.
6)Types Financial Institutions Subject the Sanctions Act : The
Sanctions Act is applicable to all banks that operate within the
U.S., including foreign financial institutions that operate branches
within the U.S. The Iran Sanctions Act also applies to money
service businesses, trust companies, insurance companies, securities
brokers and dealers, commodities exchanges, clearing corporations,
investment companies, employee benefit plans, and U.S. holding
companies, U.S. affiliates, or U.S. subsidiaries of any of these
entities.
7)Enforcement procedures : The Iran Sanctions Act enforcement has two
components with a different federal agency responsible for the
implementation and enforcement of those sanctions:
a) International Enforcement: Identification and subsequent
blacklisting of foreign financial institutions that are acting as
third-party intermediaries for prohibited Iranian interests is
the responsibility of OFAC. OFAC enforces economic and trade
sanctions against targeted foreign countries and regimes,
terrorists, international narcotics traffickers, those engaged in
activities related to the proliferation of weapons of mass
destruction, and other threats to the national security, foreign
AB 978
Page 6
policy, and the U.S. economy.
When alerted, OFAC investigates the foreign financial institution
and makes a determination. If the foreign financial institution
is found to be in non-compliance with the Sanctions Act, it is
added to the list of Foreign Financial Institutions Subject to
Part 561, also known as the "Part 561 list." U.S. financial
institutions are prohibited from opening or maintaining a
correspondent account or payable-through account with any
institution on the Part 561 List.
b) Domestic Enforcement : Establishment of due diligence policies
for U.S. financial institutions, including state chartered
institutions, is the responsibility of Financial Crimes
Enforcement Network (FinCEN). FinCEN is charged with the
detection and prevention of the misuse of correspondence accounts
and payable-through accounts by third-party foreign financial
institutions and can apply sufficient penalties to ensure
compliance. FinCEN is also the primary agency that prevents and
detects domestic and international money laundering and other
financial crimes.
Though FinCEN is the agency in charge of determining the standard
of due diligence required, FinCEN is well behind schedule for
developing these regulations. U.S. financial institutions
currently have no affirmative duties regarding the identification
of Iran Sanction Act violators. The only enforcement mechanism
in place (as of April 4, 2013) is the duty to inquire if FinCEN
makes such a request.
Given the lack of affirmative action by the federal regulating
agency responsible for U.S. based financial institutions, AB 978
fills a void by mandating the development of appropriate internal
controls for state chartered banks. Existing law (§332 of the
Financial Code), already authorizes the CFI to make changes through
regulation in instances where federal laws or regulations applying
to national banking associations are substantively different from
the provisions of the state Financial Code. For clarity, the
Committee may wish to specify that when the federal FinCEN
regulations are adopted, the CFI review state regulations for
possible conformity.
8)Penalties for Non-compliance with the Sanctions Act : Any foreign
financial institution found to be in non-compliance with the
AB 978
Page 7
Sanctions Act is added to the Part 561 List, severely prohibiting
their ability to engage in financial transactions with U.S.
financial institutions. Federal laws also prescribes domestic
penalties for any person that violates, attempts to violate,
conspires to violate, or causes a violation of Sanctions Act may be
subject to both civil and criminal penalties.
a) Civil Penalty : A civil penalty may be imposed that is not to
exceed the greater of $250,000 or an amount that is twice the
amount of the transaction that is the basis of the violation; and
b) Criminal Penalty : A person that willfully commits, willfully
attempts to commit, or willfully conspires to commit, or aids or
abets in the commission of a violation shall, upon conviction, be
fined no more than $1,000,000 or if a natural person, may be
imprisoned for not more than 20 years, or both.
State law prescribes lesser penalties for licensees including up to
$1,000 a day, provided that the aggregate penalty of all offenses in
any one action against any licensee or subsidiary of a licensee
shall not exceed $50,000. Higher penalties may be applied if a
licensee or subsidiary of the licensee that has been found to have
recklessly ($5,000 per day not to exceed $75,000) or knowingly
($10,000 per day not to exceed the value of 1% of total licensee
assets) violated a law, order, condition, or written agreement, as
specified. State law also authorizes the CFI to pursue other
administrative actions, as well as court actions in order to enforce
specified laws.
The author may wish to specify penalties and/or actions which the
CFI is to take for violations determined pursuant to this bill,
including higher penalties, notice requirements to FinCEN, and
cooperating in any federal investigation.
9)Financial Privacy under California Law : Under Government Code
Section 7470, no officer, employee, or agent of a state or local
agency or department may request or receive copies of the financial
records of any customer from a financial institution except under
limited circumstances. Given California's stringent financial
privacy laws, there is the possibility of conflict depending on the
regulations.
10)Clarifying Amendments : AB 978 proposes the development of
regulations to be used by licensees to comply with the Iran
AB 978
Page 8
Sanctions Act. It may be helpful to more clearly define the purpose
of each of the two regulations proposed in AB 978. As currently
drafted, the first regulation appears to only address how to track
U.S. Treasury actions and the second regulation requires a broad
certification that the licensee is not doing business with foreign
financial institution that knowingly violates any element of the
Sanctions Act. The California's Bankers Association has also asked
for more clarity around the certification issue. Further, it may be
useful to address the use of third-country financial intermediaries
in the regulatory process.
11)Related Bill s: Below is a list of related legislation.
a) AB 1650 (Feuer/Blumenfield) Iran Contract Prohibitions : This
bill prohibits California governments from contracting with
companies doing restricted business in Iran. Status: Signed by
the Governor, Chapter 573, Statutes of 2010.
b) AB 2160 (Blumenfield) Iran Investment Prohibitions : This bill
prohibits investments in Iran from assets that would otherwise be
considered when considering financial solvency to do business in
California. Status: Signed by the Governor, Chapter 479,
Statutes of 2011.
12)Double Referral : This measure was referred to two policy
committees by the Assembly Committee on Rules. Should AB 978 pass
the Assembly Committee on Jobs, Economic Development and the
Economy, the measure will be referred to the Assembly Committee on
Banking for further policy review.
REGISTERED SUPPORT / OPPOSITION :
Support
Jewish Public Affairs Committee of California
Opposition
None received
Analysis Prepared by : Toni Symonds and Zachary Hutsell / J., E.D. &
E. / (916) 319-2090
AB 978
Page 9