BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 978
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          Date of Hearing:   April 22, 2013

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                               Roger Dickinson, Chair
                  AB 978 (Blumenfield) - As Amended:  April 15, 2013
           
          SUBJECT  :   Financial Institutions: Iran sanctions

           SUMMARY :   Requires the Commissioner of Department of Financial  
          Institutions (Commissioner) to prescribe regulations to require  
          state chartered banks and credit unions (licensees) that  
          maintain a correspondent account or a payable-through account  
          with a foreign financial institution to establish due diligence  
          policies, procedures and controls in order to comply with Iran  
          sanctions.  Specifically,  this bill  :  

          1)Provides that the Commissioner shall prescribe regulations to  
            require licensees that maintains a correspondent account or a  
            payable-through account with a foreign financial institution  
            to establish due diligence policies, procedures, and controls  
            to comply with the Federal Comprehensive Iran Sanctions,  
            Accountability, and Divestment Act of 2010 (CISADA).

          2)Requires licensees with correspondent accounts or a  
            payable-through account with a foreign financial institution  
            to establish at every 12-month exam period that the licensee  
            is not knowingly engaging with foreign financial institutions  
            in violation of CISADA.

          3)Specifies that no licensee shall maintain specified accounts  
            with a foreign institution that the United States Treasury  
            Department's Office of Foreign Assets Control (OFAC) has  
            placed on the list of foreign institutions in violation of  
            CISADA.

          4)Requires the Commissioner to review all federal regulations  
            related to financial institution compliance with CISADA with  
            60 days of implementation and make appropriate modification to  
            state regulations.

          5)Provides for an administrative fine of up to, but not  
            exceeding $100,000.

          6)Specifies that the Commissioner shall refer all pertinent  
            information regarding potential violations to the Secretary of  








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            the United States Treasury.  

          7)Requires a state chartered bank, when under examination by the  
            Commissioner, to demonstrate that they are compliance with  
            CISADA.

          8)Provides that state chartered bank that has been examined by a  
            federal regulaters and that maintains a correspondent account  
            or a payable-through account with a foreign institution shall  
            submit a declaration of compliance with the regulations  
            required under this legislation.

           EXISTING STATE LAW  

          1)Pursuant to the Iran Contracting Act of 2010, 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. [Public Contract Code,  
            Section 2200 et seq].

          2)Prohibits the use of investments in companies doing business  
            in the energy and military sectors of Iran to satisfy an  
            insurer's capital requirements. [Insurance Code, section  
            1241.2].  

          3)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.)

           FISCAL EFFECT  :   Unknown

           COMMENTS  :   

          According to information provided by the author, this bill is  
          necessary as:

               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  








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               passed AB 2160 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.  

          United States' sanctions have been the primary feature of U.S.  
          policy toward Iran since its 1979 revolution.  Bilateral  
          sanctions and those of the United Nations are more recent, only  
          since 2006.  

          The Iran Sanctions Act (ISA) is the core of the energy-related  
          U.S. sanctions. It took advantage of the opportunity for the  
          United States to try to harm Iran's energy sector when Iran, in  
          November 1995, opened the sector to foreign investment. To  
          accommodate its insistence on retaining control of its national  
          resources, Iran used a "buy-back" investment program in which  
          foreign firms gradually recoup their investments as oil and gas  
          is discovered and then produced. With input from the  
          Administration, on September 8, 1995, Senator Alfonse D'Amato  
          introduced the "Iran Foreign Oil Sanctions Act" to sanction  
          foreign firms' exports to Iran of energy technology. A revised  
          version instead sanctioning investment in Iran's energy sector  
          passed the Senate on December 18, 1995 (voice vote). On December  
          20, 1995, the Senate passed a version applying the provisions to  
          Libya, which was refusing to yield for trial the two  
          intelligence agents suspected in the December 21, 1988, bombing  
          of Pan Am 103. The House passed H.R. 3107, on June 19, 1996  
          (415-0), and then concurred on a Senate version adopted on July  
          16, 1996 (unanimous consent). The Iran and Libya Sanctions Act  
          was signed on August 5, 1996 (P.L. 104-172). Since its enactment  
          in 1996, ISA has attracted substantial attention because it is  
          an "extraterritorial sanction"-it authorizes U.S. penalties  
          against foreign firms, many of which are incorporated in  
          countries that are U.S. allies. American firms are separately  
          restricted from trading with or investing in Iran under separate  
          U.S. executive orders. Its application has been further expanded  
          by several laws enacted since 2010.  In addition, several  
          executive orders have been issued that authorize the application  
          of ISA sanctions to specified violators.









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          Originally called the Iran and Libya Sanctions Act (ILSA), ISA  
          was enacted to try to deny Iran
          the resources to further its nuclear program and to support  
          terrorist organizations such as
          Hizbollah, Hamas, and Palestine Islamic Jihad.  Iran's petroleum  
          sector generates about 20% of
          Iran's GDP (which is about $870 billion), about 80% of its  
          foreign exchange earnings, and about
          50% of its government revenue for 2012. Iran's oil sector is as  
          old as the petroleum industry itself (early 20th century), and  
          Iran's onshore oil fields are past peak production and in need  
          of
          substantial investment.  Iran has 136.3 billion barrels of  
          proven oil reserves, the third largest after
          Saudi Arabia and Canada. With the exception of relatively small  
          swap and barter arrangements
          with neighboring countries, virtually all of Iran's oil exports  
          flow through the Strait of Hormuz,
          which carries about one-third of all internationally traded oil  
          exported by Iran and other countries
          on the Persian Gulf.  Iran's large natural gas resources (940  
          trillion cubic feet, exceeded only by Russia) were virtually  
          undeveloped when ISA was first enacted. Its gas exports are  
          small, and most of its gas is injected into its oil fields to  
          boost their production.
          
          ISA consists of a number of "triggers"-transactions with Iran  
          that would be considered
          violations of ISA and could cause a firm or entity to be  
          sanctioned under ISA's provisions. When
          triggered, ISA provides a number of different sanctions that the  
          President could impose that
          would harm a foreign firm's business opportunities in the United  
          States. ISA does not, and
          probably could not practically, compel any foreign government to  
          act against one of its firms.
          Sanctions imposed against violators are discussed below, unless  
          specified.
          
          In the 111th Congress, H.R. 2194, (Iran Refined Petroleum  
          Sanctions Act) was passed by the House on December 15, 2009, by  
          a vote of 412-12. A bill in the Senate, the "Dodd-Shelby  
          Comprehensive Iran Sanctions, Accountability, and Divestment  
          Act," (S. 2799), passed the Senate, by voice vote, on January  
          28, 2010. It was adopted by the Senate under unanimous consent  








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          as a substitute amendment to H.R. 2194 on March 11, 2010; it  
          added to the House bill several provisions beyond amending  
          ISA-provisions affecting U.S.-Iran trade and other issues. The  
          conference report resembled the more expansive Senate version.  
          The President signed the final version-the Comprehensive Iran  
          Sanctions, Accountability, and Divestment Act of 2010 (CISADA)  
          on July 1, 2010 (P.L. 111-195), which, among other provisions,  
          amended ISA to make sanctionable additional factors.

          Section 104 of CISADA provides for the Secretary of Treasury to  
          prescribe regulations to forbid banks in the U.S. from opening  
          new correspondent accounts or payable through accounts with  
          banks that process significant transactions for the Iranian  
          government or its affiliates, as well as, any entity that is  
          sanctioned by U.S. executive orders.

          Foreign banks that do not have operations in the United States  
          typically establish correspondent
          accounts or payable-through accounts with U.S. banks as a means  
          of accessing the U.S. financial system and financial industry.  
          The provision leaves it to the Treasury Department to determine  
          what constitutes a "significant" financial transaction. The  
          premise of the provision is that cutting off Iran's access to  
          the international financial system harms Iran's economy  
          primarily by preventing Iranian traders from obtaining letters  
          of credit to buy or sell goods.

          What has occurred as a result of the multitude of Iran  
          sanctions.  The Congressional Research Service in a report  
          published in January of 2013 on Iran Sanctions provides the  
          following:

               The accumulation of international, bilateral, and  
               multilateral sanctions is beginning to take a dramatic toll  
               on Iran's economy-trend increasingly admitted by Iranian  
               leaders. On February 24, 2013, Ahmadinejad presented his  
               proposed 2013-2014 budget and said that "This was a very  
               difficult year for our economy."51 The indicators of the  
               effect of sanctions and mismanagement on Iran's economy  
               include

               Oil Export Declines. Oil sales account for about 80% of  
               Iran's foreign currency earnings, and the proceeds are  
               controlled by the government (Central Bank), not the  
               private sector. The EU oil embargo and the restrictions on  








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               transactions with Iran's Central Bank have dramatically  
               reduced Iran's oil sales. In 2011, Iran exported an average  
               of about 2.5 million barrels per day (mbd). In early March  
               2013, the Energy Information Agency reported that Iran's  
               sales in February 2013 were about 1.28 mbd-roughly half the  
               2011 level. If sustained, this drop will likely deprive the  
               Iranian government of about $50 billion for all of 2013.

               Falling Oil Production. To try to adjust to lost oil sales,  
               Iran began storing some unsold oil on tankers in the  
               Persian Gulf, and it is building new storage tanks on  
               shore. Iran stored about 20 million barrels to try to keep  
               production levels up- shutting down wells risks harming  
               them and it is costly and time consuming to resume  
               production at a shut down oil well. However, that strategy  
               was unsuccessful and Iran overall oil production has fallen  
               to about 2.6 million barrels per day from the level of  
               nearly 4.0 mbd at the end of 2011.

               GDP Decline. The sanctions, and particularly the drop in  
               oil exports, have caused Iran to suffer its first gross  
               domestic product contraction in two decades.  According to  
               a GAO study on the effect on Iran of sanctions since 2010,  
               Iran's GDP likely contracted in 2012 by about 1.4%. Other  
               sources predict that it will contract an additional 1.2% in  
               2013.

               Hard Currency Depletion. The IMF estimated Iran's hard  
               currency reserves to be about $101 billion as of the end of  
               2011, and the reserves are estimated to have fallen to $90  
               billion at the end of 2012. A further decline to about $85  
               billion is expected by the end of 2013.  And the February  
               6, 2013, imposition of sanctions on Iran's ability to  
               repatriate hard currency will likely cause the depletion  
               rate to increase as Iran is virtually forced to conduct  
               trade through barter arrangements.  Analysts at one outside  
               group, the Foundation for the Defense of Democracies,  
               believe Iran's hard currency reserves might be exhausted  
               entirely by July 2014 at current rates of depletion.

               Currency Collapse. The regime has been working to contain  
               the effects of a currency collapse. The value of the rial  
               fell on unofficial markets from about 28,000 to one U.S.  
               dollar to nearly 40,000 to one dollar in one week in early  
               October 2012. Earlier, the rial had fallen from about  








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               13,000 to the dollar in late September 2011 to about 28,000  
               to the dollar as of mid-September 2012- including a  
               significant decline from about 23,000 to the dollar to the  
               28,000 to the dollar level in the first two weeks of  
               September 2012. To try to stretch its hard currency  
               reserve, on October 15, 2012, Iran said it would not supply  
               hard currency for purchases of luxury goods such as cars or  
               cellphones (the last 2 of the government's 10 categories of  
               imports, ranked by their importance). The government is  
               still supplying hard currency for essential and other key  
               imports.  Importers for essential goods can obtain dollars  
               at the official rate of 12,260 to the dollar, and importers  
               of other key categories of goods can obtain dollars at a  
               new "reference rate" of 28,500 to the dollar. The regime  
               also threatened to arrest the unofficial currency traders  
               who sell dollars at less than the rate of about 28,500 to  
               the dollar. However, unofficial trading moved offshore to  
               the emirate of Dubai, and observers say the market rate  
               there is about 39,000 to the dollar in mid-February 2013.

               Inflation. Some Iranians and outside economists worry that  
               hyper-inflation might result from the currency collapse.  
               The Iranian Central Bank estimated on January 9, 2013, that  
               the inflation rate is about 27%-the highest rate ever  
               acknowledged by the Bank-but many economists believe the  
               actual rate is between 50% and 70%. This has caused Iranian  
               merchants to withhold goods or shut down entirely because  
               they are unable to set accurate prices. Almost all Iranian  
               factories depend on imports and the currency collapse has  
               made it difficult for Iranian manufacturing to operate. In  
               order to keep the prices of pistachio nuts down, in  
               February 2013 the government placed a moratorium on exports  
               of that product.  Observers say that, to try to deflect the  
               effect of sanctions, some Iranian importers of foreign  
               goods have shifted to exporting goods from Iran-  
               benefitting from the fall of the value of Iran's currency.  
               And many Iranians have accelerated their consumer purchases  
               for fear of further price increases ahead-causing a notable  
               increase in business, according to many Iranian merchants.

               Shipping Difficulties. Beyond the issue of the cost of  
               imported goods, the Treasury Department's designations of  
               affiliates and ships belong to Islamic Republic of Iran  
               Shipping Lines (IRISL) reportedly are harming Iran's  
               ability to ship goods at all, and have further raised the  








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               prices of goods to Iranian import-export dealers. Some  
               ships have been impounded by various countries for  
               nonpayment of debts due on them.

               Domestic Payments Difficulties. Suggesting Iran's operating  
               budget is already struggling, some reports say the  
               government has fallen behind in its payments to military  
               personnel and other government workers. Others say the  
               government has begun "means testing" in order to reduce  
               social spending payments to some of the less needy  
               families. In late 2012, it also postponed phase two of an  
               effort to wean the population off subsidies, in exchange  
               for cash payments of about $40 per month to 60 million  
               Iranians. Phase one of that program began in December 2010  
               after several years of debate and delay, and was praised  
               for rationalizing gasoline prices. Gasoline prices now run  
               on a tiered system in which a small increment is available  
               at the subsidized price of about $1.60 per gallon, but  
               amounts above that threshold are available only at a price  
               of about $2.60 per gallon, close to the world price. Before  
               the subsidy phase out, gasoline was sold for about 40 cents  
               per gallon.

               Auto Production. Press reports indicate that sanctions have  
               caused Iran's production of automobiles to fall, as of  
               early 2013, by about 40% from 2011 levels. Iran produces  
               cars for the domestic market, such as the Khodro, based on  
               licenses from European auto makers such as Renault and  
               Peugeot.

               Flights Curtailed. Because of the decline in Iran's trade  
               with European countries, KLM and Austria Airlines announced  
               in January 2013 that they would be ending flights to Iran  
               later in 2013. Lufthansa, some other European airlines, and  
               most airlines in the Persian Gulf, Middle East, and South  
               Asia region still fly to Iran regularly.

               Mitigation Attempts. Mitigating some of the effects are  
               that some private funds are going into the Tehran stock  
               exchange and hard assets, such as property. However, this  
               trend generally benefits the urban elite.

          Prior to the enactment of CISADA the Treasury Department issued  
          fines against financial institutions to pressure them into  
          ceasing business with Iran.   In 2004, the Treasury Department  








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          fined UBS $100 million for the unauthorized movement of U.S.  
          dollars to Iran and other sanctioned countries, and in December  
          2005, the Treasury Department fined Dutch bank ABN Amro $80  
          million for failing to fully report the processing of financial  
          transactions involving Iran's Bank Melli.  In the biggest such  
          instance, on December 16, 2009, the Treasury Department  
          announced that Credit Suisse would pay a $536 million settlement  
          to the United States for illicitly processing Iranian  
          transactions with U.S. banks. In June 2012, Dutch bank IMG  
          agreed to pay a $619 million penalty for moving billions of  
          dollars through the U.S. financial system, using falsified  
          records, on behalf of Iranian and Cuban clients. 

          The most recent action occurred when Standard Chartered agreed  
          in August 2012 to a $340 million settlement with New York State  
          regulators for allegedly processing transactions with Iran in  
          contravention of U.S. regulations.   The settlement was the  
          largest fine ever collected by a single U.S. regulator in a  
          money-laundering case.  The accusations provided that the bank  
          had schemed for over a decade to hide over 60,000 transactions  
          totaling more than $250 billion for Iranian clients.  An  
          interesting component of this case is that New York state  
          banking regulators pursued their action against Standard for  
          violations of several provisions NY state law (Copy of regulator  
          order here,  http://www.dfs.ny.gov/banking/ea120806.pdf  ).  For  
          example, Standard was accused of failing to maintain accurate  
          books and records, obstructing the regulatory investigation,  
          failing to report crimes and misconduct, falsifying books and  
          reports, filing false instruments, falsifying business records,  
          and engaging in unauthorized Iranian transactions in violation  
          federal law.   

          Financial institutions in the U.S. and California irrespective  
          of state or federal charters must comply with sanctions  
          established by federal statute and/or Presidential executive  
          order.  The mere fact that a bank or credit union is regulated  
          by a state regulator does not lesson, nor detract from their  
          compliance responsibilities with these and a multitude of other  
          federal laws.  A failure of these entities to comply with the  
          myriad of sanctions or the OFAC list could face severe federal  
          penalties.  

           Suggested Amendments  .

          The current language in the bill contains several issues that  








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          need resolution.  In order to clarify intent of AB 978 that  
          state regulators have authority concerning compliance with  
          federal sanctions staff recommends a more straightforward  
          approach.  

             1)   Strike Sections 2 and 3 of bill.

             2)   Insert the following as new Section 2:

               Section _____ is added to Financial Code to read:
               ______(a) The commissioner when conducting examinations  
                    under sections 500 and 14250 shall ensure that a licensee  
               that maintains a correspondent account or payable-through  
               account is in compliance with the Iran Sanctions,  
               Accountability, and Divestment Act of 2010 and associated  
               regulations and Presidential Executive Orders.  If the  
               commissioner finds that a licensee is in violation the  
               commissioner may bring an action in accordance with Section  
               566 or 16200, and shall forward evidence of the violation  
               the United States Treasury Department.
               (b) This section shall cease to be operative if both of the  
               following apply:
               (1) Iran is removed from the United States Department of  
               State's list of countries that have been determined to  
               repeatedly provide support for acts of international  
               terrorism.
               (2) Pursuant to the appropriate federal statute, the  
               President of the United States determines and certifies to  
               the appropriate committee of the Congress of the United  
               States that Iran has ceased its efforts to design, develop,  
               manufacture, or acquire a nuclear explosive device or  
               related materials and technology.
          
           Previous legislation  .

          AB 1650 (Feuer/Blumenfield)of 2010. Chaptered. Prohibits  
          California governments from contracting with companies doing  
          restricted business in Iran.

          AB 2160 (Blumenfield) of 2011. Chaptered. Disallows investments  
          in Iran from assets that would otherwise be considered when  
          considering financial solvency to do business in California.

           REGISTERED SUPPORT / OPPOSITION  :   









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           Support 
           
          None on file.

           Opposition 
           
          None on file.
           
          Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081