BILL ANALYSIS �
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