AB 978 Assembly Bill - Bill Analysis

BILL ANALYSIS Ó

AB 978
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CORRECTED : 05/17/2013 Changes per consultant.

ASSEMBLY THIRD READING
AB 978 (Blumenfield)
As Amended April 25, 2013
Majority vote

ECONOMIC DEVELOPMENT 8-0 BANKING & FINANCE 11-0

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|Ayes:|Gatto, Harkey, Bigelow, | | |
| |Bocanegra, Bradford, Ian | | |
| |Calderon, Campos, Eggman, | | |
| |Gomez, Hall, Ammiano, | | |
| |Linder, Pan, Quirk, | | |
| |Wagner, Weber | | |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Donnelly | | |
| | | | |
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SUMMARY : Requires the Commissioner of Financial Institutions (CFI)
to ensure that state licensed financial institutions that maintain a
correspondence account or a payable-through account with a foreign
institution demonstrate compliance during certain examinations with
the federal Comprehensive Iran Sanctions, Accountability, and
Divestment Act of 2010 (Iran Sanctions Act) and related federal
regulations and presidential executive orders, as specified. In the
case of violations, the CFI is authorized to bring state action and
is required to forward evidence to the U.S. Treasury.

The terms of the bill are inoperative should Iran be removed from
the U.S. Department of State's list of counties that support acts of
international terrorism or the U.S. President certifies that Iran
has ceased its efforts relative to nuclear explosive devices of

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related technologies, as specified.

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 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 : According to the Assembly Appropriations Committee,
implementation of this bill would result in minor and absorbable
costs to the Department of Financial Institutions.

COMMENTS : This bill directs the CFI to ensure licensees have
established appropriate policies and are undertaking practices that
prevent the maintenance and opening of correspondent accounts and
payable-through accounts with foreign financial institutions that
illegally assist Iranian institutions. As increasingly
sophisticated techniques are used by Iran to subvert economic
sanctions, this bill would use the existing licensee examination
process to address this matter of international concern.

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 a brief summary 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. Additional background was provided in the policy

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analyses for the Assembly Jobs, Economic Development, and the
Economy Committee and the Assembly Banking and Finance Committee.

Background: 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 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
Barack Obama signed the Iran Sanctions Act (July 2010), which
further strengthened U.S. sanctions against Iran by specifically
targeting its energy and financial industries. 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 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.

Under the Iran 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 Sanctions Act.

Financial transactions between U.S. and Iranian financial
institutions are also generally prohibited. In some cases, fund
transfers through third-country banks are permitted for several
types of underlying instances, including: noncommercial family
remittances, travel-related remittances, and transactions authorized

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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.

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 institutions. OFAC has identified several evasive
practices including the use of third-country exchange houses and
trading companies, the use of correspondent accounts, and
payable-through accounts.

Any foreign financial institution found to be in non-compliance with
the Iran Sanctions Act is added to the OFAC Foreign Financial
Institutions Subject to Part 561, which severely prohibits 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 the 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 million, or if a natural person, may be
imprisoned for not more than 20 years, or both.

In addition to fines and actions under the Iran Sanctions Act, the
Assembly Banking and Finance Committee's Analysis provided
information on how the U.S. Treasury applied more general laws to
inhibit Iran's access to U.S. financial markets. In December 2009,
U.S. Treasury announced that Credit Suisse would pay a $536 million
settlement for illicitly processing Iranian transactions with U.S.
banks. And, in June 2012, Dutch bank ING 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.

Individual states have also been active. In the August 2012 case of
Standard Chartered, the company agreed to pay a $340 million

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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 bank is alleged to have
schemed for over a decade to hide over 60,000 transactions totaling
more than $250 billion for Iranian clients. For example, Standard
Chartered 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 of federal law

California law authorizes 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.

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

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