BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Lou Correa, Chair 2013-2014 Regular Session AB 978 (Blumenfield) Hearing Date: June 5, 2013 As Amended: April 25, 2013 Fiscal: Yes Urgency: No SUMMARY Would require the Department of Financial Institutions (DFI) to ensure that a licensee which maintains a correspondent account or payable-through account is in compliance with the federal Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, associated federal regulations, and any related presidential executive orders. DESCRIPTION 1. Would require the commissioner of Financial Institutions (commissioner), when conducting regulatory examinations of banks and credit unions in accordance with Financial Code Section 500 or 14250, to ensure that a licensee which maintains a correspondent account or payable-through account is in compliance with the federal Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (Public Law 111-195), associated federal regulations, and any related presidential executive orders. 2. Would provide that, if the commissioner discovers a violation, he or she shall bring an action in accordance with Section 566 or Section 16200 of the Financial Code, and shall forward evidence of the violation to the United States Department of the Treasury. 3. Would sunset the bill if both of the following occur: a. 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. b. The President determines and certifies to the appropriate committees of the United States Congress that Iran has ceased its efforts to design, develop, AB 978 (Blumenfield), Page 2 manufacture, or acquire a nuclear explosive device or related materials and technology. EXISTING LAW 4. Requires the commissioner to cause every California state bank and every foreign bank to be examined to the extent and whenever and as often as the commissioner shall deem advisable, but in no case less frequently than once every 12 months (Financial Code Section 500). 5. Requires the commissioner to examine every credit union organized under the laws of this state to the extent and whenever and as often as the commissioner shall deem advisable, but in no case less than once every two years (Financial Code Section 14250). 6. Authorizes the commissioner to bring an action against a bank under his or her jurisdiction in the name of the people of this state in superior court to enjoin any violation of, enforce compliance with, or collect any penalty or other liability imposed under any banking law subject to the jurisdiction of the commissioner, any regulation promulgated under the power of the commissioner, any agreement entered into with the commissioner, or any order issued by the commissioner (Financial Code Section 566). 7. Authorizes the commissioner to bring an action against a credit union under his or her jurisdiction in the name of the people of this state in superior court to enjoin any violation of, enforce compliance with, or collect any penalty or other liability imposed under any credit union law subject to the jurisdiction of the commissioner, or any regulation or order issued pursuant to the powers of the commissioner (Financial Code Sections 14302, 16200, and 16900). COMMENTS 1. Purpose: This bill is intended to add to California's efforts to prevent the improper flow of funds to Iran or to terrorist groups designated as such by the United States government. It does so by requiring DFI to examine depository institutions operating in California for compliance with the federal Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010. AB 978 (Blumenfield), Page 3 2. Background: In the time since the September 11, 2001 terrorist attacks on the United States, Congress has passed, and the President has signed, several pieces of legislation intended to prevent financial institutions operating in the United States from allowing their institutions to be used to hold assets for, transfer assets for, launder assets for, or otherwise use the financial system of the United States to aid enemies of our country. The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 is one of these laws. Generally speaking, that federal Act prohibits persons from knowingly funneling money to identified terrorist groups and/or to the government of Iran, in order to help stop the flow of funds to Iran for the acquisition or development of nuclear weapons capabilities. Among that Act's many provisions is one which requires the Secretary of the Treasury to prohibit or restrict the opening or maintaining in the United States of a correspondent or payable-through account by a foreign financial institution, if that institution knowingly does any of the following: a) facilitates efforts of the Iranian government or Iran's Revolutionary Guard Corps (IRGC) to acquire weapons of mass destruction or support international terrorism; b) engages in dealings with Iranian persons sanctioned by the United Nations Security Council; c) engages in money laundering or facilitates efforts of the Iran Central Bank to aid Iran's weapons of mass destruction program, support Iran's sponsorship of terrorism, or support persons under United Nations Security Council sanction; or d) conducts significant business with the Iranian government, IRGC, its affiliates, or financial institutions whose property or interests are blocked pursuant to the International Emergency Economic Powers Act. The Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 also directs the Secretary of the Treasury to require a domestic financial institution that maintains a correspondent account or a payable-through account in the United States for a foreign financial institution to do one or more of the following: a) perform an audit of activities that may be carried out by the foreign financial institution; b) report to the Department of the Treasury regarding transactions that involve activity which has been sanctioned by the United Nations Security Council; c) AB 978 (Blumenfield), Page 4 certify that the foreign financial institution is not knowingly engaging in any such sanctioned activity; and d) establish due diligence policies designed to detect whether the foreign financial institution has engaged in sanctioned activity. As noted above, that 2010 federal Act is one of many intended to minimize the likelihood that the U.S. financial system will be used to help enemies of the United States. 3. Understanding Terms Relevant To This Bill: A correspondent account is generally understood to mean an account that is established by one financial institution to receive deposits from, make payments on behalf of, or handle other financial transactions for another financial institution. A payable-through account, also known as a pass-through account or a pass-by account, is a checking account marketed to a foreign bank that would otherwise lack the ability to offer its customers access to the United States banking system. Both types of accounts can be valuable, when used for reputable purposes. For example, the payable-through account mechanism has long been used in the United States by credit unions and investment companies to offer their customers the full range of banking services that only a commercial bank has the ability to provide. However, both types of accounts can also pose significant security risks, when used for money laundering and other related criminal activities. 4. Discussion: AB 978 is based on the premise that states can and should assist the federal government in identifying and sanctioning violations of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010. In background material provided to this Committee, the author cites actions taken by the New York State Department of Financial Services against Standard Chartered Bank, a financial institution headquartered in London, with a branch in New York. In August 2012, the New York State Department of Financial Services issued an order against Standard Chartered for activities conducted by Standard Charter's New York branch on behalf of Iranian parties. That department eventually reached a $340 million settlement with Standard Chartered over improper banking practices. Standard Chartered later AB 978 (Blumenfield), Page 5 agreed to forfeit $227 million to the United States Justice Department, and pay an additional $100 million in penalties, for illegally moving millions of dollars through the U.S. financial system on behalf of sanctioned Iranian, Sudanese, Libyan, and Burmese entities. 5. Summary of Arguments in Support: The Jewish Public Affairs Committee of California supports Assemblymember Blumenfield's efforts to ensure that California's financial institutions comply with the federal Comprehensive Iran Sanctions Accountability, and Divestment Act of 2010. 6. Summary of Arguments in Opposition: None received. 7. Amendments: a. Both this bill and California law lack definitions for the terms "correspondent account" and "payable-through account." The federal Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 defines those terms by reference to 31 USC 5318A, which, in turn, defines those terms as follows: The term "correspondent account" means an account established to receive deposits from, make payments on behalf of a foreign financial institution, or handle other financial transactions related to such institution. The term "payable-through account" means an account, including a transaction account (as defined in section 19(b)(1)(C) of the Federal Reserve Act), opened at a depository institution by a foreign financial institution by means of which the foreign financial institution permits its customers to engage, either directly or through a subaccount, in banking activities usual in connection with the business of banking in the United States. In the interest of clarity, staff suggests amending this bill to add a definition for the terms "correspondent account" and "payable through account". Page 5, line 15, after the period, insert: For purposes of this section, correspondent account and payable-through account have the meanings given those terms in section 5318A of Title 31, United States Code. b. The code sections referenced in this bill require correction to further the author's desire to cover all AB 978 (Blumenfield), Page 6 credit unions operating in California under the jurisdiction of DFI. As drafted, one portion of the bill applies only to state-chartered credit unions (not to credit unions chartered elsewhere, which operate branches in California), and another portion of the bill applies only to credit unions chartered out of state, with branches in California. The following amendments will apply the credit union provisions of this bill to all credit unions operating in California, subject to the jurisdiction of DFI: Page 5, line 10, strike "Section 500 or Section 14250" and insert: Sections 500, 14250, 16150, or 16700 Page 5, line 17, strike "Section 566 or Section 16200" and insert: Sections 566, 14302, 16200, or 16900 c. This bill requires DFI to examine its licensees to ensure compliance with a specified federal law. DFI staff have advised Committee staff that DFI cannot ensure compliance by its licensees with various laws; instead, the department examines its licensees "for compliance" with the laws under its jurisdiction. To more accurately reflect DFI's practices, staff suggests the following amendment: Page 5, lines 10 and 11, strike "ensure that a licensee that maintains a correspondent account or payable-through account is in" and insert "examine institutions which maintain a correspondent account or payable-through account for " d. DFI staff have suggested that the language of this bill should more properly be added as Section 337 of the Financial Code, rather than as Section 25. Section 337 relates to the duties of the commissioner. 8. Prior and Related Legislation: a. AB 2160 (Blumenfield), Chapter 479, Statutes of 2012: Disallowed investments in Iran from assets that would otherwise be considered when considering the financial solvency of insurance companies to do business in California. b. AB 1151 (Feuer and Blumenfield), Chapter 441, AB 978 (Blumenfield), Page 7 Statutes of 2011. Updated and enhanced requirements that California pension funds divest themselves from companies doing restricted business in Iran, and added greater transparency to the divestment process. c. AB 1650 (Feuer et al.), Chapter 573, Statutes of 2010: Prohibited California governments from contracting with companies doing restricted business in Iran. LIST OF REGISTERED SUPPORT/OPPOSITION Support Jewish Public Affairs Committee of California Opposition None received Consultant: Eileen Newhall (916) 651-4102