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,  




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                 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,  




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                 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