BILL ANALYSIS �
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