Compliance Bulletin

New State Restrictions Against Iran Investing and Lending
October 18, 2010

The federal Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“Federal Act”) was signed into law on July 1, 2010. The purpose of the Federal Act is to prevent investments in companies operating in Iran’s energy sector that, in turn, support the government of Iran’s efforts to achieve nuclear weapons capability.

 The Federal Act authorizes state and local governments to adopt similar measures limiting state and local investment activities.

Pursuant to the Federal Act AB 1650 (titled the “Iran Contracting Act of 2010”), which adds Sections 2200 et seq. to the California Public Contract Code, adopts similar provisions in California. The bill was enacted to prohibit any person (hereafter broadly to include persons or entities) [1] that provides goods or services of $20 million or more in the energy sector of Iran [2], or a financial institution that extends $20 million or more in credit (for 45 days or more) to such a person, from bidding for, entering into, or renewing a contract for goods or services of $1 million or more with a public entity [3]. The public entity must require the person or financial institution to certify that it does not engage in the covered investments or extensions of credit [4]. Penalties apply for making a false certification, to include a referral to the state Attorney General [5].

In light of the compliance challenges faced by banks with respect to the federal Unlawful Internet Gambling Enforcement Act, particularly in identifying what entities are covered by that act, CBA was able to insert a provision in AB 1650 to require the California Department of General Services (“DGS”) to publish a list of persons who provide goods or services of $20 million or more in the energy sector of Iran. The DGS must do so by June 1, 2011 and update the list every 180 days. In developing the list, the DGS is required only to rely on “credible information available to the public.” In essence, financial institutions will not be required to engage in due diligence efforts to determine who is engaged in Iran energy sector investments [6].

The bill includes a procedure for the DGS to give 90 days’ prior notice to any person that it intends to include on the list. The notice will state that if the person ceases its engagement in the covered investment activities then it would be eligible for future public contracts. Note that the bill covers making bids, entering contracts, and renewing contracts. Thus, in the case of a financial institution, there is no requirement to terminate an existing public contract once the DGS has added to the list a person to whom the financial institution contractor has extended credit.

The bill does not address participation loans. A financial institution comes within the statute if it extends $20 million or more in credit to a covered person. The plain text would suggest that a financial institution is not covered if it participates in a loan totaling $20 million or more if its participation amount is less than $20 million.

Agencies are permitted to grant case-by-case exceptions from the contracting prohibition if necessary in the best interest of the state or local public entity, as applicable. (See Section 2203© for the listed conditions). In such instance, the public entity must consider a financial institution that provides credit to the exempted person eligible for the otherwise restricted public contracting [7].

An exemption is created with respect to the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) as follows:

A person that has a contract with CalPERS or CalSTRS, or both, shall not be deemed a person that engages in investment activities in Iran on the basis of those investments with CalPERS or CalSTRS. [8]

This provision was added in recognition that CalPERS and CalSTRS invest large sums in a diverse array of companies and funds, including companies that may appear on the DGS list.

The restrictions against public contracting are effective as of June 1, 2011 with respect to a person that appears on the DGS list, and as of July 1, 2011 with respect to a person who engages in a covered investment (but does not appear on the DGS list [9]). However, the certification requirement applies June 1, 2011 even if a person does not appear on the list. Financial institutions are not required to make a certification until July 1, 2011 (30 days after the list is available), and with respect to any subsequent DGS list, until 30 days after the subsequent list becomes available. During those 30 days, it must certify based on the prior list.

The Iran Contracting Act of 2010 preempts any local law, ordinance, rule, or regulation involving public contracts for goods or services with a person engaged in investment activities in Iran. The law becomes inoperative as of the date that the Federal Act ceases to authorize the states to adopt and enforce the contracting prohibitions.

Alex Alanis was CBA’s lead lobbyist on AB 1650.

  1. The definition of “person” will be codified at California Public Contract Code Section 2202(e). Hereafter, all code references are to the Public Contract Code.
  2. The “energy sector” of Iran means activities to develop petroleum or natural gas resources or nuclear power in Iran. Section 2202(b).
  3. Section 2203(a).
  4. See Section 2204(a).
  5. Section 2205.
  6. Section 2203(b).
  7. See Section 2203(d).
  8. Section 2203(b)(6).
  9. Section 2203(e).

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

© This CBA Regulatory Compliance Bulletin is copyrighted by the California Bankers Association, and may not be reproduced or distributed without the prior written consent of CBA.