BILL ANALYSIS Ó
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Date of Hearing: August 24, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
AJR 25
(Lackey) - As Introduced June 25, 2015
SUBJECT: Access to financial institutions
SUMMARY: Memorializes the President and Congress of the United
States to support legislation that will provide a comprehensive
solution to allow banks and credit unions to perform financial
services for cannabis businesses. Specifically, this bill:
1)Makes the following findings:
a) Cannabis use for medical purposes is legal in 23 states
and is legal for recreational purposes in four states and in
the District of Columbia. The expansion of cannabis
businesses across the United States requires action from
Congress and the federal government;
b) Many states have laws permitting various degrees of
commercial activity using cannabis, it still remains illegal
under federal law;
c) The conflict between federal and state laws has left
financial institutions serving cannabis-related businesses
on uncertain legal ground. Banks and credit unions are
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concerned that providing financial services for businesses
selling a product that is illegal under federal law exposes
them to possible charges of money laundering and drug
trafficking;
d) Federal laws, including the Controlled Substances Act,
the Bank Secrecy Act (BSA), and the Annunzio-Wylie
Anti-Money Laundering Act, prohibit financial institutions
from providing financial services to cannabis and hemp
businesses;
e) Directives from federal regulatory agencies such as the
Federal Reserve, the Federal Deposit Insurance Corporation,
the National Credit Union Administration, and the Office of
the Comptroller of the Currency also prohibit bankers from
accepting deposits from cannabis or hemp businesses;
f) In February 2014, the United States Treasury's Financial
Crimes Enforcement Network (FinCEN), in coordination with
the United States Department of Justice, also issued a memo
outlining expectations for compliance with the BSA;
g) The medical, retail, and hemp agricultural businesses are
unable to accept credit or debit cards from customers
because electronic payments are handled through the banking
system. Therefore, transactions must be conducted in cash;
h) The lack of financial services makes paying taxes to
local governments and the California State Board of
Equalization (BOE) a challenge because tax payments must be
made in cash by cannabis-related businesses, leading to
hundreds of thousands of dollars in cash being brought
directly into government offices. It is difficult for the
BOE to audit cash-based businesses, especially when records
of wholesale transactions are not available;
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i) Cannabis businesses cannot easily comply with California
tax laws, which has led to a significant underpayment of
revenue owed the state; and,
j) The BOE launched the Cannabis Compliance Pilot Project in
January 2015 to help determine both the degree of
noncompliance with state tax law and the amount of lost tax
revenue.
2)Urges the President and Congress to support legislation which
will provide a comprehensive solution to allow banks and credit
unions to perform financial services for cannabis businesses
without federal retribution. The current system that requires
cash-based transactions poses a risk to public safety and leads
to reduced collection of taxes.
3)Requests that the Chief Clerk of the Assembly transmit copies
of this resolution to the President and the Vice President of
the United States, to the Speaker of the House of
Representatives, to the Minority Leader of the House of
Representatives, to the Majority Leader of the Senate, to the
Minority Leader of the Senate, and to each Senator and
Representative from California in the Congress of the United
States.
EXISTING LAW: In 1996, voters approved Proposition 215, known as
the Compassionate use Act of 1996 (CUA). The CUA allowed
patients and primary caregivers to obtain and use medical
cannabis, as recommended by a physician, and prohibited
physicians from being punished or denied any right or privilege
for making a medical cannabis recommendation to a patient. In
2003, SB 420 (Vasconcellos, 2003) allowed patients and primary
caregivers to collectively and cooperatively cultivate medical
cannabis, and established a medical cannabis card program for
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patients to use on a voluntary basis. Despite the CUA and SB 420,
cannabis is still illegal under federal law.
FISCAL EFFECT: None
COMMENTS:
A longstanding issue faced by those operating in the medical
cannabis business in California is the lack of banking services.
Stories abound of businesses ranging from dispensaries to growers
all operating within California's legal framework facing the
closure of bank accounts and being denied access to bank
accounts. This has led to fees and taxes being paid at
government offices with large bags of cash that only raise
further suspicion or create security concerns.
On February 14, 2014 the FinCEN issued guidance (FIC-2014-G001)
to clarify BSA expectations for financial institutions seeking to
provide services to cannabis-related businesses. Financial
institutions and those in the legal cannabis business had hoped
that the guidance would provide greater clarity and potentially
open up more financial institutions for access. Unfortunately
those hopes were up in smoke as the guidance only added further
confusion and did little to eliminate the risk faced by financial
institutions.
Banks are required to file suspicious activity reports (SARs)
when they think that a transaction might have a drug connection.
Rather than clarify the existing SAR process for legal cannabis
business the new guidance outlines three tiers of SARs to use
just for cannabis businesses: "cannabis limited," "cannabis
priority," and "cannabis termination." In spite of expanding
paperwork requirements FinCEN was quoted in the press as saying
that these changes would reduce the burden on banks. A year and
half after the issuance of this guidance, financial institutions
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are still hesitant to open accounts for legal cannabis businesses
whether they are in California or other states that have legal
medical or recreational cannabis.
A solution was almost found in Colorado as Denver-based Fourth
Corner Credit Union was established to serve the financial needs
of the cannabis and hemp industries. Fourth Corner ran into
problems when it reached out to the Federal Bank of Kansas City
to get a master account. A master account is effectively a
bank's bank account. Master accounts at Fed branches allow banks
to not only deposit their cash reserves, but gives banks the
ability to easily transact business with other financial
institutions by settling credits and debits through the account
at that Fed branch bank. A financial institution without a
master account would be prevented from conducting most types of
electronic funds transfers. Fourth Corner has filed legal action
against the Federal Reserve Bank of Kansas City.
California impact.
In October 2005 the BOE directed staff to issue seller's permits
to all retailers of medical cannabis in order for those retailers
to collect and remit sales tax. In spite of this policy it is
still difficult to determine the total amount of cannabis
business in California because taxpayers can "decline to state"
the type of property they sell in order to avoid
self-incrimination.
In February 2014, BOE established a policy to no longer accept
cash payments and instead encourage taxpayers to pay online using
their bank account information. A "No Cash Exemption Request"
was created to assist medical cannabis retailers as they have
mostly cash-based businesses and have fears of having assets
seized if they were able to open a bank account. These cash
based businesses have put additional cost pressures on BOE as it
makes it difficult to conduct record verification and track gross
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retail sales of medical cannabis.
Earlier this year, BOE established the Cannabis Compliance Pilot
Project (project) to assess the degree of tax compliance in the
industry and identify the corresponding lost tax revenue. The
project has the following goals:
1)Determine the scope of non-compliance and identify the current
and potential tax revenue, volume of cannabis produced,
California's rate of consumption, lost revenue due to
non-compliance, and current industry practices;
2)Identify barriers that impede voluntary tax compliance by each
segment of the industry (e.g., growers, distributors,
retailers) for the purpose of developing strategies to address
the barriers;
3)In coordination with Legislative Division and relevant program
staff, provide recommendations (statutory, regulatory, policy)
for increasing voluntary compliance among growers and
retailers; and,
4)Coordinate with Legislative Division and relevant program staff
on issues related to cannabis.
Project Objectives:
1)Provide estimates for the following: current sales and use tax
revenue, potential sales and use tax revenue, volume of
cannabis produced, volume necessary to satisfy California's
current rate of consumption, and lost revenue due to
non-compliance.
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2)Provide an agency strategy and recommendations to overcome
barriers and increase voluntary compliance.
3)Identify key industry stakeholders and their legal and
government affairs representatives to gain a better
understanding of industry specific business practices, while
helping establish and leverage credibility among local
retailers and growers to proactively address current and future
obstacles to industry compliance.
4)Collaborate with other state and federal agencies (ABC, EDD,
FTB, IRS, DOJ, SWQCB, etc.) to identify current and potential
regulatory and administrative issues related to the taxation of
cannabis.
Congressional action .
Congressman Perlmutter (D-Colorado) has introduced H.R. 2076 -
Marijuana Businesses Access to Banking Act of 2015. H.R. 2076
would provide a safe harbor for depository institutions that
provide products or services to legal cannabis businesses and
prohibits a federal banking regulators from: (1) terminating or
limiting the deposit or share insurance of a depository
institution solely because it provides financial services to a
cannabis-related legitimate business; or (2) prohibiting,
penalizing, or otherwise discouraging a depository institution
from offering such services.
Additional considerations.
The complex issues associated with banking legal medical cannabis
businesses cannot easily be rolled up. Medicinal cannabis is
legal in 23 states and legal for recreational purposes in four
states and the District of Columbia yet still illegal under
federal law. At any given moment those entities operating
legally under state law could face legal action from federal
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prosecutors and have their assets seized. The current federal
enforcement policy is contained in a document known as the Cole
memo. The Cole memo was issued on August 29th, 2013 by James M.
Cole, United States Department of Justice Deputy Attorney
General. This memo provides guidance to federal enforcement
authorities giving the status of cannabis as legal for medical or
recreational use in several states. The Cole memo illuminates
how federal prosecutorial resources will be focused on the issue
of cannabis by providing the following enforcement priorities:
1)Preventing the distribution of cannabis to minors;
2)Preventing revenue from the sale of cannabis from going to
criminal enterprises, gangs, and cartels;
3)Preventing the diversion of cannabis from states where it is
legal under state law in some form to other states;
4)Preventing state-authorized cannabis activity from being used
as a cover or pretext for the trafficking of other illegal
drugs or other illegal activity;
5)Preventing violence and the use of firearms in the cultivation
and distribution of cannabis;
6)Preventing drugged driving and the exacerbation of other
adverse public health consequences associated with cannabis
use;
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7)Preventing the growing of cannabis on public lands and the
attendant public safety and environmental dangers posed by
cannabis production on public lands; and
8)Preventing cannabis possession or use on federal property.
This list of priorities would seem to blunt any arguments that
the federal government is looking to override the state laws that
allow some use of cannabis. Yet the Cole memo also includes the
following language left open to broad interpretations.
If state enforcement efforts are not sufficiently robust to
protect against the harms set forth above, the federal
government may seek to challenge the regulatory structure
itself in addition to continuing to bring individual
enforcement actions, including criminal prosecutions, focused
on those harms.
Even in the event that financial institutions are given a safe
harbor to bank cannabis businesses such safe harbors may not go
far enough to protect assets from seizure, particularly assets
that have been used as collateral for loans and lines of credit
with financial institutions. Without a change to the status of
cannabis as a Schedule I drug at the federal level, businesses
legal under state law will continue to operate in a murky area
where enforcement of federal law is only as consistent as federal
policy, versus statute, wants it to be. A change in Presidential
administration could drastically alter the views and actions of
federal law enforcement entities. Providing greater clarity for
financial institutions may provide a temporary short-term
solution to the banking question. However, only when federal law
is changed to remove cannabis from Schedule I of the Controlled
Substances Act or the federal courts clearly recognizes the right
of states to establish their own policy in this regard will the
cannabis industry have true legal protection when using financial
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institutions.
Until then, both financial institutions and cannabis businesses
will still operate in a cloudy legal space.
REGISTERED SUPPORT / OPPOSITION:
Support
State Board of Equalization, Fiona Ma, (Co-Sponsor)
State Board of Equalization, George Runner, Vice Chair
(Co-Sponsor)
California Cannabis Industry Association
California Credit Union League
Opposition
None on file.
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Analysis Prepared by:Mark Farouk / B. & F. / (916) 319-3081