BILL ANALYSIS                                                                                                                                                                                                    

                                                                      AJR 25

                                                                     Page  1

          Date of Hearing:  August 24, 2015


                               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  


                                                                      AJR 25

                                                                     Page  2

               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  

             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  

             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;


                                                                      AJR 25

                                                                     Page  3

             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  

          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  

          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  


                                                                      AJR 25

                                                                     Page  4

          patients to use on a voluntary basis. Despite the CUA and SB 420,  
          cannabis is still illegal under federal law.  

          FISCAL EFFECT:  None


          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  

          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  


                                                                      AJR 25

                                                                     Page  5

          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  

          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  


                                                                      AJR 25

                                                                     Page  6

          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  


                                                                      AJR 25

                                                                     Page  7

          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  

           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  


                                                                      AJR 25

                                                                     Page  8

          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  


                                                                      AJR 25

                                                                     Page  9

          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  


                                                                      AJR 25

                                                                     Page  10


          Until then, both financial institutions and cannabis businesses  
          will still operate in a cloudy legal space.



          State Board of Equalization, Fiona Ma, (Co-Sponsor)

          State Board of Equalization, George Runner, Vice Chair  

          California Cannabis Industry Association

          California Credit Union League


          None on file.


                                                                      AJR 25

                                                                     Page  11

          Analysis Prepared by:Mark Farouk / B. & F. / (916) 319-3081