BILL ANALYSIS                                                                                                                                                                                                    

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          25 (Lackey)

          As Introduced  June 25, 2015

          Majority vote

          |Committee       |Votes|Ayes                  |Noes                |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |Banking         |9-1  |Dababneh, Achadjian,  |Gatto               |
          |                |     |Chau, Hadley, Kim,    |                    |
          |                |     |Low, Perea,           |                    |
          |                |     |Ridley-Thomas, Mark   |                    |
          |                |     |Stone                 |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |

          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  


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               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  
               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;


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             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;

             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  


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            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), Chapter 875, Statutes of 2003,  
          allowed patients and primary caregivers to collectively and  
          cooperatively cultivate medical cannabis, and established a  
          medical cannabis card program for 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  


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          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  
          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  


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          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 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.  

          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  
          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  


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          moment those entities operating legally under state law could  
          face legal action from federal 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 29, 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;


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          6)Preventing drugged driving and the exacerbation of other  
            adverse public health consequences associated with cannabis  

          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  

            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  


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          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 institutions.

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

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