BILL ANALYSIS Ó
AJR 25
Page 1
ASSEMBLY THIRD READING
AJR
25 (Lackey)
As Introduced June 25, 2015
Majority vote
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|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Banking |9-1 |Dababneh, Achadjian, |Gatto |
| | |Chau, Hadley, Kim, | |
| | |Low, Perea, | |
| | |Ridley-Thomas, Mark | |
| | |Stone | |
| | | | |
| | | | |
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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
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;
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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
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
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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
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), 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
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
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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
use;
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
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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:
0001509