BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Marty Block, Chair
2015 - 2016 Regular
Bill No: AJR 25 Hearing Date: September
10, 2015
-----------------------------------------------------------------
|Author: |Lackey |
|-----------+-----------------------------------------------------|
|Version: |June 25, 2015 Introduced |
-----------------------------------------------------------------
-----------------------------------------------------------------
|Urgency: | |Fiscal: |No |
-----------------------------------------------------------------
-----------------------------------------------------------------
|Consultant:|Eileen Newhall |
| | |
-----------------------------------------------------------------
Subject: Access to financial institutions.
SUMMARY Memorializes the President and Congress to support
legislation that will provide a comprehensive solution to allow
banks and credit unions to perform financial services for
marijuana businesses.
DESCRIPTION
1. Contains several findings, including the following:
a. Cannabis use is legal for medical purposes in 23
states and for recreational purposes in four states and
the District of Columbia.
b. While many states have laws permitting various
degrees of commercial activity using cannabis, the drug
remains illegal under federal law. 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.
c. Federal law, including the Controlled Substances
Act, Bank Secrecy Act, and the Annunzio-Wylie Anti-Money
AJR 25 (Lackey) Page 2
of ?
Laundering Act, prohibit financial institutions from
providing financial services to cannabis and hemp
businesses. Directives from federal regulatory agencies
such as the Federal Reserve, Federal Deposit Insurance
Corporation, National Credit Union Administration, and
Office of the Comptroller of the Currency also prohibit
bankers from accepting deposits from cannabis or hemp
businesses.
d. In February 2014, the United States Treasury's
Financial Crimes Enforcement Network (FinCEN), in
coordination with the United States Department of
Justice, issued a memo outlining expectations for
marijuana businesses seeking to comply with the Bank
Secrecy Act. Despite this progress, remaining
uncertainties under current federal law still prevent
banks and credit unions from accepting cannabis-based
businesses as customers.
e. The medical, retail, and help 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. Further, these businesses cannot
deposit cash from sales into financial institutions.
This is a major problem in California, as many businesses
now have hundreds of thousands of dollars in cash in
their locations, which poses a public safety risk to
businesses, employees, and customers.
f. 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
BOE to audit cash-based businesses, especially when
records of wholesale transactions are not available.
g. Cannabis businesses cannot easily comply with
California tax laws, which has led to a significant
underpayment of revenue owed the state. In response, BOE
launched the Cannabis Compliance Pilot Project in
January, 2015, to help determine both the degree of
AJR 25 (Lackey) Page 3
of ?
noncompliance with state tax law and the amount of lost
tax revenue. However, state efforts alone cannot solve
the problem.
2. Urges the President and Congress to support legislation
that will provide a comprehensive solution to allow banks
and credit unions to perform financial services for cannabis
businesses without federal retribution. States that the
current system, which requires cash-based transactions,
poses a risk to public safety and leads to reduced
collection of taxes.
EXISTING LAW
3. Provides for the Compassionate Use Act of 1996 (Health and
Safety Code Section 11362.5), added by Proposition 215, an
initiative statute approved by the voters on November 5,
1996. Under the Compassionate Use Act of 1996, Health and
Safety Code Section 11357, making it unlawful to possess
marijuana, and Section 11358, making it unlawful to
cultivate marijuana, do not apply to a patient or to a
patient's primary caregiver, who possesses or cultivates
marijuana for the personal medical purposes of the patient
upon the written or oral recommendation or approval of a
physician.
4. Requires the State Department of Health Services to
establish and maintain a voluntary program for the issuance
of identification cards to qualified patients and establish
procedures under which qualified patients with an
identification card may use marijuana for medical purposes.
Authorizes the State Attorney General to ensure the security
and nondiversion of marijuana grown for medical use, and to
set forth and clarify details concerning possession and
cultivation limits, as specified (Article 2.5 of Chapter 6
of Division 10 of the Health and Safety Code), commencing
with Section 11362.7).
COMMENTS
1. Purpose: This bill is co-sponsored by BOE Members Fiona Ma
and George Runner, to encourage the federal government to
remove roadblocks that have prevented banks and credit
unions from serving cannabis businesses in California and,
AJR 25 (Lackey) Page 4
of ?
in doing so, reduce the amount of unpaid taxes owed by
cannabis businesses and reduce the public safety concerns
associated with cash payments of tax liability by these
businesses.
2. Background: California is one of 23 states that have
decriminalized the use of marijuana for medical purposes.
However, those who cultivate marijuana in compliance with
California law and who run medical marijuana dispensaries in
compliance with California law are currently shut off from
the banking system. Because the federal government
classifies marijuana as a Class I drug, whose cultivation,
sale, and possession can constitute felonies, banks and
credit unions risk federal regulatory sanctions if they
knowingly accept marijuana businesses as customers.
Although federal regulators, including the U.S. Department of
Justice, FinCEN, and the Federal Deposit Insurance
Corporation, have issued guidance intended to assuage
bankers' fears about providing banking services to marijuana
businesses that are operating in accordance with the laws of
their states, the guidance has had little effect. According
to an August, 2014 speech by FinCEN's director, less than 1%
of all banks and credit unions nationwide provide banking
services to cannabis businesses.
The challenges faced by financial institutions seeking to serve
cannabis businesses were recently illustrated, when the
Federal Reserve Bank of Kansas City rejected an application
from Denver, Colorado-based Fourth Corner Credit Union to
open a master account, and the National Credit Union
Administration denied the credit union's application for
deposit insurance. Although the credit union holds a
charter from the State of Colorado, it has effectively been
denied the ability to operate by the actions of the Federal
Reserve Bank of Kansas City and the National Credit Union
Administration. The credit union, which is seeking to be
the first in the nation to cater specifically to the
marijuana industry, has sued both federal agencies, but the
lawsuits remain pending.
Within California, there are anecdotal accounts of certain
credit unions being willing to open accounts for local
cannabis businesses, but the vast majority of cannabis
AJR 25 (Lackey) Page 5
of ?
businesses operating in accordance with California's medical
marijuana laws remain unbanked.
3. Discussion: The widespread inability of cannabis businesses
in California to access the banking system has created
several practical problems. For example, these businesses
are at increased risk of theft due to the large amounts of
money they hold. Furthermore, because they lack access to
the banking system, they are not only unable to obtain bank
accounts, but cannot obtain debit or credit cards or
business loans, and cannot process debit or credit cards
that their customers might want to use to purchase cannabis
products.
Cannabis businesses also pose problems for California's tax
agencies, which do not typically deal in cash. The sponsors
of AJR 25, BOE Members Fiona Ma and George Runner, believe
that a significant amount of tax revenue goes uncollected,
due to the lack of electronic bank records. Ms. Ma and Mr.
Runner launched the Cannabis Compliance Pilot Project in
January, 2015, in an effort to quantify the degree of tax
compliance among cannabis businesses, and identify the
corresponding lost tax revenue.
4. A Solution: At the present time, it appears that a solution
to these problems must come from the federal government.
Senator Jeff Merkley from Oregon and Congressman Ed
Perlmutter from Colorado have introduced legislation in the
current Congress titled Marijuana Businesses Access to
Banking Act of 2015 (S. 1726 and H.R. 2076), but the future
success of that legislation is unknown.
5. Summary of Arguments in Support:
a. BOE Members George Runner and Fiona Ma are
co-sponsoring AJR 25 as an important step toward
improving industry compliance with existing tax laws.
BOE, which is responsible for collecting sales tax, has
provided seller's permits to medical cannabis-based
businesses since 2005. However, due to the lack of
electronic bank records stemming from these business'
lack of access to banking services, BOE estimates that
millions of dollars in tax revenue goes uncollected every
year. "As long as financial institutions are unable to
AJR 25 (Lackey) Page 6
of ?
provide access to their services, legitimate
cannabis-based businesses will be unable to take
advantage of bank accounts, debit or credit cards and
business loans. They will continue to complete all
business transactions in cash, making audits nearly
impossible. Not only does this reduce tax revenue, it is
also a serious public safety concern."
b. The California Cannabis Industry Association
observes that in states like California, where medical
cannabis use is legal, both banks and the cannabis
industry face regulatory uncertainty. "Rather than
assume the risk of affiliating with businesses that
handle a drug considered illegal under federal law, banks
choose not to provide services to cannabis businesses.
Consequently, these business are forced to operate on a
largely cash basis, discouraging financial transparency,
encouraging tax evasion, and creating public safety
risks. Opening up banking access to the cannabis
industry will ensure better security for California's
medical cannabis industry and patients, allow for easier
accounting and financial transparency, and provide the
industry with more resources to invest in our state and
local economies." The California Chapter of the National
Organization for the Reform of Marijuana Laws expresses
similar arguments in support.
c. The California Credit Union League writes, "Credit
unions and banks face significant regulatory uncertainty
when considering banking the cannabis industry.
Furthermore, credit unions and banks may have problems
with their federal and state regulators and access to the
U.S. Federal Reserve. Federal legislation providing
guidelines to financial institutions on how to
efficiently serve the cannabis industry would mitigate
the regulatory uncertainty facing financial
institutions."
6. Summary of Arguments in Opposition: None received.
LIST OF REGISTERED SUPPORT/OPPOSITION
AJR 25 (Lackey) Page 7
of ?
Support
Board of Equalization Member Fiona Ma (co-sponsor)
Board of Equalization Member George Runner (co-sponsor)
California Cannabis Industry Association
California Chapter of the National Organization for the Reform
of Marijuana Laws
California Credit Union League
Opposition
None received
-- END --