BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON
                         BANKING AND FINANCIAL INSTITUTIONS
                             Senator Marty Block, Chair
                                2015 - 2016  Regular 

          Bill No:             AJR 25         Hearing Date:     September  
          10, 2015
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          |Author:    |Lackey                                               |
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          |Version:   |June 25, 2015    Introduced                          |
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          |Urgency:   |                       |Fiscal:    |No               |
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          |Consultant:|Eileen Newhall                                       |
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                     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  







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                 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  








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                 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,  








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              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  








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              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  








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                 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
            








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          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


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