BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AJR 25| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AJR 25 Author: Lackey (R), et al. Introduced:6/25/15 Vote: 21 SENATE BANKING & F.I. COMMITTEE: 4-1, 9/10/15 AYES: Block, Vidak, Hueso, Lara NOES: Morrell NO VOTE RECORDED: Galgiani, Hall ASSEMBLY FLOOR: 67-3, 8/27/15 - See last page for vote SUBJECT: Access to financial institutions SOURCE: Board of Equalization Member Fiona Ma Board of Equalization Member George Runner DIGEST: This resolution 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. ANALYSIS: Existing law: 1)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 Health and Safety Code Section 11358, making it unlawful AJR 25 Page 2 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. 2)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). This resolution: 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 Laundering Act, prohibit financial institutions from providing financial services to cannabis and hemp businesses. Directives from federal regulatory agencies such as the Federal Reserve Board, Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Office of the Comptroller of the AJR 25 Page 3 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 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. 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 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 AJR 25 Page 4 current system, which requires cash-based transactions, poses a risk to public safety and leads to reduced collection of taxes. 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 FDIC, 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 NCUA 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 NCUA. 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 businesses operating in accordance with California's medical marijuana laws remain unbanked. AJR 25 Page 5 Comments 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. 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. FISCAL EFFECT: Appropriation: No Fiscal Com.:NoLocal: No SUPPORT: (Verified9/10/15) Board of Equalization Member Fiona Ma (co-source) Board of Equalization Member George Runner (co-source) California Cannabis Industry Association California Chapter of the National Organization for the Reform of Marijuana Laws California Credit Union League AJR 25 Page 6 OPPOSITION: (Verified9/10/15) None received ARGUMENTS IN SUPPORT: Board of Equalization 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 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." 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." ASSEMBLY FLOOR: 67-3, 8/27/15 AYES: Achadjian, Alejo, Baker, Bigelow, Bloom, Bonilla, Bonta, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Dababneh, Dahle, Dodd, Eggman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gomez, Gonzalez, Gordon, Gray, Hadley, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Obernolte, O'Donnell, Olsen, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Weber, Wilk, Williams, Wood, Atkins NOES: Travis Allen, Gatto, Harper NO VOTE RECORDED: Brough, Brown, Cooper, Daly, Frazier, Beth AJR 25 Page 7 Gaines, Grove, Nazarian, Patterson, Waldron Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102 9/10/15 23:17:22 **** END ****