BILL ANALYSIS Ó
AB 1575
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Date of Hearing:
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
AB 1575
(Bonta) - As Amended April 13, 2016
SUBJECT: Medical cannabis
SUMMARY: Makes changes to the Medical Marijuana Regulation and
Safety Act (MMRSA) Specifically, this bill:
1)Renames MMRSA to the Medical Cannabis Regulation and Safety
Act (Act).
2)Requires the State Board of Equalization (BOE) to form an
advisory group made up of representatives from financial
institutions, the medical cannabis industry, law enforcement,
and state and federal banking regulators.
3)Mandates the BOE to submit a report to the Legislature by July
1, 2017 with proposed changes to state law or regulations that
will improve financial monitoring of medical cannabis and
improve compliance with federal law.
4)Requires The Department of Business Oversight (DBO) to create
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an enhanced financial monitoring certification for entities
licensed pursuant to the Act that further enables those
entities to comply with the federal banking regulations under
the federal Bank Secrecy Act (BSA). Further requires DBO to
consider including requirements to use electronic financial
monitoring that enables real-time sales inventory tracking and
other tools that allow a bank or credit union to readily
access information they are required to monitor under the
federal BSA.
5)Allows DBO to collect fees from applicants requesting the
enhanced financial monitoring certification in an amount
sufficient to fund the actual reasonable costs of
implementation.
6)Specifies that a financial institution that provides financial
services to a licensee under the Act is exempt from any
criminal law of this state, provided that the financial
institution has verified the licensee has a valid license in
good standing.
7)Makes numerous other changes to MMRSA.
EXISTING STATE LAW:
1)Prohibits the possession, possession with intent to sell,
cultivation, sale, transportation, importation, or furnishing
of marijuana, except as otherwise provided by law. (Health
and Safety Code (HSC) §§ 11357, 11358, 11359, and 11360)
2)Prohibits prosecution of a patient or a patient's primary
caregiver for possessing or cultivating marijuana for personal
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medical purposes of the patient upon the written or oral
recommendation or approval of a physician. (HSC § 11362.5)
3)Provides that qualified patients, persons with valid
identification cards, and their designated primary caregivers
who associate in order to collectively or cooperatively
cultivate marijuana, are not subject to criminal liability
solely on that basis, until one year after the Bureau of
Medical Marijuana Regulation (Bureau) begins issuing licenses
under the ACT. (HSC § 11362.775)
4)Enacts the Act, which provides for the state licensure and
regulation of commercial cannabis activities, including
cultivation, possession, manufacture, processing, storing,
laboratory testing, labeling, transporting, distribution, and
sale of medical cannabis or medical cannabis products.
(Business and Professions Code (BPC) § 19300 et seq.)
5)Establishes the Bureau within the Department of Consumer
Affairs (DCA), and requires the Bureau, the California
Department of Public Health (CDPH), and the California
Department of Food and Agriculture (CDFA) to administer the
Act and promulgate regulations for implementation of the act.
(BPC § 19300 et seq.)
6)Vests in the DCA the sole authority to create, issue, renew,
discipline, suspend, or revoke licenses for medical marijuana
activities, including licenses for dispensaries, distributors,
and transporters. Prohibits a licensee from holding more than
one license except as specified. (BPC §§ 19302.1, 19328)
7)Allows the Bureau to convene an advisory committee to advise
the Bureau and licensing authorities on the development of
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standards and regulations, including best practices and
guidelines to ensure qualified patients have adequate access
to medical marijuana and medical marijuana products. (BPC §
19306)
8)Provides that the actions of a licensee permitted pursuant to
both a state license and a license or permit issued by the
local jurisdiction following the requirements of the
applicable local ordinances, and conducted in accordance with
the Act are not unlawful under state law. (BPC § 19317)
9)Prohibits a person from engaging in commercial cannabis
activity without possessing both a state license and a local
permit or other authorization upon the date of implementation
of regulations by the licensing authority. (BPC § 19320)
10)Requires an applicant for a state license to, among other
things, submit fingerprints to the Department of Justice, and
provide documentation, issued by the local jurisdiction,
certifying that the applicant is in compliance with all local
ordinances and regulations; evidence of the legal right to
occupy the proposed location; for applicants with 20 or more
employees, provide a statement that the applicant will enter
into, or already has entered into, a labor peace agreement; a
seller's permit number; and other specified information. (BPC
§ 19322)
11)Requires applicants seeking licensure to cultivate,
distribute, or manufacture medical cannabis, to include a
detailed description of the applicant's operating procedures
for all of the following as required by the licensing
authority: 1) cultivation; 2) extraction and infusion methods;
3) transportation procedures; 4) inventory procedures; and 5)
quality control procedures. (BPC § 19322)
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EXISTING FEDERAL LAW
The Financial Recordkeeping and Reporting of Currency and
Foreign Transactions Act of 1970 (31 U.S.C. 5311 et seq.) is
referred to as the BSA. The purpose of the BSA is to require
U.S. financial institutions to maintain appropriate records and
file certain reports involving currency transactions and a
financial institution's customer relationships. Currency
Transaction Reports (CTRs) and Suspicious Activity Reports
(SARs) are the primary means used by banks to satisfy the
requirements of the BSA. The recordkeeping regulations also
include the requirement that a financial institution's records
be sufficient to enable transactions and activity in customer
accounts to be reconstructed if necessary. In doing so, a paper
and audit trail is maintained. These records and reports have a
high degree of usefulness in criminal, tax, or regulatory
investigations or proceedings.
The BSA consists of two parts: Title I Financial Recordkeeping
and Title II Reports of Currency and Foreign Transactions.
Title I authorizes the Secretary of the Department of the
Treasury (Treasury) to issue regulations, which require insured
financial institutions to maintain certain records. Title II
directed the Treasury to prescribe regulations governing the
reporting of certain transactions by and through financial
institutions in excess of $10,000 into, out of, and within the
U.S.
The Treasury's implementing regulations under the BSA are
included in the FDIC's Rules and Regulations and on the FDIC
website. The implementing regulations under the BSA were
originally intended to aid investigations into an array of
criminal activities, from income tax evasion to money
laundering. In recent years, the reports and records prescribed
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by the BSA have also been utilized as tools for investigating
individuals suspected of engaging in illegal drug and terrorist
financing activities. Several acts and regulations expanding
and strengthening the scope and enforcement of the BSA,
anti-money laundering (AML) measures, and counter-terrorist
financing measures have been signed into law and issued,
respectively, over the past several decades. Several of these
acts include:
1)Money Laundering Control Act of 1986
2)Annuzio-Wylie Anti-Money Laundering Act of 1992
3)Money Laundering Suppression Act of 1994
4)Money Laundering and Financial Crimes Strategy Act of 1998.
Most recently, the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act (more commonly known as the USA PATRIOT Act) was
enacted by Congress in October 2001, in response to the
September 11, 2001 terrorist attacks. The USA PATRIOT Act
established a host of new measures to prevent, detect, and
prosecute those involved in money laundering and terrorist
financing
The Controlled Substances Act (CSA) (21 U.S. Code § 812 )is the
federal drug policy that regulates the manufacture and
distribution of controlled substances such as hallucinogens,
narcotics, depressants, and stimulants. The CSA categorizes
drugs into five "Schedules" or classifications based on their
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potential for abuse, status in international treaties, and any
medical benefits they may provide. Drugs classified in Schedule
1 are considered the most harmful substances with no medical
benefits, and the rest descend from there. Marijuana is listed
as a Schedule 1 drug.
FISCAL EFFECT: Unknown
COMMENTS: AB 1575 makes numerous changes to the current
regulatory scheme for medical cannabis. The Assembly Business
and Professions Committee recently heard this bill and examined
the various changes impacting areas under the jurisdiction of
that committee. This analysis will focus on those items in AB
1575 that impact banking and finance issues.
AB 1575 would do four key things around the issue of banking
medical cannibas businesses (MCBs)
1)Advisory Group : BOE would form an advisory group made up of
representatives from financial institutions, the medical
cannabis industry, law enforcement, and state and federal
banking regulators.
2)Reporting: BOE is required to submit a report to the
Legislature by July 1, 2017 with proposed changes to state law
or regulations that will improve financial monitoring of
medical cannabis and improve compliance with federal law.
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3)Creation of special monitoring certification : Requires DBO to
create an enhanced financial monitoring certification for
entities licensed pursuant to the Act that further enables
those entities to comply with the federal banking regulations
under the federal BSA. Further requires DBO to consider
including requirements to use electronic financial monitoring
that enables real-time sales inventory tracking and other
tools that allow a bank or credit union to readily access
information they are required to monitor under the federal
BSA.
4)Protection of criminal Liability: A financial institution
that provides financial services to a licensee under the Act
would be exempt from any criminal law of this state.
An obstacle faced by those operating MCBs in California is the
lack of banking services. Businesses ranging from dispensaries
to growers all operating within California's legal framework
have faced the closure of bank accounts or denial of new
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 hoped that
the guidance would provide greater clarity and potentially open
up more financial institutions for access. Unfortunately, the
guidance only added further confusion and did little to
eliminate the risk faced by financial institutions.
Banks are required to file SARs when they think that a
transaction might have an illegal connection such as drug
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trafficking. Rather than clarify the existing SAR process for
legal cannabis businesses 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.
Almost two years 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.
The current federal enforcement policy concerning state
legalized cannabis activity is contained in the Cole memo. 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;
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5)Preventing violence and the use of firearms in the cultivation
and distribution of cannabis;
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.
The FinCEN guidance and the Cole memo do not provide a safe
harbor to financial institutions, but rather outline a series of
actions that ultimately are not a guarantee that an institution
could face sanction. Furthermore, financial institutions face
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the uncertainty that should federal enforcement of drug laws
increase, even with state level marijuana legalization, that
they run the risk of having assets seized or frozen,
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.
Fourth Corner Credit Union was established to serve the cannabis
business in Colorado but was unable to get access to the Federal
Reserve System and ultimately filed legal action against the
Federal Reserve Bank of Kansas City, Fourth Corner Credit Union
v. Federal Reserve Bank of Kansas City (D. Colo., 15-cv-01633).
In January of 2016 the case was dismissed. In the order
dismissing the case, the presiding judge offered the following
in relation to the Cole Memo and FinCEN guidance:
Plaintiff contends that the FinCEN guidance and Cole
memorandum already provide federal authorization to
financial institutions to serve MRBs. Therefore, offering
to serve MRBs only if authorized by federal law is
something of a sleight of hand. The problem is, the FinCEN
guidance and Cole memorandum do nothing of the sort. On
the contrary, the Cole memorandum emphatically reiterates
that the manufacture and distribution of marijuana violates
the Controlled Substances Act, and that the DOJ is
committed to enforcement of that Act. It directs federal
prosecutors to apply certain priorities in making
enforcement decisions, but it does not change the law. The
FinCEN guidance acknowledges that financial transactions
involving MRBs generally involve funds derived from illegal
activity, and that banks must report such transactions as
"suspicious activity." It then, hypocritically in my view,
simplifies the reporting requirements. In short, these
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guidance documents simply suggest that prosecutors and bank
regulators might "look the other way" if financial
institutions don't mind violating the law. A federal court
cannot look the other way. I regard the situation as
untenable and hope that it will soon be addressed and
resolved by Congress.
An initial analysis of the decision makes it clear that the
creation of a state licensed bank or credit union created for
the purpose of servicing MCBs is not a legally viable option
until federal law is changed.
The difficulties of banking MSBs has become magnified as many
other states have legalized marijuana either by expanding
medical marijuana usage or the full scale legalization such as
in Colorado. In response to this growth several companies have
created banking alternatives designed to provide electronic
transactions for MCBs and assist with FinCEN and Cole Memo
requirements. These alternatives range from kiosk type
interface systems that allow customer payment and order without
exchanging cash at the MCB to mobile phone applications that
service as a digital wallet to allow customers to pay with their
phone from an account that is preloaded with funds. Many of
these systems also include inventory management, product
tracking and customer transaction tracking in an attempt to
comply with the requirements under federal anti-money laundering
laws. A recent article (February 16, 2016) in The New York
Times , As Marijuana Sales Grow, Start-Ups Step In for Wary Banks
stated:
Most of the start-ups trying to help with this problem are
focuses in one way or another, on tracking every detail of
every purchase in a more sophisticated way. Careful
record-keeping can answer the concerns of banks worried
about violating anti-money laundering laws.
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Careful record keeping can assuage concerns about anti-money
laundering violations, but it would be overly simplistic to
state that financial institutions are concerned only with this
one aspect given the various concerns already outlined in this
document.
Marijuana's inclusion under the CSA leaves states with legalized
marijuana, whether for medical or recreational use, in a
difficult position where any potential safe harbor is only as
good so long as federal enforcement of the CSA ignores states
with legalization. However, financial institutions face this
problem even more directly due to their regulatory nexus with
the federal government via the need for deposit insurance and
access to the Federal Reserve. These are not the only
considerations, as previously banking regulators have urged
banks to avoid reputational risk involved with banking certain
"high risk" although legal, industries.
The current difficulties will only increases exponentially. The
implementation of California's medical marijuana regulations and
the prospect of full scale legalized recreational use will
expand the volume of business and state licensing fees will need
to be paid in addition to taxes and potential local fees. The
payment of licensing fees and taxes will remain problematic
until the banking question is answered. MMRSA requires an
initial and yearly licensing fee which is likely to be paid in
cash unless a solution is reached. Media reports suggested that
cities and counties throughout the state are considering
additional marijuana fees and taxes, yet these jurisdictions
will have to deal with large amounts of cash to cover these
payments. These are obstacles for the current legal medical
marijuana industry.
However, the essential deciding factor that will open up access
to banking would be either a change of the CSA to remove
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marijuana from the list of controlled substances or the creation
of a safe harbor for financial institutions that offer accounts
to state legalized MCBs.
Discussion:
The Assembly Banking & Finance Committee conducted an oversight
hearing on February 29th, 2015, Banking the Medical Cannabis
Industry. Based on witness testimony provided from a wide range
of stakeholders financial institutions face many obstacles in
banking MCBs. A limited number of financial institutions bank
MCBs sometimes unknowingly. The hearing confirmed what the
research already suggests, that state laws and regulations are
not the obstacle, nor necessarily the solution for banking MCBs.
Rather, federal law creates heightened risk and until federal
law is changed that risk cannot be fully mitigated by changes to
state law.
The banking related provisions of AB 1575 are problematic from
both an implementation standpoint and their actual impact. The
following are issues requiring attention.
1)The requirement for DBO to create an enhanced financial
monitoring certification so licensees under the Act can comply
with federal banking regulations creates a quasi-licensing
scheme without providing DBO with appropriate enforcement
authority. Additionally, it lacks detail on how the
certification process would work and whether DBO could pass
regulations.
No other financial services licensing law provides a
certification. Furthermore, this provision would place MCBs
that are not financial service entities under partial
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authority of DBO. This would set a precedent of allowing a
financial regulator to have oversight over what are
effectively wholesale and retail operations of non-financial
entities.
A certification may also inadvertently give MCBs false
security in that they could interpret the certification as
protecting them from liability that could occur do to federal
law. The potential costs of such a program could limit
certification, assuming certification provides any value, to
large MCBs that can afford an additional level of costs.
Finally, it requires a state regulator to certify activity
that could be subject to federal enforcement action.
2)AB 1575 would exempt a financial institution that provides
financial services to a licensed MCB from any criminal law of
the state. As noted previously, the difficulty in banking
MCBs is due to federal law. Staff is unaware of any state
level banking enforcement actions against MCBs or a financial
services provider.
The state of Oregon recently passed a very similar bill to
remove criminal liability for financial institutions that
serve MCBs. The Oregon legislation for which this section
mirrors provides no real benefit from the underlying problem,
and that is federal law. Staff believes that such an approach
will only provide a false sense of hope to MCBs and that
ultimately it will not do anything to change the current
situation. A state law is also unable to provide any legal
immunity from federal law. Finally, this section has a major
drafting problem in that it would exempt a financial
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institution "from any criminal law" even if the law is
unrelated to MCBs activities.
3)The requirement that BOE form an advisory group should include
DBO as they are the chief regulator of financial institutions
and other financial service providers in the state.
Amendments:
Based on the issues outlined previously, staff recommends the
following amendments to Section 8 of the bill.
Section 19310.5. of the B&P Code:
(a) It is the intent of the Legislature to enact a statute that
improves the medical cannabis industry's ability to comply with
federal law and regulations that would allow improved access to
banking services.
(b) (1) The State Board of Equalization in conjunction with the
Department of Business Oversight shall form an advisory group
made up of representatives from financial institutions, non-bank
financial service providers, the medical cannabis industry, law
enforcement, and state and federal banking regulators. By July
1, 2017, the board in conjunction with department shall submit a
report to the Legislature with proposed changes to state law or
regulations recommendations from the advisory group that will
improve financial monitoring of medical cannabis businesses. and
improve compliance with federal law .
(2) A report submitted pursuant to paragraph (1) shall be
submitted in compliance with Section 9795 of the Government
Code. The requirement for submitting a report imposed in
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paragraph (1) is inoperative on July 1, 2021, pursuant to
Section 10231.5 of the Government Code.
(c) The advisory group shall examine strategies, such as the use
of integrated point-of-sale systems with state track and trace
systems and other measures that will improve financial
monitoring of medical cannabis businesses.
(d) (1) The Department of Business Oversight shall create an
enhanced financial monitoring certification for entities
licensed pursuant to this chapter that further enables those
entities to comply with the federal banking regulations under
the federal Bank Secrecy Act. The Department of Business
Oversight shall consider including requirements to use
electronic financial monitoring that enables real-time sales
inventory tracking and other tools that allow a bank or credit
union to readily access information they are required to monitor
under the federal Bank Secrecy Act.
(2) The Department of Business Oversight may collect fees from
applicants requesting the enhanced financial monitoring
certification in an amount sufficient to fund the actual
reasonable costs of implementing subdivision (d).
(3) After the Bureau of Medical Cannabis Regulation posts a
notice on its Internet Web site that the licensing authorities
have commenced issuing licenses pursuant to the Medical Cannabis
Regulation and Safety Act, a financial institution that provides
financial services customarily provided by financial
institutions to other entities to a current licensee under the
Medical Cannabis Regulation and Safety Act is exempt from any
criminal law of this state, provided that the financial
institution has verified the licensee has a valid license in
good standing.
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(4) The Bureau of Medical Cannabis Regulation may provide
information to a financial institution to verify the status of a
licensee.
REGISTERED SUPPORT / OPPOSITION:
Support
Consortium Management Group
Opposition
1 individual
Analysis Prepared by:Mark Farouk / B. & F. / (916) 319-3081
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