Challenges Ahead For California After Voters Approve Recreational Marijuana


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On December 2, California State Treasurer, John Chiang, announced the formation of the Cannabis Banking Working Group to address the banking issues surrounding state-licensed marijuana businesses. On November 8, California voters approved Proposition 64, legalizing the recreational use of marijuana. Although the recreational use and possession of marijuana are now legal in California, the commercial distribution of cannabis is still a year away, as state legislators and local governments hammer out the details surrounding licensing, taxes, enforcement and regulations.

In a press release issued by his office, Chiang announced that the group would include representatives from law enforcement, bank regulators, stakeholders from the banking industry, tax officials, local governments, and prominent members of the cannabis community. The stated goal of the group is to discuss and agree on solutions to the problems surrounding implementation of the new law. The first meeting is scheduled for December 19, 2016, at the Treasurer’s office in Sacramento.

Of particular concern are the federal rules that prohibit cannabis businesses from participating in the national banking system. Under federal classification, cannabis is a Schedule 1 drug, regulated under the Controlled Substances Act. Although several states have now legalized marijuana for recreational use, federal law still prohibits banks from doing business with companies – or states for that matter – involved in the trafficking of illegal drugs and the money derived from their sale. These federal rules leave states that have legalized marijuana in a precarious situation concerning the transfer of money, granting loans, the collection of tax revenue, and the ability to conduct normal banking functions and other commerce.

As California joins seven other states in voter-approved legalization, they are coming to the realization that changes must be made before the full law goes into effect. In a call with reporters, Chiang said, “The standoff between states and the federal government means a lot of businesses will be hauling around a lot of cash with no place to deposit their money and putting themselves at the risk of robbery.” States have a tough road ahead directly convincing national banks to work with their legal cannabis operations, and, as with Chiang, many will lean heavily on their respective congressional representatives to start a conversation in Washington.

Why Banks Ignore the Cannabis Industry

Conspiracy to Commit a Federal Crime – As the law stands now, for a federally insured bank to provide a loan to a cannabis company or place its funds into a checking account, it would amount to conspiring to distribute marijuana. Even standard banking functions such as accepting credit card transactions and processing deposits would implicate the bank in an illegal business and make the institution complicit in acting as an accessory after the fact.

A few banks have experimented with cannabis banking but have been hampered by Federal Reserve rules. One such credit union in Colorado formed as a “cannabis credit co-operative,” which was authorized under state law to operate without deposit insurance. Even so, because of its involvement with the marijuana industry, it was denied access to a master account, which is required for banks to transfer money by Fed wire.

Due Diligence Requirements – Even if banks were to engage in business with cannabis sellers after assurances from the feds that they will not be hassled, the increased due diligence responsibilities would be significantly greater than requirements for most, if not all, non-cannabis business accounts. Cash deposits of over $10,000 must be reported to federal authorities. For dispensaries and marijuana resellers, this could become a near daily occurrence. To ensure compliance, the banks would also be responsible for reviewing the licensing and permitting of marijuana growers and sellers, and even a small oversight could result in the bank handling what would be deemed as “illegal monies.” Under the Bank Secrecy Act (BSA), not reporting pertinent information or discrepancies with a Suspicious Activity Report (SAR) could open the bank up to a FinCEN investigation. These actions could be considered a felony, exposing the institution, along with its executives and shareholders, to litigation, criminal prosecution, and possible fines and sanctions.

Anti-Money Laundering Punishment and Sanctions – The Obama administration has provided guidance that was intended to alleviate concerns of the banks about accepting deposits from cannabis businesses. A change in policy by the incoming Trump administration could reverse the present stance by taking a hardline against banks accepting deposits from the cannabis industry. Since possession or distribution of marijuana still violates federal law, banks that provide support or participate in banking activities for businesses involved in federal crimes, can be found in violation of federal anti-money laundering laws. FinCEN, the government regulatory agency that oversees financial crimes, has the ability to impose millions of dollars in fines or even revoke a bank’s FDIC designation if it sees fit.

Taking The Next Step

The combination of the continued federal criminalization of marijuana, the uncertainty presented by the current transition of presidential administrations, the heightened compliance requirements, and the overall lack of clear guidelines and uniformity has made banks reluctant to test the waters. With California’s cannabis market projected to become the biggest in the nation within only a few years, Chiang is proactively seeking solutions to the banking concerns and other obstacles facing the industry before full-scale commercialization takes effect in 2018.

Earlier this month, Chiang penned a letter to President-elect Donald Trump and members of California’s congressional delegation to seek guidance in finding a solution to cannabis banking restrictions. Chiang indicated that revenue from cannabis businesses in California is expected to be upward of $7 billion annually, with state and local taxes likely to be in the neighborhood of $1 billion. Without banking, California pot dispensaries have been forced to carry bags of cash to state offices just to pay their tax bill. It gets even trickier for marijuana businesses to pay their federal payroll tax, considering that the IRS requires those payments be remitted by bank wire.

In his letter to Trump, Chiang wrote, the “conflict between federal and state rules creates some difficulties for states that have legalized cannabis use, including collecting taxes, increased risk of serious crime and the inability of a legal industry under state law to engage in banking and commerce.” Chiang went on to claim that federal policies have not offered financial institutions the assurances they need to interact with the cannabis industry. And the sheer size of the California market will only serve to emphasize the necessity of the U.S. Congress to urgently address the problem through legislation.

On January 20, President-elect Trump will usher in a new agenda and be forced to take a position on where he stands on federal legalization. Although Trump has not called for outright legalization at the national level, he has expressed his support for medical marijuana and for allowing states to make their own decisions on the matter. With recreational marijuana now legal in eight states, and 24 states having some form of medical marijuana legalization, it is time for legislators in D.C. to begin the process of reforming regulations that continue to restrict the legal cannabis industry from fairly engaging in banking and commerce.

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