Beginning on January 1, 2018, California began issuing licenses to businesses for commercial cultivation, distribution, and sale of cannabis for recreational purposes. The legalization effort was pushed for many years, finally being approved by voters in the November 2016 general election. While the cannabis market promises to be an economic and tax boon for California, it is not without its regulatory and financial challenges.
With this legalization comes an intensely regulated environment for cannabis businesses to follow. First, cannabis businesses must contend with local and state laws in operating a business. These regulations include tracking their product from plant to sale, land uses restrictions, as well as reporting all income collected as a result of cannabis sales. Aside from the elephant in the room that is the conflict between legalization and the state level and continued criminalization at the Federal level; one of the biggest, if not the biggest, obstacles facing the rapidly expanding cannabis industry is the lack of access to financial services providers.
Under federal law, any national bank or financial institution that engages in illegal activity could face penalties including revocation of their National Association charter and possible loss of FDIC insurance. This threat has made most national banks wary of engaging with cannabis businesses for fear of federal regulatory reprisals.
The lack of access to financial services, especially banking, has made it difficult for cannabis businesses to participate in commerce. Since most cannabis businesses transact almost exclusively in cash, the degree of difficulty for some of the most basic accounting tasks, such as paying bills, making payroll, and paying taxes, is increased exponentially.
During the Obama administration, the federal government relaxed its position on cannabis in states with some level of cannabis legalization, including the issuance of the Ogden and Cole Memoranda, which provided guidance to U.S. attorneys and discouraged them from allocating resources to prosecute cannabis businesses that were compliant with a robust regulatory environment at the state and local level.
However, this memorandum was recently rendered null when Attorney General Jeff Sessions issued his own memorandum. The thrust of the Sessions Memorandum is that U.S. attorneys should execute the prosecutorial discretion given to them when deciding whether or not to prosecute a defendant, which discretion should be exercised in accordance with “Well-established principles that govern all federal prosecutions.” These principals require a prosecutor to weighing all relevant factors, including “federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes in a community.” While the Sessions Memo does not mandate that U.S. attorneys in states with legalized cannabis prosecute cannabis businesses, it contributes to the ongoing hurdles faced by legalized cannabis businesses by failing to add any clarity to the situation.
This volatile and uncertain legal and regulatory environment has caused headaches for both banks and cannabis businesses. Other cannabis-friendly states, such as Colorado, have begun working on solutions for their legitimate cannabis businesses.
A recent settlement between a Colorado credit union and the Federal Reserve Bank of Kansas City provided the Denver credit union with a master account, allowing it to engage in bank-to-bank services such as check cashing and money transfers. The settlement comes after the credit union sued the Federal Reserve in 2015 for refusing to issue it a Fed account. While the Federal Reserve finally agreed to provide an account to the credit union, the institution must still comply with certain conditions before it is allowed to engage with cannabis-related businesses. Of general concern, is the requirement that the credit union does not engage with cannabis-related companies until it becomes federally legal to do so. This stipulation makes it nearly impossible to provide bank services to the industry until lawmakers in Congress choose to act.
In California, state lawmakers and government agencies have decided to take the matter upon themselves.
John Chiang, State Treasurer and a proponent of legal cannabis, has said that the DOJ’s stance on cannabis has made it more difficult to address the needs of California’s new multi-billion dollar industry. “The recent action taken by Attorney General Sessions threatens us with new national divisiveness, and casts into turmoil a newly established industry that is creating jobs and tax revenues,” Chiang said in a statement.
Chiang announced that he and the state Attorney General’s Office would undertake a feasibility study to consider the legal and financial risks to opening a state-run cannabis bank. In an attempt to gather information related to the venture, the Treasurer’s Office released a Request for Information (RFI) to industry stakeholders to solicit input. Chiang estimates that the report would be ready for publication by the end of 2018.
This announcement came after the state legislature introduced Senate Bill 930, which would allow certain financial institutions to work with cannabis businesses to issue checks, conduct payroll activities, and pay their bills with cannabis-related revenue. The bill’s sponsor, Sen. Bob Hertzberg (D-Van Nuys) said that the bill would allow retailers to engage in business without having to manage and handle large piles of cash.
“These businesses handle significant economic activity, yet they are forced to operate under the table and with little government oversight, as if they’re a black-market operation,” Hertzberg said.
State Treasurer Chiang had previously commissioned a panel known as the Cannabis Working Group, tasked with finding banking solutions for the California cannabis industry. As of yet, it appears that the 17-member group has not been able to find a fix-all solution to the lack of financial services facing cannabis businesses. However, Chiang felt confident that the state could solve the problem without the help of the federal government.
“The current administration is out of step with the will of the people … not only those in California, but the 29 states that have legitimized either or both medicinal and recreational use cannabis,” Chiang said. “Until the slow, clunking machinery of the federal government catches up with the values and will of the people it purportedly serves, states like California will continue to both resist, and more importantly, to lead.”
As of February, only 13 out of California’s 58 counties have passed ordinances allowing commercial cannabis activity. Because of the slow-rolling actions of municipalities to act on legal cannabis, more businesses will likely remain in the shadows and continue to operate outside of the legal framework.
The limited access to banking services only serves to exacerbate the problem, restricting the movement of money and reducing the amount of investment capital available to fuel this burgeoning new billion-dollar marketplace. It also highlights the importance that California’s state government must place upon finding a permanent solution to the cannabis banking conundrum.
