Spurred by the recent shift in federal policy, California appears to be inching closer to a state-run bank for the burgeoning marijuana industry.
What happened
As of Jan. 1, California joined the growing number of states to legalize the use of recreational marijuana for adults. But the new industry presents a recurring problem found in other states with similar measures: how to provide banking services when federal law still prohibits the drug.
Because the Controlled Substances Act bans the possession and sale of marijuana, the majority of cannabis businesses are run on cash. Some efforts have been made to alleviate the problem, particularly under the Obama administration. The Department of Justice adopted a hands-off federal policy that deferred to state governments as set forth in the “Cole Memo,” a memorandum issued by then-Deputy Attorney General James M. Cole to all U.S. attorneys on the issue of enforcement of federal anti-marijuana laws in light of growing state acceptance.
The Financial Crimes Enforcement Network also weighed in, issuing guidance on how to work with marijuana-related businesses while still complying with due diligence expectations and reporting requirements consistent with Bank Secrecy Act obligations.
However, that approach changed with the release of a one-page memorandum from Attorney General Jeff Sessions in January 2018. Reversing course, the Attorney General emphasized that marijuana remains illegal under federal drug laws and specifically referenced a provision of the BSA that requires financial institutions to create and maintain sufficient anti-money laundering policies and procedures.
What is a state to do? In California, the answer may be take matters into its own hands.
State Treasurer John Chiang announced that he and the state Attorney General’s Office will jointly undertake a feasibility study to consider the financial and legal risks of a state-run bank dedicated to the marijuana industry. The Treasurer’s Office will focus on structure and funding while Attorney General Xavier Becerra will take a closer look at the jurisdictional and legal responsibilities, Chiang added.
“We are contending with the emergence of a multibillion-dollar cannabis industry that needs banking services and a private banking industry that is stymied by federal law in meeting the needs of this new industry,” Chiang said in a statement. “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.”
To help gather data, the Treasurer’s Office released a Request for Information (RFI) asking for input from stakeholders. Chiang estimated the report will be complete by the end of 2018.
The announcement followed a new bill introduced in the state legislature that would allow certain financial institutions to work with licensed growers and retailers to issue certified checks, pay their rent and conduct payroll activities. Senate Bill 930 would allow the state to collect much-needed tax revenue and permit retailers to safely pay employees without the burden of large piles of cash, explained sponsor Sen. Bob Hertzberg (D-Van Nuys).
“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,” Sen. Hertzberg said in a statement.
To read Senate Bill 930, click here.
Why it matters
In the absence of changes in federal law and regulation, eventually a solution for effectively providing banking services to the marijuana industry will be tried by one or more state or local governments. The California study follows up on the efforts of the Cannabis Working Group, a 17-member group led by Chiang that met several times and tried to come up with a financial services solution to the new marijuana industry in the state. In his announcement of the study, Chiang remained confident that the state will solve the problem—without the help of the federal government. “The current [federal] 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,” he 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.”