With the passage of California Proposition 64, the California Marijuana Legalization Initiative, in November, 2016, came a plethora of questions surrounding the regulatory processes that must be established before the sale of adult-use cannabis begins on January 1, 2018.
The primary question: How does the state bank the cannabis industry? It seems paradoxical to require these businesses to pay taxes, yet not allow them to have bank accounts to pay these taxes in a safe and efficient manner.
I have been a strong, active proponent of finding a solution to this banking issue. When California State Treasurer John Chiang invited me to participate on his Cannabis Banking Working Group – a diverse group of stakeholders within the cannabis industry – and help pinpoint specific issues and create implementable solutions, I proudly accepted.
The working group’s mission was conveyed by Chiang in his opening address at the first group meeting in Sacramento on December 19th:“It is the will of the people of California that recreational cannabis use is accepted and permissible for use under state law. Cannabis use in some form, whether for medicinal or recreational use, is legal in many other states. Meanwhile, the machinery of the federal government is clunking along behind the trending preferences of the American people. The people increasingly proclaim cannabis use as acceptable, yet federal law maintains its use as a crime. There may be a disconnect between understandable risk avoidance and risk management as a result of this seeming conflict between federal and state law. Yet, despite these phenomena, guidance does exist. Perhaps we need an evolution of this guidance to avoid devolving into a ‘don’t ask don’t tell’ environment for banking.”
One of the first policy items we in the group heard centered on safety issues that coincide with an all-cash industry. I have heard first-hand from several cultivators, dispensary owners, and manufacturers about how dangerous it is for them to transport a duffel bag full of cash several hundred miles just to pay their taxes. Not only is the cash collection dangerous for those in the cannabis industry, but is also makes the facilities managing cash payments more vulnerable to crime, and impedes the general course of commerce.
The meeting highlighted challenges from banking in California due to the fact that cannabis is still classified as a schedule 1 drug federally, and therefore banks often do not accept cash from the cannabis industry since they are insured by the Federal Deposit Insurance Corporation (FDIC). This meeting created a forum for stakeholders to share their concerns, and set the groundwork for additional meetings throughout the state.
The second meeting on February 10 focused on the disconnect between the federal and state policy, with the main concern being what – if any – amendments President Trump might make to the 2013 Cole memo regarding how the feds should not interfere with marijuana businesses that are following state laws.
Speakers also mentioned the need for upgraded equipment and technology in order to more safely and efficiently collect cash, such as installing smart safes and shifting from annual payments to quarterly or monthly to break up the amount of cash being transported. There will also be an increase in staffing and workload that will occur from ramping up facilities and security.
Todd Boui, the assistant director of finance for the Los Angeles Office of Finance, also mentioned the need for point-of-sale cash registers in dispensaries to allow states and counties to establish whether or not they are receiving accurate tax payments based on receipts.
In the third working group meeting on March 27, panelists included Russell Rosenthal, president of Solale Credit Union in Seattle; Andrew Freedman, who recently left his position as director of marijuana coordination for Colorado and is now working as a consultant about the business with Louis Koski, also in attendance at the meeting, who was the head of Colorado’s Marijuana Enforcement Division.
Freedman described how the federal Financial Crimes Enforcement Network’s (FinCEN) guidelines scared several banks away from the industry, and discussed two types of emerging banks – those who stringently abide by FinCEN guidance, and those banks trying to work around it.
Koski said that the working group’s conversations are strikingly similar to those in Colorado, which led to the Colorado’s Department of Revenue’s decision to create a regulated framework for the industry that would help build trust from the banks and the federal system.
Part of this framework is the implementation of a seed-to-sale system that relies on robust record-keeping requirements, as well as security systems built-in to the regulations.
I have toured Washington and Colorado, and was impressed with what these states have been able to do so far. The stark difference we must consider is that California is substantially larger than both states, and our cannabis industry is exponentially more robust as well.
I believe California can implement parts from these states where we can, yet understand more needs to happen. The upcoming meetings for the working group, on May 4 in Santa Rosa, and (tentatively) July 7 in San Diego, will include discussions of the options of state and industry banks, and include panelists from the federal level, which I believe is the key that we need to unlock any solutions in California going forward.
For more information about the Cannabis Banking Working Group, visit: http://www.treasurer.ca.gov/cbwg/index.asp.