As California’s Medicinal and Adult Use Cannabis Regulation and Safety Act’s January 1 deadline for cannabis licensing draws closer, the cannabis industry’s lack of access to banking continues to concern industry members and regulators alike. While most businesses take their bank accounts for granted, a checkbook is the ultimate golden ticket for a cannabis-related business (CRB). The lack of access is due to cannabis’s federal status as a Schedule I substance under the Controlled Substances Act. Though California, like nearly 60 percent of states across the country, has created a legal framework to regulate cannabis, most financial institutions in the state will not service CRBs because of cannabis’s federal status. Consequently, these businesses must transact in cash. Cash reliance puts CRBs in grave danger, as criminals know cash-reliant businesses are easy targets for robberies. CRBs also have little choice but to pay their taxes in cash. Given the cannabis industry’s profitability, tax payments made in cash place an incredibly heavy burden on governmental agencies, which must dedicate a great deal of time and money to processing the colossal cash piles.
To thwart the cannabis cash complications that await California once the State begins licensing CRBs, California State Treasurer John Chiang formed the Treasurer’s Cannabis Banking Working Group, which brings together regulators and representatives from the banking and cannabis industries. For nearly a year, the working group has hosted public meetings, during which it has heard from banking experts, cannabis industry members, out-of-state regulators, and third parties with potential solutions. The meetings culminated in the treasurer’s November 7, 2017, report titled “Banking Access Strategies for Cannabis-Related Businesses.”
Concerns And Considerations
The report’s four focus areas are handling the collection of cash payments remitted for various taxes and fees, expanding the cannabis industry’s access to financial services under existing law, the possibility of creating a state-backed financial institution to service CRBs, and developing a strategy to change federal law and remove legal obstacles to cannabis banking.
To efficiently collect taxes and fees paid in cash, the report suggests using armored courier services to transport the payments to governmental agencies. The report also cites using smart safes, which are floor-bolted machines that take, count, verify, and credit cash, and money services businesses or third-party payment services as other means of more effective tax and fee collection.
To facilitate CRBs’ access to financial services, the report suggests financial institutions use compliance tools to ensure their CRB clients’ compliance. Further, the report states the California State Association of Counties is creating a localized database for cannabis licensing data, product tracking, and point-of-sale information to “provide critical compliance data to financial institutions.”
The report also offers two types of state-backed financial institutions as potential solutions. The first is a public bank, backed and owned by California’s taxpayers, which would operate akin to the Bank of North Dakota. The second is a bankers’ bank, which would serve as “a storehouse of information on cannabis banking…help financial institutions put in place programs to comply with [the] Cole Memorandum and FinCEN guidelines…[and] develop a template to standardize financial institution compliance operations.”
Finally, to remove federal restrictions on cannabis banking, the report calls for the creation of a “multistate consortium” to provide education about state cannabis policies and CRBs’ lack of access to financial services, maintain a central database of information about state cannabis laws, and participate in congressional and executive-branch policy advocacy.
The report refers to its first three focus areas as “stopgap measures to protect public safety, improve revenue collection, and bolster the safety and efficiency of the cannabis industry until federal law is changed.” However, as states with well-banked cannabis industries, like Washington, Oregon, and Colorado, illustrate, providing CRBs access to financial services is possible without change in federal law. By bringing together regulators, financial institution executives, and the cannabis industry, these states have significantly reduced their CRBs’ cash reliance, increased public safety, and improved tax and fee collection through means like electronic tax payments.
California’s cannabis industry cannot wait for a shift in federal policy or the creation of a public bank. Given the predicted profitability of the industry, an immediate solution is the only way the state’s CRBs and regulators can avoid the detrimental consequences of cannabis cash. The solution lies with local, state-chartered banks and credit unions, which are the financial institutions best suited to service CRBs. To facilitate financial services for CRBs, California’s banking regulators must directly educate and encourage financial institutions to service the cannabis industry. Furthermore, to increase their chances of accessing financial services, CRBs must remain fully compliant, keep accurate records of their financial transactions, and be willing to provide ongoing access to the information financial institutions need to perform thorough Know Your Customer due diligence.
Though gaining access to financial services is no easy task for CRBs, it is not impossible. Through outreach, education, and compliance, California’s cannabis industry can curb its cash reliance.
Sahar Ayinehsazian is an associate at Vicente Sederberg’s California Practice Group, where she specializes in cannabis banking, licensing, and regulatory compliance. Vicente Sederberg is one of the nation’s largest cannabis law firms, with offices in Denver, Boston, Los Angeles, Las Vegas, and Washington, D.C.