A legislative proposal to create a limited-service banking system for the California cannabis industry crossed an important hurdle last week when the State Senate Bank and Financial Institutions Committee unanimously approved the bill.

Senate Bill 930’s author State Sen. Robert Hertzberg (D-Van Nuys) introduced the bill on Jan. 25, 2018 to address the fact that the federal prohibition on marijuana makes traditional banking difficult for most California cannabis businesses. It would provide for “cannabis limited charter banks,” that could issue certified checks to pay state and local taxes, rent and vendors serving cannabis businesses. The bill is fairly general and would likely change and become more detailed were it to be approved by the State Legislature.

U.S. Treasury Department guidelines allow federally-chartered banks to serve cannabis clients, but require such banks to maintain records and issue special reports specifically on cannabis accounts. As a result, most commercial cannabis operators have chosen to transact in cash. This causes numerous practical challenges, including the need to transport and store large amounts of cash and the inability to write checks or make direct electronic deposits.

SB 930 addresses some of the banking issues facing cannabis businesses, but not all. The bill notes that cannabis limited charter banks will not be prohibited by the state from “obtaining private insurance,” but does not create a state-backed financial insurance option that would replace the Federal Deposit Insurance Corporation. In addition, the bill would limit payment options to paper checks, because electronic fund transfers are regulated by the federal Electronic Fund Transfer Act, placing any electronic transfers under federal authority.

Under SB 930, the California Department of Business Oversight would oversee the new limited banking system, but the department has not taken a position on Hertzberg’s bill. Last year, the department discussed setting up a network of financial institutions that would guarantee to federal banking regulators that the accounts they hold are subject to special tracking, oversight and transparency, but nothing concrete has come of those discussions.

Suffice it to say, the appointment of Jeff Sessions as the United States Attorney General did not remove uncertainty from the cannabis industry. How our new Attorney General will approach the industry remains unclear. Indeed, a quick search of the Office of the Attorney General’s website under “News and Speeches” shows no press releases regarding “cannabis.”

However, Attorney General Jeff Sessions’ March 15, 2017 speech on efforts to combat violent crime and restore public safety does merit consideration not only for what it says, but also for the opportunity that it offers – a way forward that aligns the federal government and the cannabis industry.  Attorney General Sessions opined:

“Criminal enforcement is essential to stop both the transnational cartels that ship drugs into our country, and the thugs and gangs who use violence and extortion to move their product. One of the President’s executive orders directed the Justice Department to dismantle these organizations and gangs – and we will do just that.

… we need to focus on the third way we can fight drug use:  preventing people from ever taking drugs in the first place. 

I realize this may be an unfashionable belief in a time of growing tolerance of drug use. But too many lives are at stake to worry about being fashionable. I reject the idea that America will be a better place if marijuana is sold in every corner store. And I am astonished to hear people suggest that we can solve our heroin crisis by legalizing marijuana – so people can trade one life-wrecking dependency for another that’s only slightly less awful. Our nation needs to say clearly once again that using drugs will destroy your life.”

Attorney General Sessions is charged with enforcing federal laws, and this author does not disagree that drug abuse can “destroy your life.” However, the Attorney General’s comments offer the chance for a more constructive dialogue – i.e., what is the most effective approach to prevent criminal exploitation of the cannabis business?

The focus of effective regulation of the cannabis industry should be on money laundering, which is a federal crime under the Money Laundering Control Act of 1986 (18 U.S.C. §§ 1956, 1957). Money laundering is the process of concealing the true source of funds by using financial systems or services that do not identify or trace the sources or destinations of those funds.  See 18 U.S.C. § 1956(a).

In fact, preventing such unlawful activity is the focus of Financial Crime Enforcement Network (FinCEN) guidance issued to financial institutions in 2014. FinCEN’s stated mission is “to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.”  Accordingly, FinCEN sought to promote greater financial transparency in the cannabis industry and mitigate the dangers associated with all-cash businesses – i.e., money laundering and criminal activity – through its guidance to banks.  In this regard, it was a thoughtful approach.

Moreover, FinCEN’s focus on money laundering to combat unlawful activity is not unique. For instance, the Financial Action Task Force (FATF) is a 33-member organization with primary responsibility for developing a worldwide standard to prevent money laundering that is used to finance terrorism. FATF was established in 1989 at the G-7 Summit in Paris, and it works closely with the International Monetary Fund (IMF), the World Bank, and the United Nations, among other regulatory bodies.

According to the IMF, “[a]n effective anti-money laundering/counter financing of terrorism framework must . . . prevent, detect and punish illegal funds entering the financial system and the funding of terrorist individuals, organizations and/or activities,” as well as “ aim at attacking the criminal or terrorist organization through its financial activities, and use the financial trail to identify the various components of the criminal or terrorist network. This implies to put in place mechanisms to read all financial transactions, and to detect suspicious financial transfers.” This policy position sounds exactly like what FinCEN sought to do by its 2014 guidance to financial institutions who work with cannabis businesses.

While many entrepreneurs are currently attempting to devise acceptable workarounds to the federal banking system so as to remove the all-cash element from the cannabis industry, an effective long-term strategy for regulating the industry to prevent criminal enterprises from using it for unlawful purposes would be to allow cannabis businesses full access to our banking institutions. In fact, on December 14, 2016, ten United States Senators wrote to FinCEN to make this very point. Perhaps it is time that the United States Attorney General recognize that the most effective way to combat drug crime is by hitting criminals where it hurts the most – in their wallets – and not by preventing state-authorized businesses access to a checking account at institutions that are subject to federal oversight. Legitimate cannabis businesses who are allowed access to a federally-regulated banking system will help bring the industry out of the metaphorical shadows and could also help make the Attorney General’s job of prosecuting criminals easier.

Remember, Al Capone was never convicted for being a bootlegger, and during Prohibition the U.S. Treasury Department authorized doctors to write prescriptions for booze.

Simply stated, voter approval of Prop. 64 did not solve the California Cannabis Industry’s banking problem. It does not matter that cannabis – recreational or medicinal – is legal in California. In order to participate in the Federal Deposit Insurance Corporation (FDIC) program that insures all accounts, banks must comply with federal law. And, as we all know, marijuana is still deemed illegal under federal law.

The benefit of the FDIC program should not be underestimated. The FDIC sign, which is posted at every insured bank and savings association across the country, is a symbol of confidence for Americans in our banking system. It means that if the banks fail, most people (those with $250,000 or less in their accounts) will get all of their money back. Concerns about being shut out of the FDIC program or losing their charters have made banks reluctant to work with cannabis businesses (i.e., limiting the services provided to them), or more typically, disinterested altogether.

There have been limited exceptions to the banking industry’s general refusal to service cannabis operators. At least one Colorado-based bank, Safe Harbor Private Banking (https://safeharborprivatebanking.com/cannabis-banking/) is attempting to work with cannabis businesses. It claims to have passed “state and federal examinations,” and boasts of offering the “only compliance based cannabis banking program of its kind.” Unfortunately, the bank’s website is short on actual details, so it is unclear whether this purported model is really the panacea for the cannabis industry’s banking woes.

For the time being then, many cannabis businesses are – and will likely remain – cash businesses. Having no checking accounts, this can be a serious problem – try keeping all of your money safe and paying all of your bills in cash. To address this significant issue, California’s State Treasurer, John Chiang, recently convened a working group to study the matter and make recommendations as to how banks may be able to work with California cannabis businesses. However, while the Treasurer conducts his studies (which still require some federal cooperation to be effective long term), what can a cannabis business do to manage its finances? Well, there might be an app for that, particularly with respect to customer transactions.

The Portland Business Journal recently reported that a Colorado-based company, CanPay, has launched an electronic payment app in Colorado, Washington and Oregon that aims to take the cash out of the marijuana industry. The customer pays for product at the dispensary by accessing the site on his/her mobile phone. Then CanPay generates a single use token or a QR code, which is presented to the retailer for payment, who pays the transaction fee.

CanPay is not alone in the mobile app payment space. Medical Cannabis Payment Solutions similarly claims to be a payment solution that complies with both state and federal laws. While it is focused on medical cannabis, we assume that their focus will ultimately include payment solutions for states where recreational use of cannabis has been legalized. Like Safe Harbor Private Banking, though, the website is short on details, prohibiting us from fully vetting this payment platform.

Yet another app-based payment product, PayQwick claims to go beyond the customer transaction and offer cannabis business banking account access. PayQwick is a federally registered Money Services Business, and it is licensed by the Washington State Department of Financial Institutions and the Oregon Division of Finance and Corporate Securities as a money transmitter. PayQwick advertises its ability to take cash out of the customer transaction process, allowing cannabis retailers to pay producers/processors for inventory electronically and pay bills via online bill-pay, providing armored car cash pick up services, and providing cannabis businesses the ability to pay (Washington State) excise taxes electronically. PayQwick’s capabilities are worth looking into as they may serve as a model for other states going forward.

In future blog posts, we will explore in more detail the various approaches that are being taken to address the banking issue confronting the cannabis industry. While our focus will remain on California, we nevertheless believe that industry players in other markets still may be able to provide insight into how the cannabis industry can shift from a cash-only operation model to a more traditional (and bankable) position.