Disclaimer: This column is written for educational purposes only. It does not provide specific legal advice and does not create an attorney-client relationship. This column should not be used as a substitute for competent legal advice from a licensed attorney in your state.
The cannabis industry's banking crisis has been brewing for years, but in recent months it's been gaining more attention. In 2016, nearly $7 billion worth of marijuana and marijuana products was sold within the United States. U.S. marijuana sales are projected to rise 35 percent in 2017, with the market reaching $17 billion in annual sales by 2021. Now that recreational marijuana has been legalized in California (effective January 1, 2018), the state's cannabis market alone has a projected value of $7 billion. Of this $7 billion, $1 billion is expected to be collected in taxes by state and local governments. However, the large majority of these profits may never be deposited into bank accounts.
So far, the industry has remained largely "unbanked." Many of the estimated 7,000 to 11,000 legal plant-touching cannabis businesses in the U.S. operate primarily in cash, leaving owners and employees vulnerable to burglary, armed robbery and other violent crime. Major banks and credit card companies are especially wary of doing business with growers, manufacturers and dispensaries "out of fear they'll be penalized for money laundering," as one Los Angeles Daily News piece put it. Even the 14,000 to 22,000 legal, non-plant-touching businesses face difficulty finding consistent financial services. Unfortunately, because marijuana is still listed as a Schedule I drug in the federal Controlled Substances Act, most federally chartered banks and credit unions refuse to work with cannabis businesses.
The Obama-era Cole Memo, which is still in effect, set forth eight priorities for the federal government in enforcing marijuana-related crimes. In response to the Cole Memo, the Financial Crimes Enforcement Network ("FinCEN") issued Guidance laying out how financial institutions can potentially provide services to marijuana businesses in a manner that would be consistent with their obligations under the Bank Secrecy Act. The Bank Secrecy Act requires financial institutions in the U.S. to assist the federal government in detecting and preventing money laundering. Financial institutions are obligated to report suspicious activities that might amount to money laundering, tax evasion and other criminal activities.
FinCEN's 2014 Guidance confirmed that financial institutions choosing to service state legal marijuana businesses must file a suspicious activity report ("SAR") if the institution knows, suspects, or has reason to suspect that any transaction involves funds derived from illegal activities. However, while this Guidance provides a means for financial institutions to work with cannabis businesses, the SAR obligations are so burdensome and risky that a majority of financial institutions have chosen not to serve any marijuana businesses. Still, banks are required to file a SAR even if they don't serve marijuana-related businesses. As of March 31, 2017, FinCEN reports that nearly 300 banks and 100 credit unions have filed 28,651 SARs associated with cannabis businesses.
Without access to financial services, marijuana-related businesses operate primarily in cash, meaning that payroll, taxes, utilities and vendor services are often paid for completely in cash. A lawyer for one California-based medical marijuana dispensary revealed that the business pays over $325,000 each year in salaries to employees who only deal with cash handling, and estimates that it loses $1 million annually due to the burdens of cash handling. Not only is this time consuming and costly, it's also dangerous. To pay taxes, dispensary employees, growers and manufacturers often have to physically deliver duffel bags containing hundreds of thousands of dollars in cash to local and state taxing authorities. Because they are so cash-intensive, these businesses have become targets for crime. Last year, the manager of a Los Angeles dispensary shot two armed robbers attempting to steal cash from the dispensary.
In December of 2016, California Treasurer John Chiang organized the Cannabis Banking Working Group ("CBWG") to explore options and come up with recommendations to address the banking issues that cannabis businesses face. The group is made up of 17 stakeholders including representatives from state agencies, financial groups and cannabis industry organizations. CBWG has held six meetings so far in various cities around the state.
On August 10, the group met in Los Angeles to discuss the option of setting up a public, state-run bank. Public banks are owned and operated by the people through their representative governments. They can exist at any level of government. While privately owned banks have shareholders who typically seek short-term profits as their highest priority, publicly owned banks serve the public's interest first. Profits earned by public banks are returned to the general fund, giving them the ability to reduce taxes within their jurisdictions. Public banks do not need to charge interest to themselves, which can reduce the costs of public projects by 50 percent when the projects are funded through public banks.
However, public banks in the U.S. are extremely rare. The Bank of North Dakota, created in 1919 to serve farmers and others struggling to gain access to commercial banks, is the only public bank currently operating in the U.S. Public banks are not subject to all of the same federal regulations as other banks because their transactions are backed by the state rather than the Federal Deposit Insurance Corporation. Thus, they could be a promising option to provide financial services to cannabis businesses.
Los Angeles and Oakland are both considering the option of opening city-run banks so they can use marijuana funds to build public infrastructure and make low-interest loans to needy residents. However, opponents to the idea of public banks cite the fact that federal regulators have shut down similar plans for a dedicated marijuana credit union in Colorado. Experts say that even if a state-run bank adhered closely to federal guidelines, federal regulators could still seize cannabis money so long as marijuana is federally illegal. It's predicted that it would take years and cost California $2 billion to set up a state bank. While this was disheartening news for supporters of the public bank option, it is still being considered as a possible solution. If California does collect an estimated $1 billion in marijuana taxes each year, there is the potential that the costs to set up a public bank could be offset using a portion of these funds. The Cannabis Banking Working Group will meet one final time in Sacramento this fall to draft their final recommendations.