California legislature considering legislation that would create state-chartered banks for cannabis businesses

May 16, 2019

The California State Senate is currently considering a bill that would allow marijuana businesses to bank with state-chartered banks and credit unions.

Senate Bill 51 would establish state-chartered banks and credit unions that could provide typical banking services to marijuana retailers and growers. The bill just has to survive the dreaded “Suspense File” reading in the Senate Appropriations Committee first.

The California State Treasurer’s Office convened a panel in 2018 to determine how best to address the cannabis banking business crisis. The panel found that “large amounts of cash make cannabis businesses, their employees, and their customers targets of violent crime.”

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The panel also stated that “banking relationships can help law enforcement officials and regulators distinguish between legal cannabis businesses from illegal market operators.”

“As policymakers, we have a duty to further the will of the voters while protecting the public safety of our constituents,” author of the bill California Senate Majority Leader Robert Hertzberg said during a Press Release last month, upon introducing SB 51.

“This measure is by no means the ultimate solution, but it’s just one small step in the right direction to get some of this money off the streets and into bank accounts,” Hertzberg concluded.

What does the bill propose?

If passed as currently written, SB 51 would allow for the creation of cannabis-limited, or cannabis-specific, limited charter banks and credit unions. The purpose of these chartered banks and/or credit unions would be to authorize the use of special-purpose checks issued by the cannabis banks for specific financial transactions.

By establishing cannabis banks, marijuana entrepreneurs that have faced outright exclusion from the traditional banking system would be allowed to access depository services at state-approved cannabis banks.

Additionally, SB 51 would allow private banks or credit unions to apply for a state charter, enabling these banks to provide specific services to state-licensed cannabis firms, growers, and retailers.

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The impetus for this legislation is two-fold: ensuring that licensed cannabis businesses can accurately and safely monitor funds from business procedures, and to ensure protections for those banks that partner with marijuana businesses.

California’s legal cannabis industry has not been quite the cash-crop that legislators initially hoped for. Just last week, California Governor Gavin Newsom announced that the state’s budget plan had cut cannabis tax revenue projections by approximately $223 million.

Due to the fact that marijuana is still considered a Schedule I drug by the Federal government, many banks refuse to partner with marijuana businesses. This forces marijuana entrepreneurs to conduct their business primarily in cash, as they are unable to open bank accounts with federally chartered financial institutions.

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While there are federal efforts to find a way to allow those states that have legalized marijuana for recreational use to establish safe cannabis banking practices, it seems that it’s going to be a state-by-state battle.

“Banks are scared to death, and they just don’t want the expense and the trauma of exposing themselves,” Gavin Kogan, chairman and co-founder of Grupo Flor told CNBC. “We appreciate the state’s efforts here on the banking bill, but it may take congressional action to finally solve this.” 

What are the bill’s chances of survival?

Earlier this week, the Senate Appropriations Committee placed SB 51 on the Suspense File, a list of state bills that have a significant fiscal impact. Legislation with significant costs to the state face particular scrutiny.

The Appropriations Committee reviews these bills and determines if they will go on to the Senate or Assembly floor for further review.

A similar bill by Hertzberg, SB 930 was introduced last year, and failed to make it off of the Suspense List.

According to the Senate Appropriation Committee’s analysis, the bill would create costs to the state Department of Business Oversight as this organization will be responsible for chartering the new banks and credit unions.

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While the overall cost depends on how many new banks would actually be created, it is estimated that the implementation of this bill could cost up to $2 million per annum. The majority of the funding, roughly $1.8 million per year, would go towards conducting field examinations on the new banks and credit unions.

There are also unknown costs to the State Treasurer’s Office, the State Controller’s Office, the Bureau of Cannabis Control, and the Department of Finance for additional workloads.

Pot-policy trackers will have to wait and see how the Suspense File reading goes to see if this iteration of a cannabis banking bill survives in California.

(Update since this article was written: SB 51 passed appropriations as of today.)

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