Recently, SB 930 (Hertzberg), was amended to created a state-chartered banking system in California that would allow banks to offer basic services to cannabis businesses.
Under the bill, banks that are not a part of the federal banking network would be allowed to apply for a license through the Department of Business Oversight. This license would allow a bank to 1) create accounts; 2) accept deposits; 3) issue “special purpose” checks; and 4) join in a network with other state licensed banks. Account holders could use the special purpose checks to pay taxes, rent, and vendors, and invest in state and municipal bonds.
For many in the industry, SB 930, comes as a welcomed solution to the cash-crisis that plagues the industry. However, despite it’s promise, the largest obstacle to a long-term functional banking solution remains: the federal government.
In 2013, U.S. Deputy Attorney General James Cole issued guidance, commonly referred to as the “Cole Memo” that said the federal government would not prosecute marijuana businesses where state’s had created a strong regulatory system, and kept the drug away from children, other states, and profits away from drug cartels.
In 2014, the U.S. Treasury issued guidance that said it would not charge banks with a federal crime for offering services to the industry as long as they ensured the businesses were following all state rules and the directives laid out in the Cole Memo.
Colorado and Washington, both early adopters of legal adult-use, used the guidance provided by the Cole Memo to encourage banks to engage with the industry. In doing so, the banks in these states adopted stringent requirements and invested heavily in compliance staff. The result of these actions was twofold: 1) banks turning down more accounts than opened because the businesses were not fully compliant with state law, thus violating the directives of the state law and the Cole Memo; and 2) higher banking costs for the account holder to cover compliance overhead and longer delays in processing basic banking transactions.
With the recent repeal of the Cole Memo and the Trump Administration’s lawsuit against California’s “Sanctuary State” laws, it’s not impossible to assume that the federal government would use every leverage point, including heavy enforcement and large penalties to serve as a strong deterrent for any bank, state-chartered or not from servicing the industry.
For businesses in the industry, it’s almost impossible to predict how a banking system such as the one created by SB 930, would work, and that’s assuming the bill passes the Legislature and is signed by the Governor. However, the experience from many businesses in Colorado and Washington is a timely reminder that if this bill does become law, banks will require that each account holder is in 100% compliance with all laws and regulations for all the businesses in the supply chain. Remember, one unlicensed link in the chain could place your business license in jeopardy.
Now is the perfect time to review your business plan, licenses, and compliance with California’s rules to ensure your business is eligible to participate in the state-chartered banking system should it become law.