(1)Existing law, the Financial Institutions Law, regulates the activities of various financial entities, including commercial banks, industrial banks, trust companies, credit unions, and savings and loan associations. The Banking Law defines and regulates state banks and commits the enforcement of banking laws to the Commissioner of Business Oversight. The California Credit Union Law provides for the licensure and regulation of credit unions by the Commissioner of Business Oversight and makes a willful violation of that law a crime.

The Control, Regulate and Tax Adult Use of Marijuana Act of 2016, an initiative measure approved as Proposition 64 at the November 8, 2016, statewide general election, authorizes a person who obtains a state license under the act to engage in commercial adult-use cannabis activity pursuant to that license and applicable local ordinances. The Medicinal and Adult-Use Cannabis Regulation and Safety Act, among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities.

This bill would create the Cannabis Limited Charter Banking and Credit Union Law, to be administered by the Commissioner of Business Oversight and the Department of Business Oversight. The bill would create the Cannabis Limited Charter Bank and Credit Union Advisory Board and specify its composition, to include the Treasurer, the Controller, and the Chief of the Bureau of Cannabis Control, and commit to it the general responsibility for ensuring that this law functions in a safe and efficient way. The bill would prescribe the powers and duties of the board, including reviewing department enforcement reports, holding meetings that would be open to public comment, and issuing its own recommendations, which would be submitted to the Legislature and the Governor. The board would also be required to provide guidance on specified investment activities.

The bill would provide for the licensure and regulation of cannabis limited charter banks and credit unions for the purpose of providing limited banking services, as defined, to cannabis businesses. The bill would require a person who desires to be licensed as a cannabis limited charter bank or credit union to submit an application to the department, and would require that person to elect to form under either the Banking Law or the California Credit Union Law. The bill would authorize the department to charge an applicant for a cannabis limited charter bank or credit union license a reasonable fee. The bill would require a licensee to comply with all requirements in the Financial Institutions Law, and either the Banking Law or the California Credit Union Law, as applicable, except to the extent that any requirement of those laws are inconsistent with a provision of the Cannabis Limited Charter Banking and Union Law. By expanding the application of the California Credit Union Law, a willful violation of which is a crime, the bill would impose a state-mandated local program.

This bill would authorize a cannabis limited charter bank or credit union to issue to an account holder special purpose checks that would be valid for only specified purposes. The bill would authorize a cannabis limited charter bank or credit union to cash the checks it has issued, including those presented by parties that are not account holders, as specified. The bill would permit these checks to be used for the payment of state and local fees and taxes, payment of rent on property leased by, or on behalf of, the account holders cannabis business, payment of vendors physically located in California, as specified, and the purchase of state and local bonds, as specified. The bill would provide that a person or entity is not required to accept these checks. The bill would require a cannabis limited charter bank or credit union to obtain and maintain insurance at all times that it is engaged in business, subject to certain requirements including that the insurance be in an amount acceptable to the commissioner. The bill would authorize a cannabis limited charter bank or credit union to charge fees for its banking services, and would authorize the commissioner, if requested by any person or whenever the commissioner deems appropriate, to review any fee charged. The bill would require a cannabis limited charter bank and credit union to provide the commissioner with a specified fee schedule, which information the department would be required to compile and post information on its Internet Web site. The bill would authorize a cannabis limited charter bank or credit union to enter into an agreement with another licensee to form a banking network, subject to the approval of the commissioner, to facilitate the provision of cannabis banking services. The bill would require the department to adopt emergency regulations and would prohibit the department from issuing a license for these purposes prior to July 1, 2019, except as specified. The bill would require the department to provide a specified report to the Senate Committee on Banking and Financial Institutions and the Senate Committee on Governance and Finance.

The bill would require a cannabis limited charter bank or credit union to adopt policies and practices to achieve the principles and goals outlined in the federal Bank Secrecy Act and cooperate with the federal Financial Crimes Enforcement Network. The bill would prohibit a cannabis limited charter bank or credit union from engaging in banking activity with any other financial institution that lacks a limited purpose charter issued under these provisions. The bill would prescribe a framework for the administration of its provisions. The bill would also make a statement of legislative findings.

(2)The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

(1)Existing law, the Financial Institutions Law, regulates the activities of various financial entities, including commercial banks, industrial banks, trust companies, credit unions, and savings and loan associations. The Banking Law defines and regulates state banks and commits the enforcement of banking laws to the Commissioner of Business Oversight. The California Credit Union Law provides for the licensure and regulation of credit unions by the Commissioner of Business Oversight and makes a willful violation of that law a crime.

The Control, Regulate and Tax Adult Use of Marijuana Act of 2016, an initiative measure approved as Proposition 64 at the November 8, 2016, statewide general election, authorizes a person who obtains a state license under the act to engage in commercial adult-use cannabis activity pursuant to that license and applicable local ordinances. The Medicinal and Adult-Use Cannabis Regulation and Safety Act, among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities.

This bill would create the Cannabis Limited Charter Banking and Credit Union Law, to be administered by the Commissioner of Business Oversight and the Department of Business Oversight. The bill would create the Cannabis Limited Charter Bank and Credit Union Advisory Board and specify its composition, to include the Treasurer, the Controller, and the Chief of the Bureau of Cannabis Control, and commit to it the general responsibility for ensuring that this law functions in a safe and efficient way. The bill would prescribe the powers and duties of the board, including reviewing department enforcement reports, holding meetings that would be open to public comment, and issuing its own recommendations, which would be submitted to the Legislature and the Governor. The board would also be required to provide guidance on specified investment activities.

The bill would provide for the licensure and regulation of cannabis limited charter banks and credit unions for the purpose of providing limited banking services, as defined, to cannabis businesses. The bill would require a person who desires to be licensed as a cannabis limited charter bank or credit union to submit an application to the department, and would require that person to elect to form under either the Banking Law or the California Credit Union Law. The bill would require a licensee to comply with all requirements in the Financial Institutions Law, and either the Banking Law or the California Credit Union Law, as applicable, except to the extent that any requirement of those laws are inconsistent with a provision of the Cannabis Limited Charter Banking and Union Law. By expanding the application of the California Credit Union Law, a willful violation of which is a crime, the bill would impose a state-mandated local program. Under this bill,

This bill would authorize a cannabis limited charter bank or credit union would be authorized to issue to an account holder special purpose checks that would be valid for only specified purposes. The bill would authorize a cannabis limited charter bank or credit union to cash the checks it has issued, including those presented by parties that are not account holders, as specified. The bill would permit these checks to be used for the payment of state and local fees and taxes, payment of rent on property associated with leased by, or on behalf of, the account holders cannabis business, payment of vendors physically located in California, as specified, and the purchase of state and local bonds, as specified. The bill would provide that a person or entity is not required to accept these checks. The bill would require a cannabis limited charter bank or credit union to obtain and maintain insurance at all times that it is engaged in business, subject to certain requirements including that the insurance be satisfactory in an amount acceptable to the commissioner. The bill would authorize a cannabis limited charter bank or credit union to charge fees for its banking services, and would authorize the commissioner commissioner, if requested by any person or whenever the commissioner deems appropriate, to review any fee charged. The bill would require a cannabis limited charter bank and credit union to provide the commissioner with a specified fee schedule, which information the department would be required to compile and post information on its Internet Web site. The bill would authorize a cannabis limited charter bank or credit union to enter into an agreement with another licensee to form a banking network, subject to the approval of the commissioner, to facilitate the provision of cannabis banking services. The bill would require the department to adopt emergency regulations and would prohibit the department from issuing a license for these purposes prior to July 1, 2019, except as specified. The bill would require the department to provide a specified report to the Senate Committee on Banking and Financial Institutions and the Senate Committee on Governance and Finance.

The bill would require a cannabis limited charter bank or credit union to adopt policies and practices to achieve the principles and goals outlined in the federal Bank Secrecy Act and cooperate with the federal Financial Crimes Enforcement Network. The bill would prohibit a cannabis limited charter bank or credit union from engaging in banking activity with any other financial institution that lacks a limited purpose charter issued under these provisions. The bill would prescribe a framework for the administration of its provisions. The bill would also make a statement of legislative findings.

(2)The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

(1)Existing law, the Financial Institutions Law, regulates the activities of various financial entities, including commercial banks, industrial banks, trust companies, credit unions, and savings and loan associations. The Banking Law defines and regulates state banks and commits the enforcement of banking laws to the Commissioner of Business Oversight. The California Credit Union Law provides for the licensure and regulation of credit unions by the Commissioner of Business Oversight and makes a willful violation of that law a crime.

The Control, Regulate and Tax Adult Use of Marijuana Act of 2016, an initiative measure approved as Proposition 64 at the November 8, 2016, statewide general election, authorizes a person who obtains a state license under the act to engage in commercial adult-use cannabis activity pursuant to that license and applicable local ordinances. The Medicinal and Adult-Use Cannabis Regulation and Safety Act, among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities.

This bill would create the Cannabis Limited Charter Banking Law, to be administered by the Commissioner of Business Oversight and the Department of Business Oversight. The bill would create the Cannabis Limited Charter Bank Advisory Board and specify its composition, to include the Treasurer, the Controller, and the Chief of the Bureau of Cannabis Control, and commit to it the general responsibility for ensuring that this law functions in a safe and efficient way. The bill would prescribe the powers and duties of the board, including reviewing department enforcement reports, indicating its approval or disapproval of these reports, and, if it elects, holding meetings that would be open to public comment, and issuing its own recommendations, including sanctions. which would be submitted to the Legislature and the Governor. The board would also be required to provide guidance on specified investment activities.

The bill would provide for the licensure and regulation of cannabis limited charter banks and credit unions for the purpose of providing limited banking and custodial services services, as defined, to cannabis businesses. A The bill would require a person who desires to be licensed as a cannabis limited charter bank or credit union to submit an application to the department, and would require that person to elect to form under either the Banking Law or the California Credit Union Law. The bill would require a licensee to comply with all requirements in the Financial Institutions Law, and either the Banking Law or the California Credit Union Law, as applicable, except to the extent that any requirement of those laws are inconsistent with a provision of the Cannabis Limited Charter Banking Law. By expanding the application of the California Credit Union Law, a willful violation of which is a crime, the bill would impose a state-mandated local program. Under this bill, a cannabis limited charter bank or credit union would be authorized to issue to an account holder special purpose checks that would be valid for only specified purposes. The bill would permit these checks to be used for the payment of state and local fees and taxes, payment of rent on property associated with the account holders cannabis business, payment of vendors located in California, as specified, and the purchase of state and local bonds, as specified. The bill would provide that a person or entity is not required to accept these checks. The bill would authorize require a cannabis limited charter bank or credit union to obtain and maintain insurance and at all times that it is engaged in business, subject to certain requirements including that the insurance be satisfactory to the commissioner. The bill would authorize a cannabis limited charter bank or credit union to charge fees for its banking and custodial services. services, and would authorize the commissioner if requested by any person or whenever the commissioner deems appropriate, to review any fee charged. The bill would authorize a cannabis limited charter bank or credit union to enter into an agreement with another licensee to form a banking network, subject to the approval of the commissioner, to facilitate the provision of cannabis banking services.

The bill would require a cannabis limited charter bank to comply with federal law, including the or credit union to adopt policies and practices to achieve the principles and goals outlined in the federal Bank Secrecy Act, and to Act and cooperate with the federal Financial Crimes Enforcement Network. The bill would prohibit a cannabis limited charter bank from participating in a federal financial network. or credit union from engaging in banking activity with any other financial institution that lacks a limited purpose charter issued under these provisions. The bill would prescribe a framework for the application, licensure, and enforcement administration of its provisions. By providing that certain examinations may be conducted under oath, the bill would expand the crime of perjury, thus imposing a state-mandated local program. The bill would also make a statement of legislative findings.

(2)The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

(1)Existing law, the Financial Institutions Law, regulates the activities of various financial entities, including commercial banks, industrial banks, trust companies, credit unions, and savings and loan associations.

The Control, Regulate and Tax Adult Use of Marijuana Act of 2016, an initiative measure approved as Proposition 64 at the November 8, 2016, statewide general election, authorizes a person who obtains a state license under the act to engage in commercial adult-use cannabis activity pursuant to that license and applicable local ordinances. The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), Act, among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities.

This bill would state the intent of the Legislature to enact subsequent legislation that would establish a state-chartered bank that would allow a person licensed to engage in commercial cannabis activity under MAUCRSA to engage in banking activities in California. create the Cannabis Limited Charter Banking Law, to be administered by the Commissioner of Business Oversight and the Department of Business Oversight. The bill would create the Cannabis Limited Charter Bank Advisory Board and specify its composition, to include the Treasurer, the Controller, and the Chief of the Bureau of Cannabis Control, and commit to it the general responsibility for ensuring that this law functions in a safe and efficient way. The bill would prescribe the powers and duties of the board, including reviewing department enforcement reports, indicating its approval or disapproval of these reports, and, if it elects, issuing its own recommendations, including sanctions. The board would also be required to provide guidance on specified investment activities.

Existing law, the Financial Institutions Law, regulates the activities of various financial entities, including commercial banks, industrial banks, trust companies, credit unions, and savings and loan associations.

The Control, Regulate and Tax Adult Use of Marijuana Act of 2016, an initiative measure approved as Proposition 64 at the November 8, 2016, statewide general election, authorizes a person who obtains a state license under the act to engage in commercial adult-use cannabis activity pursuant to that license and applicable local ordinances. The Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA), among other things, consolidates the licensure and regulation of commercial medicinal and adult-use cannabis activities.

This bill would state the intent of the Legislature to enact subsequent legislation that would establish a state-chartered bank that would allow a person licensed to engage in commercial cannabis activity under MAUCRSA to engage in banking activities in California.

Date of Hearing: August 8, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 930

Author:(Hertzberg) – As Amended Ver:May 25, 2018

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill enacts the Cannabis Limited Charter Banking and Credit Union Law to allow for the licensure and supervision of cannabis limited charter banks and credit unions authorized to offer limited depository services to cannabis businesses. Specifically, this bill:

1. Authorizes the Department of Business Oversight (DBO) to license a cannabis depository institution (CDI) and authorizes a CDI to accept deposits and issue an account holder special purpose checks that may be used only for specified purposes.
2. Authorizes state and local agencies to accept special purposes checks and specifies that no private or public entity is required to accept special purpose checks.
3. Requires a CDI to obtain and maintain private insurance for itself and its assets and authorizes a CDI to enter into an agreement with other CDIs to form a banking network.
4. Creates the Cannabis Limited Charter Bank and Credit Union Advisory Board (Board), comprised of the California State Treasurer, the California State Controller, and the chief of the Bureau of Cannabis Control, and requires DBO to submit to the board a report of annual enforcement activities. The Board must evaluate these reports and public comments and make recommendations to the Legislature and the governor on recommended actions.

FISCAL EFFECT:

1. Ongoing costs to DBO in the range of $2 million each year to adopt emergency regulations, process applications, conduct examinations, and enforce the provisions of the bill. These cost estimates rely on optimistic assumptions that enough banks participate in the proposed close loop system to make it viable. Costs would be lower to the extent that the system never becomes operational, though DBO would still incur initial costs of developing regulations and program development. (Financial Institutions Fund, Credit Union Fund)
2. Unknown, but likely modest costs for the treasurer, controller, and the chief of the Bureau of Cannabis Control to participate in the Board and develop recommendations to the Legislature.

COMMENTS:

1. Background and purpose. Federal law prevents some cannabis businesses from accessing financial services provided by banks and credit unions, including basic checking accounts and electronic payment services that nearly all business rely to facilitate transactions with their customers. As a result, most cannabis businesses in California lack basic banking services. According to a survey conducted by the California Growers Association in 2017, more than two-thirds of its membership is unbanked, with cultivators having the lowest level of access along the supply chain. Unbanked cannabis businesses are forced to transact primarily in cash, which presents public safety challenges and makes it difficult for state and local agencies collect taxes and enforce state laws.
2. The proposed banking solution. SB 930 proposed a “closed-loop” banking system that allows cannabis businesses, state and local agencies, and other vendors to accept checks. CDIs would be authorized to provide limited services, including the acceptance of deposits and the issuance and redemption of special purpose checks. These checks may be used only to pay fees and taxes to state and local government agencies, pay rent, pay vendors located in California for expenses related to goods and services associated with the cannabis business, and purchase bonds or similar debt instruments issued by state or certain local agencies. These checks may not be used in any other capacity and balances may not be transferred to other banks outside the system.
3. Will it work? SB 930 proposes a partial solution to the banking challenges facing cannabis businesses as a result of federal law. One way to think about this proposal is that it lays the foundation from which to build additional banking solutions for cannabis businesses. However, as prior policy committee analyses have noted, there are significant obstacles toward successful implementation of this bill. They include:
4. Unresolved tax collection issues. One of the stated reasons for SB 930 is to help these cannabis businesses pay their state and local taxes. However, it is unlikely local tax collectors will participate in this system. For one, under existing law local tax collectors cannot use a limited charter bank. Second, as a more practical matter, local tax collectors would still need to transfer money in their CDI accounts to other financial institutions, which may require security and other personnel. Thus, this new system simply shifts the public safety issues associated with cash transactions to another point in the banking process.
5. Insurance. This bill requires CDIs to obtain private insurance, a requirement that will be difficult to comply with and will add significant costs to participating CDIs. Typically, deposits at traditional banks and credit unions are insured by federal agencies with risk pooled across institutions and backed by the federal government. In contrast, a private entity willing to insure a CDI will likely charge high premiums given the risk associated with cannabis banking.
6. Federal law. SB 930 does not guarantee that CDIs will be protected from federal law enforcement. As the Assembly Banking and Finance Committee analysis notes, one unfortunate side effect of this bill could be the concentration of cannabis business assets into one or several easily identifiable institutions, making them an easier target of federal law enforcement action.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: June 26, 2018

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Evan Low, Chair

SBPCA Bill Id:SB 930

Author:(Hertzberg) – As Amended Ver:May 25, 2018

SENATE VOTE: 32-6

SUBJECT: Financial institutions: cannabis

SUMMARY: Provides for the licensure and supervision of cannabis limited charter banks and credit unions authorized to offer limited depository services to cannabis businesses. Restricts the activities of cannabis limited charter banks and credit unions to accepting deposits and issuing and redeeming special purpose checks. Prohibits a cannabis limited charter bank or credit union from engaging in banking activity with any other financial institution that lacks a limited purpose charter.

EXISTING LAW:

1. Defines licensee (Financial Code Section 185)
2. Establishes oversight of financial institutions by the Department of Business Oversight (Financial Code Section 300)
3. Allows for the corporate establishment of banking institutions (Financial Code Section 1003)
4. Establishes the Bureau of Cannabis Control (Bureau) under the Department of Consumer Affairs (DCA), to establish a comprehensive system to control and regulate the cultivation, distribution, transport, storage, manufacturing, processing, and sale of cannabis products. (Business and Professions Code (BPC) Section 26000 et seq.)
5. Establishes definitions for the purpose of implementing the regulation of cannabis and cannabis products. (BPC Section 26001)
6. Establishes that the Bureau, Department of Food and Agriculture (CDFA), and Department of Public Health (DPH), are the licensing and enforcement entities for the sale, manufacture, and cultivation of cannabis in California. (BPC 26012)

THIS BILL:

1. Adds any cannabis limited charter bank or credit union to the definition of licensee in the Financial Code.
2. Adds a new division within the Financial Institutions Law the Cannabis Limited Charter Banking and Credit Union Law
3. Defines “banking services” as the provision of depository services with respect to cash or other funds and the issuance and acceptance of special purpose checks, including the acceptance and maintenance of deposit proceeds, as specified.
4. Defines “cannabis business” as a person licensed by the state of California to engage in commercial cannabis activity under Division 10 of the Business and Professions Code and an ancillary business that serves such a licensed person.
5. Provides for the licensure of a cannabis limited charter bank or credit union (CDI) by the Department of Business Oversight and requires such licensees to comply with all requirements of the Financial Institutions Law, as applicable, except to the extent that any requirement of that law is inconsistent with the provisions of this bill, in which case the provisions of this bill would prevail.
6. Authorizes a CDI to accept deposits and issue to an account holder special purpose checks that may only be used to:
   1. Pay fees or taxes to the state or a local jurisdiction.
   2. Pay rent on property that is leased by, or on behalf of, the account holder’s cannabis business.
   3. Pay a vendor physically located in California for expenses related to the account holder’s cannabis business.
   4. Purchase bonds or similar debt instruments issued by the state or a local agency.
7. Authorizes the state and local agencies to accept special purpose checks.
8. Specifies that no private or public entity is required to accept special purpose checks.
9. Authorizes a CDI to cash a special purpose check presented by a person that is not an account holder if the check was used for an authorized purpose, as specified in 6) above
10. Makes findings and declarations related to the history of cannabis legalization in California, federal policy related to cannabis, and the need for banking services in the cannabis industry.

FISCAL EFFECT: According to the Senate Committee on Appropriations:

• This bill would create costs to the Department of Business Oversight for the chartering of new banks and credit unions. The overall cost is dependent on the number of new banks and credit unions created. An estimated $190,000 per year for every two new banks or credit unions would be needed for conducting field examinations on the new banks and credit unions. These costs may potentially be offset by revenue from any application fees that DBO implements. (Financial Institutions Fund, Credit Union Fund)
• Potentially minor and absorbable costs to DBO for adopting regulations and enforcement. (Financial Institutions Fund, Credit Union Fund)
• Unknown, potentially significant costs to the State Treasurer’s Office, the State Controller’s Office, the Bureau of Cannabis Control, and the Department of Finance for additional workload to prepare for the annual advisory board meeting and to travel to and attend that meeting. (GF / Special Fund)

COMMENTS:

Purpose. This bill is sponsored by California Board of Equalization Member, Fiona Ma CPA. According to the author,

In the first two months of adult-use cannabis legalization, consumers bought an estimated $339 million worth of marijuana products from retailers in California. From a business perspective, collecting large sums of cash payments is not practical. Additionally, standard oversight and accountability measures, like audits, become very difficult when most transactions are completed in cash. Several budget change proposals have been submitted to deal with this issue. For example, the Department of Tax and Fee Administration has requested $2.5 million for tax collection activities, including setting up a tax acceptance facility in Humboldt County which will require security enhancements and armored car services.

This cash-infused industry has also presented a public safety issue. There have been several incidents throughout the state where individuals and businesses have been robbed of cash and products. For example, an employee of an Oakland-based distributor who collects cash from various dispensaries in San Diego County, was beaten and robbed of about $9,000 earlier this year. As policymakers, we have a duty to further the will of the voters while protecting the public safety of our constituents.

Background. This bill would allow for the establishment of cannabis limited charter banks and credit unions, since the cannabis industry is predominantly operated with cash.

History of Legal Cannabis in California. In 1996, California voters passed Proposition 215, legalizing the use of medical cannabis (MC) in the state. In October 2015, nearly 20 years after the authorization of the use of MC, Governor Jerry Brown signed into law a trio of bills [AB 243 (Wood), Chapter 688, Statutes of 2015, AB 266 (Bonta, Cooley, Jones-Sawyer, Lackey, and Wood), Chapter 689, Statutes of 2015, and SB 643 (McGuire), Chapter 719, Statutes of 2015] collectively known as the Medical Cannabis Regulation and Safety Act (MCRSA). MCRSA established the state’s first comprehensive regulatory framework for MC.

In 2016, the voters of California passed Proposition 64, the Adult Use of Marijuana Act (AUMA) to legalize the recreational use of cannabis in the state by 2018. In June 2017, AUMA and MCRSA were combined via the budget process to form one system for the regulation of cannabis, MAUCRSA.

Impact on Cannabis Licensees. In order to operate legally in the California cannabis market an entity or individual must apply for and be granted a license by the Bureau, DPH, or CDFA. In some cases this can be very expensive, up to $125,000 for some distributors, based on the amount of product moved. Though some participants in the market are well capitalized with funding from outside the cannabis industry, the legalization of cannabis has necessarily resulted in participation by previous illicit market participants. In these cases some potential applicants may have avoided banks or been prohibited from banking due to the federal ban on cannabis and the potential for asset seizure or unwanted attention from law enforcement.

As a result of the limited access to banking cannabis licensing entities have had to address the inability of licensees to transfer funds through checks or electronic means. At the Bureau, license applicants must make an appointment to deliver cash payments of licensing fees. The handling and transport of such large sums of cash is not only unwieldy for the licensing entities but also potentially hazardous for applicants and staff who may be targeted by unscrupulous actors seeking to intercept the cash. To address this concern, the bill allows for CDIs to issue special purpose checks that may be utilized to pay license fees or other associated costs with operating a cannabis business.

ARGUMENTS IN SUPPORT:

Galyan Law writes in support, “SB 930 allows cannabis-related businesses to open accounts and deposit income in banks that hold a limited purpose state charter created under this bill. For these reasons, Galyan Law supports SB 930.”

SEIU Local 1000 writes in support, “We believe that SB 930 can help eliminate this barrier and facilitate the growth of good paying jobs with benefits across the state.”

George Runner, Chairman of the State Board of Equalization writes in support, “I am pleased to support Senate Bill 930, which seeks to provide financial services to cannabis-based businesses. It is an important step toward improving industry compliance with existing tax laws.”

The Cannabis Distributors Association writes in support, “(CDA) respectfully writes to request your “AYE” vote on SB 930 (Hertzberg) when it is heard by the Assembly Business and Professions Committee on June 26, 2018.”

The City of Palm Desert writes in support, “(we) express out support for Senate Bill 930, which aims to mitigate several issues resulting from cannabis businesses’ restricted access to banking services.”

The City and County of San Francisco write in support, “Though this bill is not a complete solution to the cannabis banking problems in the State of California, it is an important first step.”

The Rural County Representatives of California write in support, “Despite broad support for several congressional attempts to liberalize federal banking and banking-related laws, Congress has failed to act. As such, rural counties cannot continue to wait for revisions at the federal level.”

ARGUMENTS IN OPPOSITION:

None on file

POLICY ISSUES:

Banking issues are not within the jurisdiction of this committee. However, there are a number of overlapping policy concerns affecting cannabis licensees. Though this bill seeks to address the issues of the numerous unbanked cannabis actors in the regulated market, its limited scope is only a partial solution. When operating with a CDI, licensees would still lack the ability to accept electronic payments or access other electronic payment networks that include any non-CDI financial institutions. It is unclear if the industry and licensing authorities would benefit sufficiently from this bill in the absence of the full suite of services offered by most banks.

IMPLEMENTATION ISSUES:

Under the provisions of this bill, licensing authorities would be authorized to accept special purpose checks for the purpose of payment of fees; however, it is unclear if these entities, including the Bureau, would be able to establish a system for cashing these checks. The bureau has not issued a formal opinion on this bill.

REGISTERED SUPPORT:

Fiona Ma, CPA, California State Board of Equalization (Sponsor)

Galwan Law

SEIU Local 1000

George Runner, Chairman, California State Board of Equalization

City and County of San Francisco

Cannabis Distributors Association

City of Palm Desert

Rural County Representatives of California

REGISTERED OPPOSITION:

None on file

Analysis Prepared by: Jimmy Fremgen / B. & P. / (916) 319-3301

Date of Hearing: June 18, 2018

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Monique Limón, Chair

SBPCA Bill Id:SB 930

Author:(Hertzberg) – As Amended Ver:May 25, 2018

SENATE VOTE: 32-6

SUBJECT: Financial institutions: cannabis

SUMMARY: Provides for the licensure and supervision of cannabis limited charter banks and credit unions authorized to offer limited depository services to cannabis businesses. Restricts the activities of cannabis limited charter banks and credit unions to accepting deposits and issuing and redeeming special purpose checks. Prohibits a cannabis limited charter bank or credit union from engaging in banking activity with any other financial institution that lacks a limited purpose charter.

Specifically, this bill:

1. Adds a new division within the Financial Institutions Law (Financial Code Section 99 et seq.) called the Cannabis Limited Charter Banking and Credit Union Law (Financial Code Section 11000 et seq.).
2. Defines “banking services” as the provision of depository services with respect to cash or other funds and the issuance and acceptance of special purpose checks, including the acceptance and maintenance of deposit proceeds, as specified.
3. Defines “cannabis business” as a person licensed by the state of California to engage in commercial cannabis activity under Division 10 of the Business and Professions Code and an ancillary business that serves such a licensed person.
4. Provides for the licensure of a cannabis limited charter bank or credit union (hereafter referred to as a “cannabis depository institution” or “CDI”) by the Department of Business Oversight (DBO) and requires such licensees to comply with all requirements of the Financial Institutions Law, as applicable, except to the extent that any requirement of that law is inconsistent with the provisions of this bill, in which case the provisions of this bill would prevail.
5. Requires a CDI to adopt policies and practices that allow it to achieve the principles and goals outlined in the federal Bank Secrecy Act and cooperate with the federal Financial Crimes Enforcement Network.
6. Authorizes a CDI to accept deposits and issue to an account holder special purpose checks that may only be used to:
   1. Pay fees or taxes to the state or a local jurisdiction.
   2. Pay rent on property that is leased by, or on behalf of, the account holder’s cannabis business.
   3. Pay a vendor physically located in California for expenses related to the account holder’s cannabis business.
   4. Purchase bonds or similar debt instruments issued by the state or a local agency.
7. Authorizes the state and local agencies to accept special purpose checks.
8. Specifies that no private or public entity is required to accept special purpose checks.
9. Authorizes a CDI to cash a special purpose check presented by a person that is not an account holder if the check was used for an authorized purpose, as specified in #6 above.
10. Requires a CDI to obtain and maintain private insurance for itself and its assets, in an amount acceptable to DBO.
11. Authorizes a CDI to form a banking network with other CDIs to assist each other in providing services to cannabis businesses, subject to the approval of DBO. Prohibits this network from including any institution that is not a CDI.
12. Authorizes a CDI to charge fees for the banking services it provides and requires the CDI to provide a fee schedule to DBO that must be posted on the department’s website.
13. Prohibits a CDI from engaging in banking activity (this bill does not define this term) with any financial institution that lacks a limited charter.
14. Prohibits a CDI from engaging in any activity beyond those necessary to accept deposits and perform actions expressly authorized by this bill.
15. Creates the Cannabis Limited Charter Bank and Credit Union Advisory Board, comprised of the Treasurer, the Controller, and the Chief of the Bureau of Cannabis Control. Requires DBO to submit annual reports related to enforcement activities and requires the Board to evaluate the reports and make recommendations to the Legislature and Governor.
16. Makes findings and declarations related to the history of cannabis legalization in California, federal policy related to cannabis, and the need for banking services in the cannabis industry.

EXISTING STATE LAW:

1. Provides for the licensure and regulation of commercial cannabis activities by various state agencies.
2. Authorizes DBO to license and regulate financial institutions, including banks and credit unions (Financial Code Section 99 et seq.).

EXISTING FEDERAL LAW:

1. Classifies cannabis as a Schedule 1 substance under the Controlled Substances Act (21 U.S. Code 812 et seq.) and places regulatory restrictions on research, supply, and access to Schedule 1 substances.
2. Requires financial institutions to report suspected illegal activity to the federal government (31 U.S. Code 5311 et seq.), including activity of suspected cannabis businesses that operate under state law.
3. Provides that all property purchased using proceeds from an illegal activity is subject to forfeiture (18 U.S. Code 1961 et seq.).

FISCAL EFFECT:

COMMENTS:

1. PURPOSE

According to the author’s office:

The cannabis industry is expected to generate between $8-20 billion annually. In the first two months of adult-use cannabis legalization, consumers bought an estimated $339 million worth of marijuana products from retailers in California. From a business perspective, collecting large sums of cash payments is not practical.

1. BACKGROUND

Federal law prevents some cannabis businesses from accessing financial services provided by banks and credit unions, including basic checking accounts and electronic payment services that nearly all business rely to facilitate transactions with their customers. As briefly explained in the Existing Federal Law section above, federal law categorizes cannabis as a controlled substance and prohibits the possession and distribution thereof. Additionally, federal law^[1] places requirements on financial institutions to deter money laundering through reporting of suspected illegal activity, which includes commercial activities related to cannabis. Federal law enforcement agencies, such as the Department of Justice, and federal regulators, including the Federal Reserve, National Credit Union Administration, and Federal Deposit Insurance Corp, have discretion in how these laws are implemented and enforced. Federal guidelines have provided comfort to several hundred banks and credit unions across the country to serve the cannabis industry; however, these financial institutions are doing so at their own risk of negative regulatory action and criminal prosecution.

Although some banks and credit unions accept the elevated legal risk and compliance costs to serve some cannabis businesses, many cannabis businesses in California do not have access to banking services. According to a survey conducted by the California Growers Association in 2017, more than two-thirds of its membership is unbanked, with cultivators having the lowest level of access along the supply chain. Unbanked cannabis businesses are forced to transact primarily in cash, which makes the businesses and surrounding community targets for violent criminal activity. Cash businesses also present challenges to state and local tax collection and enforcement efforts.

1. THE VISION OF SB 930

This bill envisions a partial solution to the cannabis banking problem through the creation of cannabis limited charter banks and credit unions (hereafter referred to as “cannabis depository institution” or “CDI”). Upon approval by the Department of Business Oversight (DBO) of a charter application, a CDI would be authorized to provide a very limited selection of services to its customers: the acceptance of deposits and the issuance and redemption of special purpose checks. These special purpose checks are limited to four general uses: 1) the payment of fees and taxes to local and state government agencies, 2) the payment of rent on property leased by, or on behalf of, a cannabis business, 3) payments to vendors physically located in California for expenses related to goods and services associated with the cannabis business, and 4) the purchase of bonds or similar debt instruments issued by the state or specified local agencies. CDIs are also authorized to form a network exclusively with other CDIs to assist each other in providing services to cannabis businesses.

Under this bill, CDIs are prohibited from engaging in most banking activities. This bill prohibits CDIs from offering common banking services, such as:

• merchant accounts that allow businesses to accept electronic payments (e.g., debit and credit cards);
• processing Automated Clearing House (ACH), Fedwire, or other electronic payment transactions that rely on networks that include any non-CDI financial institutions; and
• making, offering, brokering, or servicing loans.

In order to meet the needs of the cannabis industry, a substantial number of CDI branches will be necessary. Given the prohibitions against processing electronic payments and funds transfers, CDI branches must be in reasonable physical proximity to users of CDIs. Account holders will need access to a nearby branch in order to make regular cash deposits that significantly reduce the incentive for theft and robbery at their premises. Furthermore, CDI branches must be conveniently located and widely accessible to entice potential payees of special purpose checks to voluntarily agree to accept such checks.

1. IMPLEMENTATION CHALLENGES

In order to achieve the vision of SB 930, the state government and the private sector would need to overcome significant challenges to deliver the public benefits that this bill seeks. This section outlines several of the most considerable challenges, but should not be viewed as an exhaustive list.

Timing of Rulemaking and Application Process

As detailed in the Senate Banking and Financial Institutions Committee’s analysis of SB 930, dated April 18, 2018, this bill lacks specificity regarding which sections of existing Financial Institutions Law (Financial Code Section 99 et seq.) would apply to CDIs. The bill provides that CDIs must comply with all requirements of the Financial Institutions Law, as applicable, except to the extent that those requirements are inconsistent with the requirements proposed by this bill. Rather than specify which requirements of existing law apply to CDIs, this bill would defer that responsibility to DBO and does not provide clear intent from the Legislature on how DBO should make those decisions.

Due to the lack of specificity in the bill, the rulemaking process conducted by DBO is likely to be lengthy. Despite the authority granted to DBO by this bill to adopt emergency regulations, the rulemaking process will be cumbersome as the department examines each section of the Financial Institutions Law to determine its applicability to CDIs. Given the unique characteristics of the proposed CDI and the lack of any similar institution operating in the state or anywhere in the country, DBO will likely encounter sections of existing law that may be difficult to tailor to a CDI. DBO will also be required to clarify vague or undefined provisions in this bill, such as the prohibition of undefined “banking activities” between a CDI and a traditional financial institution. It is reasonable to assume that the rulemaking process could take a year or more based on prior rulemaking activities conducted by DBO, meaning DBO may not be able to accept CDI applications until the beginning of 2020.

Upon completion of rulemaking, DBO will be able to accept applications from persons interested in establishing a CDI. Under existing law, it takes nine months to get a bank or credit union charter, in the best case scenarios. In those best case scenarios, applicants have worked with experienced industry consultants to ensure that the application meets DBO’s requirements. Some of the factors that DBO considers when reviewing a charter application include:

• the character, reputation, and financial standing of the organizers or incorporators and their motives in seeking to organize the proposed bank,
• the character, financial responsibility, banking or trust experience, and business qualifications of the proposed officers of the bank,
• the character, financial responsibility, business experience, and standing of the proposed stockholders and directors,
• the adequacy of banking facilities to support its operations,
• the reasonableness to achieve and maintain profitability, and
• the viability of the Business Plan given the economic condition, growth potential, and competition of the proposed market area.

To the extent that an applicant has weaknesses in any of these factors, the application process will likely exceed nine months and the application could ultimately be denied. Due to the unique risks posed by a CDI, it is reasonable to assume that the initial application process could take longer than nine months. In a rather optimistic scenario, the first CDI could be approved by the beginning of 2021.

Private Insurance

This bill requires CDIs to obtain and maintain private insurance in an amount acceptable to the Commissioner of DBO. Typically, deposits at traditional banks and credit unions are insured by federal agencies^[2] with risk pooled across a wide breadth of financial institutions and ultimately backed by the federal government. Private deposit insurance is not widely available, and there appears to be only one provider in the country, American Share Insurance (ASI).

The insurance requirement in this bill may be difficult to comply with. As of the writing of this analysis, Assembly Banking Committee staff has not learned of any entity that is interested in insuring a CDI. Setting insurance premium rates is predicated on risk analysis informed by empirical evidence. In the case of CDIs, there are no historical data that can be used to estimate the risk of an insured loss. Furthermore, CDIs would primarily serve an industry that operates in direct violation of federal law, exposing a CDI to federal enforcement actions that could result in the seizure of all assets held by the CDI on behalf of cannabis businesses. The lack of historical data and the concentration of risk in an illegal industry pose significant barriers for a private insurer to engage in this line of business. If an insurer is willing to accept the risk, the premiums may be expensive, leading to larger fees for cannabis businesses.

Fee structures

Unlike traditional banks that receive a significant portion of their income from net interest margins^[3] and fees from large transactions, CDIs’ revenue will solely rely on a very limited number of services to generate fee income from account holders. The fees charged by a CDI will need to be sufficient to recover the cost of operations, including significantly high cash handling expenses, relatively high insurance premiums and costs for complying with anti-money laundering policies and procedures.

Verifying a special purpose check was used for authorized purpose

This bill authorizes a CDI to cash a special purpose check presented to it by a person that is not an account holder, if that CDI previously issued the check to an account holder and the check was used for one of the purposes authorized by this bill. The bill does not specify how a CDI should verify that the check was used for an authorized purpose. It is likely that DBO will need to provide further clarification through regulations of how licensees should comply with this requirement. These requirements may include the verification of lease agreements and verifying the licensing status and approved payees of cannabis businesses.

CDIs would not be immune to federal law enforcement actions

As proposed by this bill, CDIs would not be insulated from federal law enforcement action. The operations of cannabis businesses violate federal law, and their assets can be seized by law enforcement agencies under the authority of the RICO Act (18 U.S. Code 1961 et seq.). By concentrating the assets of many cannabis businesses in one or several easily-identifiable CDIs, CDIs could be a target of federal law enforcement seeking to prosecute money laundering or drug trafficking cases. Potential insurers will likely factor this risk into the premiums they charge to insure a CDI.

What happens to CDIs if federal policy changes?

As more states legalize cannabis activity, there is a growing conversation in Congress about potential changes to federal policy. Although no policy change appears imminent, there may soon be a time when traditional banks and credit unions can legally serve the cannabis industry. Upon sufficient federal policy change that lowers the risk for traditional financial institutions to serve the cannabis industry, it is reasonable to assume that cannabis businesses will desire the full suite of banking services that CDIs cannot offer – merchant accounts, electronic payments and funds transfer, and loan products. The threat of obsolescence – that a LCFI may be unnecessary in the near future if federal policy changes – could deter the private sector from investing the time and resources in pursuing a CDI charter.

How do account holders and owners of CDIs facilitate certain transactions?

Due to the prohibition on banking activities between a CDI and a financial institution that does not hold a CDI charter, it is unclear how certain transactions would be conducted given that CDIs will have no mechanism for electronic funds transfer. For example, this bill permits account holders to use special purpose checks to purchase state and local bonds. However, it seems unlikely that a bond dealer or broker would accept a special purpose check that the dealer or broker would need to redeem for cash at a CDI.

In another example, it is not clear how owners of CDIs will be able to receive dividends or other distributions of a CDI’s profits. It appears that many transactions will require two or more steps, including withdrawing cash from a CDI and depositing that cash in an account with a traditional financial institution, which may expose account holders and payees to the type of violent criminal activity that this bill seeks to prevent.

The restriction on banking activities with traditional financial institutions could also complicate large cash transactions. A CDI would not be authorized to initiate an armored carrier transfer of cash to a traditional bank, so an account holder or owner of a CDI would be required to arrange the transfer. The traditional bank receiving the inbound cash would be required to comply with more complex filing requirements specified by the federal Financial Crimes Enforcement Network. A risk-averse receiving bank could decide to decline receipt of such cash shipments if the receiving bank was unable to verify that the CDI had adequate compliance procedures in place.

1. DBO SUPERVISION PROVIDES PROTECTIONS

Despite the lack of clarity in this bill, some of the challenges outlined in the previous section can be partially resolved through rulemaking and supervision by DBO. Strong state oversight reduces the risk that unscrupulous actors would be able to establish a CDI to defraud or prey on cannabis businesses that are desperate for a banking solution. DBO uses a rigorous set of criteria when reviewing an applicant for a bank or credit union charter, and the department will heavily scrutinize an applicant’s private insurer to verify that the insurance policy will be available to compensate depositors if the CDI encounters financial troubles. While state oversight cannot fix all of the structural challenges posed by this bill, regulation and oversight should prevent bad actors from taking advantage of businesses that have few alternatives.

REGISTERED SUPPORT / OPPOSITION:

Support

Bizfed - Los Angeles County
Black American Political Association
Board Of Equalization
Brian Webster And Associates
Calasian Chamber Of Commerce
California Cannabis Industry Association
California Cannabis Manufacturers Association
California Growers Association
California NORML
Cannabis Distributors Association
Clark Neubert
CMG/Caliva
El Capitan Advisors, LLC
Emeryville; City Of
Fresno; City Of
High Hampton Holdings
Humboldt; County Of
Infusion Factory
Irvine; City Of
Leafly
Los Angeles; City Of
Lovingly And Legally
Monterey; County Of
Port Of Hueneme
River Distribution
Rural County Representatives Of California
Sacramento; City Of
San Francisco, City
Santa Monica; City Of
Service Employees International Union, Local 1000
Sespe Creek Collective
Southern California Coalition
Sparc
State Board Of Equalization
Sunstone Distribution
Truth Enterprises
We Drop
Wurk

Opposition

None on file

Analysis Prepared by: Michael Burdick / B. & F. / (916) 319-3081

1. The Bank Secrecy Act as amended by the USA Patriot Act (31 U.S. Code 5311 et seq.) ↑

2. The Federal Deposit Insurance Corp or the National Credit Union Administration ↑

3. The difference between the interest received from loan assets and the interest paid for deposits and other funding sources ↑

 THIRD READING  

Bill No: SB 930

Author:

:

Vote:

SENATE BANKING & F.I. COMMITTEE: 7-0, 4/18/18

AYES: Bradford, Vidak, Gaines, Galgiani, Hueso, Lara, Portantino

SENATE GOVERNANCE & FIN. COMMITTEE: 6-1, 4/25/18

AYES: McGuire, Beall, Hernandez, Hertzberg, Lara, Moorlach

NOES: Nguyen

SENATE APPROPRIATIONS COMMITTEE: 5-2, 5/25/18

AYES: Lara, Beall, Bradford, Hill, Weiner

NOES: Bates, Nielsen

SUBJECT:

SOURCE: Board of Equalization Member Fiona Ma

DIGEST:

This bill authorizes the creation of limited charter banks and credit unions, as specified, and authorizes the use of special purpose checks issued by these institutions for specified purposes, including the payment of state and local taxes, rent, and goods and services, and the purchase of state and local securities, as specified.

ANALYSIS:

Existing law:

1. Provides for Proposition 215 (The Compassionate Use Act of 1996), which exempts from specified criminal penalties the possession or cultivation of medical marijuana by patients and primary caregivers; and Proposition 64 (The Control Regulate, and Tax Adult Use of Marijuana Act of 2016), which provides for the licensure and regulation of commercial adult marijuana activities by various state agencies.
2. Provides for the Medicinal and Adult-Use Cannabis Regulation and Safety Act (Business and Professions Code Section 60000 et seq.) and its implementing regulations (California Code of Regulations Title 16, Division 42, Section 5000 et seq.), administered by the California Bureau of Cannabis Control.
3. Provides for the Department of Business Oversight (DBO) and gives DBO authority to administer the Financial Institutions Law. The three divisions of the Financial Institutions Law that are relevant for purposes of this bill include Division 1, related to administration, enforcement, and liquidation and conservation (Financial Code Section 99 et seq.); Division 1.1, the Banking Law (Financial Code Section 1000 et seq.); and Division 5, California Credit Union Law (Financial Code Section 14000 et seq.).

This bill:

1. Contains findings and declarations related to passage of Proposition 64 in 2016, authorizing the recreational use of cannabis, and to passage of Proposition 215 in 1996, authorizing the medicinal use of cannabis; the significant challenges that cannabis businesses have accessing traditional banking services; the regulatory and public safety issues arising from cannabis businesses’ lack of access to banking services; and the responsibility of the state, consistent with the will of California voters, to provide a mechanism to help lawful cannabis businesses gain access to banking services.
2. Establishes a new Division 2.5 within the Financial Code (Section 11000 et seq.) called the Cannabis Limited Charter Banking and Credit Union Law (CLCL), administered by DBO.
3. Defines the terms banking services, cannabis business, cannabis limited charter bank (CLCB), cannabis limited charter credit union (CLCCU), and Cannabis Limited Charter Bank and Credit Union Law Advisory Board for purposes of the CLCL.
4. Authorizes CLCBs and CLCCUs to issue special purpose checks, which are valid only for specified purposes, and to cash special purpose checks, as specified. Requires each special purpose check to include the following text, in at least 12-point type: “This check is issued by [insert name of CLCB or CLCCU] and may only be deposited or cashed at this CLCB/CLCCU or another CLCB/CLCCU that agrees to accept the check.”
5. Allows special purpose checks to be used only for specified purposes, but clarifies that no individual or entity, whether private or public, is required to accept a special purpose check issued by a CLCB or a CLCCU. Special purpose checks may only be used to:
   1. Pay fees or taxes to the state or a local jurisdiction.
   2. Pay rent on property that is leased by or on behalf of the account holder’s cannabis business.
   3. Pay a vendor physically located in California for expenses related to goods and services associated with the account holder’s cannabis business.
   4. Purchase bonds or interest-bearing notes or warrants backed by the full faith and credit of the state, or bonds or warrants of any local jurisdiction, as specified.
6. Requires persons wishing to form as a CLCB or CLCCU to obtain a license from DBO, as specified, and to comply with all requirements of Division 1 of the Financial Institutions Law (which generally cover administrative and enforcement functions) and with either Division 1.1 of the Financial Code (the Banking Law) or Division 5 of the Financial Code (the California Credit Union Law), as applicable, but further provides that any requirement of any of those laws that is inconsistent with Division 2.5 does not apply to that CLCB or CLCCU.
7. Requires CLCBs and CLCCUs to obtain and maintain private insurance for themselves and their assets at all times they are engaged in banking services, and authorizes CLCBs and CLCCUs to do all things and assume and discharge all obligations required of them in this regard, which are not in conflict with state law.
8. Authorizes CLCBs and CLCCUs to charge fees for the services they provide, provide the Commissioner of Business Oversight (commissioner) with a fee schedule listing the types and sizes of fees it charges for the services it provides, requires the commissioner to compile the fee schedules and post that information on DBO’s Web site in a manner intended to promote transparency, and authorizes the commissioner to review any fee charged by a CLCB or CLCCU, upon request or whenever the commissioner deems such review appropriate.
9. Requires DBO to adopt emergency regulations to implement the CLCL and provides that DBO may not issue CLCB or CLCCU licenses before July 1, 2019, except as specified.
10. Provides that the Cannabis Limited Charter Bank and Credit Union Law Advisory Board is comprised of the State Treasurer, State Controller, and the Chief of the Bureau of Cannabis Control as voting members, and the Director of the Department of Finance (DOF) as an ex-officio, nonvoting member.
    1. Holds the Board generally responsible for ensuring that the CLCBL provides a safe and efficient way to pay state and local taxes and fees, pay rent associated with the account holder’s cannabis business, issue special purpose checks, and legally invest in California’s economy.
    2. Requires the Board to hold noticed, public meeting at least once a year, or more often as needed, to review enforcement activity reports from DBO and to draft recommended legislative or administrative actions for submission to the Legislature and the Governor, as specified.
    3. Requires the Board to provide guidance and education to registered broker-dealers and licensed investment advisors on how to accommodate CLCB and CLCCU account holders who wish to purchase allowable state and/or local securities.
    4. Expressly prohibits Board members from being compensated for their services.
11. Makes related conforming amendments to provisions of the Financial Code.

Background

This bill is sponsored by Board of Equalization Member Fiona Ma to help mitigate several of the problems resulting from cannabis businesses’ access to banking services. The problem giving rise to the bill is well known and simply stated, though extremely challenging to solve: the vast majority of traditional banks and credit unions will not knowingly provide banking services to cannabis businesses or, in many cases, to businesses that serve cannabis businesses. Neither the Federal Deposit Insurance Corporation nor the National Credit Union Administration have, to date, been willing to provide deposit insurance to banks and credit unions that knowingly provide banking services to cannabis businesses. No federal clearinghouse has been willing to clear a check known to have been written by or to a cannabis business. Furthermore, because the payment rails used to process electronic payments are run by federally-regulated institutions, banks and credit union will not issue credit or debit cards to businesses they know to be cannabis businesses, nor process credit and debit card transactions they know to involve the proceeds of cannabis activity.

For the aforementioned reasons, if California is going to devise a way for cannabis-specific depository institutions to legally operate in the state, those institutions will need to be walled off from the traditional banking sector. This bill envisions such an approach.

Comments

If this bill is enacted, the author and sponsor envision that one or more CLCBs or CLCCUs will form in one or more areas of the state. Once formed and operational, a CLCB or CLCCU will open accounts for California licensed cannabis businesses and accept cash and special purpose check deposits from those businesses. CLCBs and CLCCUs will be authorized to engage in only two activities: 1) accepting and holding deposits for their account holders, and 2) issuing special purpose checks to their account holders. A cannabis business with an account at a CLCB or CLCCU will be able to use special purpose checks, rather than cash, to pay taxes and to pay for certain products and services, but only if the entity to which the cannabis business presents the special purpose check wishes to accept it. Because traditional banks and credit unions will be unlikely to deposit or cash special purpose checks, these checks cannot be considered legal tender. They are, in essence, cannabis scrip, which can only be exchanged with a business or other entity that agrees to accept them.

If one assumes that the state and some local jurisdictions will agree to accept special purpose checks for the payment of taxes (something not yet authorized or required), the most obvious advantage to the system envisioned by this bill is the increased ability of cannabis businesses to pay their state and local taxes, without having to physically carry large bags of cash into state and local taxing agencies. Other advantages may flow from the authority granted by this bill, but may be more limited, at least initially.

For example, in certain geographic areas of the state whose economies are heavily reliant on cannabis, and whose residents and business owners frequently interact with cannabis businesses, the special purpose checks envisioned by this bill may be readily accepted, and, as such, may help take some cash off the streets and mitigate some of the existing public safety risks that result from cannabis business’s lack of access to banking services. If everyone has an account at the local CLCB or CLCCU, being presented with a special purpose check is not a problem; one just deposits it into one’s account. Even in areas where the economy is less dependent on cannabis, and where most residents and businesses do not interact with cannabis businesses, these special purpose checks may help cannabis businesses interact with one another, without having to exchange large amounts of cash. One’s out-of-town landlord may not want to accept a special purpose check, but the vendor that serves multiple cannabis businesses probably will.

However, in other areas of the state whose economies are less reliant on cannabis, and where residents and businesses interact to a much more limited extent with cannabis businesses, these special purpose checks may not be readily accepted. If a landlord receives a special purpose check from a cannabis business but does not have an account at a CLCB or CLCCU, the landlord has little, if any, ability to convert that check to cash. Even if the landlord has access to a nearby CLCB or CLCCU, something that is not assured, it is unclear (see suggested amendments, below) whether that landlord could turn the special purpose check into cash at a CLCB, and similarly unclear how much that landlord would be charged for doing so. The fewer CLCBs and CLCCUs that form under the authority created by this bill, the harder it will be for cannabis businesses wishing to use special purpose checks in lieu of cash to find people and businesses to accept them.

It should also be noted that, even though this bill authorizes different CLCBs and CLCCUs to enter into banking networks with one another, this authority does not extend to electronic transmission of money from one to another. This bill does nothing to grant CLCBs or CLCCUs access to federal payment rails, access that cannot be granted as long as cannabis remains illegal at the federal level.

The idea in this bill holds promise, but its success will be heavily dependent on several factors: the amount of private deposit insurance and collateral DBO will require, the extent to which insurers authorized to do business in this state will provide the required insurance, the cost of that insurance, the extent to which CLCBs and CLCCUs will have access to required amounts of collateral. the number of CLCBs and CLCCUs that form, the geographic distribution of those entities, and the abilities of those CLCBs and CLCCUs to devise ways to accept and deposit checks issued by their brother- or sister- CLCBs and CLCCUs.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, this bill will result in costs to DBO related to the chartering of new banks and credit unions. The overall cost is dependent on the number of new banks and credit unions created. An estimated $190,000 per year for every two new banks or credit unions would be needed for conducting field examinations on the new banks and credit unions. These costs may potentially be offset by revenue from any application fees that DBO implements. SB 930 will also result in potentially minor and absorbable costs to DBO for adopting regulations and enforcement and in unknown, potentially significant costs to the State Treasurer’s Office, the State Controller’s Office, the Bureau of Cannabis Control, and DOF for additional workload to prepare for the annual advisory board meeting and to travel to and attend that meeting.

SUPPORT: (Verified 5/29/18)

Board of Equalization Member Fiona Ma (source)

BizFed (Los Angeles County Business Federation)

Black American Political Association of California

Board of Equalization Member George Runner

Brian Webster and Associates

California Asian Chamber of Commerce

California Cannabis Industry Association

California Cannabis Manufacturers Association

California Growers Association

Cannabis Distribution Association

California NORML

Clark Neubert LLP

CMG/Caliva

City of Emeryville

City of Irvine

City of Los Angeles

City of Sacramento

City of Santa Monica

Fresno Councilmember Oliver Baines, III

Humboldt County Board of Supervisors

Infusion Factory

Irvine Councilmember Melissa Fox

Leafly Holdings

Lovingly and Legally

Monterey County Board of Supervisors

Port Hueneme Chamber of Commerce

River Distributing Company

Rural County Representatives of California

Service Employees International Union, Local 1000

Southern California Coalition

SPARC

Truth Enterprises (lbs Distribution, Apex Agriculture, Woodland Reserve, Puff Pre-rolls)

WeDrop

OPPOSITION: (Verified 5/29/18)

None received

ARGUMENTS IN SUPPORT: Board of Equalization Member Fiona Ma is sponsoring SB 930 as a significant step toward integrating cannabis-related businesses into the California economy in a safe and transparent manner.

Prepared by:

5/29/18 15:36:33

**** END ****

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 930 (Hertzberg) - Financial institutions: cannabis

Bill Summary:

SB 930 would authorize the creation of cannabis limited charter banks and credit unions and authorize the use of special purpose checks issued by those institutions for specified purposes.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on May 25, 2018

Fiscal Impact:

• This bill would create costs to the Department of Business Oversight (DBO) for the chartering of new banks and credit unions. The overall cost is dependent on the number of new banks and credit unions created. An estimated $190,000 per year for every two new banks or credit unions would be needed for conducting field examinations on the new banks and credit unions. These costs may potentially be offset by revenue from any application fees that DBO implements. (Financial Institutions Fund, Credit Union Fund)
• Potentially minor and absorbable costs to DBO for adopting regulations and enforcement. (Financial Institutions Fund, Credit Union Fund)
• Unknown, potentially significant costs to the State Treasurer’s Office, the State Controller’s Office, the Bureau of Cannabis Control, and the Department of Finance for additional workload to prepare for the annual advisory board meeting and to travel to and attend that meeting. (GF / Special Fund)

Author Amendments:

Clarify that board members are not compensated. Authorize DBO to charge an application fee.

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 930 (Hertzberg) - Financial institutions: cannabis

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 930 would authorize the creation of cannabis limited charter banks and credit unions and authorize the use of special purpose checks issued by those institutions for specified purposes.

Fiscal Impact:

• This bill would create costs to the Department of Business Oversight (DBO) for the chartering of new banks and credit unions. The overall cost is dependent on the number of new banks and credit unions created. An estimated $190,000 per year for every two new banks or credit unions would be needed for conducting field examinations on the new banks and credit unions. (Financial Institutions Fund, Credit Union Fund)
• Potentially minor and absorbable costs to DBO for adopting regulations and enforcement. (Financial Institutions Fund, Credit Union Fund)
• Unknown, potentially significant costs to the State Treasurer’s Office, the State Controller’s Office, the Bureau of Cannabis Control, and the Department of Finance for additional workload to prepare for the annual advisory board meeting and to travel to and attend that meeting. (GF / Special Fund)

Background:

Proposition 215 in 1996 legalized medicinal marijuana in California and Proposition 64 in 2017 legalized adult-use cannabis use in California as of January 2018. However, the cannabis industry has been locked out of the traditional banking system.

Together, the Bank Secrecy Act, the USA Patriot Act, and the Racketeer Influenced and Corrupt Organizations (RICO) Act make it illegal for traditional financial institutions to handle funds stemming from criminal activity, including violations of federal drug laws, and subject financial institutions to possible regulatory sanctions for placing their safety and soundness at risk. The RICO Act also subjects all property bought with the proceeds of illegal activity to forfeiture. Neither the Federal Deposit Insurance Corporation (FDIC) nor the National Credit Union Administration have been willing to provide deposit insurance to banks and credit unions that knowingly provide banking services to cannabis businesses. Additionally, no federal clearinghouse has been willing to clear a check known to have been written by or to a cannabis business and banks and credit unions will not issue credit or debit cards to businesses they know to be cannabis businesses.

Proposed Law:

This bill would:

• Make various Legislative findings and declarations related to the passage of Proposition 64 in 2016 and Proposition 215 in 1996 and the challenges that the cannabis industry faces with limited access to traditional banking services;
• Establish the creation of cannabis limited charter banks (CLCBs) and cannabis limited charter credit unions (CLCCUs) to provide limited banking services to the cannabis industry;
• Establish the Cannabis Limited Charter Bank and Credit Union Advisory Board composed of the Treasurer, the Controller, and the Chief of the Bureau of Cannabis Control; and the Director of Finance serving as an ex officio, nonvoting member. This bill would require the board to meet at least once a year to review enforcement activity reports from the Department of Business Oversight (DBO), evaluate the reports and the comments of the public and draft recommended actions to be taken legislatively or administratively, and provide guidance and education to registered broker-dealers and licensed investment advisors on how to accommodate account holders of CLCBs and CLCCUs in purchasing, holding, and selling any of the investments;
• Require DBO to submit reports of enforcement activities to the board for review annually or as the board may require;
• Require an applicant that desires to be licensed to act as a CLCB or CLCCU to submit a completed application to DBO in a form prescribed by the commissioner that satisfies the requirements of the provisions of this bill. This bill would also require a CLCB or CLCCU licensee to comply with all requirements of the Financial Institutions Law and either the Banking Law or the California Credit Union Law, as applicable, and to adopt policies and practices that allow it to achieve the principles and goals outlined in the federal Bank Secrecy Act;
• Require DBO to adopt emergency regulations;
• Prohibit DBO from issuing a licensee before July 1, 2019, with specified exceptions, and prior to that date, require DBO to report to the Senate Committee on Banking and Financial Institutions and the Senate Committee on Governance and Finance regarding the status of the regulations and the implementation of the provisions of this bill;
• Authorize a CLCB or CLCCU to issue to an account holder special purpose checks for specified purposes and authorize state and local government offices to accept a special purpose check issued by a CLCB or CLCCU. This bill would provide that an individual or entity is not required to accept a special purpose check issued by a CLCB or CLCCU. In addition, a CLCB or CLCCU is authorized a special purpose check presented to it by a person or entity that is not an account holder, if that limited charter bank or credit union previously issued that special purpose check to an account holder, and the check was used for one of the specified authorized purposes;
• Require a CLCB or CLCCU to obtain and maintain private insurance in an amount acceptable to the commissioner for the cannabis depository institution and its assets at all times while it is engaged in banking services, as specified;
• Authorize a CLCB or CLCCU to enter into an agreement with one or more other limited charter licensees in order to form a banking network, as specified, subject to approval of the commissioner;
• Authorize a CLCB or CLCCU to provide accounts to people and entities other than cannabis businesses, pursuant to rules adopted by the commissioner;
• Authorize a CLCB or CLCCU to charge fees for the banking services that it provides and require the CLCB or CLCCU to provide to the commissioner a fee schedule, listing the types and sizes of fees it charges for the services it provides and authorize the commissioner to review any fee charged;
• Require DBO to compile the fee schedule information and post that information on its Internet Web site;
• Prohibit a CLCB or CLCCU from engaging in banking activity with any other financial institution that lacks a limited purpose charter issued under these provisions and prohibit a CLCB or CLCCU from engaging in traditional banking, other than activity required to accept deposits.

Related Legislation:

SB 148 (Weiner, 2017) would have authorized the Board of Equalization and counties to collect cash payments from cannabis-related businesses for the payment of taxes. This bill was held in the Senate Appropriations Committee.

Staff Comments:

It is unknown how many CLCBs and CLCCUs will be created from this bill. If 10 new CLCBs and/or CLCCUs were created, DBO would need nearly $1 million per year in staffing to examine the banks and credit unions. The overall cost would increase or decrease accordingly, dependent on the number of CLCBs and CLCCUs created.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Financial institutions: cannabis

Authorizes the creation of both cannabis limited charter banks and credit unions, and authorizes the use of special purpose checks issued by these institutions for specified purposes

Background

Federal law relating to cannabis. Federal law prohibits the manufacture, possession, sale, or distribution of cannabis. In 1970, Congress enacted the Controlled Substances Act (CSA) which sets forth five schedules of specified drugs. For a drug to be designated a Schedule I controlled substance, CSA states the substance must have “a high potential for abuse," and have "no currently accepted medical use” in the United States. Federal law lists cannabis as a Schedule I controlled substance.

State law relating to cannabis. In 1996, California voters approved Proposition 215, known as the Compassionate Use Act of 1996 (CUA). Under CUA, qualified patients with specified illnesses, and their primary caregivers, cannot be prosecuted for possessing or cultivating medical cannabis upon the written or oral recommendation or approval of an attending physician. In other words, CUA allowed qualified patients and primary caregivers to obtain and use medical cannabis.

The Legislature clarified CUA by enacting SB 420 (Vasconcellos, 2003). SB 420 exempts qualified patients and caregivers from prosecution for using or cultivating medical cannabis. It also protects patients with valid identification cards from both arrest and criminal liability for possession, transportation, delivery, or cultivation of cannabis. The industry remained largely unregulated at the state level until 2015, when the Legislature enacted the Medical Marijuana Regulation and Safety Act (MMRSA). MMRSA comprised a package of legislation that comprehensively regulated many aspects of medical cannabis including cultivation, manufacturing, transportation, distribution, sale, and product safety. In 2016, several bills made slight changes to MMRSA, including renaming the Act the Medical Cannabis Regulation and Safety Act.

On November 8^th, 2016, California voters approved Proposition 64—the Control, Regulate and Tax Adult Use of Marijuana Act (Act)—which legalized the recreational use of cannabis by adults age 21 and older. The Act provides for the licensure and regulation of commercial adult marijuana activities by various state agencies.

The Act imposes a cannabis excise tax upon purchasers of cannabis or cannabis products sold in this state, equal to 15% of the retail sale’s gross receipts. The initiative establishes a cultivation tax as well at the following rates:

• $9.25 per dry-weight ounce on cannabis flowers, and
• $2.75 per dry-weight ounce on cannabis leaves.

State and local governments also impose sales and use taxes on cannabis, on top of the excise tax and the cultivation tax. The sales and use tax is based upon the retailer's gross receipts. The state sales and use tax rate is equal to 7.25%, and local rates generally add up to an additional 2%. The cultivation tax would not apply to cannabis cultivated for personal use.

Federal banking laws and money laundering. The Money Laundering Control Act of 1986 made money laundering—the concealment of the origins of illegally obtained money—a federal crime. Accordingly, regardless of state law, financial institutions can commit money laundering by conducting financial transactions involving substances explicitly prohibit in CSA, such as marijuana.

Under the Bank Secrecy Act of 1970, financial institutions must assist government agencies in detecting and preventing money laundering: they must conduct sufficient due diligence to adequately assess the risk of doing business with each of its customer. For example, financial institutions must understand its customers’ area of business as well as the nature of its customers’ accounts. They must also report any transaction exceeding $10,000, and any suspicious or illegal activities to the federal Financial Crimes Enforcement Network (FinCEN). If financial institutions do not abide by the Bank Secrecy Act, FinCEN has the authority to seek substantial civil money penalties, which often reach well into the millions of dollars, as well as criminal prosecution.

Additionally, under the Racketeer Influenced and Corrupt Organizations (RICO) Act of 1970, the federal government can prosecute all individual involved in a corrupt organization. RICO subjects all property bought with the proceeds of illegal activity to forfeiture.

The Cole Memo. On August 29^th, 2013, the U.S. Department of Justice (DOJ) issued the Cole Memo, which provided guidance to federal prosecutors regarding cannabis enforcement. The Cole Memo suggested that the federal government may ignore some CSA violations in states that legalize and regulate marijuana use, such as California. It instructed DOJ attorneys and law enforcement officials to focus on the following enforcement priorities:

• Preventing the distribution of cannabis to minors;
• Preventing revenue from cannabis sales from going to criminal enterprises, gangs, and cartels;
• Preventing the diversion of cannabis from states where it is legal to other states where it is illegal;
• Preventing state-authorized cannabis activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
• Preventing violence and the use of firearms in the cultivation and distribution of cannabis;
• Preventing drugged driving and other adverse public health consequences associated with cannabis use;
• Preventing the growth of cannabis on public lands;
• Preventing the public safety and environmental dangers posed by cannabis production on public lands; and
• Preventing cannabis possession or use on federal property.

The Cole Memo’s priorities guided the DOJ 's enforcement of CSA relating to cannabis nationwide. However, on January 4^th, 2018, the DOJ rescinded the Cole Memo, which means U.S Attorneys can resume enforcing all federal marijuana laws in states with legalized recreational marijuana use, like California.

As a result of cannabis’s illegal status under federal law, cannabis businesses have been locked out of the banking system. The author wants to help the recently legal industry access a banking system that is walled off from the traditional banking sector.

Proposed Law

Senate Bill 930 establishes the creation of cannabis limited charter banks (CLCBs) and cannabis limited charter credit unions (CLCCUs) to provide limited banking services to the cannabis industry. Under the administration of the Department of Business Oversight (DBO), CLCBs and CLCCUs can accept and maintain cash deposits as well as issue special purpose checks that can only be used for the following:

• To pay fees or taxes to the state or local jurisdiction,
• To pay rent on property that is associated with the account holder’s cannabis business,
• To pay vendors located in California for expenses related to goods and services associated with the account holder’s cannabis business, or
• To purchase bonds or interest-bearing notes or warrants backed by the full faith and credit of the state, or bonds or warrants of any local jurisdiction.

CLCBs and CLCCUs can charge fees for their services and enter into agreements to form banking networks only with other CLCBs and CLCCUs. SB 930 requires CLCBs and CLCCUs to obtain private insurance for both themselves and their assets. Additionally, it establishes the Cannabis Limited Charter Bank Advisory Board (Board) which is comprised of the Treasurer, the Controller, the Chief of the Bureau of Cannabis Control, and the Director of Finance.

SB 930 contains findings and declarations as well related to the following:

• The passage of both Proposition 64 and Proposition 215,
• The significant challenges the cannabis business faces with limited access to traditional banking services,
• The regulatory and public safety issues arising from the cannabis industries lack of access to banking, and
• The responsibility of the state to provide a mechanism to help the cannabis industry gain access to banking services.

State Revenue Impact

No estimate.

Comments

1. Purpose of the bill. According to the author, “The use and consumption of medical marijuana was legalized in California in 1996, and Proposition 64 legalized adult-use cannabis as of January 2018. However, due to cannabis’ federal classification as a Schedule I drug, cannabis-related businesses are not able to deposit income with federally-insured financial institutions. The cannabis industry is expected to generate between $8-20 billion annually. This is a massive industry that we can only expect will continue to grow; yet cultivation, distribution, and retail businesses alike have been forced to operate on a cash-only basis. This is not only impractical from an accounting perspective, but also presents a significant public safety issue. The Department of Finance estimates that the state will collect $600 million in cannabis taxes in the upcoming year. Unlike most businesses however, cannabis businesses arrive to government offices with duffel bags of cash to fulfill their tax obligations. Standard oversight and accountability measures, like audits, become very difficult when most transactions are completed in cash. Additionally, these businesses face security risks because of the volume of cash in their possession.”

2. Delaying. The Committee has held three separate hearings on cannabis tax collection and related issues over the past two years: California Cannabis in a Turbulent Time on February 14^th, 2017; Preparing for California’s Green Gold Rush on July 19^th, 2017; and First 60 Days of Prop. 64 on March 1^st, 2018. The three hearings showed that cannabis issues are complex and tough to solve. Growers and retailers that have been in the shadows for decades are reluctant to engage with government actors. SB 930’s innovative approach to banking will take time to perfect. Furthermore, the specific rules that will govern banking under this bill have not been explicitly stated. SB 930 uses general control language to describe the requirements CLCBs and CLCCUs are subject to. DBO will need time to promulgate regulations outlining the explicit changes. As a result, both the complexity of cannabis issues as well as CLCBs and CLCCUs significant implementation challenges make a January 1^st, 2019, effective date difficult. The Committee may wish to consider amending SB 930 to delay its operative date.

3. A new approach. SB 930 envisions CLCBs or CLCCUs that are completely walled off from the traditional banking sector. These limited charter banks will form networks with each other and establish branches throughout the state. CLCBs and CLCCUs will open accounts for California licensed cannabis businesses and will provide their customers with two types of services: accepting and holding deposits as well as issuing special purpose checks. Thus, a cannabis business with an account at a CLCB or CLCCU will be able to use special purpose checks, rather than cash, to pay for certain products and services as well as to pay their taxes. These special purpose checks will be readily accepted and cash will be taken off the streets, mitigating some of the existing public safety risks. Plus, cannabis businesses will have an easier way to pay their state and local taxes. Instead of walking around with suitcases full of cash, taxpayers can simply write a special purpose check.

4. Details. Local governments do not have to accept SB 930’s special purpose checks if they choose not to, which means taxpayers would still have to pay their local taxes in cash. Additionally, state agencies may be reluctant to do business with CLBCs and CLCCUs due to the risk and uncertainty surrounding federal banking laws. While state agencies are allowed under current state law to accept insured checks, the statute is unclear whether they have the ability to accept special purpose checks that are issued outside the current banking system. The Committee may wish to consider amending current state law to allow state agencies, if they choose, to accept special purpose checks.

5. Private insurance. Neither the Federal Deposit Insurance Corporation nor the National Credit Union Administration has yet been willing to provide deposit insurance to banks and credit unions that knowingly provide banking services to cannabis businesses. Thus, CLBCs and CLCCUs will have to obtain private insurance for themselves and their assets. Several unanswered questions remain around the level of private deposit insurance that will be available to CLBCs and CLCCUs. It is unclear whether insurers who are authorized to do business in this state will provide the required insurance as well as the cost of that insurance. It is also unclear the extent to which CLBCs and CLCCUs will have access to the required amounts of collateral needed to secure private insurance. Regardless of the need for a business is to move away from an all cash business model, no cannabis company will likely deposit its money in an institution that can’t fully insure its deposits and promise liquidity. This bill’s success depends heavily on the private insurance market.

6. Electronic transmissions. Even though SB 930 authorizes different CLCBs and CLCCUs to enter into banking networks with one another, this authority does not extend to electronic transmission of money. Only a change in federal law would grant CLCBs or CLCCUs access to federal payment rails, which allow different banks to electronically transmit money to each other. This access cannot be granted as long as cannabis remains illegal at the federal level. As a result, CLCBs and CLCCUs will have to devise ways to accept and deposit checks issued by their brother or sister CLCBs and CLCCUs that do not include federal payment rails.

7. Incoming! On April 18^th, the Senate Committee on Banking and Financial Institutions approved SB 930 by a vote of 7 to 0. The Committee on Governance and Finance is hearing the measure as the committee of second reference.

Support and Opposition

(4/19/18)

Support: Board of Equalization Member Fiona Ma (sponsor); Board of Equalization Member George Runner; Black American Political Association of California; California Asian Chamber of Commerce; California Cannabis Industry Association; California Growers Association; Cannabis Distribution Association; California NORML; CMG/Caliva; City of Los Angeles; City of Santa Monica; Fresno Councilmember Oliver Baines, III; River Distributing Company; Rural County Representatives of California; Service Employees International Union, Local 1000; Southern California Coalition; Truth Enterprises (lbs Distribution, Apex Agriculture, Woodland Reserve, Puff Pre-rolls); WeDrop, Irvine City Council Member Melissa Fox; Sunstone Distribution; High Hampton Holdings; Sespe Creek Collective; El Captain Advisors.

Opposition: None received.

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SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2017 - 2018 Regular

Bill No: Hearing Date: April 18, 2018

Subject:

SUMMARY

This bill authorizes the creation of limited charter banks and credit unions, as specified, and authorizes the use of special purpose checks issued by these institutions for specified purposes, including the payment of state and local taxes, rent, and goods and services, and the purchase of state and local securities, as specified.

EXISTING LAW

1. Provides for Proposition 215 (The Compassionate Use Act of 1996), which exempts from specified criminal penalties the possession or cultivation of medical marijuana by patients and primary caregivers; and Proposition 64 (The Control Regulate, and Tax Adult Use of Marijuana Act of 2016), which provides for the licensure and regulation of commercial adult marijuana activities by various state agencies.
   
2. Provides for the Medicinal and Adult-Use Cannabis Regulation and Safety Act (Business and Professions Code Section 60000 et seq.) and its implementing regulations (California Code of Regulations Title 16, Division 42, Section 5000 et seq.), administered by the California Bureau of Cannabis Control.
   
3. Provides for the Department of Business Oversight (DBO) and gives DBO authority to administer the Financial Institutions Law. The three divisions of the Financial Institutions Law that are relevant for purposes of this bill include Division 1, related to administration, enforcement, and liquidation and conservation (Financial Code Section 99 et seq.); Division 1.1, the Banking Law (Financial Code Section 1000 et seq.); and Division 5, California Credit Union Law (Financial Code Section 14000 et seq.).

THIS BILL

1. Contains findings and declarations related to passage of Proposition 64 in 2016, authorizing the recreational use of cannabis, and to passage of Proposition 215 in 1996, authorizing the medicinal use of cannabis; the significant challenges that cannabis businesses have accessing traditional banking services; the regulatory and public safety issues arising from cannabis businesses’ lack of access to banking services; and the responsibility of the state, consistent with the will of California voters, to provide a mechanism to help lawful cannabis businesses gain access to banking services.
   
2. Establishes a new Division 2.5 within the Financial Code (Section 11000 et seq.) called the Cannabis Limited Charter Banking Law (CLCBL), administered by DBO.
   
3. Defines the terms banking services, cannabis business, and cannabis limited charter bank, cannabis limited charter credit union, and board for purposes of the CLCBL, as follows:
   
   1. Banking services means the provision of depository services with respect to cash or other funds, including the acceptance and maintenance of deposit proceeds, and the issuance of special purpose checks, as specified.
      
   2. Cannabis business is defined as a person licensed to engage in commercial cannabis activity pursuant to Division 10 of the Business and Professions Code and an ancillary business or profession that serves such a licensed person.
      
   3. Cannabis business limited charter bank (CLCB) means a person that receives a cannabis business limited charter bank license from DBO.
      
   4. Cannabis business limited charter credit union (CLCCU) means a person that receives a cannabis business limited charter credit union license from DBO.
      
   5. Board means the Cannabis Limited Charter Bank Advisory Board.
      
4. Authorizes CLCBs and CLCCUs to issue special purpose checks, which are valid only for specified purposes. Requires each special purpose check to include the following text, in at least 12-point type: “This check is issued by [insert name of CLCB or CLCCU] and may only be deposited or cashed at this CLCB/CLCCU or another CLCB/CLCCU that agrees to accept the check.”
   
5. Allows special purpose checks to be used only for specified purposes, but clarifies that no individual or entity, whether private or public, is required to accept a special purpose check issued by a CLCB or a CLCCU. Special purpose checks may only be used to:
   
   1. Pay fees or taxes to the state or a local jurisdiction.
      
   2. Pay rent on property that is associated with the account holder’s cannabis business.
      
   3. Pay a vendor located in California for expenses related to goods and services associated with the account holder’s cannabis business.
      
   4. Purchase bonds or interest-bearing notes or warrants backed by the full faith and credit of the state, or bonds or warrants of any local jurisdiction, as specified.
      
6. Requires persons wishing to form as a CLCB or CLCCU to obtain a license from DBO, as specified, and to comply with all requirements of Division 1 of the Financial Institutions Law (which generally cover administrative and enforcement functions) and with either Division 1.1 of the Financial Code (the Banking Law) or Division 5 of the Financial Code (the California Credit Union Law), as applicable, but further provides that any requirement of any of those laws that is inconsistent with Division 2.5 does not apply to that CLCB or CLCCU.
   
7. Requires CLCBs and CLCCUs to obtain and maintain private insurance for themselves and their assets at all times they are engaged in banking services, and authorizes CLCBs and CLCCUs to do all things and assume and discharge all obligations required of them in this regard, which are not in conflict with state law.
   
8. Authorizes CLCBs and CLCCUs to charge fees for the services they provide and authorizes the Commissioner of Business Oversight (commissioner) to review any fee charged by a CLCB or CLCCU, upon request or whenever the commissioner deems such review appropriate.
   
9. Authorizes CLCBs and CLCCUs to enter into agreements to form banking networks with other CLCBs and CLCCUs for the purpose of helping each other provide services to cannabis businesses, but expressly forbids a network of this type from including any institution that is not a CLCB or CLCCU.
   
10. Requires CLCBs and CLCCUs to adopt policies and practices that allow them to achieve the principles and goals outlined in the federal Bank Secrecy Act and to cooperate with the federal Financial Crimes Enforcement Network.
    
11. Prohibits CLCBs and CLCCUs from engaging in banking activity with any other financial institution that lacks a California limited purpose charter and from engaging in any activity other than that required to accept deposits and perform actions authorized under Division 2.5 of the Financial Code.
    
12. Provides that the Board is comprised of the Treasurer, Controller, and the Chief of the Bureau of Cannabis Control as voting members, and the Director of Finance as an ex-officio, nonvoting member.
    
    1. Holds the Board generally responsible for ensuring that the CLCBL provides a safe and efficient way to pay state and local taxes and fees, pay rent associated with the account holder’s cannabis business, issue special purpose checks, and legally invest in California’s economy.
       
    2. Requires the Board to hold noticed, public meeting at least once a year, or more often as needed, to review enforcement activity reports from DBO and to draft recommended legislative or administrative actions for submission to the Legislature and the Governor, as specified.
       
    3. Requires the Board to provide guidance and education to registered broker-dealers and licensed investment advisors on how to accommodate CLCB and CLCCU account holders who wish to purchase allowable state and/or local securities.
       
13. Makes related conforming amendments to provisions of the Financial Code.

COMMENTS

1. Purpose: This bill is sponsored by Board of Equalization Member Fiona Ma to help mitigate several of the problems resulting from cannabis businesses’ access to banking services.
   
2. Author’s Statement: The author states, “The use and consumption of medical marijuana was legalized in California in 1996, and Proposition 64 legalized adult-use cannabis as of January 2018. However, due to cannabis’ federal classification as a Schedule I drug, cannabis-related businesses are not able to deposit income with federally-insured financial institutions. The cannabis industry is expected to generate between $8-20 billion annually. This is a massive industry that we can only expect will continue to grow; yet cultivation, distribution, and retail businesses alike have been forced to operate on a cash-only basis. This is not only impractical from an accounting perspective, but also presents a significant public safety issue.
   
   “The Department of Finance estimates that the state will collect $600 million in cannabis taxes in the upcoming year. Unlike most businesses however, cannabis businesses arrive to government offices with duffel bags of cash to fulfill their tax obligations. Standard oversight and accountability measures, like audits, become very difficult when most transactions are completed in cash. Additionally, these businesses face security risks because of the volume of cash in their possession.”
   
3. Why Are Cannabis Businesses Locked Out of the Banking System? Virtually everyone who has attempted to solve the problem this bill’s author and sponsor are seeking to solve has faced the reality that the vast majority of traditional banks and credit unions will not knowingly provide banking services to cannabis businesses or, in many cases, to businesses that serve cannabis businesses. Reluctance to serve the cannabis industry is based on a minimum of three different laws: the Bank Secrecy Act, the USA Patriot Act, and the Racketeer Influenced and Corrupt Organizations (RICO) Act. Together, these laws make it illegal for financial institutions to handle funds stemming from criminal activity, including violations of federal drug laws, and subject financial institutions to possible regulatory sanctions for placing their safety and soundness at risk by failing to take appropriate actions to avoid illegal activity. The RICO Act additionally subjects all property bought with the proceeds of illegal activity to forfeiture.
   
   Several problems specific to cannabis banking stem from these federal laws. For example, neither the Federal Deposit Insurance Corporation nor the National Credit Union Administration have, to date, been willing to provide deposit insurance to banks and credit unions that knowingly provide banking services to cannabis businesses.
   
   No federal clearinghouse has been willing to clear a check known to have been written by or to a cannabis business. Furthermore, because the payment rails used to process electronic payments are run by federally-regulated institutions, banks and credit union will not issue credit or debit cards to businesses they know to be cannabis businesses, nor process credit and debit card transactions they know to involve the proceeds of cannabis activity.
   
   For the aforementioned reasons, if California is going to devise a way for cannabis-specific depository institutions to legally operate in the state, those institutions will need to be walled off from the traditional banking sector. This bill envisions such an approach.
   
4. How Will All of This Work? If this bill is enacted, the author and sponsor envision that one or more CLCBs or CLCCUs will form in one or more areas of the state. Once formed and operational, a CLCB or CLCCU will open accounts for California licensed cannabis businesses and accept cash and special purpose check deposits from those businesses. CLCBs and CLCCUs will be authorized to engage in only two activities: 1) accepting and holding deposits for their account holders and 2) issuing special purpose checks to their account holders. A cannabis business with an account at a CLCB or CLCCU will be able to use special purpose checks, rather than cash, to pay taxes and to pay for certain products and services, but only if the entity to which the cannabis business presents the special purpose check wishes to accept it. Because traditional banks and credit unions will be unlikely to deposit or cash special purpose checks, these checks cannot be considered legal tender. They are, in essence, cannabis scrip, which can only be exchanged with a business or other entity that agrees to accept them.
   
   If we assume that the state and some local jurisdictions will agree to accept special purpose checks for the payment of taxes (something not yet authorized or required), the most obvious advantage to the system envisioned by this bill is the increased ability of cannabis businesses to pay their state and local taxes, without having to physically carry large bags of cash into state and local taxing agencies. Other advantages may flow from the authority granted by this bill, but may be more limited, at least initially.
   
   For example, in certain geographic areas of the state whose economies are heavily reliant on cannabis, and whose residents and business owners frequently interact with cannabis businesses, the special purpose checks envisioned by this bill may be readily accepted, and, as such, may help take some cash off the streets and mitigate some of the existing public safety risks that result from cannabis business’s lack of access to banking services. If everyone has an account at the local CLCB or CLCCU, being presented with a special purpose check is not a problem; one just deposits it into one’s account. Even in areas where the economy is less dependent on cannabis, and where most residents and businesses do not interact with cannabis businesses, these special purpose checks may help cannabis businesses interact with one another, without having to exchange large amounts of cash. One’s out-of-town landlord may not want to accept a special purpose check, but the vendor that serves multiple cannabis businesses probably will.
   
   However, in other areas of the state whose economies are less reliant on cannabis, and where residents and businesses interact to a much more limited extent with cannabis businesses, these special purpose checks may not be readily accepted. If a landlord receives a special purpose check from a cannabis business but does not have an account at a CLCB or CLCCU, the landlord has little, if any, ability to convert that check to cash. Even if the landlord has access to a nearby CLCB or CLCCU, something that is not assured, it is unclear (see suggested amendments, below) whether that landlord could turn the special purpose check into cash at a CLCB, and similarly unclear how much that landlord would be charged for doing so. The fewer CLCBs and CLCCUs that form under the authority created by this bill, the harder it will be for cannabis businesses wishing to use special purpose checks in lieu of cash to find people and businesses to accept them.
   
   It should also be noted that, even though this bill authorizes different CLCBs and CLCCUs to enter into banking networks with one another, this authority does not extend to electronic transmission of money from one to another. This bill does nothing to grant CLCBs or CLCCUs access to federal payment rails, access that cannot be granted as long as cannabis remains illegal at the federal level.
   
   The idea in this bill holds promise, but its success will be heavily dependent on the number of CLCBs and CLCCUs that form, on their geographic locations across the state, and on their abilities to devise ways to accept and deposit checks issued by their brother- or sister- CLCBs and CLCCUs.
   
5. Will Private Insurance Be Available? What About Sufficient Collateral to Ensure Liquidity? Several of the unanswered questions surrounding the limited purpose depository institution charter authorized by this bill include the level of private deposit insurance and collateral DBO will require, the extent to which insurers authorized to do business in this state will provide the required insurance, the cost of that insurance, and the extent to which limited charter banks and credit unions will have access to required amounts of collateral. No cannabis business, regardless of how desperate it is to move away from an all-cash business model, is likely to deposit its money in an institution that might not fully insure its deposits, nor in one that cannot promise instant liquidity, when it wishes to withdraw its funds.
   
6. Should This Bill Spell Out the Specific Requirements to Which CLCBs and CLCCUs are Subject? This bill opts to use general control language to describe the requirements to which CLCBs and CLCCUs are subject rather than spelling out each and every requirement in detail. For example, Financial Code Section 11021, proposed to be added by this bill, states that a CLCB and CLCCU shall comply with all requirements of Division 1 of the Financial Code, and with either Division 1.1 (CLCBs) or Division 5 (CLCCUs), except that, to the extent any requirement of those laws is inconsistent with a provision of the Cannabis Limited Charter Banking Law, the provisions of the cannabis law shall prevail. The challenge posed by this broad language is its lack of specificity. Which requirements are inconsistent? Should they be ignored or should they be modified to remove the inconsistency? How? Section 11040 contains similar, unclear control language.
   
   Both of these control sections substitute for a much lengthier alternative, which would provide far greater clarity and certainty to entities seeking to become licensed as CLCBs and CLCCUs. This alternative would entail drafting two new, cannabis-specific articles of law, one based on the Banking Law and the other based on the Credit Union Law. Although lengthy and time-consuming to draft, these two cannabis-specific articles would clarify the specific rules applicable to both types of limited charter depositories. Amendments are suggested (see Section 9b of this analysis) to replace this bill’s control sections with cannabis-specific articles of law.
   
7. Support:
   
   1. Board of Equalization member Fiona Ma is sponsoring SB 930 as a significant step toward integrating cannabis-related businesses into the California economy in a safe and transparent manner.
      
   2. The California Cannabis Industry Association, Cannabis Distributors Association, Cannabis Growers Association, Southern California Coalition, Service Employees International Union, Black American Political Association of California, Rural County Representatives of California, California Asian Pacific Islander Chamber of Commerce, and several others support the bill, because it would allow cannabis-related businesses to perform routine financial transactions in a much safer manner.
8. Opposition: None received.
   
9. Amendments:
   
   1. This bill creates the Cannabis Limited Charter Banking Law and authorizes limited charter banks and limited charter credit unions to form under that law. It is questionable whether a credit union will want to form under a law called a “Banking Law.” Both for clarity and in the interest of encouraging, rather than discouraging credit unions from forming under the new cannabis law, staff suggests renaming Division 2.5 as either the “Cannabis Limited Charter Banking and Credit Union Law” or the “Cannabis Limited Charter Depository Institution Law.”
      
   2. Financial Code Section 11040 requires applicants wishing to become licensed as CLCBs or CLCCUs to form under either the Banking Law or the Credit Union Law, as applicable, and to comply with all requirements imposed by those laws, except to the extent any requirement is inconsistent with the provisions of the Cannabis Limited Charter Banking Law. The language of Financial Code Section 11040 is inconsistent with the requirement, explained earlier in this analysis, that CLCBs and CLCCUs be wholly separate from their traditional counterparts. A CLCB cannot form under the Banking Law and be wholly separate from a traditional bank formed under the Banking Law.
      
      The clearest solution to the problem posed by the language of Section 11040 is its deletion and substitution with two, separate articles, one based on the Banking Law and one based on the Credit Union Law, each of which expressly deletes and/or modifies language in Division 1.1 and Division 5 that is inconsistent with the Cannabis Limited Charter Banking Law. In this way, a CLCB would be required to form under the article patterned on, but distinct from, the Banking Law, and a CLCCU would be required to form under the article patterned on, but distinct from, the California Credit Union Law.
      
   3. The uses to which special purpose checks may be put would benefit from tighter definitions.
      
      For example, this bill authorizes the use of a special purpose check to pay rent on a property that “is associated with” the account holder’s cannabis business. The term association is extremely broad and could include properties with extremely loose, possibly indirect associations. If the intent of the author is to limit this provision to the payment of rent on properties leased by or on behalf of the cannabis business, the language on Page 15, lines 31 and 32 should be modified accordingly.
      
      Similarly, this bill authorizes the use of a special purpose check to pay a vendor located in California for certain expenses. The term “located in California” would benefit from further clarification. At a minimum, this language should refer to businesses physically located in California. However, the language may also benefit from clarification to address businesses, which have physical locations in California, but which have centralized billing operations located outside the state. If a cannabis business purchases goods or services from a vendor that is physically located in California, but is required to remit payment to the vendor’s centralized billing operation in another state, it is highly unlikely that the vendor will be able to convert the special purpose check into legal tender and thus highly unlikely that vendor will accept the check.
      
   4. This bill’s author may also wish to amend his bill to add authority for a CLCB or CLCCU to cash a special purpose check it previously issued on behalf of one of its account holders, which is presented to it by person or entity that is not an account holder. In this way, a landlord that receives a special purpose check for payment of rent, who does not wish to open an account at the institution that issued the check, can convert the special purpose check into cash at the issuing special purpose depository institution.
      
   5. This bill authorizes the commissioner to review fees charged by CLCBs and CLCCUs but is silent on the authority of the commissioner to demand that a CLCB or CLCCU modify its fees pursuant to an order of the commissioner. If this bill’s author would like DBO to have that authority, an amendment will be necessary to provide it.
      
   6. The following technical and clarifying amendments are suggested:
      
      1. Financial Code Section 329(a)(1)(G): Insert an inadvertently omitted reference to limited charter credit unions.
         
         Page 8, line 27, after “bank”, insert: or credit union
         
      2. Financial Code Section 11052: Specify that the private insurance, which CLCBs and CLCCU must hold, must be in an amount acceptable to the commissioner.
         
         Page 16, line 13, after insurance, insert: in an amount acceptable to the commissioner
         
      3. Financial Code Section 11054: Clarify that the network must consist solely of limited charter licensees.
         
         Page 16, line 21, after “other” insert: limited charter
         
      4. Financial Code Section 11056: Use language of the sort used in other laws administered by DBO.
         
         Page 16, line 29, strike “as defined by the department” and insert: pursuant to rules that may be adopted by the commissioner.
         
   7. Finally, staff suggests that thought be given to expressly granting DBO emergency rulemaking authority to speed up the issuance of regulations necessary to implement the bill. The bill might also benefit from a delayed operative date, to give DBO time to issue regulations, before entities are authorized to begin applying for limited charter licenses.
      
10. Prior and Related Legislation:
    
    1. SB 148 (Weiner), from the 2017-18 Legislative Session, would have authorized the Board of Equalization and counties to collect cash payments from cannabis-related businesses for the payment of taxes. Held on the Senate Appropriations Committee Suspense File.
       

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

Board of Equalization Member Fiona Ma (sponsor)

Board of Equalization Member George Runner

Black American Political Association of California

California Asian Chamber of Commerce

California Cannabis Industry Association

California Growers Association

Cannabis Distribution Association

California NORML

CMG/Caliva

City of Los Angeles

City of Santa Monica

Fresno Councilmember Oliver Baines, III

River Distributing Company

Rural County Representatives of California

Service Employees International Union, Local 1000

Southern California Coalition

Truth Enterprises (lbs Distribution, Apex Agriculture, Woodland Reserve, Puff Pre-rolls)

WeDrop

Opposition

None received

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