CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 1525

Author:(Jones-Sawyer)

As Amended Ver:August 21, 2020

Majority vote

SUMMARY:

Clarifies that no state law prohibits an entity from providing financial services, as specified, to a licensed cannabis business. Permits a cannabis business to authorize a state regulatory agency to share the business' track-and-trace data with financial institutions.

The Senate Amendments:

Technical and clarifying in nature.

COMMENTS:

As generally enforced by regulators today, federal law does not strictly prohibit financial institutions from providing products and services to cannabis businesses. Rather, federal law places restrictions and requirements on financial institutions that are burdensome and reduce the incentive for financial institutions to serve the cannabis industry. As a consequence, individual banks and credit unions can decide whether the benefits of engaging with a cannabis business exceed the associated costs and risks. As of June 30, 2019, 715 bank and credit unions were actively providing banking services to cannabis businesses across the country, based on their reports to federal regulators.

The cost and risk associated with compliance requirements related to anti-money laundering laws are significant concerns for a financial institution considering a relationship with a cannabis business. Federal guidelines require financial institutions to comply with due diligence requirements that the cannabis business is operating legally under state laws and that the business is working to achieve federal priorities related to cannabis activities.

This bill aims to reduce the cost and risk of complying with these federal requirements by sharing data collected by state regulators on cannabis business activities directly with financial institutions that engage with a cannabis business. In a 2017 report from the State Treasurer's Cannabis Banking Working Group, the working group recommended the following:

The State of California and local governments should create an online portal aggregating data on cannabis businesses from local government units and all 11 state agencies with cannabis regulatory or data-collection responsibilities. The portal should be designed with financial institution compliance needs in mind and provide material to help institutions fulfill their know-your-customer responsibilities. The data should include licensing and regulatory information, data on key personnel, product lists, sources of supply, financial records including major transactions, ongoing regulatory activity including citations for violations, adverse comments, and evidence of suspicious or illegal activities, provided such material is not restricted by disclosure rules or other agreements.

This bill would provide the necessary statutory clarity to ensure that state regulators and licensed cannabis businesses can continue to make progress on this recommendation.

According to the Author:

In order to increase overall access to banking, AB 1525 would create a safe harbor under state law for financial institutions and accountants that provide services to the cannabis industry. This bill would allow cannabis businesses to share their track-and-trace data with banks to facilitate the ability of financial institutions to comply with due diligence reporting requirements to federal regulating agencies.

Arguments in Support:

Cannabis industry professionals, financial professionals, local governments, and elected officials support the bill because of its potential to increase the number of financial institutions willing to provide financial services to cannabis businesses and decrease the cost of regulatory compliance for institutions that provide these services.

Arguments in Opposition:

The United Cannabis Business Association and six other cannabis business organizations oppose the bill on the basis that it is unnecessary and sets bad precedent by legitimizing the collection of confidential information about cannabis businesses by joint powers authorities.

FISCAL COMMENTS:

According to the Senate Appropriations Committee:

1. Indeterminate costs to the Bureau of Cannabis Control (BCC) to promulgate regulations and address other administrative workload.
2. Estimated one-time information technology (IT) cost of $85,000 for the BCC to update its online applications and build an outgoing interface to share licensee information with financial institutions. This cost estimate assumes that a standardized application can be used across all entities. There may be additional costs if a standardized application cannot be used to transfer licensee data, which may be absorbable by redirecting existing maintenance resources.
3. Estimated ongoing costs of $120,169 to the California Department of Food and Agriculture (CDFA) to hire one additional analyst to evaluate requests and process reports.
4. Estimated one-time IT cost of $82,795 for the CDFA to perform system enhancements.
5. Estimated ongoing costs of $177,000 to the State Department of Public Health to process requests (Cannabis Control Fund).

VOTES:

ASM BANKING AND FINANCE: 8-1-3

YES: Limón, Bauer-Kahan, Burke, Cervantes, Gabriel, Mark Stone, Weber, Wicks

NO: Melendez

ABS, ABST OR NV: Chen, Choi, Grayson

ASM BUSINESS AND PROFESSIONS: 18-0-1

YES: Low, Brough, Arambula, Bloom, Chen, Chiu, Cunningham, Eggman, Fong, Gipson, Gloria, Grayson, Holden, Irwin, McCarty, Mullin, Obernolte, Ting

ABS, ABST OR NV: Medina

ASM APPROPRIATIONS: 17-0-1

YES: Gonzalez, Bloom, Bonta, Brough, Calderon, Carrillo, Chau, Megan Dahle, Diep, Eggman, Fong, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

ABS, ABST OR NV: Bigelow

ASSEMBLY FLOOR: 68-1-11

YES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Chau, Chen, Chiu, Chu, Cooley, Cooper, Cunningham, Daly, Diep, Eggman, Flora, Fong, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Mullin, Muratsuchi, Nazarian, O'Donnell, Obernolte, Petrie-Norris, Quirk, Quirk-Silva, Reyes, Luz Rivas, Robert Rivas, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Waldron, Weber, Wicks, Wood

NO: Voepel

ABS, ABST OR NV: Bigelow, Cervantes, Choi, Megan Dahle, Frazier, Medina, Melendez, Patterson, Ramos, Rodriguez, Rendon

SENATE FLOOR: 28-2-10

YES: Allen, Archuleta, Atkins, Beall, Bradford, Caballero, Dodd, Durazo, Galgiani, Glazer, Hertzberg, Hill, Hueso, Hurtado, Jackson, Leyva, McGuire, Mitchell, Monning, Nielsen, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wiener

NO: Lena Gonzalez, Wieckowski

ABS, ABST OR NV: Bates, Borgeas, Chang, Dahle, Grove, Jones, Melendez, Moorlach, Morrell, Wilk

UPDATED:

VERSION: August 21, 2020

CONSULTANT: Michael Burdick / B. & F. / (916) 319-3081 FN: 0003459

 THIRD READING  

Bill No: AB 1525

Author: Jones-Sawyer (D), et al.

Amended: 8/21/20 in Senate

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 7-0, 8/13/20

AYES: Bradford, Chang, Caballero, Dahle, Durazo, Hueso, Portantino

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/20/20

AYES: Portantino, Bates, Bradford, Hill, Jones, Leyva, Wieckowski

ASSEMBLY FLOOR: 68-1, 1/27/20 - See last page for vote

SUBJECT: Cannabis: financial institutions

SOURCE: Author

DIGEST:

This bill states that the provision of financial services to a person licensed to engage in commercial cannabis activity in this state is not a violation of California law and authorizes persons licensed to engage in commercial cannabis activity in this state to request that specified information about them in the state’s track-and-trace system be shared with financial institutions for specified purposes.

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. Regulates, pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA; Division 10 of the Business and Professions Code [BPC], BPC Section 26000 et seq.), the cultivation, distribution, transport, storage manufacturing, processing, and sale of medicinal cannabis and medicinal cannabis products for patients with valid physician’s recommendation and adult-use cannabis and adult-use cannabis products for adults 21 years of age and over. MAUCRSA grants the Bureau of Cannabis Control authority to create, issue, deny, suspend, and revoke licenses issued for microbusinesses, transportation, storage, distribution, testing, and sale of cannabis and cannabis products, and grants the California Department of Food and Agriculture authority to establish and manage a track and trace program to report the movement of cannabis and cannabis products through the distribution chain, as specified.

This bill

1. Provides that an entity, as defined, which receives deposits, extends credit, conducts fund transfers, transports cash or financial instruments, or provides other financial services does not commit a crime under any California law, solely by virtue of the fact that the person receiving the benefit of those services engages in commercial cannabis activity as a licensee under Division 10 of the Business and Professions Code. For purposes of this provision, an entity is defined as a bank, savings association, industrial bank or industrial loan company, credit union, trust company, or money transmitter (e.g., as a financial institution as defined in Financial Code Section 185), an armored car service licensed by the California Highway Patrol that has been contracted by a financial institution, or a person providing financial services to persons licensed to engage in commercial cannabis activity pursuant to Division 10 of the Business and Professions Code.
   
2. Authorizes a person licensed to engage in commercial cannabis activity pursuant to Division 10 of the Business and Professions Code to request in writing that a state or local licensing authority, state or local agency, or joint powers authority share that person’s application, license, and other regulatory and financial information with a financial institution of the person’s designation and requires the written request to be accompanied by a waiver authorizing the sharing of that information and waiving any confidentiality or privilege that applies to the information. Authorizes the licensing authority, state or local agency, or joint powers authority to share that information upon receipt of a written request and accompanying waiver. For purposes of this provision, “application, licensee, and other regulatory and financial information” includes, but is not limited to, information in the track and trace system established pursuant to Business and Professions Code Sections 26067 and 26068.
   
3. Authorizes a person that provides a waiver as described above to withdraw their waiver at any time, and states that upon receipt of a waiver withdrawal request, the state or local licensing authority, state or local agency, or joint powers authority must cease sharing application, licensee, or other regulatory or financial information with the financial institution.
   
4. Provides that an individual or firm, which practices pubic accounting pursuant to Chapter 1 of Division 3 of the Business and Professions Code, does not commit a crime under California law solely for providing professional accounting services to persons licensed to engage in commercial cannabis activity pursuant to Division 10 of the Business and Professions Code.
   
5. States that this bill shall be construed to refer only to the disclosure of information by a state or local licensing authority, state or local agency, or joint powers authority reasonably necessary to facilitate the provision of financial services for the licensee making a request pursuant to this bill. Further provides that nothing in this bill authorizes the disclosure of confidential or privileged information or waives a licensee’s rights to assert confidentiality or privilege, except to a financial institution, and except as reasonably necessary to facilitate the provision of financial services for the licensee making the request.

Background

Cannabis businesses’ lack of consistent and ready access to banking services is a long-standing, well-documented problem that has created ripple effects ranging from public safety challenges associated with large amounts of cash and tax collection challenges associated with payment issues. Despite California having legalized adult use of cannabis in 2016, the vast majority of banks and credit unions will not knowingly provide banking services to licensed cannabis businesses or, in many cases, to businesses that serve those 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.

Comments

Despite the aforementioned challenges, a small but increasing number of depository institutions are knowingly providing financial services to so-called “marijuana-related businesses” (MRBs), according to data from the U.S. Financial Crimes Enforcement Network (FinCEN). As of March 31, 2020, 525 banks and 185 credit unions were actively providing banking services to MRBs (https://www.fincen.gov/sites/default/files/shared/508_293283_MJ_Banking_Update_2nd_QTR_FY2020_Public_Final.pdf).

Federal guidance issued under the Obama Administration directed depository institutions providing service to MRBs to file one of three types of Suspicious Activity Reports (SARs) with FinCEN, reflecting the degree to which the MRBs are complying with the Cole Memorandum (a memorandum that outlined requirements with which state-legalized markets must comply in order to avoid enforcement actions by federal law enforcement agencies). Although the Cole Memorandum was rescinded after President Obama left office, it continues to represent a yardstick against which financial institutions evaluate MRBs.

Depository institutions that provide banking services to MRBs must engage in due diligence to determine whether to file a Marijuana Limited, Marijuana Priority, or Marijuana Termination SAR. A Marijuana Limited SAR indicates that the MRB does not raise any of the red flags in the Cole Memorandum and is compliance with the appropriate state’s regulations regarding MRBs. Institutions that file Marijuana Limited SARs are understood by FinCEN to be providing banking services to the MRB.

A Marijuana Priority SAR means that the financial institution’s due diligence has uncovered evidence that the MRB may raise one or more of the red flags in the Cole Memorandum or may not be fully compliant with the appropriate state’s regulations for MRBs. Institutions that file Marijuana Priority SARs are understood by FinCEN to be providing banking services to the MRB while conducting further investigations into the MRB.

A Marijuana Termination SAR means that the financial institution has confirmed that the MRB is raising one or more of the red flags in the Cole Memorandum, is not fully compliant with the appropriate state’s regulations regarding MRBs, or that the financial institution has decided not to provide banking services to MRBs for business reasons. An institution that files a Marijuana Termination SAR is understood by FinCEN to have terminated its relationship with the MRB.

As of March 31, 2020, FinCEN had received over 125,000 SARs involving MRBs. Just over 95,000 of those SARs were Marijuana Limited, slightly under 10,000 were Marijuana Priority, and about 30,000 were Marijuana Termination. The information that this bill will authorize state and local agencies to share with financial institutions is intended to help financial institutions perform their required due diligence more readily than they can at present. The author’s hope is that by making it easier for depository institutions to perform required due diligence, more depositories may be willing to offer financial services to MRBs.

Related/Prior Legislation

SB 930 (Hertzberg, 2018) and SB 51 (Hertzberg, 2019) would have authorized the creation of special purpose, limited charter banks and credit unions, as specified, to help provide a limited number of core banking services to cannabis businesses. SB 930 was held on the Assembly Appropriations Committee Suspense file. SB 51 remains on the Inactive File on the Assembly Floor.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee:

• Indeterminate costs to the Bureau of Cannabis Control (BCC) to promulgate regulations and address other administrative workload.
• Estimated one-time information technology (IT) cost of $85,000 for the BCC to update its online applications and build an outgoing interface to share licensee information with financial institutions. This cost estimate assumes that a standardized application can be used across all entities. There may be additional costs if a standardized application cannot be used to transfer licensee data, which may be absorbable by redirecting existing maintenance resources.
• Estimated ongoing costs of $120,169 to the California Department of Food and Agriculture (CDFA) to hire one additional analyst to evaluate requests and process reports.
• Estimated one-time IT cost of $82,795 for the CDFA to perform system enhancements.
• Estimated ongoing costs of $177,000 to the State Department of Public Health to process requests (Cannabis Control Fund).

SUPPORT: (Verified 8/20/20)

State Treasurer Fiona Ma

California Association of Treasurers and Tax Collectors

California Bankers Association

California Board of Accountancy

California Cannabis Industry Association

California Credit Union League

California Society of Certified Public Accountants

CMG/Caliva

International Cannabis Farmers Association

Los Angeles Mayor Eric Garcetti

Rural County Representatives of California

Southern California Coalition

OPPOSITION: (Verified 8/20/20)

Berkeley Patients Group

Cannabis Chamber of Commerce

Cannabis Equity Retailer Association

Long Beach Collective Association

San Francisco Cannabis Retailers Alliance

Santa Ana Cannabis Association

Silicon Valley Cannabis Alliance

United Cannabis Business Association

ARGUMENTS IN SUPPORT: Cannabis industry professionals, financial professionals, local governments, and elected officials support the bill because of its potential to increase the number of financial institutions willing to provide financial services to cannabis businesses and decrease the cost of regulatory compliance for institutions that provide these services. The California Bankers Association writes, “for a financial institution considering a relationship with a cannabis business, the risk associated with compliance requirements and persisting conflicts between state and federal law remain significant concerns. The banking industry concludes that there are no complete solutions at the state level that allow licensed cannabis businesses to access the same level of banking services that other businesses currently receive and that the ultimate solution to banking the cannabis industry requires a change in federal law. By aiming to reduce the risk of servicing cannabis businesses by providing financial institutions with necessary access to the data that will allow these institutions to better evaluate potential customers as well as matters associated with compliance and risk, AB 1525 may be successful in reducing the California cannabis industry’s cash reliance until a federal-level solution is achieved. Licensed cannabis businesses, and the ancillary businesses that provide them with goods and services, will be safer and better regulated if they are permitted to use the banking system, which would increase the transparency and accountability of the industry and better protect our communities.”

ARGUMENTS IN OPPOSITION: The United Cannabis Business Association and six other cannabis business organizations oppose the bill on the basis that it is unnecessary and sets bad precedent by legitimizing the collection of confidential information about cannabis businesses by joint powers authorities. “Currently, there are banks and credit unions providing banking services to cannabis businesses regardless of the Federal Government’s designation as a Schedule I substance. Each cannabis licensee can share business information with a banking institution as needed to obtain banking services. Cannabis licensees’ application, financial, and track and trace information should be confidential and not disclosed to entities, including Joint Power Authorities.”

ASSEMBLY FLOOR: 68-1, 1/27/20

AYES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Chau, Chen, Chiu, Chu, Cooley, Cooper, Cunningham, Daly, Diep, Eggman, Flora, Fong, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Petrie-Norris, Quirk, Quirk-Silva, Reyes, Luz Rivas, Robert Rivas, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Waldron, Weber, Wicks, Wood

NOES: Voepel

NO VOTE RECORDED: Bigelow, Cervantes, Choi, Megan Dahle, Frazier, Medina, Melendez, Patterson, Ramos, Rodriguez, Rendon

Prepared by: Eileen Newhall / B. & F.I. /

8/25/20 16:09:14

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 1525 (Jones-Sawyer) - Cannabis: financial institutions

Bill Summary:

AB 1525 states that an entity providing financial and professional accounting services to a person licensed in California to engage in commercial cannabis activity does not commit a crime under California law and authorizes state and local licensing authorities to share information with a financial institution, as specified.

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

The following information is revised to reflect amendments

adopted by the committee on August 20, 2020

Fiscal Impact:

• Indeterminate costs to the Bureau of Cannabis Control (BCC) to promulgate regulations and address other administrative workload.
• Estimated one-time information technology (IT) cost of $85,000 for the BCC to update its online applications and build an outgoing interface to share licensee information with financial institutions. This cost estimate assumes that a standardized application can be used across all entities. There may be additional costs if a standardized application cannot be used to transfer licensee data, which may be absorbable by redirecting existing maintenance resources.
• Estimated ongoing costs of $120,169 to the California Department of Food and Agriculture (CDFA) to hire one additional analyst to evaluate requests and process reports.
• Estimated one-time IT cost of $82,795 for the CDFA to perform system enhancements.
• Estimated ongoing costs of $177,000 to the State Department of Public Health to process requests (Cannabis Control Fund).

Committee Amendments:

• Authorizes a person who requests a waiver to withdraw that waiver at any time.
• Requires a state or local licensing authority, state or local agency, or joint powers authority to cease sharing application, licensee, or other regulatory or financial information with the financial institution upon receipt of the withdrawal.

-- END --

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

AB 1525 (Jones-Sawyer) - Cannabis: financial institutions

Bill Summary:

AB 1525 states that an entity providing financial and professional accounting services to a person licensed in California to engage in commercial cannabis activity does not commit a crime under California law and authorizes state and local licensing authorities to share information with a financial institution, as specified.

Fiscal Impact:

• Indeterminate costs to the Bureau of Cannabis Control (BCC) to promulgate regulations and address other administrative workload.
• Estimated one-time information technology (IT) cost of $85,000 for the BCC to update its online applications and build an outgoing interface to share licensee information with financial institutions. This cost estimate assumes that a standardized application can be used across all entities. There may be additional costs if a standardized application cannot be used to transfer licensee data, which may be absorbable by redirecting existing maintenance resources.
• Estimated ongoing costs of $120,169 to the California Department of Food and Agriculture (CDFA) to hire one additional analyst to evaluate requests and process reports.
• Estimated one-time IT cost of $82,795 for the CDFA to perform system enhancements.
• Estimated ongoing costs of $177,000 to the State Department of Public Health to process requests (Cannabis Control Fund).

Background:

The federal Bank Secrecy Act, the USA Patriot Act, and the Racketeer Influenced and Corrupt Organizations (RICO) Act make it illegal for financial institutions to handle funds stemming from criminal activity, including violations of federal drug laws. The acts also 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. These federal acts have contributed to the reluctance for the vast majority of banks and credit unions to willingly serve cannabis businesses and individuals licensed in California to engage in commercial cannabis activity. 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.

Despite the aforementioned challenges, a small but increasing number of depository institutions are knowingly providing financial services to so-called “marijuana-related businesses” (MRBs). According to data from the U.S. Financial Crimes Enforcement Network (FinCEN), as of March 31, 2020, 525 banks and 185 credit unions were actively providing banking services to MRBs.

Federal guidance issued under the Obama Administration directed depository institutions providing service to MRBs to file a report with the FinCEN, reflecting the degree to which the MRBs are complying with the Cole Memorandum. The Cole Memorandum outlined requirements with which state-legalized cannabis markets must comply in order to avoid enforcement actions by federal law enforcement agencies. Although the Cole Memorandum was rescinded after President Obama left office, it continues to represent a yardstick against which financial institutions evaluate MRBs.

The information that this bill will authorize state and local agencies to share with financial institutions is intended to help these entities perform their required due diligence more readily and potentially be more willing to offer financial services to MRBs.

Proposed Law:

This bill:

• States that an entity that receives deposits, extends credit, conducts fund transfers, transports cash or financial instruments, or provides other financial services to a person licensed to engage in commercial cannabis activity does not commit a crime under California law.
• Authorizes a person licensed to engage in commercial cannabis activity to request, in writing, a state or local licensing agency to share the person’s application, license, and other regulatory and financial information with a financial institution specified by the person. Requires a waiver authorizing the transfer of that information and any confidentiality or privilege that applies to that information in the written request.
  • Authorizes a state or local licensing agency to share the person’s information to facilitate the provision of financial services for that person.
• Includes information in the track and trace system in the definition of “application, licensee, and other regulatory and financial information.”
• Defines “entity” to mean a financial institution (as defined in Section 185 of the Financial Code), armored car service licensed by the Department of the California Highway Patrol, or a person providing financial services to persons licensed to engage in commercial cannabis activity.
• States an individual or firm that providing professional accounting services to persons licensed to engage in commercial cannabis activity does not commit a crime under California law.

Related Legislation:

SB 930 (Hertzberg, 2018) and SB 51 (Hertzberg, 2019) would have authorized the creation of special purpose, limited charter banks and credit unions to provide a limited number of core banking services to cannabis businesses. SB 930 was held on the Assembly Appropriations Committee Suspense File. SB 51 remains on the Inactive File on the Assembly Floor.

Staff Comments:

The BCC may need to promulgate regulations to establish a process for licensees to request information to be shared with financial institutions. The cost for the BCC to promulgate regulations is unknown.

Additionally, depending on the volume of licensee requests submitted to the BCC to share information with financial institutions, there may be additional workload impacts. As the volume of requests is unknown, the potential impact to the BCC is indeterminate. To the extent that the BCC cannot absorb this additional workload, the BCC may need to acquire authorization to establish a fee cover the cost of additional administrative activities to, among other things, review and transmit requests.

The DPH’s Manufactured Cannabis Safety Branch (MCSB) currently has 971 active licenses. The MCSB anticipates approximately 922 licensees, or 95% of its licensees, to submit waivers requesting information to be sent to financial institutions. This estimate is based on the percentage of licensees that submit tax payments via bank accounts through a comparable waiver and disclosure program in Washington State. The MCSB also estimates that licensees will likely request information to be sent to an average of three financial institutions in order to increase their chances of finding financial service solutions for their businesses.

Based on these assumptions, the MCSB anticipates the need for 1.5 additional staff to review requests, redact personal information not reasonably necessary to facilitate commercial banking, and transmit information to requested financial institutions. The MCSB notes that because federal law requires banks to collect and report any changes to a banked business’s status on a regular and ongoing basis, the MCSB will need to continue this workload on an ongoing basis as well.

-- END --

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2019 - 2020 Regular

Bill No: AB 1525 Hearing Date: August 13, 2020

Subject: Cannabis: financial institutions.

SUMMARY

This bill states that the provision of financial services to a person licensed to engage in commercial cannabis activity in this state is not a violation of California law and authorizes persons licensed to engage in commercial cannabis activity in this state to request that specified information about them in the state’s track-and-trace system be shared with financial institutions for specified purposes.

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. Pursuant to the Medicinal and Adult-Use Cannabis Regulation and Safety Act (MAUCRSA; Division 10 of the Business and Professions Code [BPC], BPC Section 26000 et seq.), regulates the cultivation, distribution, transport, storage manufacturing, processing, and sale of medicinal cannabis and medicinal cannabis products for patients with valid physician’s recommendation and adult-use cannabis and adult-use cannabis products for adults 21 years of age and over. MAUCRSA grants the Bureau of Cannabis Control authority to create, issue, deny, suspend, and revoke licenses issued for microbusinesses, transportation, storage, distribution, testing, and sale of cannabis and cannabis products, and grants the California Department of Food and Agriculture authority to establish and manage a track and trace program to report the movement of cannabis and cannabis products through the distribution chain, as specified.
   

THIS BILL

1. Provides that an entity, as defined, which receives deposits, extends credit, conducts fund transfers, transports cash or financial instruments, or provides other financial services does not commit a crime under any California law, solely by virtue of the fact that the person receiving the benefit of those services engages in commercial cannabis activity as a licensee under Division 10 of the Business and Professions Code. For purposes of this provision, an entity is defined as a bank, savings association, industrial bank or industrial loan company, credit union, trust company, or money transmitter (e.g., as a financial institution as defined in Financial Code Section 185), an armored car service licensed by the California Highway Patrol that has been contracted by a financial institution, or a person providing financial services to persons licensed to engage in commercial cannabis activity pursuant to Division 10 of the Business and Professions Code.
   
2. Authorizes a person licensed to engage in commercial cannabis activity pursuant to Division 10 of the Business and Professions Code to request in writing that a state or local licensing authority, state or local agency, or joint powers authority share that person’s application, license, and other regulatory and financial information with a financial institution of the person’s designation and requires the written request to be accompanied by a waiver authorizing the transfer and waiving any confidentiality or privilege that applies to the information. Authorizes the licensing authority, state or local agency, or joint powers authority to share that information upon receipt of a written request and accompanying waiver. For purposes of this provision, “application, licensee, and other regulatory and financial information” includes, but is not limited to, information in the track and trace system established pursuant to Business and Professions Code Sections 26067 and 26068.
   
3. Provides that an individual or firm, which practices pubic accounting pursuant to Chapter 1 of Division 3 of the Business and Professions Code, does not commit a crime under California law solely for providing professional accounting services to persons licensed to engage in commercial cannabis activity pursuant to Division 10 of the Business and Professions Code.
   
4. States that the bill shall be construed to refer only to the disclosure of information by a state or local licensing authority, state or local agency, or joint powers authority reasonably necessary to facilitate the provision of financial services for the licensee making a request pursuant to the bill. Further provides that nothing in the bill authorizes the disclosure of confidential or privileged information or waives a licensee’s rights to assert confidentiality or privilege, except to a financial institution, and except as reasonably necessary to facilitate the provision of financial services for the licensee making the request.
   

COMMENTS

1. Purpose: This bill is intended to increase the ability of licensed commercial cannabis businesses to access to financial services by providing financial institutions who agree to provide financial services to those businesses a safe harbor under California law and increased access to information about those businesses.
   
2. Background: Cannabis businesses’ lack of consistent and ready access to banking services is a long-standing, well-documented problem that has created ripple effects ranging from public safety challenges associated with large amounts of cash and tax collection challenges associated with payment issues. Despite California having legalized adult use of cannabis in 2016, the vast majority of banks and credit unions will not knowingly provide banking services to licensed cannabis businesses or, in many cases, to businesses that serve those 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.
   
3. Discussion: Despite the aforementioned challenges, a small but increasing number of depository institutions are knowingly providing financial services to so-called “marijuana-related businesses” (MRBs), according to data from the U.S. Financial Crimes Enforcement Network (FinCEN). As of March 31, 2020, 525 banks and 185 credit unions were actively providing banking services to MRBs (https://www.fincen.gov/sites/default/files/shared/508_293283_MJ_Banking_Update_2nd_QTR_FY2020_Public_Final.pdf).
   
   Federal guidance issued under the Obama Administration directed depository institutions providing service to MRBs to file one of three types of Suspicious Activity Reports (SARs) with FinCEN, reflecting the degree to which the MRBs are complying with the Cole Memorandum (a memorandum that outlined requirements with which state-legalized markets must comply in order to avoid enforcement actions by federal law enforcement agencies). Although the Cole Memorandum was rescinded after President Obama left office, it continues to represent a yardstick against which financial institutions evaluate MRBs.
   
   Depository institutions that provide banking services to MRBs must engage in due diligence to determine whether to file a Marijuana Limited, Marijuana Priority, or Marijuana Termination SAR. A Marijuana Limited SAR indicates that the MRB does not raise any of the red flags in the Cole Memorandum and is compliance with the appropriate state’s regulations regarding MRBs. Institutions that file Marijuana Limited SARs are understood by FinCEN to be providing banking services to the MRB.
   
   A Marijuana Priority SAR means that the financial institution’s due diligence has uncovered evidence that the MRB may raise one or more of the red flags in the Cole Memorandum or may not be fully compliant with the appropriate state’s regulations for MRBs. Institutions that file Marijuana Priority SARs are understood by FinCEN to be providing banking services to the MRB while conducting further investigations into the MRB.
   
   A Marijuana Termination SAR means that the financial institution has confirmed that the MRB is raising one or more of the red flags in the Cole Memorandum, is not fully compliant with the appropriate state’s regulations regarding MRBs, or that the financial institution has decided not to provide banking services to MRBs for business reasons. An institution that files a Marijuana Termination SAR is understood by FinCEN to have terminated its relationship with the MRB.
   
   As of March 31, 2020, FinCEN had received over 125,000 SARs involving MRBs. Just over 95,000 of those SARs were Marijuana Limited, slightly under 10,000 were Marijuana Priority, and about 30,000 were Marijuana Termination. The information that this bill will authorize state and local agencies to share with financial institutions is intended to help financial institutions perform their required due diligence more readily than they can at present. The author’s hope is that by making it easier for depository institutions to perform required due diligence, more depositories may be willing to offer financial services to MRBs.
   
4. Support:
   
   1. Cannabis industry professionals, financial professionals, local governments, and elected officials support the bill because of its potential to increase the number of financial institutions willing to provide financial services to cannabis businesses and decrease the cost of regulatory compliance for institutions that provide these services. The California Bankers Association writes, “for a financial institution considering a relationship with a cannabis business, the risk associated with compliance requirements and persisting conflicts between state and federal law remain significant concerns. The banking industry concludes that there are no complete solutions at the state level that allow licensed cannabis businesses to access the same level of banking services that other businesses currently receive and that the ultimate solution to banking the cannabis industry requires a change in federal law. By aiming to reduce the risk of servicing cannabis businesses by providing financial institutions with necessary access to the data that will allow these institutions to better evaluate potential customers as well as matters associated with compliance and risk, AB 1525 may be successful in reducing the California cannabis industry’s cash reliance until a federal-level solution is achieved. Licensed cannabis businesses, and the ancillary businesses that provide them with goods and services, will be safer and better regulated if they are permitted to use the banking system, which would increase the transparency and accountability of the industry and better protect our communities.”
5. Opposition:
   
   1. The United Cannabis Business Association and six other cannabis business organizations oppose the bill on the basis that it is unnecessary and sets bad precedent by legitimizing the collection of confidential information about cannabis businesses by joint powers authorities. “Currently, there are banks and credit unions providing banking services to cannabis businesses regardless of the Federal Government’s designation as a Schedule I substance. Each cannabis licensee can share business information with a banking institution as needed to obtain banking services. Cannabis licensees’ application, financial, and track and trace information should be confidential and not disclosed to entities, including Joint Power Authorities.”
      
      The cannabis business groups writing in opposition to the bill observe that the California Cannabis Authority (CCA; a joint powers authority) adopted a financing structure that requires a fee to be paid by each member county and participating entity. In order for counties to join the CCA, the counties must require cannabis licensees to directly provide the CCA confidential point-of-sales information. The cannabis businesses are not only concerned about the fees they are required to pay the CCA, but are also concerned that their confidential point-of-sales information is being used by the CCA for unspecified reasons.
      
6. Prior and Related Legislation:
   
   1. SB 930 (Hertzberg) from 2018 and SB 51 (Hertzberg) from 2019 would have authorized the creation of special purpose, limited charter banks and credit unions, as specified, to help provide a limited number of core banking services to cannabis businesses. SB 930 was held on the Assembly Appropriations Committee Suspense file. SB 51 remains on the Inactive File on the Assembly Floor.

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

Berkeley Patients Group

California Association of Treasurers and Tax Collectors

California Bankers Association

California Board of Accountancy

California Cannabis Industry Association

California Credit Union League

CMG/Caliva

International Cannabis Farmers Association

Los Angeles Mayor Eric Garcetti

Rural County Representatives of California

Southern California Coalition

State Treasurer Fiona Ma

Opposition

Cannabis Chamber of Commerce

Cannabis Equity Retailer Association

Long Beach Collective Association

San Francisco Cannabis Retailers Alliance

Santa Ana Cannabis Association

Silicon Valley Cannabis Alliance

United Cannabis Business Association

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 1525

Author:(Jones-Sawyer)

As Amended Ver:January 16, 2020

Majority vote

SUMMARY:

Clarifies that no state law prohibits a financial institution from providing financial services to a licensed cannabis business. Permits a cannabis business to authorize a state regulatory agency to share the business' track-and-trace data with financial institutions.

Major Provisions

1. Authorizes state licensing authorities for cannabis businesses to share application, licensee, and regulatory information, including information in the track and trace system, with financial institutions, upon request of the cannabis business.
2. Specifies that a person providing accounting services does not commit a crime under California law solely for providing professional accounting services to a licensed cannabis business.

COMMENTS:

As generally enforced by regulators today, federal law does not strictly prohibit financial institutions from providing products and services to cannabis businesses. Rather, federal law places restrictions and requirements on financial institutions that are burdensome and reduce the incentive for financial institutions to serve the cannabis industry. As a consequence, individual banks and credit unions can decide whether the benefits of engaging with a cannabis business exceed the associated costs and risks. As of June 30, 2019, 715 bank and credit unions were actively providing banking services to cannabis businesses across the country, based on their reports to federal regulators.

The cost and risk associated with compliance requirements related to anti-money laundering laws are significant concerns for a financial institution considering a relationship with a cannabis business. Federal guidelines require financial institutions to comply with due diligence requirements that the cannabis business is operating legally under state laws and that the business is working to achieve federal priorities related to cannabis activities.

This bill aims to reduce the cost and risk of complying with these federal requirements by sharing data collected by state regulators on cannabis business activities directly with financial institutions that engage with a cannabis business. In a 2017 report from the State Treasurer's Cannabis Banking Working Group, the working group recommended the following:

The State of California and local governments should create an online portal aggregating data on cannabis businesses from local government units and all 11 state agencies with cannabis regulatory or data-collection responsibilities. The portal should be designed with financial institution compliance needs in mind and provide material to help institutions fulfill their know-your-customer responsibilities. The data should include licensing and regulatory information, data on key personnel, product lists, sources of supply, financial records including major transactions, ongoing regulatory activity including citations for violations, adverse comments, and evidence of suspicious or illegal activities, provided such material is not restricted by disclosure rules or other agreements.

This bill would provide the necessary statutory clarity to ensure that state regulators and licensed cannabis businesses can continue to make progress on this recommendation.

According to the Author:

In order to increase overall access to banking, AB 1525 would create a safe harbor under state law for financial institutions and accountants that provide services to the cannabis industry. This bill would allow cannabis businesses to share their track-and-trace data with banks to facilitate the ability of financial institutions to comply with due diligence reporting requirements to federal regulating agencies.

Arguments in Support:

The California Credit Union League writes, "the Financial Crimes Enforcement Network (FinCEN) issued guidelines that financial institutions can serve cannabis if they comply with due diligence reporting obligations related to suspicious activity. Filing suspicious activity reports (SARs) require financial institutions to ensure a business does not violate state law or any federal priority. The track-and-trace information will verify lawful transactions and help expedite SAR filings. Without the requirement in [this bill] to allow financial institutions access to the track-and-trace data, credit unions run a higher risk of conducting any financial transaction for marijuana-related businesses that is outside of the State of California's licensing and regulatory requirements."

Arguments in Opposition:

None received.

FISCAL COMMENTS:

According to the Assembly Appropriations Committee,

1. Costs to California Department of Food and Agriculture (CDFA), which licenses cultivators, and the Department of Consumer Affairs (DCA), which licenses retailers, distributors and testing laboratories through the Bureau of Cannabis Control (BCC), for the workload of processing data sharing waivers and remitting the data to financial institutions. Aggregate costs would depend on the number of waivers each licensing authority receives, but could be significant and in excess of $100,000.
2. Significant IT costs for licensing authorities to process data sharing waivers. For example, one-time costs for BCC would be approximately $85,000.

VOTES:

ASM BANKING AND FINANCE: 8-1-3

YES: Limón, Bauer-Kahan, Burke, Cervantes, Gabriel, Mark Stone, Weber, Wicks

NO: Melendez

ABS, ABST OR NV: Chen, Choi, Grayson

ASM BUSINESS AND PROFESSIONS: 18-0-1

YES: Low, Brough, Arambula, Bloom, Chen, Chiu, Cunningham, Eggman, Fong, Gipson, Gloria, Grayson, Holden, Irwin, McCarty, Mullin, Obernolte, Ting

ABS, ABST OR NV: Medina

ASM APPROPRIATIONS: 17-0-1

YES: Gonzalez, Bloom, Bonta, Brough, Calderon, Carrillo, Chau, Megan Dahle, Diep, Eggman, Fong, Gabriel, Eduardo Garcia, Maienschein, Petrie-Norris, Quirk, Robert Rivas

ABS, ABST OR NV: Bigelow

UPDATED:

VERSION: January 16, 2020

CONSULTANT: Michael Burdick / B. & F. / (916) 319-3081 FN: 0002662

Date of Hearing: January 23, 2020

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 1525

Author:(Jones-Sawyer) – As Amended Ver:January 16, 2020

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

SUMMARY:

This bill specifies that an entity that provides financial services (such as receiving deposits, extending credit, conducting funds transfer and transporting cash) for commercial cannabis licensees does not commit a crime under any California law by providing those services. This bill also authorizes state licensing authorities for cannabis businesses, upon receiving a written request from a licensee, to share application, licensee and regulatory information, including information in the track and trace system, with financial institutions.

FISCAL EFFECT:

1. Costs to California Department of Food and Agriculture (CDFA), which licenses cultivators, and the Department of Consumer Affairs (DCA), which licenses retailers, distributors and testing laboratories through the Bureau of Cannabis Control (BCC), for the workload of processing data sharing waivers and remitting the data to financial institutions. Aggregate costs would depend on the number of waivers each licensing authority receives, but could be significant and in excess of $100,000.
2. Significant IT costs for licensing authorities to process data sharing waivers. For example, one-time costs for BCC would be approximately $85,000.

COMMENTS:

1. Background. Because of the uncertainties around federal law, many commercial cannabis licensees in California remain unbanked. The unbanked cannabis businesses transact primarily in cash, which results in public safety risks and makes it difficult for state and local agencies to collect taxes and enforce state laws.
2. Federal discretion and reporting requirements. As generally enforced today, federal law does not prohibit financial institutions from working with cannabis businesses but instead requires financial institutions to comply with anti-money laundering requirements. As policy committee notes in its analysis of this bill, federal guidelines require banks and other financial institutions to comply with rigorous due diligence requirements that a cannabis business is operating legally under state laws and that the business is “working to achieve federal priorities related to cannabis activities.” In many cases, the costs of complying with these requirements exceed revenue received from working with cannabis businesses.
3. Purpose. According to the author, AB 1525 will create a “safe harbor under state law for financial institutions and accountants” that provide services to the cannabis industry. Supporters note that the information provided by state regulators to financial institutions will help verify lawful transactions and help expedite required reporting.

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

Date of Hearing:

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Evan Low, Chair

ABPCA Bill Id:AB 1525

Author:(Jones-Sawyer) – As Amended Ver:January 6, 2020

SUBJECT: Cannabis: financial institutions.

SUMMARY: Provides that an entity, as defined, that receives deposits, extends credit, conducts fund transfers, transports cash or financial instruments on behalf of a financial institution, or provides other financial services, including public accounting, as provided, for a person licensed to engage in commercial cannabis activity does not commit a crime under any California law solely by virtue of receiving deposits, extending credit, conducting fund transfers, transporting cash or other financial instruments, or providing other financial services.

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, § 5000 et seq.), administered by the California Bureau of Cannabis Control.
3. Federal laws, including the Bank Secrecy Act, the USA PATRIOT Act, and the Racketeer Influenced and Corrupt Organizations Act, provide for prohibitions, restrictions, and compliance requirements that cause many financial institutions to decline service to cannabis businesses.
4. Defines licensee (Financial Code (FIN) §185)
5. Establishes oversight of financial institutions by the Department of Business Oversight (FIN § 300)
6. Allows for the corporate establishment of banking institutions (FIN § 1003)
7. 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) § 26000 et seq.)
8. Establishes definitions for the purpose of implementing the regulation of cannabis and cannabis products. (BPC § 26001)
9. 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)

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.).

THIS BILL:

1. Specifies that an entity that receives deposits, extends credit, conducts fund transfers, transports cash or financial instruments on behalf of a financial institution, or provides other financial services for persons licensed to engage in commercial cannabis activity pursuant to this division does not commit a crime under any California law solely by virtue of providing those financial services.
2. Authorizes state licensing authorities for cannabis businesses to share application, licensee, and regulatory information, including information in the track and trace system, with financial institutions.
3. Requires a cannabis business to sign a waiver allowing state licensing authorities to engage in the authorized activity described in #2 above.
4. Specifies that a certified public accountant or certified public accounting firm does not commit a crime under California law solely for providing professional accounting services to a licensed cannabis business.
5. Allows cannabis licensees to request their track and trace data to be shared with their financial institution (as opposed to require them to do so).
6. Includes the California Cannabis Authority as one the entities that can share track and trace data with financial institutions.
7. Changes a cross reference to ensure that all accountants are included in the bill.
8. Ensures that information shared with banks is limited to information necessary to facilitate banking.

FISCAL EFFECT: Unknown. This bill is keyed fiscal by Legislative Counsel.

COMMENTS:

Purpose. This bill is author sponsored. According to the author

California voted overwhelmingly for Proposition 64, which legalized the adult use of cannabis. However, despite the widespread support for cannabis as a legitimate business enterprise, the industry faces a unique, but significant, barrier to success. Legitimate cannabis businesses are unable to take advantage of bank accounts, debit or credit cards, and business loans, forcing them to complete most business transactions in cash because cannabis remains a controlled substance at the federal level.

Having an entire industry operating with limited access to banking services is also a serious public safety threat and makes commercial cannabis businesses a target for crime, putting the safety of employees and customers at risk. The lack of access to banking services creates barriers for entrepreneurs interested in pursuing business opportunities in the cannabis industry. Moreover, the inability to obtain business loans disproportionally prevents the communities that have been most affected by the war on drugs from participating in this new industry.

In order to increase overall access to banking, AB 1525 would create a safe harbor under state law for financial institutions and accountants that provide services to the cannabis industry. This bill would also require cannabis businesses to share their track-and-trace data with banks to facilitate the ability of financial institutions to comply with due diligence reporting requirements to federal regulating agencies.”

Background. Recent changes to state law have allowed for a legal, regulated cannabis industry to operate in California that serves both medicinal users and nonmedicinal users. The cannabis industry is expected to generate revenue of $6.6 billion per year by 2025. Many of these cannabis businesses, however, do not have a bank account and transact primarily in cash. According to a survey conducted by the California Growers Association, nearly 70% of cannabis businesses have never had a bank account, with the proportion of unbanked businesses being heavily concentrated in the cultivation segment of the supply chain.

Without changes to federal policy, there are no solutions at the state level that would allow cannabis businesses to access the same level of banking services as other businesses currently receive. Proposals at the state or local level may be successful in reducing the amount of cash stored or transported by cannabis business, but loans and electronic payment processing will likely remain out of reach without federal policy changes.

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 on 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 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.

Current Related Legislation. AB 1288 (Cooley) requires the Department of Food and Agriculture to insure that the track and trace program is fully integrated into the California Law Enforcement Telecommunications System.

SB 51 (Hertzberg) would provide for the licensure and regulation of cannabis limited charter banks and credit unions for the purpose of providing banking services.

SB 67 (Wood) extends temporary licenses until December 31, 2019 for applicants who submitted an annual application before the expiration date of their temporary license, and authorizes licensing authorities to issue provisional licenses to individuals without a temporary license.

Prior Related Legislation. AJR 28 (Jones Sawyer). This resolution urges the federal government to pass legislation that would permit financial institutions to provide services to cannabis businesses. Chaptered by Secretary of State - Res. Chapter 101, Statutes of 2018.

SJR 5 (Stone). Requests the United States Congress to pass a law to reschedule cannabis, marijuana, and its derivatives from a Schedule I drug to an alternative schedule, and for the President of the United states to sign such legislation. Chaptered by Secretary of State. Res. Chapter 187, Statutes of 2017.

ARGUMENTS IN SUPPORT:

According to The California Credit Union League, “The Financial Crimes Enforcement Network (FinCEN) issued guidelines that financial institutions can serve cannabis if they comply with due diligence reporting obligations related to suspicious activity. Filing suspicious activity reports (SARs) require financial institutions to ensure a business does not violate state law or any federal priority. The track-and-trace information will verify lawful transactions and help expedite SAR filings. Without the requirement in [this bill] to allow financial institutions access to the track-and-trace data, credit unions run a higher risk of conducting any financial transaction for marijuana-related businesses that is outside of the State of California’s licensing and regulatory requirements.”

Also in support, as proposed to be amended, The California State Association of Counties writes, “[This bill], as proposed to be amended, will help financial institutions that wish to work with the [cannabis] industry by allowing state licensing entities and the California Cannabis Authority, a local public agency, to share cannabis regulatory data with banks and credit unions so that they might more efficiently and cost effectively fulfill their reporting requirements. Government is uniquely positioned to provide this type of information, as we have access to critical track and trace and state and local compliance data.”

ARGUMENTS IN OPPOSITION:

None on file.

AMENDMENTS:

Committee suggests the following amendment:

(d) A certified public accountant or certified Any individual or public accounting firm, which practices public accounting pursuant to Chapter 1 (commencing with Section 5000) of Division 3, does not commit a crime under California law solely for providing professional accounting services as specified to persons licensed to engage in commercial cannabis activity pursuant to this division.

REGISTERED SUPPORT:

California Credit Union League

California State Association of Counties

California State Treasurer

Eric Garcetti, Mayor of Los Angeles

Rural County Representatives of California

Southern California Coalition

REGISTERED OPPOSITION:

None on file

Analysis Prepared by: Danielle Sires / B. & P. / (916) 319-3301

Date of Hearing: January 14, 2020

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Evan Low, Chair

ABPCA Bill Id:AB 1525

Author:(Jones-Sawyer) – As Amended Ver:January 6, 2020

SUBJECT: Cannabis: financial institutions.

SUMMARY: Provides that an entity, as defined, that receives deposits, extends credit, conducts fund transfers, transports cash or financial instruments on behalf of a financial institution, or provides other financial services, including public accounting, as provided, for a person licensed to engage in commercial cannabis activity does not commit a crime under any California law solely by virtue of receiving deposits, extending credit, conducting fund transfers, transporting cash or other financial instruments, or providing other financial services.

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, § 5000 et seq.), administered by the California Bureau of Cannabis Control.
3. Federal laws, including the Bank Secrecy Act, the USA PATRIOT Act, and the Racketeer Influenced and Corrupt Organizations Act, provide for prohibitions, restrictions, and compliance requirements that cause many financial institutions to decline service to cannabis businesses.
4. Defines licensee (Financial Code (FIN) §185)
5. Establishes oversight of financial institutions by the Department of Business Oversight (FIN § 300)
6. Allows for the corporate establishment of banking institutions (FIN § 1003)
7. 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) § 26000 et seq.)
8. Establishes definitions for the purpose of implementing the regulation of cannabis and cannabis products. (BPC § 26001)
9. 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)

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.).

THIS BILL:

1. Specifies that an entity that receives deposits, extends credit, conducts fund transfers, transports cash or financial instruments on behalf of a financial institution, or provides other financial services for persons licensed to engage in commercial cannabis activity pursuant to this division does not commit a crime under any California law solely by virtue of providing those financial services.
2. Authorizes state licensing authorities for cannabis businesses to share application, licensee, and regulatory information, including information in the track and trace system, with financial institutions.
3. Requires a cannabis business to sign a waiver allowing state licensing authorities to engage in the authorized activity described in #2 above.
4. Specifies that a certified public accountant or certified public accounting firm does not commit a crime under California law solely for providing professional accounting services to a licensed cannabis business.
5. Allows cannabis licensees to request their track and trace data to be shared with their financial institution (as opposed to require them to do so).
6. Includes the California Cannabis Authority as one the entities that can share track and trace data with financial institutions.
7. Changes a cross reference to ensure that all accountants are included in the bill.
8. Ensures that information shared with banks is limited to information necessary to facilitate banking.

FISCAL EFFECT: Unknown. This bill is keyed fiscal by Legislative Counsel.

COMMENTS:

Purpose. This bill is author sponsored. According to the author

California voted overwhelmingly for Proposition 64, which legalized the adult use of cannabis. However, despite the widespread support for cannabis as a legitimate business enterprise, the industry faces a unique, but significant, barrier to success. Legitimate cannabis businesses are unable to take advantage of bank accounts, debit or credit cards, and business loans, forcing them to complete most business transactions in cash because cannabis remains a controlled substance at the federal level.

Having an entire industry operating with limited access to banking services is also a serious public safety threat and makes commercial cannabis businesses a target for crime, putting the safety of employees and customers at risk. The lack of access to banking services creates barriers for entrepreneurs interested in pursuing business opportunities in the cannabis industry. Moreover, the inability to obtain business loans disproportionally prevents the communities that have been most affected by the war on drugs from participating in this new industry.

In order to increase overall access to banking, AB 1525 would create a safe harbor under state law for financial institutions and accountants that provide services to the cannabis industry. This bill would also require cannabis businesses to share their track-and-trace data with banks to facilitate the ability of financial institutions to comply with due diligence reporting requirements to federal regulating agencies.”

Background. Recent changes to state law have allowed for a legal, regulated cannabis industry to operate in California that serves both medicinal users and nonmedicinal users. The cannabis industry is expected to generate revenue of $6.6 billion per year by 2025. Many of these cannabis businesses, however, do not have a bank account and transact primarily in cash. According to a survey conducted by the California Growers Association, nearly 70% of cannabis businesses have never had a bank account, with the proportion of unbanked businesses being heavily concentrated in the cultivation segment of the supply chain.

Without changes to federal policy, there are no solutions at the state level that would allow cannabis businesses to access the same level of banking services as other businesses currently receive. Proposals at the state or local level may be successful in reducing the amount of cash stored or transported by cannabis business, but loans and electronic payment processing will likely remain out of reach without federal policy changes.

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 on 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 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.

Current Related Legislation. AB 1288 (Cooley) requires the Department of Food and Agriculture to insure that the track and trace program is fully integrated into the California Law Enforcement Telecommunications System.

SB 51 (Hertzberg) would provide for the licensure and regulation of cannabis limited charter banks and credit unions for the purpose of providing banking services.

SB 67 (Wood) extends temporary licenses until December 31, 2019 for applicants who submitted an annual application before the expiration date of their temporary license, and authorizes licensing authorities to issue provisional licenses to individuals without a temporary license.

Prior Related Legislation. AJR 28 (Jones Sawyer). This resolution urges the federal government to pass legislation that would permit financial institutions to provide services to cannabis businesses. Chaptered by Secretary of State - Res. Chapter 101, Statutes of 2018.

SJR 5 (Stone). Requests the United States Congress to pass a law to reschedule cannabis, marijuana, and its derivatives from a Schedule I drug to an alternative schedule, and for the President of the United states to sign such legislation. Chaptered by Secretary of State. Res. Chapter 187, Statutes of 2017.

ARGUMENTS IN SUPPORT:

According to The California Credit Union League, “The Financial Crimes Enforcement Network (FinCEN) issued guidelines that financial institutions can serve cannabis if they comply with due diligence reporting obligations related to suspicious activity. Filing suspicious activity reports (SARs) require financial institutions to ensure a business does not violate state law or any federal priority. The track-and-trace information will verify lawful transactions and help expedite SAR filings. Without the requirement in [this bill] to allow financial institutions access to the track-and-trace data, credit unions run a higher risk of conducting any financial transaction for marijuana-related businesses that is outside of the State of California’s licensing and regulatory requirements.”

Also in support, as proposed to be amended, The California State Association of Counties writes, “[This bill], as proposed to be amended, will help financial institutions that wish to work with the [cannabis] industry by allowing state licensing entities and the California Cannabis Authority, a local public agency, to share cannabis regulatory data with banks and credit unions so that they might more efficiently and cost effectively fulfill their reporting requirements. Government is uniquely positioned to provide this type of information, as we have access to critical track and trace and state and local compliance data.”

ARGUMENTS IN OPPOSITION:

None on file.

AMENDMENTS:

Committee suggests the following amendment:

(d) A certified public accountant or certified “An individual, association, limited liability company, or firm, that practices public accounting …” In this version, the term “firm” would be further defined as having the same meaning as that in Section 5035.1.

REGISTERED SUPPORT:

California Credit Union League

California State Association of Counties

California State Treasurer

Eric Garcetti, Mayor of Los Angeles

Rural County Represenatives of California

Southern California Coalition

REGISTERED OPPOSITION:

None on file

Analysis Prepared by: Danielle Sires / B. & P. / (916) 319-3301

Date of Hearing:

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Evan Low, Chair

ABPCA Bill Id:AB 1525

Author:(Jones-Sawyer) – As Introduced Ver:February 22, 2019

SUBJECT: Cannabis: financial institutions.

SUMMARY: Clarifies that no state law prohibits a financial institution from providing financial services to a licensed cannabis business. Requires a cannabis business to allow regulators to share the business’ track-and-trace data with financial institutions.

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, § 5000 et seq.), administered by the California Bureau of Cannabis Control.
3. Federal laws, including the Bank Secrecy Act, the USA PATRIOT Act, and the Racketeer Influenced and Corrupt Organizations Act, provide for prohibitions, restrictions, and compliance requirements that cause many financial institutions to decline service to cannabis businesses.
4. Defines licensee (Financial Code (FIN) §185)
5. Establishes oversight of financial institutions by the Department of Business Oversight (FIN § 300)
6. Allows for the corporate establishment of banking institutions (FIN § 1003)
7. 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) § 26000 et seq.)
8. Establishes definitions for the purpose of implementing the regulation of cannabis and cannabis products. (BPC § 26001)
9. 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)

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.).

THIS BILL:

1. Specifies that an entity that receives deposits, extends credit, conducts fund transfers, transports cash or financial instruments on behalf of a financial institution, or provides other financial services for persons licensed to engage in commercial cannabis activity pursuant to this division does not commit a crime under any California law solely by virtue of providing those financial services.
2. Authorizes state licensing authorities for cannabis businesses to share application, licensee, and regulatory information, including information in the track and trace system, with financial institutions.
3. Requires a cannabis business to sign a waiver allowing state licensing authorities to engage in the authorized activity described in #2 above.
4. Specifies that a certified public accountant or certified public accounting firm does not commit a crime under California law solely for providing professional accounting services to a licensed cannabis business.

FISCAL EFFECT: Unknown. This bill is keyed fiscal by Legislative Counsel.

COMMENTS:

Purpose. This bill is author sponsored. According to the author

California voted overwhelmingly for Proposition 64, which legalized the adult use of cannabis. However, despite the widespread support for cannabis as a legitimate business enterprise, the industry faces a unique, but significant, barrier to success. Legitimate cannabis businesses are unable to take advantage of bank accounts, debit or credit cards, and business loans, forcing them to complete most business transactions in cash because cannabis remains a controlled substance at the federal level.

Having an entire industry operating with limited access to banking services is also a serious public safety threat and makes commercial cannabis businesses a target for crime, putting the safety of employees and customers at risk. The lack of access to banking services creates barriers for entrepreneurs interested in pursuing business opportunities in the cannabis industry. Moreover, the inability to obtain business loans disproportionally prevents the communities that have been most affected by the war on drugs from participating in this new industry.

In order to increase overall access to banking, AB 1525 would create a safe harbor under state law for financial institutions and accountants that provide services to the cannabis industry. This bill would also require cannabis businesses to share their track-and-trace data with banks to facilitate the ability of financial institutions to comply with due diligence reporting requirements to federal regulating agencies.”

Background. Recent changes to state law have allowed for a legal, regulated cannabis industry to operate in California that serves both medicinal users and nonmedicinal users. The cannabis industry is expected to generate revenue of $6.6 billion per year by 2025. Many of these cannabis businesses, however, do not have a bank account and transact primarily in cash. According to a survey conducted by the California Growers Association, nearly 70% of cannabis businesses have never had a bank account, with the proportion of unbanked businesses being heavily concentrated in the cultivation segment of the supply chain.

Without changes to federal policy, there are no solutions at the state level that would allow cannabis businesses to access the same level of banking services as other businesses currently receive. Proposals at the state or local level may be successful in reducing the amount of cash stored or transported by cannabis business, but loans and electronic payment processing will likely remain out of reach without federal policy changes.

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 on 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 places requirements on financial institutions to deter money laundering through reporting of suspected illegal activity, which includes commercial activities related to cannabis.^[1] 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.

Current Related Legislation.

AB 1288 (Cooley) requires the Department of Food and Agriculture to insure that the track and trace program is fully integrated into the California Law Enforcement Telecommunications System.

SB 51 (Hertzberg) would provide for the licensure and regulation of cannabis limited charter banks and credit unions for the purpose of providing banking services.

SB 67 (Wood) extends temporary licenses until December 31, 2019 for applicants who submitted an annual application before the expiration date of their temporary license, and authorizes licensing authorities to issue provisional licenses to individuals without a temporary license.

Prior Related Legislation.

AJR 28 (Jones Sawyer). This resolution urges the federal government to pass legislation that would permit financial institutions to provide services to cannabis businesses. Chaptered by Secretary of State - Res. Chapter 101, Statutes of 2018.

SJR 5 (Stone). Requests the United States Congress to pass a law to reschedule cannabis, marijuana, and its derivatives from a Schedule I drug to an alternative schedule, and for the President of the United states to sign such legislation. Chaptered by Secretary of State. Res. Chapter 187, Statutes of 2017.

ARGUMENTS IN SUPPORT:

According to The California Credit Union League, “The Financial Crimes Enforcement Network (FinCEN) issued guidelines that financial institutions can serve cannabis if they comply with due diligence reporting obligations related to suspicious activity. Filing suspicious activity reports (SARs) require financial institutions to ensure a business does not violate state law or any federal priority. The track-and-trace information will verify lawful transactions and help expedite SAR filings. Without the requirement in [this bill] to allow financial institutions access to the track-and-trace data, credit unions run a higher risk of conducting any financial transaction for marijuana-related businesses that is outside of the State of California’s licensing and regulatory requirements.”

Also in support, as proposed to be amended, The California State Association of Counties writes, “[This bill], as proposed to be amended, will help financial institutions that wish to work with the [cannabis] industry by allowing state licensing entities and the California Cannabis Authority, a local public agency, to share cannabis regulatory data with banks and credit unions so that they might more efficiently and cost effectively fulfill their reporting requirements. Government is uniquely positioned to provide this type of information, as we have access to critical track and trace and state and local compliance data.”

POLICY ISSUE(S) FOR CONSIDERATION:

Both as drafted and as proposed to be amended, this bill would expressly state that entities and individuals who provide financial services for persons engaged in commercial cannabis activity do not commit a crime under any California law solely because they provide those services. Specifically, the bill refers to those who provide services on behalf of a bank or similar financial institution, as well as those who provide accounting services. The bill additionally defines “entity” as including armored car drivers, or a person “providing financial services to persons licensed to engage in commercial cannabis activity.”

The bill’s statement that no California law is broken when an individual or entities provides professional services to a lawful, licensed cannabis business is of course superfluous. Under MAUCRSA and the final adoption of its implementing regulations, a fully regulated cannabis marketplace has quickly begun to grow, and state lawmakers have taken significant steps to promote legal actors and disband what remains of the illicit market. While a number of substantive questions remain as to the manner and setting in which cannabis is sold and consumed, the fact that California law sanctions the direct and indirect activities of the regulated cannabis industry is both irrefutable and well known.

If the entities and individuals under this bill have reason to feel uncertain about whether they may face consequences for providing services to cannabis businesses, it is not because of California law. The financial service professionals who are specifically referenced in this legislation may have good reason to take caution because the majority of them are not solely regulated by the state, but are subject to additional oversight by the United States government. Meanwhile, cannabis remains a prohibited Schedule I controlled substances under federal law.

Banks, trust companies, and industrial loan companies, as well as savings and loan associations and credit unions, are subject to regulation by myriad federal entities. This includes but is not limited to the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Federal Reserve System, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau. The role of these federal regulators in overseeing financial institutions has been frequently discussed in numerous discussions regarding how cannabis businesses can take advantage of banking services. The underlying premise of those discussions is that most likely, any of the entities described by this bill who deal with income from cannabis businesses and who are partly regulated by an entity within the Federal Financial Institutions Examination Council are potentially breaking federal law.

This is additionally true for other entities mentioned in the bill. For example, the bill both specifically refers to certified public accountant firms and to entities who provide financial services that may include accounting. Certified public accountants (CPAs) are largely regulated at the state level by the California Board of Accountancy (CBA); however, as was discussed in the CBA’s most recent sunset paper this year, “the CPA profession is unique, in that, in addition to licensure requirements imposed by individual states, the federal government also requires that CPAs register to practice, the most notable being the Securities and Exchange Commission and Public Company Accounting Oversight Board.” Further, many accounting firms employ not only CPAs, but other professionals authorized to perform tax preparation services—including enrolled agents, who are solely federally regulated by the U.S. Department of the Treasury.

While California has increasingly chosen to eschew the federal government’s unremitting prohibition on the sale and use of cannabis over the past several decades, it has nevertheless taken care to encourage caution from individuals who may be subject to federal oversight. For example, in its April 2018 Guidelines for the Recommendation of Cannabis for Medical Purposes, the Medical Board of California (MBC) made note of the fact that “although the [Compassionate Use Act of 1996] allows the use of cannabis for medical purposes by a patient upon the recommendation of a physician, California physicians should bear in mind that cannabis is listed in Schedule I of the federal Controlled Substances Act.” It is for this reason that physicians in California may still only recommend—not prescribe, as expressly regulated by the federal Drug Enforcement Agency—medical cannabis to patients.

There is little remaining policy controversy in California as to whether the sale, possession, or use of cannabis should be universally criminalized. With the passage of the AUMA, a majority of the state’s population appears to recognize that an individual working in a business that responsibly engages in the supply chain for a regulated product should not be treated the similarly as a person who would, for example, commit an invasive crime such as burglary or theft of personal property. Nevertheless, the state is limited in its authority to safeguard its professionals from liability when they are subject to oversight by a federal agency.

Because there is not a lack of clarity as to the legality of regulated cannabis activity under California law, this bill may be regarded as largely unnecessary. In addition, it is arguably irresponsible for the state to pass a law that could lend a false sense of security to individuals imperiled not by California law, but by federal law. During this period of time in which tensions between the state’s responsible regulation of cannabis and the federal government’s prohibition of that controlled substance remain unresolved, it may be both premature and potentially hazardous to pass legislation making unsupportable assurances to professionals who should continue to act thoughtfully in how they engage in their professional services.

AMENDMENTS:

The author’s office has agreed to take amendments that:

• Clarify that a cannabis business has the ability to determine which financial institutions may access their compliance-related data by removing the mandate that a cannabis business must authorize a licensing authority to share data with any financial institution.
• Clarify that a licensing authority, including the California Cannabis Authority, may share compliance-related data with a financial institution upon receipt of a written request and waiver from a cannabis business.
• Clarify that nothing in the bill requires disclosure of information beyond that which is reasonably necessary to facilitate a commercial banking relationship.

REGISTERED SUPPORT:

California Credit Union League

California State Association of Counties (as proposed to be amended)
Rural County Representatives Of California
Southern California Coalition

REGISTERED OPPOSITION:

None on file.

Analysis Prepared by: Danielle Sires / B. & P. / (916) 319-3301

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

Date of Hearing: April 22, 2019

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Monique Limón, Chair

ABPCA Bill Id:AB 1525 (

Author:Jones-Sawyer) – As Introduced Ver:February 22, 2019

SUBJECT: Cannabis: financial institutions

SUMMARY: Clarifies that no state law prohibits a financial institution from providing financial services to a licensed cannabis business. Requires a cannabis business to allow regulators to share the business’ track-and-trace data with financial institutions.

Specifically, this bill:

1. Specifies that an entity that receives deposits, extends credit, conducts fund transfers, transports cash or financial instruments on behalf of a financial institution, or provides other financial services for persons licensed to engage in commercial cannabis activity pursuant to this division does not commit a crime under any California law solely by virtue of providing those financial services.
2. Authorizes state licensing authorities for cannabis businesses to share application, licensee, and regulatory information, including information in the track and trace system, with financial institutions.
3. Requires a cannabis business to sign a waiver allowing state licensing authorities to engage in the authorized activity described in #2 above.
4. Specifies that a certified public accountant or certified public accounting firm does not commit a crime under California law solely for providing professional accounting services to a licensed cannabis business.

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: Unknown

COMMENTS:

1. PURPOSE

The author states:

Despite the widespread support for cannabis as a legitimate business enterprise, the industry faces a unique, but significant, barrier to success. Legitimate cannabis businesses are unable to take advantage of bank accounts, debit or credit cards, and business loans, forcing them to complete most business transactions in cash because cannabis remains a controlled substance at the federal level.

Having an entire industry operating with limited access to banking services is also a serious public safety threat and makes commercial cannabis businesses a target for crime, putting the safety of employees and customers at risk. The lack of access to banking services creates barriers for entrepreneurs interested in pursuing business opportunities in the cannabis industry. Moreover, the inability to obtain business loans disproportionally prevents the communities that have been most affected by the war on drugs from benefiting from this new industry.

In order to increase overall access to banking, AB 1525 would create a safe harbor under state law for financial institutions and accountants that provide services to the cannabis industry. This bill would also require cannabis businesses to share their Track-and-Trace data with banks to facilitate the ability of financial institutions to comply with due diligence reporting requirements to federal regulating agencies.

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 on 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 places requirements on financial institutions to deter money laundering through reporting of suspected illegal activity, which includes commercial activities related to cannabis.^[1] 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. HOW THIS BILL CAN ADDRESS CANNABIS BANKING CHALLENGES

As generally enforced by regulators today, federal law does not strictly prohibit financial institutions from providing products and services to cannabis businesses. Rather, federal law places restrictions and requirements on financial institutions that are burdensome and reduce the incentive for financial institutions to serve the cannabis industry. As a consequence, individual banks and credit unions can decide whether the benefits of engaging with a cannabis business exceed the associated costs and risks. As of December 31, 2018, 551 bank and credit unions were actively providing banking services to cannabis businesses across the country, based on their reports to federal regulators.^[2]

The cost and risk associated with compliance requirements related to anti-money laundering laws are significant concerns for a financial institution considering a relationship with a cannabis business. Federal guidelines require financial institutions to comply with due diligence requirements that the cannabis business is operating legally under state laws and that the business is working to achieve federal priorities related to cannabis activities.^[3]

This bill aims to reduce the cost and risk of complying with these federal requirements by sharing data collected by state regulators on cannabis business activities directly with financial institutions that engage with a cannabis business. In a 2017 report from the State Treasurer’s Cannabis Banking Working Group, the working group recommended the following:

The State of California and local governments should create an online portal aggregating data on cannabis businesses from local government units and all 11 state agencies with cannabis regulatory or data-collection responsibilities. The portal should be designed with financial institution compliance needs in mind and provide material to help institutions fulfill their know-your-customer responsibilities. The data should include licensing and regulatory information, data on key personnel, product lists, sources of supply, financial records including major transactions, ongoing regulatory activity including citations for violations, adverse comments, and evidence of suspicious or illegal activities, provided such material is not restricted by disclosure rules or other agreements.

This bill would provide the necessary statutory clarity to ensure that state regulators and licensed cannabis businesses can continue to make progress on this recommendation.

1. POTENTIAL FOR FEDERAL POLICY CHANGE

Recent reports indicate that a federal policy change to address the cannabis banking problem may be achievable during the current Congressional session.^[4] In recent years, the California Legislature has considered several bills that propose creative approaches that attempt to sidestep federal constraints. It is unclear whether those proposals would have improved the cannabis banking problem or how those proposals would fare subsequent to a federal policy change.

The proposal in this bill has the potential for positive impact – whether federal policy changes or not. This bill supports the development of a data platform that could deliver important value to financial institutions that are willing to bear the risks and costs of serving cannabis businesses. Even if federal law changes to alleviate risks to financial institutions that serve cannabis businesses, financial institutions will still need to comply with federal “Know Your Customer” and anti-money laundering requirements, meaning that the data platform would still provide value as a tool in managing compliance costs.

1. ARGUMENTS IN SUPPORT

The California Credit Union League writes:

The Financial Crimes Enforcement Network (FinCEN) issued guidelines that financial institutions can serve cannabis if they comply with due diligence reporting obligations related to suspicious activity. Filing suspicious activity reports (SARs) require financial institutions to ensure a business does not violate state law or any federal priority. The track-and-trace information will verify lawful transactions and help expedite SAR filings. Without the requirement in AB 1525 to allow financial institutions access to the track-and-trace data, credit unions run a higher risk of conducting any financial transaction for marijuana-related businesses that is outside of the State of California’s licensing and regulatory requirements.

The California State Association of Counties writes:

AB 1525, as proposed to be amended, will help financial institutions that wish to work with the [cannabis] industry by allowing state licensing entities and the California Cannabis Authority, a local public agency, to share cannabis regulatory data with banks and credit unions so that they might more efficiently and cost effectively fulfill their reporting requirements. Government is uniquely positioned to provide this type of information, as we have access to critical track and trace and state and local compliance data.

1. DOUBLE-REFERRED

This bill is double-referred to the Assembly Business and Professions Committee.

1. PROPOSED AMENDMENTS

The author’s office has agreed to take amendments that:

• Clarify that a cannabis business has the ability to determine which financial institutions may access their compliance-related data by removing the mandate that a cannabis business must authorize a licensing authority to share data with any financial institution.
• Clarify that a licensing authority, including the California Cannabis Authority, may share compliance-related data with a financial institution upon receipt of a written request and waiver from a cannabis business.
• Clarify that nothing in the bill requires disclosure of information beyond that which is reasonably necessary to facilitate a commercial banking relationship.

These amendments will be processed in the Assembly Business and Professions Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

California Credit Union League

California State Association of Counties (as proposed to be amended)
Rural County Representatives Of California
Southern California Coalition

Opposition

None received

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. Financial Crimes Enforcement Network (FinCEN) Marijuana Banking Update, https://www.fincen.gov/sites/default/files/shared/Marijuana_Banking_Update_Public_Dec_2018.pdf ↑

3. BSA Expectations Regarding Marijuana-Related Businesses, https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses ↑

4. https://www.americanbanker.com/news/pot-banking-reform-gets-a-boost-from-barr-endorsement ↑