California Cannabis Banking: All You Need to Know

By Eric Ives
October 10, 2019
California Cannabis Banking: All You Need to Know

Imagine opening a business in a multi-billion-dollar industry; only to find out that a bank loan is impossible. The inability…

Imagine opening a business in a multi-billion-dollar industry; only to find out that a bank loan is impossible. The inability to get this loan has nothing to do with your credit score. In fact, it has nothing to do with you at all. This ridiculous scenario is all too real for anyone involved in the marijuana sector.

It may be legal in 33 American states and D.C. for medicinal use, but it is federally illegal. As such, the banking sector won’t touch the weed industry with someone else’s long stick. This is because all banks in the U.S. are subject to federal law; regardless of whether they are state-chartered or a national bank.

All banks have federal deposit insurance, which necessitates adherence to federal law. Any financial institution discovered to have broken the federal law could lose its charter. It is also a fact that all banks in America must meet the requirements of the Bank Secrecy Act (BSA). Under the act, banks are legally obliged to report suspected illegal activity to the federal government; this includes marijuana business-related transactions.
It doesn’t matter if the business is conducting its operations legally according to state law. As a consequence, you can forget about asking for a loan to help your burgeoning weed enterprise. You could lose your existing account with a bank for even broaching the subject!

California has long been one of the leaders when it comes to sensible marijuana laws, and it has taken significant steps towards eliminating the current ridiculous hurdle facing cannapreneurs.

State-Chartered Banks Could Be on the Way

In May 2019, the California Senate approved legislation to create state-chartered marijuana banks to help the sector get around the existing restrictions. It was approved by a whopping 35 votes to 1 and will enable credit unions or private banks to apply for a limited-purpose state charter to allow licensed weed businesses to benefit from depository services.

The measure is called Senate Bill 51 (SB51) and will need the approval of Governor Gavin Newsom and the State Assembly to become law. However, it is a bold step forward and a necessary one.

Even the state of California has come a long way regarding banking in the last few years. Back in 2015, the California Bankers Association (CBA) released a statement saying it would continue its stance of opposing state banks even if limited to marijuana-related businesses.

The CBA fell back upon the industry’s default stance of saying these weed-servicing banks would fall foul of federal law and would find it tough to get approval from the Federal Reserve Insurance Corporation in relation to deposit insurance.

SB51 is a necessary development because, at present, the legal marijuana industry does not have access to commercial banking services such as loans, deposits, and payroll. It seems crazy that such a huge sector is being treated as if it is still the 1970s. According to Robert Hertzberg, the state Senate Majority Leader, policymakers must protect public safety while also satisfying the will of the voters.

He acknowledged that it wasn’t an ‘ultimate solution’ but stressed that it was an important small step to get marijuana money off the streets and into bank accounts. SB51 would set up special checks by cannabis enterprises as a means of paying rent, fees, local & state taxes.

While it will be good news if it passes, it won’t allow cannapreneurs to get loans from banks. Robert Selna is an attorney based in Oakland and said that while SB51 helps weed companies to pay their rent, it isn’t clear on how the legislation will fit into federal law. Even if the law passes, there is no guarantee that credit unions and banks will take part out of fear of a crackdown by the government.

Will SB51 Make it Into Law?

It is not the first bill of its type to make it to the State Assembly floor. In August 2018, Hertzberg authored SB930 which was all but killed off. It is very similar to SB51, but with Gavin Newsom as Governor, there is a better chance of the latter bill making it over the line.

However, we’ll have to wait to see if it makes it into law because the state legislature does not return from summer recess until the middle of August. At that stage, it will spend a full month trying to deal with all the bills on its plate; particularly those relating to marijuana. There is no guarantee that SB51, or any other pro-weed bill, will even make it as far as Newsom’s desk.

One thing is for sure: SB51 will face a tough battle in the Senate or Assembly Appropriations Committee because many bills have fallen there due to the perceived negative fiscal impact. We have to wait for an Assembly Appropriations Committee hearing before the next step can be taken. Even if it passes, it could take years for financial services to be made available to marijuana companies finally.

In early July 2019, SB51 made it through the Assembly committee when 12 of 19 members voted to move it on to the Assembly Appropriations Committee.

Why Banking Laws Must Be Changed

There is a possibility that marijuana could be made federally legal during the next administration featuring a Democrat as president. If this happens, the entire banking issue could be solved in quick time. Until then, however, existing laws need to change. Senator Mike McGuire told Hertzberg that there was around $2 billion in cash buried in Northern California, in barrels!

Fiona Ma is the California State Treasurer, and she painted a grim portrait of what is happening in the industry without access to banking. She said that suitcases and duffel bags full of cash would arrive every quarter at one of her offices, and business owners have to travel hundreds of miles just for the privilege of paying their taxes.

When she asked how much tax was being collected from the marijuana industry, she was told that as tax revenues were ‘comingled’ and deposited with other cash tax payments, there was no way of knowing! Although the state took in $345 million in tax revenue in 2018, that figure is likely to be well below what would be garnered with an effective marijuana banking system.

In 2017, the California Growers Association discovered that almost 70% of its membership was ‘unbanked.’ It turns out that growers have the lowest level of banking access in the industry. As you can imagine, this all poses a huge security risk. We have hundreds of businesses forced to keep enormous sums of cash on hand to pay taxes, fees, and employees; not to mention suppliers.

At Least the 1% Are Thriving!

The American Dream suggests that if you work hard, you can enjoy a fruitful life with your own home and financial security. Shame it is a complete fantasy. The existing scenario is very good news for the ultra-wealthy companies in the marijuana industry. If the situation persists, we’ll end up with a handful of ‘brands’ that sell weed.

Are you interested in starting a marijuana business in California? If so, you’ll need to wait a couple of years to get an adult-use license; it will also cost you around $2 million or more. Applicants must hold a lease or own a building for several months at least and must pay exorbitant fees while also greasing the palms of lobbyists. Then you have to pay for your inventory, staff, and get lots of cash ready to pay the taxman.

Oh, and there is no way in hell, you will get a bank loan! American banks have well over $600 million in outstanding loans to U.S. small businesses, but none of it goes to the marijuana industry. Would-be cannapreneurs must work all hours of the day to meet ridiculous state regulations, but must also find the time to meet with investors.

It is a national scandal that we’re in this situation. Large-scale firms with tens of millions of dollars in investment capital thrive; mainly because of a lack of competition. These businesses can take a short or even medium-term financial hit; safe in the knowledge that they will eventually take control of the market. Even a small but stable market share in the cannabis industry is worth an absolute fortune.

Final Thoughts on California Cannabis Banking

We can only hope that SB51, and any similar legislation around the country, gets passed into law. Those looking to make their fortune in the marijuana industry need all the help they can get. At present, there are so many barriers that ‘making it’ is as likely as hitting the Powerball jackpot for some.

SB51 gives a semblance of hope to smaller marijuana businesses, although it still won’t make provisions for loans even if it gets through. It is the latest in a string of bills that aim to make some sense of the fiasco. In March 2019, for instance, the Secure and Fair Enforcement Banking Act was passed by the House Financial Services Committee. It aims to protect banks and employees that work with weed companies. Ultimately, we NEED marijuana to no longer be federally prohibited if the industry is truly going to thrive. By lifting the ban, banks would no longer be faced with their existing legal quandary, and would be more open to the idea of providing loans. It would also help if state regulations eased off on taxes and licensing restrictions. Until then, businesses in the marijuana industry must keep purchasing duffel bags.
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