California Lawmakers Search for “Short-Term” Solution to Cannabis Banking Obstacles

One state senator thinks that there are “two billion dollars buried in barrels in northern California,” thanks to the cash-based cannabis business.

Apr 5, 2019 6:50AM EDT California

Julia Barajas @Julia_P_Barajas

LA native, graduated from Columbia Journalism School after working in education for several years. Her work has also appeared in La Opinión, the Columbia Journalism Review, and La Prensa Gráfica.

Earlier this week, California State Senator Bob Hertzberg (D-San Fernando Valley) testified before the committee on Banking and Financial Institutions in favor of a bill that seeks to provide relief for California’s cash-based cannabis industry through the establishment of limited charter banks and credit unions.

The bill, co-sponsored by the State Treasurer Fiona Ma, would allow provide for the licensure and regulation of said entities, which would be authorized to issue special purpose checks.

Now in its second iteration, the bill includes a sunset provision, which stipulates that the banks would become inoperative once the federal government puts an end to prohibition or “enacts legislation that establishes protections for depository institutions that provide financial services to cannabis-related legitimate businesses.”

Throughout the hearing, Hertzberg reiterated that the bill is only meant to provide a temporary solution, that is, “until the federal government actually legalizes this stuff.”

“It’s not by any stretch of the imagination a perfect solution, he said. “It’s a very short-term, interim thing.”

To illustrate the urgent need to create a banking solution for the cannabis industry, Hertzberg shared two anecdotes: “I met a gentleman who came to my office, says he’s got a tractor trailer with forty million dollars cash in it. Says he doesn’t know what to do with it.” Likewise, said Hertzberg, Senator McGuire recently told him that he believes there are “two billion dollars buried in barrels in northern California.”

Treasurer Ma, who formerly served on the State Board of Equalization, then jumped in to explain how the lack of a banking system undercuts California’s ability to collect revenues. The state, said Ma, has been struggling to collect revenue since 1996.

“When I was on the State Board of Equalization,” she said, “we spent a better [part] of two years going around the state trying to advise folks who had a dispensary about their obligation to file.”

“The way we would audit them,” she went on, “is we would stand outside of the dispensary, couple days of the month . . . and [we would] count how many people went in. We would assess an average dollar amount, maybe sixty dollars per person. We would extrapolate back three years, assess interest and penalties, and send them a bill and we would hope that they would pay.” This system, Ma concluded, was “not very efficient.”

This experience, she explained, caused her to question: “Why don’t they have banking?” It’s very difficult to audit businesses that operate with cash, Ma added. But the most pressing problem, she said, is the lack of safety for businesses that do want to comply. “Many of these folks who did pay their sales taxes would come to our Board of Equalization offices with duffel bags, sometimes suitcases, of cash. It wasn’t safe. It wasn’t efficient for our employees to be counting this high amount of cash. And now, with the passage of Prop 64, it is exacerbating the situation because not only are they supposed to pay their sales taxes but distribution tax, cultivation tax, as well as any other local taxes that may be assessed on this industry.”

Ma, who testified on the need to provide banking services to cannabis-related businesses before the U.S. House Committee on Financial Services in February, said that although “bills are starting to move a little bit” at the federal level, “it’s going to be slow-going, so we definitely need a solution till the banks open up their doors to this industry.”

Amy O’Gorman Jenkins, who lobbies on behalf of the California Cannabis Industry Association and accompanied Ma to Washington, D.C. also spoke in support of the bill. The cash-only nature of the industry, O’Gorman Jenkins said, is “one of the top priorities that we talk about consistently.” Cash-carrying members of the association, she added, have been followed on “countless” occasions and many of the encounters they have are “largely unreported.”

During the period for public comment, several other associations, companies, and jurisdictions expressed their support, including Eaze, the California Asian Pacific Chamber of Commerce, and a lobbyist from the city of Santa Monica, located some 380 miles south of Sacramento.

No member of the public opposed the bill. However, members of the Banking and Financial Institutions committee asked Hertzberg to speak to the sunset provision.

“Once the federal government decides to do this,” said Hertzberg, “we got a window that these banks then become regularized banks—they can’t be these limited charter banks, which makes perfect sense. They were only intended to be a bridge.”

And then, the Senator added, because of the role of private investors, “what’s going to happen is the big entities are going to come and buy them up.” Private investors, he explained, will make a profit when, “all of a sudden, a Chase comes over and says they want to buy.”

The Committee also asked Hertzberg how depositors would have their assets protected from federal seizures or other liabilities, seeing as how they cannot count on the Federal Deposit Insurance Corporation (FDIC). In response, the Senator explained that, under the bill, members of the cannabis industry would have to turn to private insurance. This, Hertzberg insisted, is still significantly less expensive and cumbersome than handling piles of cash.

Ultimately, the bill was re-referred to the committee on Governance and Finance, with six ayes and one no.