A San Fernando Valley lawmaker has introduced legislation that would allow cannabis business owners to start a limited charter bank in California.
State Sen. Robert Hertzberg said such a financial institution will improve business operations for dispensaries and other suppliers to the industry as well as address public safety issues as the businesses won’t be handling large amounts of cash.
Hertzberg called his bill a simple solution to a problem that will only become worse now that recreational marijuana sales are legal in the state.
“The discussions have been around forming government banks and I think that is too difficult,” Hertzberg said. “Let’s rely on the rules that we have been developing for decades to make sure it works well and then grow it.”
The bill, SB 930, was introduced on Jan. 25. It won’t begin moving through the Senate until later this month.
Banks, even in states where marijuana is allowed, avoid dealing with legal pot businesses because the drug is classified by the federal government as a controlled substance, making its possession basically illegal. Banks that handle marijuana cash could face charges of money laundering.
Twenty-nine states plus the District of Columbia allow medical and adult recreational use of marijuana. So, California is not the only state grappling with the issue of lack of access to banking services. But as the largest market for cannabis in the country, whatever solution the state comes up with may be copied elsewhere.
Hertzberg’s idea is to permit limited charter banks specifically for the cannabis industry, thus relieving several stress factors the industry faces. For one, it allows the business to open a checking account and deposit money into it. Vendors, landlords and taxes could then be paid in a form other than cash. Checks written on the account could only be cashed at the issuing bank, Hertzberg said.
Additionally, a limited charter bank would allow the cannabis industry to purchase state bonds.
“The message is hire in California, invest in California and pay your taxes in California safely,” Hertzberg added.
But a limited charter bank taking in money from the sale of federally controlled drug has two problem areas that Hertzberg sees.
One is that a bank would need insurance but going through the Federal Deposit Insurance Corp., as a regular bank does, would not be an option. Fortunately, there are mechanisms in place to use private insurance carriers, such as some credit unions do, Hertzberg said.
The other is that a cannabis bank would not have access to the federal nationwide clearinghouse, a financial institution that facilitates the exchange or clearance of payments, securities or derivatives transactions.
However, as more limited charter banks open throughout the state, Hertzberg said he can envision that they will join together to accept cashing each other’s checks.
“If I am somebody from Massachusetts I cannot be involved with these banks,” Hertzberg said. “But if it’s somebody in Mendocino versus Los Angeles, you can cash a check if you are part of the same system. It will be a closed-loop system outside of the federal government.”
It is that closed loop system that concerns Jerred Kiloh, owner of The Higher Path, a Sherman Oaks dispensary.
While a limited charter bank sounds good in theory, they are still only stop-gap measures. These banks do not allow access to other parts of the banking system, such as credit cards or the interbank STAR network that handles payments using debit cards, said Kiloh, who serves as president of the United Cannabis Business Association, a trade group of medical marijuana dispensaries in Los Angeles.
“That is the issue that we’ve run into numerous times, and that is why these types of charters have not really been beneficial,” he added.
Hertzberg is not the only elected official tackling the problem.
State Treasurer John Chiang formed a Cannabis Banking Working Group, while Los Angeles City Councilman Bob Blumenfield, whose district is in the west San Fernando Valley, has suggested that the city insist cannabis retailers go cashless.
Chiang’s group released a study in November that recommended four steps to bring banking services to cannabis businesses, including the chartering of a public or quasi-public bank. It also recommended pursuing changes at the federal level.
“A definitive solution to the cannabis banking quandary will remain elusive until the federal government removes cannabis from its official list of dangerous drugs or Congress approves safe harbor legislation protecting financial institutions that serve cannabis businesses from federal penalties,” the report said.
That is a strategy shared by the California Bankers Association, said Beth Mills, the group’s spokeswoman.
While the Sacramento-based advocacy association understands and empathizes with the public safety concerns of businesses that handle so much cash, in the end it will be up to the feds to bring a solution, Mills said.
“We are hoping that we’ll see some clarity at some point from the federal government in terms of giving banks immunity so that we can bank these businesses or perhaps changing the law one way or another,” she added.