Slow Burn: California Makes Another Attempt to Pass a Marijuana Bank Bill

Financial Services Law

The movement to provide a limited bank charter to serve marijuana businesses in California inched forward when the California Senate approved SB 51 by an almost unanimous vote, sending the measure to the Assembly for review.

The proposed legislation attempts to solve the problem of providing financial services to cannabis businesses by permitting a limited purpose charter to banks and credit unions specific to the industry to effectuate specific transactions.

What happened

Despite the continuing growth of the industry—with dozens of states having legalized medical marijuana and a growing number permitting recreational use—marijuana remains illegal under the federal Controlled Substances Act (CSA). As a result, banks have shied away from the risks of working with cannabis businesses, leaving the operations to run largely on a cash basis.

After California joined the ranks of jurisdictions with legalized marijuana on January 1, 2018, the state began working to solve the problem of providing banking services. One option was to form a state-owned bank to service the cannabis industry. The treasurer’s and the attorney general’s offices conducted a feasibility study to consider the financial and legal risks of a state-run bank dedicated to the marijuana industry.

However, the results of the study dashed the hopes of lawmakers that a state-run bank was a viable option. “Our conclusion is that no option for a public bank focused on the cannabis industry is feasible,” the report concluded. “All alternatives fail on both risk and financial grounds.”

The second option was legislation proposed in 2018 that would authorize the licensing of state-chartered, limited purpose banks to service the cannabis industry. That bill, SB 930, was approved by the California Senate but not by its Assembly.

California legislators are again attempting to find a solution to the problem facing the legal cannabis industry in California—that they have no ability to obtain banking services. Legislators responded most recently with SB 51, a proposal to create the Cannabis Limited Charter Banking and Credit Union Law.

The current measure, again introduced by Sen. Robert Hertzberg, is virtually identical to his 2018 proposed legislation. It would provide for the licensure and regulation of cannabis limited charter banks and credit unions authorized to provide limited banking services to the cannabis industry. In recognition of federal law, financial institutions that receive this limited charter would be required to adopt policies and practices “to achieve the principles and goals” outlined in the Bank Secrecy Act (BSA) and cooperate with the Financial Crimes Enforcement Network.

Cannabis limited charter banks and credit unions would be authorized to issue special-purpose checks to account holders that would be valid for these specified purposes only: to pay state and local fees and taxes; to pay rent on property leased by, or on behalf of, the account holder’s cannabis business; to pay vendors physically located in California; and to purchase state and local bonds.

The bill would authorize the limited charter bank and credit union to charge fees for its banking services (as long as they are posted “conspicuously” on its website) and enter into agreements with other limited charter licensees to form a banking network—subject to the approval of the Department of Business Oversight (DBO)—to facilitate banking services for the cannabis industry.

The DBO, which would have oversight of these banks, would be required to adopt regulations and could begin issuing licenses on July 1, 2020.

If federal law changes—for example, if the CSA is amended to remove cannabis from the federal schedule of controlled substances or legislation is enacted to establish protections for depository institutions providing banking services to cannabis businesses—SB 51 would make the Cannabis Limited Charter Banking and Credit Union Law inoperative, and any banks or credit unions previously chartered would have to be wound down in an orderly fashion.

The bill was approved by a vote of 35 to 1 in the Senate and moved to the Assembly for consideration.

To read SB 51, click here.

Why it matters

Thus far the bill has had limited opposition and has enjoyed almost unanimous, bipartisan support. Nevertheless, its ultimate passage could be affected by federal enforcement trends and by the prospects for passage of relief at the federal level. While support continues to build for a federal measure—the Secure and Fair Enforcement Banking Act passed a committee vote for consideration by the full House of Representatives—it remains to be seen whether federal legislation will pass, or whether SB 51 will gain enough support to be passed and become law in California. California is trying its best to adopt a stopgap measure to fill the banking void. With federal legislation slowly gaining traction, however, the question remains whether anyone would be interested in chartering a cannabis-based bank if such a bank would have to be wound down following favorable federal changes on cannabis for existing commercial banks.