A Cannabis-Friendly Public Bank in California? Not Likely

 

Anyone who follows the US cannabis industry knows that federal cannabis prohibition makes access to banking services a major hurdle.

California officials seemed on the brink of a solution late last year with their pursuit of a public bank, but as 2019 kicks off, that possibility is looking bleak.

At a public hearing in Sacramento on December 27, authorities released a study analyzing the feasibility of creating a public cannabis bank, and the analysis found that doing so would pose “too great of a legal and financial risk to the State of California.”

Following a 2017 report by the state’s Cannabis Banking Working Group, outgoing Treasurer John Chiang commissioned the consulting firm Level 4 Ventures and the State Attorney General’s Office to address the possibility of having a state-run or state-backed institution to provide financial services to cannabis businesses. Level 4 explored several options, including three versions of a public bank—one that would provide services exclusively to the industry; one that would primarily serve the industry, but also other individuals and businesses; and one that would serve other commercial banks through a state-run “correspondent bank.”

None were deemed feasible.

Ultimately, the study determined that there is a “high probability” that federal regulators will not issue the necessary “master account,” which is required for any bank to open and conduct basic functions. Moreover, if the state failed to secure the master account after it began spending an anticipated $35 million on start-up costs for any of the three alternatives, taxpayer funds expended to that date “would be wasted.”

The firm also explored other alternatives—the possibility of a public credit union, the state purchase of a private bank, and the use of cryptocurrency. These potential solutions were also ruled out, as they would “still run afoul of current federal law.” In a summary accompanying its 151-page report, Level 4 Ventures concluded that “a state-backed cannabis bank involves unacceptable degrees of legal, schedule, mission, and financial risks.”

Notably, the firm’s report underscores that there would be dangers to a public bank no matter which way the federal conversation about cannabis goes. “If federal regulators begin to aggressively enforce federal laws, the bank would be closed and deposits subject to confiscation,” the report noted. Yet, with an eye towards the potential end of prohibition, it also notes that “If federal regulations change during this time and cannabis banking becomes legal, the bank would most likely be closed at that point due to a decreased business demand for the bank and thereby incur a significant loss.”

Level 4’s findings were echoed in a separate analysis produced by the California Department of Justice, which focused on potential legal obstacles. In a letter issued to the State Treasurer’s Office one day before the public hearing, California Attorney General Xavier Becerra said that a public cannabis bank would “violate several federal criminal statutes, including the Controlled Substances Act, anti-money laundering laws, and the Racketeer Influenced & Corrupt Organizations Act (RICO).”

Though the state’s findings come on the heels of a failed attempt to create a public bank in Los Angeles, where a November ballot measure was defeated, it is unclear whether they mark the end of the possibility in California. Activists in the city of Santa Rosa have organized in favor of a public bank and are networking with like-minded groups throughout the state. On the national front, some federal legislators have expressed interest in public banks, which proponents maintain could better provide funding for green energy projects and affordable housing. This includes Rep. Alexandria Ocasio-Cortez (D-New York), whose draft text for a select committee on a Green New Deal calls for “a new public bank or system of regional and specialized public banks.” The draft, however, makes no mention of cannabis, a notable fact given that, at the municipal level, some proponents have even opposed using public banks to serve the cannabis industry.

In the same vein, the report commissioned by the California State Treasurer recognized the success of the Bank of North Dakota and the recently approved Territorial Bank of American Samoa, but noted that neither was “created with the intention to serve the cannabis industry.” (The North Dakota bank was founded 100 years ago to aid grain farmers).

The Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, a bipartisan bill that aims to protect state cannabis regulations from federal interference, could also bring about a solution to the banking problem. If implemented, transactions involving the legal cannabis industry would no longer be considered “trafficking” under the federal Controlled Substances Act. These transactions could therefore be carried out without the threat of money laundering prosecution, civil forfeiture of collateral, and other criminal violations that could lead to a charter revocation.

“While today’s announcement may not lay out the path some of us had hoped,” Treasurer Chiang said at the hearing, “it did reinforce the inconvenient reality that a definitive solution will remain elusive until the federal government takes action.”

“They must either remove cannabis from its official list of banned narcotics or approve safe harbor legislation that protects banks serving cannabis businesses from prosecution,” Chiang added.

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Cannabis Wire
Cannabis Wire
Cannabis is rich territory for serious journalism. Legalization raises urgent questions about regulation and law, technology and taxation, science and business, criminal justice and individual liberties. It stands at the intersection of a booming billion-dollar industry and promising advances in medicine, all while remaining federally illegal.

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