Is It Legal? California's Cannabis Conflict

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The Conflict Between Federal and State Law Regarding Marijuana, and How It Impacts Business Owners, Investors, and Workers

By Tom Yacko

Most of you have probably heard or read about the “Marijuana Boom” taking place in various areas of the United States, and particularly in the State of California, in the wake of legislation being passed at the state and local levels legalizing marijuana to some degree or another. This blog post will discuss the effect of new legislation on Orange County and southern California businesses.

Key Takeaways

  • Cannabis has a long-rooted history as a Schedule I Drug
  • Banks are hesitant to partner with cannabis businesses and will likely remain so as long as cannabis is federally illegal and thus a threat to Federal Deposit Insurance Corporation backing
  • The solution is a partnership between the California legislative and executive branches, cannabis businesses, and local banks

The "Marijuana Boom” refers to the urgency and vigor with which many people, who are either involved in the marijuana industry or are trying to break into the market as eager newcomers, have been approaching the feat of starting up or further developing their legal marijuana business. The boom is taking place despite marijuana still being clearly illegal under Federal law

Because the industry of legalized marijuana is relatively new in the State of California, and especially because many cities and counties have limited the number of marijuana dispensaries and/or cultivation facilities permitted within their jurisdiction, the race is on for those seeking to establish an advantageous position in the market early on. For those business owners and entrepreneurs who do it right, there are stacks of cash to be made. However, due to the Federal prohibition of marijuana, the vast majority of banking institutions and credit unions still refuse to accept or even handle money made from or associated with marijuana-related commerce. 

This brings us to the focus point of this post – what to do with all that cash, and how to protect it. This serves as a great cross-over between the legal concerns surrounding marijuana businesses and properly managing one’s cash and assets through effective estate planning. These issues also affect a much broader portion of the population than one might initially think – of course owners and investors in any marijuana business are affected, but so are all workers and employees of the business, farmers and growers, transporters, scientists and research personnel, property owners where any marijuana-related commercial activity takes place, and anyone else who made any profit attributable to the marijuana industry. 

BACKGROUND / GROWTH OF THE MARIJUANA INDUSTRY

Marijuana is currently prohibited by Federal law and has been since 1970, specifically under the “Controlled Substances Act” (21 U.S.C. §811) which classifies “cannabis” as a “Schedule I” drug and treats marijuana the same way as it treats heroin or cocaine. In 1996, California passed Proposition 215, otherwise known as the “Compassionate Use Act,” effectively legalizing medical marijuana. In 2016, California passed Proposition 64, which effectively legalized recreational marijuana, although the state licensing and regulatory agencies that will govern recreational marijuana commerce are not expected to be in place until around January 2018, so currently recreational marijuana businesses are still illegal in California. 

Ever since the passage of the Compassionate Use Act of 1996, business owners and entrepreneurs in California have been racing with “Gold Rush” fervor to establish legal (and often times, illegal) medical marijuana dispensaries, growth and cultivation facilities, and other medical marijuana-based businesses in an attempt to strike while the marijuana iron is hot. After Prop 64 passed, considerably more people started rushing to get a piece of the semi-legal weed pie. 

During that timeframe, marijuana in California alone has grown into a billion-dollar industry, and it is projected to reach a value of $7 Billion as an industry in California by the end of 2018, creating projected annual tax revenues of approximately $1 Billion for the state. To demonstrate how rapid the growth of the industry has become, in 2014, the marijuana industry nationwide was valued at only $2.7 Billion. The marijuana industry in the United States is projected to be worth over $20 Billion by 2020. It has been speculated by Forbes magazine that by 2020, the marijuana industry will be responsible for creating more jobs in the United States than the manufacturing, utilities, or government sectors. Clearly, marijuana is an economic catalyst in our country, and there is an astronomical amount of money to be made for those involved in the industry. We know that marijuana grows on trees, but it seems like the money to be made off the marijuana does too!! 

THE PROBLEM OF ESTABLISHING BANK ACCOUNTS AND INVESTING AND PROTECTING CASH EARNINGS

Due to the dichotomy between the prohibition of marijuana under Federal law and the legalization of marijuana both medically and recreationally at the state level in California, there is a massive grey area with respect to the legality of commercial marijuana. While a California business owner might be able to operate his marijuana business safely and legally within the State of California under the state regulatory agencies, there is nothing stopping the Federal government from stepping in and prosecuting that business owner under Federal law. 

The problem is that, due to the grey area, most banking and credit institutions refuse to deal financially with persons involved in the marijuana industry, for fear that such conduct would subject them to federal money laundering laws. Moreover, because there are so few financial institutions willing to collaborate with or service the marijuana industry, marijuana businesses have been forced to operate exclusively on a cash-flow basis. That is, there are no credit or debit transactions – all transactions are done with cash only. 

What does this mean for the typical businessman involved in the marijuana business? The most obvious answer is that the marijuana industry has virtually no access to this country’s financial system, despite its enormous contributions to the economy, both past and projected for the future. Business owners have no way of obtaining business loans if they are for a marijuana-related purpose. More importantly, business owners have no safe, insured and protected way to invest or save their money. This not only hinders the growth of the marijuana industry and therefore also our economy, as a whole; but it also endangers those persons who have been forced to create personal stashes to keep their cash earnings – subjecting them to the very real threat of financial exploitation by others, as well as the threat of violent crime as a means to take that money, which actually happens quite often in the marijuana industry. 

Sadly, to circumvent this problem, many in the marijuana industry have lied to banks in order to establish “legal” accounts. This, of course, is illegal in and of itself. But, really, what other options are available? 

THE SOLUTION – STATE GOVERNMENTS MUST COLLABORATE WITH BANKING INSTITUTIONS 

The solution to this problem is not easily ascertained. In fact, there have already been some efforts on the part of the Federal government to establish a compromise that would allow banking institutions peace of mind that they would not get prosecuted for accepting or handling marijuana money. 

In 2014, under the Obama administration, the United States Treasury Department sought to ease rules for financial institutions seeking to service state-licensed marijuana businesses by issuing a set of guidelines to banking institutions and representing that if the banks followed the guidelines, the Federal government would not prioritize prosecution of that institution. In other words, the government could and likely would still prosecute financial institutions who accepted marijuana money and followed the government’s proposed guidelines, but doing so would not be considered a “priority.” The guidelines also were accompanied with a law that financial institutions still had to file a “suspicious activity report” with the Federal authorities for every customer who took in marijuana money. 

This was not nearly enough to convince financial institutions that it was safe to handle marijuana money, especially considering the possibility that a change in the administration would lead to the evisceration of those protective guidelines and allow for unfettered prosecution of the banking institutions (time will tell if this happens under the Trump administration). So, banks continued and still now continue refusing to handle marijuana money. 

Luckily, certain groups in California and in other states are taking matters into their own hands. California officials, led by California State Treasurer John Chiang, have been hosting a continual series of meetings with a group self-identified as the “Cannabis Banking Working Group.” According to Chiang, at these meetings, the group operates as a think-tank seeking to identify policies under which “the cannabis industry may fully avail itself of banking services… that every other business in California enjoys.” 

One proposal that emerged from these think-tank meetings was to form a credit union specifically designed to service exclusively marijuana growers. I can see the commercial now – “We! Are! (Marijuana) Farmers! Bum-budum bum bum bum bum!” Joking aside though, the proposed credit union would be nonprofit, and would participate in granting loans to licensed and legitimate farmers and growers in the marijuana industry. This proposal is one of many that the think-tank has yielded, but that has still not been put into action due to the fear that the Trump administration would target such a venture. 

Given that this is all completely new ground for California commerce, the best place to look for guidance is probably those states that have already successfully legalized medical and recreational marijuana, and have at least some banking institutions in place to service the industry. Colorado, Oregon and Washington are just a few states to look into. 

Take Washington state, for instance, which has legalized both medical and recreational marijuana. In Washington, some financial institutions have begun embracing the marijuana industry and the money that accompanies it. One such institution is the Seattle-based “Salal Credit Union,” which is a $500 million institution catering primarily to health care workers in the state of Washington. However, over the last couple years, Salal Credit Union has accepted accounts from 275 state-licensed marijuana businesses. 

Salal’s CEO, Russell Rosendal, commented that although it takes much longer for Salal’s marijuana industry customers to get their accounts approved than it takes for other business clients (approximately 10 days for marijuana customers compared to 15 minutes for other business clients), Salal still complies with the Federal law. The Credit Union specifically ensures a “suspicious activity report” is filed with the Federal government for every marijuana industry client it takes on. Although taking on these clients is a risk, the business and relationships it creates is “worth the effort for the credit union and marijuana industry,” according to Rosendal.  

In Oregon, which has also legalized marijuana both medically and recreationally, Maps Credit Union based in Salem, OR has been servicing state-licensed medical and recreational marijuana businesses for at least three years now. Maps Credit Union’s Vice President Shane Saunders asserted that the institution’s choice to service the marijuana industry was motivated in large part by public safety concerns within the surrounding community. The logic essentially is that it’s better to allow a business owner to keep his money safely with a bank than to remove that option, thereby forcing the person to keep very large amounts of cash on his person and subjecting him to the threat of harm and violence. 

Perhaps what we need in California is a few more Russell Rosendals or Shane Saunders’s willing to take the first leap and pave the way for more financial institutions to follow suit. But, without state law providing stronger protections for its citizens from the Federal prohibition, that seems unlikely to happen. 

Former Justice Department assistant deputy chief John Vardaman, who initially wrote a memorandum in 2013 (colloquially known as the Cole memo) on behalf of the Federal government pledging to states that the Federal government would not raid state-licensed marijuana facilities so long as the state took strong measures to protect marijuana from reaching children or reaching criminal markets, recently commented that “State legalized marijuana and marijuana banking are inextricably linked. You simply cannot have the former without the latter. That means relevant authorities in states that have legalized marijuana must do everything possible to facilitate marijuana banking.” 

In other words, the solution lies with the State. This has been demonstrated most recently in the State of Washington, where after a year of working with Federal regulators, the state Department of Financial Institutions Director Scott Jarvis was able to establish guidelines for marijuana-related businesses to legally bank in the State of Washington, and the state publicly posts these guidelines and other helpful documents to facilitate legal banking by those in the marijuana industry.

That said, newly minted Attorney General Jeff Sessions issued new guidance on the subject of marijuana enforcement in his own memo in January of 2018 effectively revoking the Cole guidance and putting legalized marijuana industries in a lasting state of uncertainty. While this act has sparked widespread dissent and continued hyper-paritsanship, especially from Colorado Senator Cory Gardner (R-Colo.), whether enforcement is ratcheted up or remains concentrated on illegitimate businesses and criminal organizations is ultimately up to California's own attorneys general. As of now, things seem to be all systems go.

Considering how rapidly the laws in the State of California have changed with respect to marijuana in only the last couple years, it is not unreasonable to assume that state legislators and lobbyists will follow Washington’s lead and begin meaningful negotiations with the Federal government to facilitate legal banking for marijuana-related businesses despite the Attorney General's position. Ulitmately, negotiations will take time and the ever-changing administration could bring in differing opinions and policies. What's most imporant is that discussions begin. Indeed, with more and more special interest groups like the “Cannabis Banking Working Group” taking hold in California and with a marijuana industry growing at an exponential rate, the pressure is on the state government to act now to help legitimize an industry that is shaping up to become an economic behemoth.

If you're looking to become a part of the cannabis economy, schedule a strategy session today and we'll walk you through the process. Here's to planning smarter.

Tom Yacko is practices at Schlau|Rogers in an Of Counsel capacity in a wide-range of transactional matters, particularly related to cannabis businesses. Tom is also a lawyer at Peirano & Associates Inc. practicing in cannabis business litigation Orange, San Diego, Los Angeles and Riverside counties. He is a devoted Angels fan, avid runner, finds his second home in the great outdoors, and is really good at helping people achieve their goals.

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