California has a potential resolution to the problem of banks being unwilling to handle money from the state’s multibillion-dollar legal marijuana industry, one that officials have said would be the first system of its kind in the United States.
Discussions are taking place between the state, banks and federal regulators on a plan to allow banks to serve a marijuana market that is expected to grow to $7 billion annually by 2020 in California. Starting Jan. 1, it will be legal to grow and sell marijuana for recreational and medical uses.
State authorities say without financial institutes taking marijuana money, thousands of marijuana businesses will be storing and transporting billions of dollars in cash for paying employees, suppliers and state and local taxes, which could result in robberies and violence.
“We know there is a concern with having so much cash flowing around on the street in transactions for what is now a state legal product,” said Peter Williams, deputy secretary and general counsel for the state Business, Consumer Services, and Housing Agency. “The administration is looking for a solution to the problem. We are all concerned about the public safety issue here, and we think this is an idea to help mitigate that problem.”
For those who use, it could eventually mean buying with a major credit card. At the moment, purchases are generally made in cash. For those who live near pot shops, the banking system could mean fewer robberies and less violence in the neighborhood because large amounts of cash will no longer be sitting in shops or driven to tax offices.
The issue has implications beyond California. Twenty-nine states have legalized the possession and sale of marijuana for medical uses, and eight of those have approved cannabis for recreational purposes. Several other states are expected to have marijuana legalization measures on the ballot next year.
Marijuana remains illegal under federal law so federally regulated banks have refrained from handling industry proceeds.
Officials in Gov. Jerry Brown’s administration have secretly met with representatives of over 60 banks and credit unions throughout the past few weeks about creating a network of financial institutions that would accept funds from pot businesses in a way that would guarantee federal banking regulators that the cannabis industry money is subjected to special tracking, oversight, and transparency.
The green banking proposal: To designate one bank as a central correspondent bank that would hold accounts from other banks that are doing business with marijuana firms.
When a pot retailer wants to pay a distributor for a crop, the transaction would go from the retailer’s bank through the central correspondent bank, which would instantly clear payment through the distributor’s bank.
Setting up a special clearinghouse for the money the marijuana industry generates would allow the state to provide a second level of compliance oversight by assigning examiners to make sure special restrictions set by the federal government are followed, suspicious activity reports are filed and the number and scope of transactions through the central bank are tracked.
“We think that adds to the transparency of our system that will also be looked upon favorably to the federal government,” Williams said.
Some banks have expressed interest in participating, he said. The state will now await decisions by the boards of directors of banks that are willing to voluntarily participate in such a network. It will be up to those banks to design the network with contracts.
It would not take legislation, Williams stated.