Cannabis industry’s hope for California public bank derailed

The cannabis industry’s hope for California to establish a bank for the sector was dashed Thursday with the release of a highly anticipated report that said such a move would place state funds and workers at risk with no guarantee of success.

The conclusions of the 151-page report delivered to a cannabis banking working group led by state Treasurer John Chiang derail attempts to establish a public bank for marijuana companies when state lawmakers reconvene in Sacramento in January.

Supporters hoped a favorable report would provide momentum for the Legislature to clear the way for such a bank to help bring the multibillion-dollar cannabis industry - still mostly a cash-only business almost one year after marijuana was legalized for recreational use in California - into the financial mainstream. The lack of traditional commercial banking access for cannabis enterprises has hindered growth, placed employees at risk of robbery and denied the state and local municipalities additional tax revenue.

“We went in to try to find a way to make it work,” said William Roetzheim, the founder of Level 4 Ventures, a business analytics firm based in San Diego that studied the feasibility of cannabis banking, then wrote the report and presented it to the state working group on Thursday. “Every single channel through the set of possibilities that we followed ended up reaching a dead end.”

Instead, Roetzheim and his team wrote that the thorny banking issue has to be ultimately settled at the federal level, given that marijuana is still classified as an illegal drug under federal law - in the same class as heroin and LSD. Therefore, most banks will not open accounts for cannabis-related enterprises. They fear losing their banking charters, something that would put them out of business.

“While today’s announcement may not lay out the path some of us had hoped, it did reinforce the inconvenient reality that a definitive solution will remain elusive until the federal government takes action,” Chiang said at the last hearing of his working group. “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 had focused on the topic for years, including in 2016 when he visited Santa Rosa cannabis maker CannaCraft to learn the obstacles the company faced in its operations. He leaves office next month after an unsuccessful bid for governor.

The debate in Congress and the Trump administration about bringing cannabis operators out of the financial shadows remains murky. Incoming U.S. House Speaker Nancy Pelosi, D-San Francisco, has placed the onus on President Trump. The biggest obstacle in Trump’s inner circle was former Attorney General Jeff Sessions, who resigned last month. Treasury Secretary Steve Mnuchin signaled earlier this year to Congress a greater willingness for banks to provide services to legal pot businesses.

Meanwhile, the state report found numerous hurdles in trying to establish a public bank, which already faced opposition from the powerful commercial banking lobby in Sacramento. They included most prominently: time, as it would take at least six years before a public bank could offer any services; and money, because the state’s cannabis industry would likely need $1 billion in funds to be fully capitalized. The state would not receive any dividends from operating such a bank until 25 to 30 years after it opened, likely 2050 at the earliest.

Federal regulators also would be concerned the proposed bank would have a high-risk portfolio because it would serve only one industry - one emerging and growing rapidly. That could subject the state’s taxpayers to a risk of failure during an economic downturn, Roetzheim said.

“This is a high-risk industry even if it’s legal,” he told the working group Thursday during a hearing in Sacramento.

State employees who would be involved in banking relationships with cannabis firms also would be placed in legal jeopardy given that they would not be immune from prosecution under federal criminal statutes, Roetzheim said. “You never know what they are going to do,” he said of the federal government.

Level 4, the business analytics firm, considered different models for a California public bank, including one that also offered noncannabis services; a correspondent bank providing services to other banks; a public credit union; and new financial technology firms that use cryptocurrency options. All of them, however, would face the risk of shutdown by federal banking regulators.

In the absence of traditional banking services, cannabis business operators have relied on other financial options. Some prefer to keep it a cash business, while others open an account with a local bank or credit union and hope they don’t get caught and have banks close their accounts.

Larger marijuana firms, such as CannaCraft, the producer of cannabis drinks and food, use specialized banks offering limited services to pay vendors and landlords - but that comes with steep banking fees. The company recently secured limited financial services from a Los Angeles-area bank. It took six months and more than $40,000 to obtain the bank account, CannaCraft’s chief compliance officer Tiffany Devitt said recently.

“The cost of losing a (bank) account is huge,” said Hezekiah Allen, chairman of Emerald Grown, a Humboldt-based cooperative of cannabis growers. Allen also served on the state treasurer’s working group. Roetzheim was not all negative in his remarks to the working group. He said there are at least 300 banks and firms nationwide providing banking services to cannabis-related businesses. In fact, the state of Washington, which legalized weed in 2012, now receives 96 percent of its cannabis tax payments through digital transactions as opposed to cash.

“Banks will gradually enter this industry in California,” said Roetzheim, who compared the dilemma to the rapid acceptance of gay marriage across the country earlier this century. “It’s going to slowly solve itself.”

One option suggested by Roetzheim was for California to allocate $2 million annually over the next five years to bring on more staff at the state Bureau of Cannabis Control and Department of Business Oversight, as well as other state agencies. Those workers could help in coordinating better policy in such as areas as tax payments and other services.

“There is a constructive path forward here,” Allen said. “It’s not all bad.”

You can reach Staff Writer Bill Swindell at 707-521-5223.