There Are No Drug Cartels in California, and 97% of WA Cannabis Businesses Have Checking Accounts … What We Learned in the House Hearing on Cannabis & Banking – Updated

The House Financial Services Committee’s Subcommittee on Consumer Protection and Financial Institutions held a hearing on February 13, 2019 titled “Challenges and Solutions: Access to Banking Services for Cannabis-Related Businesses”.

There were two panels of witnesses. The first panel was the Honorable Ed Perlmutter, Member of Congress (D. CO), the primary sponsor of the SAFE Banking Act of 2019. He testified passionately and with purpose on his many-years’ of effort to reform marijuana/cannabis laws, up to the just-introduced SAFE Banking Act of 2019. The second panel was made up of:

The video of the hearing – available at ran for a total of 4 hours and 50 minutes, less 26 minutes at the beginning when the hearing was slightly delayed and a one hour and twenty-three minute recess at the 1 hour 40 minute mark (all of this – and the time tags to follow – are for the benefit of those that may choose to watch the video of the hearing!).

First, some highlights of the written testimony of the witnesses.

California Treasurer Ma’s testimony included the following:

“The well understood Cole Memorandum offered some sense of comfort to those financial institutions skilled enough to properly know their customer, apply appropriate due diligence to the business activities of those customers, and to safeguard their banks as well as the nation’s payment system from known bad actors who violated the eight basic tenets set forth in that Memo. Unfortunately, the Cole Memorandum has been rescinded and now these financial institutions are left without even the most basic safe harbor mechanisms to guide their business decisions.”

I’d point out that this statement isn’t quite accurate. The poorly understood (in my opinion) Cole Memoranda (there were three of them) offered no sense of comfort to financial institutions, skilled or otherwise, didn’t provide a safe harbor, and remains part of the FinCEN Guidance. This was all corrected by the (excellent) written testimony of Ms. Pross:

“The compliance framework Maps utilizes to serve canna-businesses is based on the U.S. Department of the Treasury’s Financial Crimes Enforcement Network BSA Expectations Regarding Marijuana-Related Businesses (“FinCEN Guidance”). Though the February 2014 Cole Memorandum from the Department of Justice (“Cole Memo”) was rescinded in January of 2018 by Attorney General Sessions, the guidelines of the Cole Memo remain in place as part of the FinCEN Guidance.”

Ms. Pross also testified (@3:06:20) that “the FinCEN Guidance is not a safe harbor.” This is an accurate statement. And Mr. Deckard, representing the Independent Community Bankers Association, had this to say about the FinCEN Guidance:

“FinCEN Guidance (described below) does provide some assurances that a bank is complying with anti-money laundering rules if it follows the agency’s heightened SAR guidelines. However, without a statutory safe harbor, bankers rationally fear that the politics could shift against cannabis in an instant. It is telling that banks that choose to serve cannabis-related businesses are required to have an exit plan to unwind their loans, a requirement that does not exist for any other category of lending”.

The “all cash” aspects of cannabis related businesses was a central theme of the hearing. In his written testimony, Major Franklin wrote:

“Current conditions, which require all-cash transactions in every aspect of the business encourage tax fraud, add expensive monitoring and bookkeeping expenses, and – most importantly – leave legitimate businesses vulnerable to theft, robbery, and the violence that accompany those crimes.”

It may be that current conditions require all-cash transactions, but there are dozens (more than fifty have been identified by myself and others) payment providers, Point-of-Sale system providers, credit and debit card and merchant services providers that have developed end-runs around the merchant identification code requirements, card network rules, etc., in order to allow – albeit improperly – consumers to swipe or insert their AmEx, Visa, Mastercard, and Discover branded cards at cannabis dispensaries and retailers. Almost every cannabis store you will walk into accepts some sort of electronic payment – either in a closed-loop system, masked as an ATM withdrawal, masked as a cryptocurrency purchase, or using a false or deceptive Merchant Identification Code to get around the issuing banks’ controls and the network rules. Ms. Pross’s written testimony touched on this issue:

“Cannabis businesses are frequently bombarded with proposals for payment “solutions” that are unregulated (and therefore not subject to Bank Secrecy Act compliance), and their “solutions” are often very clearly a form of money laundering. We have heard of proposals involving everything from cryptocurrency to cashless “chit” mechanisms to the use of prepaid gift cards—none of which would provide the Federal government any valuable information on cannabis-related financial activity or the movement of cannabis within the United States.”

One thing that re- or de-scheduling of cannabis and cannabis-related banking reforms could accomplish is to get these unregulated and sometimes less-than-transparent businesses out of the cannabis banking environment completely. That would be a positive for everyone (except those providers of end-run, head-fake payments services).

Ms. Pross, representing the Credit Union National Association, also included quite a lot of detailed information on her credit union’s cannabis program. Her written testimony included the following:

“our organization has come to provide banking services to five hundred Oregon sanctioned cannabis businesses. That makes the cannabis banking program at Maps one of the largest in the United States … In 2017 and 2018 alone, Maps received well over $529 million in cash deposits from cannabis businesses …”.

There are roughly 250 business days in a year, so over 500 business days, Maps received, on average, over $1 million in cannabis-related cash deposits from some or all of its 500 cannabis related business members (credit unions don’t have “customers”, they have “members”). That is a lot of cash for a 250 employee, 10-branch credit union in Salem, Oregon. As Ms. Pross correctly pointed out, that is $529 million that was taken off the street and entered the banking system: she and her colleagues at Maps Credit Union should be commended for that.

Ms. Pross continued:

“To put some numbers around this compliance program, Maps filed over 13,500 individual reports related to cannabis business accounts in 2017 and 2018 alone. For more context around those numbers, Maps has filed 2,770 Suspicious Activity Reports since January 1, 2017, and 90.2% of those SARs were directly due to our filing obligations for cannabis businesses.”

Based on this, and her testimony at 4:21:05, in two years Maps Credit Union filed 11,000 CTRs over approximately 500 business days, or an average of 22 CTRs per day on an average of $1 million in cannabis-related cash deposits (not all of which would have hit the $10,000.01 threshold for filing a CTR).

But the SAR testimony is more interesting. Although Ms. Pross verbally testified that “in the past two years we’ve filed nearly 3,000 marijuana-related SARs to FinCEN” and that of the 3,000, “90% related to cannabis businesses” (4:21:05), the written testimony may be more accurate. There, 90.2% of 2,770 is 2,500 SARs. The FinCEN Guidance requires banks and credit unions to file a Marijuana-related SAR every 90 days. So, if Maps has 500 CRB customers – and assuming that they had 500 CRB customers through the course of those two years, that would mean that they should have filed 500 SARs every 90 days, or 4,000 SARs in 2017-2018. They filed 2,500. Ms. Pross may need to provide some detail on the number of CRB customers it had through 2017 and 2018: simply based on this written testimony and the statement that they had 500 CRB customers, the math doesn’t seem to work.

Update – Ms. Pross did provide an update on February 14th. She wrote: “To clarify the SAR numbers, this is a growing program, so we have not had 500 cannabis business accounts for the past two years.  In fact, as of January 2017, we had 133 such accounts.  Also, it’s important to note that SAR filing requirements are effectively a 120-day reporting timeframe.  There is 90 days of activity to report and an additional 30 days to file the SAR.  While a financial institution may still report at the 91 day mark, we have an additional 30 days past the reporting timeframe to utilize as necessary.  Thanks again!”

Shifting gears, a number of the Republican Congressmen (notably Mr. Luetkmeyer (R. MO), Mr. McHenry (R. NC) and Mr. Posey (R. FL)) brought up Operation Choke Point and what they saw as an oddity that bank regulators were discouraging banks from banking certain federally legal businesses (the Choke Point issue) yet in this case there is an encouragement (through the proposed SAFE Banking Act) to bank federally illegal businesses. Mr. Deckard’s written testimony referenced Operation Choke Point. Mr. Deckard wrote:

“The memories of Operation Choke Point are still fresh. Even legal, legitimate, long-established businesses were, and unfortunately remain, subject to examiner coercion, both subtle and direct. ICBA [Independent Community Bankers Association] appreciates the ongoing work of Ranking Member Luetkemeyer and others on this committee to being an end to Operation Choke Point, just as we now seek your help in creating a safe harbor for legal cannabis businesses.”

Mr. Luetkemeyer had this interesting comment (32:42) that summarized his thinking and what appears to be lack of support for the SAFE Banking Act: “Until we modernize the BSA and anti-money laundering regulations, it would be irresponsible to open up our financial institutions to another major challenge.”

There was an interesting exchange between Mr. Tipton (R. CO) and California Treasurer Ma (3:24 – 3:27) aroudn cannabis and organized crime. Mr. Tipton stated that drug cartels can gain access to legitimate marijuana businesses, and that in Colorado, organized crime cases had tripled in the five years since legalization.[1] Treasurer Ma answered as follows (3:27:10): “The cartels actually don’t come to California anymore because of Proposition 215 [1996] and because of Proposition 64 [2016] that passed, so the legislation in our State has actually made it safer.”

Leaving aside whether the California cannabis-related legislation has actually made California safer, I don’t believe the statement “the cartels actually don’t come to California anymore”, whether because of the 1996 and 2016 propositions or not, is an appropriate statement to make. I trust that Treasurer Ma will formally retract that statement – unless, of course, it is true that drug cartels no longer come to California.

Update: On February 11, 2019 the Governor of California announced that he was pulling California’s National Guard troops from the southwest border. To effect that he issued General Order 2019-01, which among other things “authorizes up to 100 service members with critical skills to that the California National Guard can focus vital and exclusive support on combating transnational criminal organizations …”. In his state-of-the-state speech that same day, the Governor stated that he was redeploying troops to northern California “to go after illegal cannabis farms, many of which are run by cartels …”. 

Miss Porter (D. CA) asked Treasurer Ma about California’s cannabis-related tax revenue, and whether the banks that accept that revenue should also be required to provide banking services to cannabis-related businesses. Treasurer Ma replied (4:04:30) that California does business with eight banks, and “marijuana tax proceeds go into one national bank.” I was waiting to hear which national bank that was, but she neither volunteered the information nor was she asked.

For those interested, Representative Alexandria Ocasio-Cortez (D. NY) is a member of the Subcommittee and had her five minutes of time (beginning at 4:11:58). Her commentary and questions focused on what she described as the “racial wealth gap”.

Overall, I thought the introduction of the proposed SAFE Banking Act of 2019, the written testimony, and the thoughtful and respectful questions and answers, all advanced the dialogue on moving forward with responsible legislation to address the state/federal cannabis issues. As I have written many times, and most recently on January 17, 2019 (

“Unless and until the financial services industry gets clear, unequivocal, consistent, written laws, regulations, and guidance from Congress, Treasury, and Justice to provide banking services to marijuana-related businesses, it will and should do what it is currently doing – balancing the undue risks against the insufficient rewards – and continue to stand on the sidelines while our communities, veterans, patients, doctors, caregivers, and others suffer.”

[1] Mr. Tipton referenced a Denver Post article that referred to a Colorado government report from October 2018. That report from the Colorado Division of Criminal Justice, found that the number of court filings charged with the Colorado Organized Crime Control Act that were linked to one or more cannabis charges had gone from 31 in 2012 to 119 in 2017. Lost in the headline, though, is that the number of COCCA charges linked to marijuana dropped in 2013 to 15, and dropped again to 1 in 2014 before increasing to 40 in 2015, 81 in 2016, and 119 in 2017.