Premature for California to Plan for Cannabis Banking

This op-ed originally appeared in the Orange County Register

With all the financial challenges impacting our global economy, many are planning for the next economic slowdown. Not to be undone, Sacramento is focused on creating a new economy and “cash crop” for the Golden State. Ready to place an initiative on the 2016 ballot, high-ranking elected state officials and other promoters of cannabis legalization are working to craft legislation that would meet federal guidelines for the “industry.”

However, Colorado’s efforts just hit a pothole in the road toward legitimate tax collection. Cannabis, fully legal in Colorado, is still an illegal substance at the federal level, a fact which continues to stymie Colorado’s attempt to blaze trails, most recently with a state-chartered credit union to accept marijuana deposits.

The main criteria for tax collection are the ability to establish and keep records and a bank account for deposits, or a relationship to verify and accept cash. Without verifiable record keeping, the receivers of cash spent on marijuana could be accused of money laundering.

In July, the Federal Reserve denied the Denver-based Fourth Corner Credit Union a master account, which would have allowed the credit union to begin banking relationships with the cannabis industry and interact with other banking institutions.

The roadblock cited is a small, but clarifying, compound sentence in the Constitution. It doesn’t require a constitutional lawyer to interpret the Supremacy Clause:

“This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the constitution or laws of any state to the contrary notwithstanding.”

The long-standing, simple analysis of the clause is aptly noted below:

“Consistent with that command, we have long recognized that state laws that conflict with federal law are ‘without effect.’” Maryland v. Louisiana, 451 U.S. 725, 746 (1981).

In other words, until federal law is amended to legalize medicinal, as well as recreational, cannabis production and consumption, either wholesale or piecemeal, any attempts to normalize relations between banks and the fledgling industry may continue to go up in smoke.

California’s report from the Blue Ribbon Commission on Marijuana Policy outlines U.S. Justice Department guidelines for states. Justice will allow states to enact and enforce a legalization system so long as states prevent: distribution to minors; revenue going to criminal enterprises; diversion of marijuana to other unwilling states; being used as a cover for trafficking of illegal activity and other provisions.

While federal requirements may appear doable for the optimistic, we must understand how difficult the hurdles are without a nationally legitimized and bankable industry. It would seem that whatever form of fiat banking we contrive would probably meet a similar fate to Colorado’s Fourth Corner Credit Union.

Whether cannabis should be legal in California is not the issue – federal law is. So, before we change our moniker from Golden State to Emerald State in anticipation of new tax revenue, let’s ensure our efforts won’t run afoul of the Supremacy Clause.

While we should encourage our leaders to explore resolutions to this burgeoning underground economy, our focus should remain on providing water and power to our people and industries such as agriculture, housing, transportation, clean technology and manufacturing. Promoting growth for these less exciting industries would stimulate employment, provide greater job opportunities and, ultimately, create more taxpayers and revenue. California will need these jobs and industries to shoulder the burden on all of us during the inevitable next downturn in the economy.