California’s Weed Market Will Remain Cash-Only…For Now

Hopes have been very high for SB 51, which proposes to create state-chartered banking services for legal cannabis businesses. So businesses and consumers felt a little let down last week upon learning that the bill is being tabled.

Senator Hertzberg’s office wants to assure the bill’s supporters that this move is only temporary, and that the bill is in no way being tabled for lack of support—just the opposite, in fact.

“Lack of support is definitely not the issue with this bill,” says Katie Hanzlik, Press Secretary for Senator Hertzberg. “It got bipartisan support and only received 5 ‘no’ votes total over the course of six committee hearings and a Senate Floor vote.”

Instead, the devil seems to be in the details. After all, cannabis is still illegal on the federal level, and this makes it very difficult to get bankers on board with state-legal cannabis activities. This has led to frustrating and even dangerous transactions involving – literally – piles of cash. It’s an immense safety issue for the industry as a whole.

In some cases, legal cannabis businesses are being forced to pay taxes and fees amounting to hundreds of thousands of dollars in cash. This obviously makes them a target for theft. And what are state offices supposed to do with these piles of cash?

Worse, it’s hard on the consumers too. Almost every dispensary in the state is operating on a cash-only basis. This has led to some rather creative problem solving on the part of industry players, and while creative thinking is usually commendable in the business sector, some are under attack for their efforts.

Creative Accounting or Fraud?

Just recently, the founders of Herban filed a lawsuit with their former business companions Eaze, alleging they were committing fraud through their online payment platform. Their complaint alleges that Eaze conspired to hide the nature of customer payments from offshore payment processors by disguising the transactions through shell companies with non-cannabis related names.

Their complaint is purely a civil suit based on charges of unfair competition, not a criminal one. Herban’s efforts are focused on obtaining an injunction to stop these transactions in order to level the playing field for compliant companies. It raises criminal concerns as well though, with the proponents of the lawsuit saying “Eaze is directing, coordinating, and participating in a scheme to defraud credit card companies and financial institutions into processing cannabis transactions in violation of a host of criminal laws.”

What Will The Discovery Process Find?

Matters only got worse for Eaze on Sept. 10, 2019 when the San Francisco Superior Court denied Eaze’s motion to drop the suit. Herban says that they will now continue forward to “conduct discovery into Eaze’s alleged credit and debit card fraud and bring the matter to trial.”

When a civil case is moving through the discovery process, it’s sometimes possible for a civil suit to reveal criminal actions as well. This could turn the case into a criminal trial in certain circumstances. This is rare, but if and when it does happen, the person or entity can pass through the civil claim and then face criminal charges if law enforcement chooses to prosecute.

How To Solve The Banking Problem

Long story short, this kind of creative accounting wouldn’t even be necessary if SB 51 were to pass—or better yet, the federal government were to remove prohibitions against providing banking services to cannabis-related enterprises.

To that end, the SAFE Banking Act is moving though Congress and a vote is planned for the end of September. This act would create protections for banks and other services that work with licensed cannabis businesses. If it passes, then the accounting problems that cannabis businesses face can be solved in short order.

Meanwhile, it’s up to state legislators to find the solution for California’s cannabis banking woes, and Hertzberg’s office is hard at work on a viable solution.

“We plan to spend the next couple of months working with the Governor’s administration to iron out any final details about implementation and what this would actually look like on the ground. That seemed to be the biggest question mark as the bill moved through the process,” says Hanzlik. “We should have some clarity by January, when we can get it across that final hurdle on the Assembly Floor and then to the Governor for signature. This bill has an urgency provision, so it would go into effect immediately!”

Speak Up!

If you’d like to show support for SB 51’s quick return and passage, you can contact your state legislator here.

And to show support for the SAFE Act, you can contact you Congressional representative here.