California's Cannabis Chaos Continues According to the 2019 Annual Report
California's Cannabis Advisory Committee ("CAC") has released its 2019 Annual Report. It is available at Cal CAC 2019 Annual Report.
Some excerpts from the report show that the world's largest legal (and perhaps largest illegal) cannabis market isn't functioning as well as it should or could. Now that California is in its fourth year of legal adult-use cannabis sales, the arguments that "it's still early" are starting to ring a bit hollow. California, and Californians, should be concerned that if the State government is unwilling or unable to turn things around, the Feds may step in. Some highlights from the Report include ...
Page 4: "Despite the state's committed efforts to bring cannabis businesses fully into the regulated commercial market, the illicit market continues to pose a significant challenge to the regulated industry. In fact, estimates indicate that as much as 80 percent of the cannabis market in California remains illicit. While California is expected to generate $3.1 billion in licensed cannabis sales this year, nearly triple that amount — $8.7 billion - is expected to be spent in the illicit cannabis market."
Page 20: "… it is estimated that approximately 76 percent of [482] cities and 69 percent of [58] counties have passed ordinances that ban all legal medicinal and adult-use cannabis sales. The widespread ban on legal cannabis sales, comes despite a recent University of California Berkeley poll suggesting that 63 percent of California voters support permitting cannabis stores where they live."
Comment: this reference on page 20 is a good example of sloppy statistics, as it suggests a disconnect between the percentage of voters supporting local cannabis sales (63%) and the percentage of communities that allow local cannabis sales (24%). Given the differences in population between cities, and the overwhelming support for local cannabis sales in the larger urban centers and overwhelming support against local cannabis sales in the smaller cities, it actually makes statistical sense that the majority of voters may approve of local sales yet the majority of cities ban local sales. Colorado has a similar dynamic, by the way, with the majority of cities and counties banning local cannabis sales.
Page 21: "reports suggest that California’s illicit market is actually growing since legalization. According to BDS Analytics and ArcView Market Research, 74 percent of cannabis sales in 2017 occurred in the illicit market. And in 2018, as much as 80 percent of cannabis sales occurred in the illicit market."
This is troubling since California is almost three years into its adult-use regime. However, two data points doesn't necessarily indicate a trend.
Page 22 set out eight factors hurting the licensed cannabis market participants: "The issues facing small businesses, and existing cultivators are complex, and the result of many factors including duplicative and onerous regulatory requirements, complicated licensing structure that requires multiple licenses to operate, expensive and complicated environmental compliance, prohibitive statutory language, lack of access to local permits, inability to obtain small business loans, inability to access banking, and excessive taxation at the local and state level."
This is an interesting list. This committee, created by the state government, appears to be blaming the state government for the challenges facing the industry. Five of the eight factors could largely be addressed by the state (duplicative and onerous regulatory requirements, a complicated licensing structure, expensive and complicated environmental compliance, prohibitive statutory language, and excessive taxation at the state level).
Page 23: "The increase in [state] taxation comes at a time when the complex regulatory framework, coupled with high taxation pose significant challenges to the licensed cannabis market. According to a recently released report published by Arcview Market Research, these two factors could disadvantage the licensed market by as much as 77 percent on pricing compared to well established illicit market operations."
Page 24 included a discussion about access to financial services:
"Due to the Bank Secrecy Act, the USA Patriot Act, and the Racketeer Influenced and Corrupt Organizations (RICO) Act, it remains illegal for traditional financial institutions to handle funds stemming from criminal activity, including funds generated in violation of federal drug laws.
Additionally, the Money Laundering Control Act of 1986 made money laundering—the concealment of the origins of illegally obtained money—a federal crime. Regardless of state law, financial institutions may be charged with money laundering, and/or be subject to violations, by conducting financial transactions involving substances explicitly prohibited by the Controlled Substances Act, such as cannabis.
Under the Bank Secrecy Act of 1970, financial institutions must assist government agencies in detecting and preventing money laundering. They must report any transaction exceeding $10,000, and any suspicious or illegal activities to the federal Financial Crimes Enforcement Network (FinCEN). If financial institutions do not abide by the Act, FinCEN has the authority to seek significant civil penalties and even criminal prosecution.
As a result, neither the Federal Deposit Insurance Corporation (FDIC) nor the National Credit Union Administration have been willing to provide deposit insurance to banks and credit unions that knowingly provide banking services to legal cannabis businesses. Additionally, no federal clearinghouse has been willing to clear a check known to have been written by or to a cannabis business. Banks and credit unions will not approve traditional business loans, or issue credit or debit cards to businesses identified to be cannabis businesses."
None of the twenty-two members of the Committee appear to have any financial services background. But, in relying on a state legislative report, this section seems reasonably accurate.