City Council
MEETING DATE: 8/12/2015
TITLE:
Title
Medical Marijuana Dispensary Kiosk and Cash Transaction Ordinances.
End
FROM:
Charles Green, City Attorney
Nicholas Hermsen, Deputy City Attorney
RECOMMENDATION:
Recommendation
That the City Council receive and consider this report and take whatever action it deems appropriate.
Body
BACKGROUND:
Last year the City Council enacted an ordinance which initially will allow three (3) medical marijuana dispensaries to operate within the City. The ordinance, as originally adopted and currently in effect, contains numerous operational regulations intended to protect the public health, safety and welfare and to avoid negative secondary effects of the operation of the dispensaries.
Among the regulations, the ordinance presently prohibits cash transactions entirely, and requires all transactions to “be made by personal check or credit cards.” Since the ordinance was enacted and during the application process, several dispensary applicants have complained to staff that this prohibition is unworkable.
Specifically, the complaints stem from the underlying conflict between State and Federal law and the Federal Government’s continued classification of marijuana as a Schedule I drug under all instances. Although the Federal Department of Justice has deprioritized enforcement of the marijuana prohibition in states where medical marijuana has been permitted at the state level, the issue remains mired in something of a bureaucratic maze in certain respects. The regulation of financial institutions that wish to do business with medical marijuana businesses is still problematic. The dispensary applicants have complained that they haven’t been able to do business with banks or other financial institutions, and they are unable to secure credit card transaction services or deposit or cash personal checks due to issues at the Federal level.
Green Cross Pharma, the only applicant to have been issued a medical marijuana dispensary conditional use permit as of the date of the preparation of this staff report, is one of the parties to complain about this regulation. Green Cross Pharma’s principal, Maria Scagliotti, has represented that she has contacted “hundreds” of financial institutions, and none are willing to do business with a marijuana dispensary. Another applicant, John Chaisson of Green Cross Co-Op (the #8 applicant), asserts that Chase Bank closed a number of his long-standing accounts when they determined that they were being used in connection with medical marijuana businesses, and he also indicated he has been unsuccessful in finding a bank that will work with him in California.
The City Council has three potential options to address the problems raised by the cash prohibition issue:
1. Reverse the rule and allow cash transactions at the dispensaries;
2. Permit dispensaries to utilize a “kiosk system” through which the kiosk accepts cash in a manner that avoids dispensary personnel being directly involved in a cash transaction; or
3. Take no action and allow the current regulations to stand.
Option 1: Allow Cash Transactions
This option would be fairly simple to implement-the City Council could simply adopt an ordinance eliminating the cash prohibition on transactions. That ordinance has been prepared and is attached should the City Council decide to adopt it. Palm Springs now allows cash transactions, after initially prohibiting them.
One concern with allowing cash transactions is it would make monitoring and auditing sales records for purposes of collection of the City’s dispensary receipts tax more challenging. Also, processing large amounts of cash on site could create an increased risk of crime.
It should be noted that some of the dispensary applicants who have been in communication with staff and our office on this issue favor this option.
Option 2: Authorize a “Kiosk” System
In connection with this matter, staff met with representatives of C4Ever Systems, a company that provides kiosk payment services for medical marijuana dispensaries in other states, including Washington, Colorado, and Nevada. C4Ever Systems also provides payment kiosks for the receipt of parking fines in a number of jurisdictions in California, and informs us that it has been working with Santa Ana and Desert Hot Springs on regulations to allow kiosks to operate in those jurisdictions.
Representatives of C4Ever Systems will be present at the study session in order to give the City Council a demonstration of how their kiosk system works.
The intent of bringing this matter to the City Council’s attention is not to advocate on behalf of C4Ever Systems or its particular kiosk model, or even in favor of allowing kiosks at all. If the City Council elects to permit kiosks, then any qualified company would be permitted to provide kiosks to a dispensary. As of the date of this staff report, our office has unsuccessfully attempted to contact a number of other companies who may offer dispensary kiosk services to discuss this matter. At least one of the dispensary applicants has expressed concern that if there is only one active kiosk company currently providing these services, it may result in a monopoly through which the kiosk company would be able to exert undue financial pressure on the dispensaries.
The kiosk system would allow patients to pay for medical marijuana with cash. The kiosk accepts cash and has built-in security features which are intended to safeguard the money. The kiosk then gives the customer a slip indicating the payment received, which the customer then gives to the dispensary staff in order to obtain marijuana. The kiosk system can also allow the customer to select what type of marijuana he or she wishes to purchase, and can be networked with the dispensary to maintain records of the dispensary’s supply. Of importance to the City, the kiosk system would maintain records of sales for auditing purposes, and would automatically transmit tax payments to the City. The kiosk company would work with another third party armored transport company to pick up the cash from the kiosk and transport it to a financial institution.
Importantly, C4Ever Systems has maintained that it has developed relationships with financial institutions where dispensaries would be permitted to maintain accounts under this model. Any other qualified kiosk company would of course also be permitted to operate also under the proposed ordinance.
Importantly, however, C4Ever Systems has indicated that in order for it to operate kiosk systems in Cathedral City (or in any other jurisdiction), certain additional specified amendments to the dispensary ordinance would be needed. Our office has worked with C4Ever Systems staff to identify the minimum necessary changes to the ordinance that would allow them to commence operations.
The reason C4Ever Systems believes these changes to the ordinance would be necessary would be to satisfy the Federal Government in a way that would allow financial institutions to do business with marijuana businesses. In this regard, C4Ever Systems’ attorneys have referred our office to two documents emanating from the Federal Government: (1) a memorandum from Deputy United States Attorney James M. Cole entitled “Guidance Regarding Marijuana Enforcement” dated August 29, 2013 (the “Cole Memo”); and (2) a memorandum from the Department of the Treasury, Financial Crimes Enforcement Network entitled “Bank Secrecy Act Expectations Regarding Marijuana-Related Businesses” dated February 14, 2014 (the “FinCen Guide”). Both the Cole Memo and the FinCen Guide are attached.
a. The Cole Memo
The Cole Memo provides guidance to federal law enforcement agencies to focus resources on persons or organizations whose conduct interferes the following priorities (“Cole Memo Priorities”):
1. Preventing the distribution of marijuana to minors;
2. Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;
3. Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;
4. Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;
5. Preventing violence and the use of firearms in the cultivation and distribution of marijuana;
6. Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;
7. Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and
8. Preventing marijuana possession or use on federal property.
These eight enforcement priorities are meant to address the most serious threats posed by marijuana through a consistent policy. Aside from these priorities, the federal government has “traditionally relied on states and local law enforcement agencies to address marijuana activity through enforcement of their own narcotics laws.” (Cole Memo, pg. 2). The assumption is that the state and local authorities that choose to allow marijuana activity will develop “strong and effective regulatory and enforcement systems that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests. (Id.) Another assumption is that through the implementation of robust local regulatory systems, the Cole Memo Priorities are less likely to be affected. If, however, these local systems are not sufficient, the “federal government may seek to challenge the regulatory structure itself in addition to continuing to bring individual enforcement actions.” (Cole Memo, pg. 3).
b. The FinCen Guide
The FinCen Guide was intended to supplement the Cole Memo, and provides guidance for financial institutions that want to provide services for marijuana-related businesses, but also want to comply with the Bank Secrecy Act (“BSA”). In particular, the Cole Memo Priorities are considered by federal officials “with respect to federal money laundering, unlicensed money transmitter, and BSA offense predicated on marijuana-related violations of the [Controlled-Substances Act].” (FinCen Guide, pg. 2).
The most important requirement under FinCen is to submit Suspicious Activity Reports (“SAR”). Financial institutions in general must file SARs if they suspect that a transaction involves funds derived from illegal activity. Since marijuana is illegal under federal law, financial institutions that have a relationship with marijuana-related businesses must file SARs. (FinCen Guide, pg. 3). These reports are used by federal authorities in criminal investigations. There are three different types of reports:
• If a marijuana-related business does not implicate one of the Cole Memo Priorities, financial institutions may file a “Marijuana Limited” SAR. This report merely identifies the related parties, their address, and the fact they are involved in marijuana-related business.
• If the marijuana-related business does implicate a Cole Memo Priority, the financial institution must file a “Marijuana Priority” SAR. In addition to the information above, the SAR must include the enforcement priority that has been implicated, and the details and relevant information of the suspicious activity.
• If a financial institution terminates a relationship with a marijuana-related business, it must file a “Marijuana Termination” SAR.
As part of the financial institutions’ due diligence, they must verify that the marijuana-related businesses are duly licensed and compliant with state law, review publicly available information, request information from state authorities regarding the businesses, and provide ongoing monitoring for suspicious activity.
c. Effect on Cathedral City
Taken together, the Cole Memo and FinCen Guide provide guidance for state and local marijuana-related businesses to do business without threat of federal intervention. State and local authorities must ensure that regulations are in place to avoid implicating one of the Cole Memo Priorities. Moreover, state and local authorities should aid financial institutions in monitoring marijuana businesses and report any suspicious activities.
C4Ever Systems has reviewed the City’s current regulations and indicated that the proposed ordinance contains the minimum required amendments that would allow it to operate its kiosk system in Cathedral City. In other states with more developed marijuana regulations such as Washington and Colorado, state regulations have been deemed sufficient for C4Ever Systems to establish service. However, State regulations in California are currently minimal and C4Ever Systems do not believe that those regulations alone provide the framework necessary to comply with the Federal Government’s requirements. It is for that reason that C4Ever Systems asserts amendments to the ordinance are necessary.
d. The Proposed Kiosk Ordinance
The proposed ordinance would provide:
1. Allow payment to be made through a City-approved payment system which includes the following:
a. Payment kiosks;
b. A point of sale system;
c. Armored carriers or cash-in-transit services to transport money or goods;
d. A database through which the dispensary must report all transactions, inventory, and other relevant records in real-time and which the City may access to independently audit and monitor all dispensary activities.
2. Dispensaries must maintain accurate and comprehensive inventory tracking records that account for, reconcile, and evidence all inventory activity for medical marijuana and marijuana-infused products from either seed until the medical marijuana or marijuana-infused product is destroyed or sold to a patient.
3. Dispensaries must maintain accurate and comprehensive transactional, financial, and transportation records that fully account for, reconcile, and evidence all relevant activity.
4. The City shall have access to all records maintained by dispensaries, and may disclose such records to any financial institution or other agency for purposes of complying with State or Federal law.
5. Dispensaries shall disclose, as needed, all records to any financial institution in order to comply with the FinCen Memo and the Federal Bank Secrecy Act.
6. Inventory, product and currency must be made through an armored carrier or cash-in-transit provider.
7. The City Manager or designee may hire a vendor to assist the City in enforcing the City’s records requirements, and may impose reasonable conditions for hiring any vendor including, but not limited to, insurance coverage and indemnity agreements.
8. The City Manager or designee may promulgate rules, regulations and procedures to implement the dispensary ordinance.
Option 3: Take No Action
The City also has the option to take no action at this time and allow dispensaries to operate with the current rules in place. The concern with this is that a number of dispensary applicants have indicated that this may result in an unworkable system where they may not be able to operate within the parameters of the City’s ordinance.
Attachments:
Cole Memo
FinSen Memo
Kiosk Ordinance
Ordinance Allowing Cash Transactions