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> = Po cor > Qa A CHAPTER! Executive Summary As prices decline, we are starting to see closer price parity between state-legal and illegal markets (in the United States, cannabis is generally priced lower in illegal markets than in state-legal markets). We believe that lower retail prices in state-legal markets will accelerate consumer transition from illegal to state-legal markets and drive increased overall penetration rates. However, state and local taxes will continue to impact pricing for cannabis products in state-legal cannabis markets, which will impede the transition to legal markets. In international markets, cannabis cultivators in South America, particularly in Colombia and Uruguay, are expected to proceed with large-scale operations in 2018, with the anticipated supply of cannabis entering the market in late 2018 or early 2019. These operations are designed to produce out- put that exceeds local demand, and South American countries are expected to export products to other legal markets, such as Canada and Germany. As legal markets increasingly import cannabis products, we anticipate downward-pricing pressure for cannabis in both the wholesale and retail markets. Canna- bis cultivators in domestic markets that permit imports may be challenged by large, low-cost cannabis producers in South America and elsewhere. While these dynamics are expected to impact international cannabis markets, they should not materially affect prices in the United States until the importation of cannabis products becomes legal under federal law. Access to Banking Services for U.S. Cannabis Companies Because most cannabis-related businesses in the United States violate federal law, most domestic finan- cial institutions do not provide services to participants in the cannabis industry. Companies in the cannabis industry may not be able to open or maintain bank accounts or access other products and services—such as credit facilities, payment processing and insurance coverage—typically provided by traditional financial institutions. A lack of access to banking and other traditional financial products and services continues to impede the growth of the industry; it increases the time, effort and expense related to ongoing operations and increases risks associated with cash transactions and the use of alter- native products and services. The California State Treasurer’s Cannabis Banking Working Group—a panel convened by Califor- nia State Treasurer John Chiang that includes representatives from the cannabis industry and financial institutions, and government tax collection, law enforcement and regulatory agencies— issued a report in November 2017 on the cannabis industry’s banking challenges. In the report, the State Treasurer's Office stated that the cannabis industry's lack of access to banking services is one of the biggest threats to the success of the state’s recreational cannabis law, which is scheduled for implementation starting in January 2018. The U.S. Bank Secrecy Act (BSA) requires financial institutions to file “suspicious activity reports” (SARs) with the Financial Crimes Enforcement Network (FinCEN) regarding customers engaged in “marijuana-related business.” From February 2014 through June 2017, FinCEN received a total of 33,692 marijuana-related SAR filings from a total of 390 banks and credit unions (out of approxi- mately 11,500 depository institutions). The following graph based on FinCEN data shows the number of banks and credit unions making such filings. While the percentage of the total number of depository institutions serving the cannabis industry remains small, the growing number of depository institu- tions making SAR filings indicates that cannabis businesses increasingly are accessing the federal bank- ing system despite federal law. © 2017 Ackrell Capital, LLC | Member FINRA/SIPC 11 HOUSE_OVERSIGHT_024647