Sign-up today for your complimentary subscription to the State Net Capitol Journal to stay up-to-date on the latest legislative and regulatory news
Subscribe To Our Newsletter
Follow Us On Twitter
Follow Us On LinkedIn
LexisNexis® State Net® helps you identify, assess, and respond quickly to legislative and regulatory activity. Use State Net resources to search, analyze, track, and report on relevant bills, regulations, and local ordinances.
HomeSpotlight Story | Bird’s Eye View | Budget & Taxes | Politics & Leadership | Governors | Hot Issues | Once Around the Statehouse Lightly
There is an old jest that says the fastest way for a business to run off its customers is to adhere to the motto: In God we trust; all others must pay cash. But for the legal marijuana industry, cash and carry is almost always the only option, and it really is no laughing matter.
Since 1996, 23 states and the District of Columbia have legalized the use of marijuana for medicinal purposes. Since 2012, four of those states and DC have gone a step further by allowing adults to use small amounts of pot strictly for recreation. These have been profitable ventures. Overall, according to a report by The ArcView Group, a cannabis industry research and investment firm in San Francisco, the marijuana industry took in over $2.7 billion in 2014. That’s a 74 percent jump from 2013, and the numbers are poised to only get bigger this year.
In most businesses, such profitability would be very good news. But proprietors in the cannabis industry face a unique problem: banks don’t want their business. Dealing in marijuana remains a federal crime. Fearful of running afoul of federal drug and racketeering laws, banks have generally opted to reject setting up accounts with pot sellers, forcing those businesses to operate on a strictly cash basis. A growing number of state officials say this reluctance by banks has posed a range of problems, from increasing the potential for crimes against cash-flush pot operators and customers to cannabis operations being forced to spend tens of thousands of dollars every month on security.
With no money trail to follow, officials say, there is no way to monitor sellers for illegal activity or to ensure that pot companies are reporting the full amount of income they make and thus paying up the required taxes generated by those sales. And while nobody knows for certain if anyone in the legal pot trade has actually shorted state or local coffers on taxes, it is known that without access to a checking account, legal sellers who pay their taxes from marijuana profits are forced to do so in cash. Anecdotes abound of pot entrepreneurs showing up at local tax agencies bearing boxes or bags stuffed with huge amounts of cash in small bills.
There is good reason for banks to be wary of handling marijuana assets. The federal government still classifies marijuana as a Schedule 1 drug, the same as heroin, cocaine and other highly addictive narcotics. That makes it a federal crime to possess or sell pot, and it also makes it illegal for banks to knowingly do business with someone who sells pots for a living, even in a state where medical or recreational weed is legal. That prohibition could even chain out to include security companies that provide legal weed outlets with security or transportation services.
The U.S. Department of the Treasury has sought to mitigate the problem. The agency’s financial enforcement arm, the Financial Crimes Enforcement Network or FinCEN, issued guidelines in 2014 that gave banks a pathway for dealing with marijuana businesses. Those include a requirement that such businesses take responsibility for making sure their marijuana clients are obeying the laws of their state and notify federal authorities of suspicious transactions. Other actions have since followed, including a Department of Justice directive to U.S. Attorneys ordering them not to prosecute banks that deal with pot sellers as long as the banks adhere to federal guidelines. Congress also prohibited the DOJ from spending money to go after medical marijuana dispensaries that are obeying their own state’s rules.
But most banks remain unconvinced. Beth Mills, Vice President for Communications and Marketing for the California Bankers Association, says that is because the Department of Justice has also made it clear they would prosecute banks that do not strictly adhere to the guidelines.
“They’re saying, ‘go ahead and do it, but if you make a mistake we’ll pull your charter,’” she says. “It just makes banks extremely leery of doing business with those companies.”
Even so, some banks are making the effort, though how many is unclear. FinCEN says less than 200 banking institutions across the nation – mostly small banks and credit unions – have agreed to work with marijuana retailers. The identity of these banks and credit unions has been a closely guarded secret. Taylor West, deputy director of the National Cannabis Industry Association, says most banks do not want to broadcast their connection for fear of being inundated with pot sellers desperate for banking services.
“Banks that are handling these accounts are doing so very quietly,” she says.
Many likely are aware of the experience of MBank, a small community bank in Gresham, Oregon that sought to offer its services to the legal pot industry. President and CEO Jef Baker said the bank had about 75 marijuana clients, mostly in Oregon but a handful in Washington as well. The bank had also made inroads into Colorado, but complying with the federal requirements to closely monitor all aspects of its customers’ operations proved to be too much and it announced in April it was closing out those accounts and getting out of servicing the industry.
“When we started out, we had a concept of how it would be,” he says. “But the expectations and demands on our resources became too intense. We just did not have the resources to maintain that much oversight on those customers.”
Because financial institutions are largely regulated by the federal government, states are limited in what they can do to ease this situation. Colorado took action last year when Gov. John Hickenlooper (D) signed legislation to allow the creation of a state-chartered credit union geared specifically to handle the legal pot industry. But federal law requires all banks and credit unions to also have a master account with the U.S. Federal Reserve in order to be allowed to process checks and credit cards. Fourth Corner applied for such an account last December. Most applications from a state-chartered bank take only a week to process; Fourth Corner has been waiting for over six months, with no thumbs up or down decision even on the horizon.
MBank’s Baker is skeptical of Fourth Corner’s chances for approval, saying the credit union’s focus on a singular industry may well discourage the Fed’s endorsement.
Regardless of what happens with Fourth Corner, the situation has definitely got lawmakers’ attention. Oregon Treasurer Ted Wheeler (D) sent a letter last month to U.S. Treasury Secretary Jacob Lew asking the federal government to give banks full assurance they can do business with legal marijuana dealers without facing prosecution and loss of their charters. Wheeler cited potential safety threats to legal dealers and the challenge of keeping tabs on illegal operations without being able to monitor fiscal transactions.
He is not alone. Multiple bills have been introduced in Congress, including HR 2076 by Colorado Rep. Ed Perlmutter (D). The so-called “Business Access to Banking Act” would grant banks “safe harbor” and other civil protections for dealing with weed-based businesses. Perlmutter noted that approximately 213 million people currently live in the states and DC where medical or recreational marijuana is legal, adding that “it is coming to a state near you soon.”
He could well be right. Pro marijuana groups are working to get legalization measures on the ballot in at least five more states in 2016: Nevada, California, Arizona, Massachusetts and Maine. Of those, California is the obvious big prize. The Golden State is in fact already home base to about three quarters of the nation’s approximately 2,000 legal medical marijuana dispensaries and many observers believe California allowing recreational sales as well could be the tipping point for prompting Congress to move legal pot into the financial mainstream.
“Having California legalize recreational marijuana will absolutely put pressure on Congress to change the law,” says the National Cannabis Industry Association’s West. “The more members of Congress with constituents impacted by this the more likely they will act.”
Not that it is a given. West notes that Congress has a well-chronicled propensity for failing to reach consensus.
“The biggest hurdle in D.C. has for years been Congressional dysfunction,” she says.
MBank’s Baker agrees that California’s sheer size could have a lot of influence on what Congress does. But he believes every state should be on board as well.
“Federal drug laws are not really the problem here,” he says. “The real challenge is that banks are being asked to serve as a kind of front-line law enforcement operation monitoring the legal marijuana industry because banks are the only resource to monitor the business financially. So it would be my hope that every state would increase pressure to help banks get into the system because they are truly needed.”
- By RICH EHISEN