August 20 -- Pension Update
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This Tuesday, Ohio voters will go to the polls to decide whether to legalize recreational and medicinal marijuana use. But even if the Buckeye State becomes the 24th (along with the District of Columbia) to legalize some form of marijuana, it will not solve one of the most significant problems facing the burgeoning legal weed industry: the lack of access to banking services that virtually all other legal businesses take for granted.
It is hardly a new problem (See “Legal Weed Outlets Flush in Cash Struggling to Find Banks” in the July 2, 2015 issue of SNCJ). But with Ohio possibly boarding the legal marijuana bandwagon and several states likely to have legalization ballot measures in 2016, it is one that cries for a solution.
Since 2012, four states and DC – all of which already allowed medicinal marijuana use - have passed laws legalizing the use by adults of small amounts of marijuana for recreation. Legalization advocacy groups like the Washington D.C.-based National Organization for the Reform of Marijuana Laws (NORML) expect similar bills in between six to eight states next year. This includes California, the first state to legalize medicinal marijuana use (via Proposition 215 in 1996) and home to more than 12 percent of the U.S. population.
The prime motivation behind such a relatively rapid push for legalization is simple: money. According to a report released earlier this year by The ArcView Group, a research and investment firm in San Francisco, the marijuana industry took in more than $2.7 billion in 2014, a 74 percent jump from the year before. ArcView predicts that as many as 18 states could pass recreational use laws by 2020, something that could drive cumulative annual revenues as high as $10.2 billion.
Much of that is predicated on what happens at the ballot box in California, where voters rejected a marijuana legalization ballot measure in 2010. But with polls showing a majority of Californians now support legalization, proponents feel confident the Golden State may soon be going green.
“Should an Adult Use legalization initiative pass in California in 2016 the entire industry could rapidly double in size,” the ArcView report concludes. Another study by New York-based Green Wave Advisors is even more bullish on the so-called “green rush” economy, saying in an October 2014 report that nationwide legalization could push combined medical and recreational retail marijuana sales to over $35 billion a year.
If the results in Colorado and Washington - the first two states to make recreational pot legal - are any indicator, it’s not hard to imagine such bold predictions coming true. According to the Colorado Department of Revenue, combined medical and recreational pot sales in August topped $100 million, the first time monthly revenues have reached that plateau. The Centennial State has already taken in over $86 million in marijuana tax revenues this year, more than it collected in all of 2014. Washington, meanwhile, has collected more than $67 million in pot tax revenues in its first year of legalization. Steve Lerch, executive director and chief economist for the state’s Economic and Revenue Forecast Council, told BloombergBusiness in October that Washington expects to take in more than $1 billion in pot-related revenues over the next four years.
But while states have no problem processing and banking such large amounts of cash, weed sellers are not so fortunate. With marijuana still barred by federal law, most banks want no part of their money. That leaves the vast majority of dispensaries as strictly cash-only operations – and high-value targets for theft and robbery. It also makes accurately collecting and tracking taxes on those sales much more problematic for state and local officials than for other industries.
Colorado has tried to address the situation. In 2014 Gov. John Hickenlooper (D) signed legislation to create a state-chartered credit union that would cater specifically to the state’s nascent legal weed industry. But the legislation had to clear a tall hurdle - federal law requires banks and credit unions to have a master account with the U.S. Federal Reserve in order to process checks and credit cards. The first financial institution created under the new Colorado law, Fourth Corner Credit Union, applied for such an account in December 2014. After months of silence, the Fed rejected Fourth Corner’s application in July, citing marijuana’s illegality under federal law. Fourth Corner has since filed suit seeking to force the Fed to grant them the account. A federal court is scheduled to hear oral arguments on December 28.
Another possible avenue opened up in May with the formation of CannaNative, the brainchild of a trio of Native American businessmen in Southern California who want to unite over 550 Western tribes in the cannabis business. In a statement, CannaNative co-founder Anthony Rivera says the tribes would use their expertise in running casinos on sovereign land to set up financial services for weed dispensaries. In doing so, he says, tribes would use the fast-growing weed industry “to gain true sovereignty” in a way that is both economically and environmentally sustainable.
“CannaNative will usher a new age for sovereign nations, as Native American tribes have unique rights that allow for cannabis (marijuana and industrial hemp) cultivation, manufacturing, marketing, sales, use, distribution, medical research and even banking institutions for the rapidly growing cash-and-carry industry,” he said in a statement.
But while that might sound good to weed sellers desperate to find a bank, it seems highly unlikely that such a scheme will ever come to fruition.
“I don’t see how they would have the leeway to do something like that,” says Khurshid Khoja, the founder of Greenbridge Corporate Counsel in San Francisco, which represents numerous clients in the cannabis industry. “Even with tribal sovereignty there are things they can’t do. I just question how much leeway they would have to exempt themselves from federal anti-money laundering laws.”
The answer is very little, according to Brian Pierson, an attorney who specializes in working with Native American tribes for the law firm Godfrey and Kahn in Milwaukee.
“Certainly there is tremendous need in Indian country, and it’s fair for tribes to explore every potential means for economic development,” he says. “But with respect to commercial activity focused on non-Indians living off reservation, there is no judicial authority for immunity or exemption from federal law.”
Technology is now also offering potentially much simpler possibilities for weed entrepreneurs. Companies like Denver-based FlowHub and Integrated Compliance Solutions, based in Las Vegas, offer “seed to sale” accounting and point-of-sale solutions that allow cannabis dealers to meet the strict guidelines laid out by the U.S. Department of Justice and the U.S. Financial Crimes Enforcement Network (FinCEN) for ensuring dispensaries are not laundering money or running afoul of racketeering laws. Others, like California-based Hypur, are promoting software they claim can almost fully automate the compliance process for banks, thus drastically reducing the amount of time they take to service a marijuana client.
But while technology offers wondrous new tools, it does not by itself solve the basic problem facing financial institutions that work with cannabis companies.
“At the end of the day, it is still the bank’s responsibility to make sure there’s no mistakes made with one of these accounts, regardless of what software they are using,” says Beth Mills, Vice President for Communications and Marketing for the California Bankers Association.
That reality is why most observers still look to Congressional action for a resolution. But the wait has so far been frustrating. Multiple bills have been introduced in Congress, including HR 2076 by Colorado Rep. Ed Perlmutter (D). The “Business Access to Banking Act” would grant civil protections for managing accounts with legal weed dispensaries, but it has so far languished in a House subcommittee with no sign it will ever get a vote. With an often dysfunctional and hyper-partisan Congress heading into an election year, its prospects appear dim.
But there remains one small ray of hope for those who support a Congressional solution. An amendment to the tentative budget agreement reached last month between the White House and Congress included an amendment authored by Oregon Sen. Jeff Merkley and Washington Sen. Patty Murray, both Democrats, that would bar the Dept. of Justice from using federal funds to go after banks that provide services to marijuana businesses that are operating legally within their own states. It is yet to be seen if the amendment survives the complicated budget negotiation process. Even if it does not this time, NORML Deputy Director Paul Armentano says the expansion of the legal marijuana industry in the states is likely to force Congress’s hand sooner rather than later.
“Ultimately, this is an issue for Congress,” he says. “It is federal law that is preventing these state-compliant businesses from gaining access to financial services, and ultimately it is Congress that has to deal with this issue head on.”
Follow Rich on Twitter at @WordsmithRich