Operating cannabis businesses is becoming easier, as more states recognize the legality of such establishments – but storing money at the end of the day is not. In fact, banking guidelines for the industry have become increasingly complicated for business owners.
This major obstacle is often overshadowed by the success of the nascent sector. For example, recreational cannabis proved to be a huge hit in Nevada, bringing in an estimated $3 million worth of sales in the first four days of public openings. Despite such accomplishments, legal cannabis transactions remain cash only in the state.
Banks, which are largely governed by federal law, are not optimistic about supporting cannabis retail shops with mainstream financial services typically offered to other types of businesses. This is because on a federal level, cannabis is still illegal. Since financial institutions rely on federal systems for insurance, wire transfers and payments, the last thing they want to do is rub authorities the wrong way.
One of the ways banks could overstep their relationship with federal regulators is by failing to report illegal activities, which is where cannabis business owners and financial institutions are currently at a standstill. Cannabis is considered to be legal in states that acknowledge it as a product – even though federal authorities persistently view the plant as a controlled substance.
“The FDIC could step in and shut down a bank, and it can do that with very little notice,”
said Julie Hill, a law professor at the University of Alabama and former finance industry attorney.
“Nobody’s ever gotten their bank brought back to life after it’s been closed by regulators.”
As a result, retail shop owners are taking two very different approaches to managing their finances.
Some groups are hoarding cash in personal vaults, with help from third-party security agencies, to prevent criminals from targeting their establishments. Technically speaking, this approach isn’t illegal – just very risky. As long as sales are properly accounted for, recorded and reported to the federal government, there’s nothing wrong with maintaining boatloads of banknotes in a secure safe.
Other cannabis business owners prefer to take their earnings directly to the Federal Reserve Bank, where it is placed into a credit union account for safekeeping. The most dangerous part of this method is bringing cash to the federal building. No one wants to carry large amounts of money around in broad daylight, even with a security escort.
“Right now, at the downtown office of finance, there’s a six-story parking structure 500 yards away,” explained Jerred Kiloh, owner of Higher Path Collective, a medical cannabis dispensary located in Sherman Oaks, California.
“I have to walk through what is essentially a homeless encampment with a duffel bag full of cash, walk across the street, go through security and then sometimes stand in line.”
There’s no doubt that partnering with a local bank is the key solution to reducing risks related to managing retail transactions. By allowing cannabis shops to leverage electronic financial services, owners would not have to choose between maintaining an in-store vault or delivering their earnings directly to federal institutions.
Derek Peterson, Chairman and CEO of the publicly-traded company Terra Tech Corp, was denied a life insurance policy based on his affiliation with the cannabis industry.
A letter was sent to Peterson by Mutual of Omaha, notifying him that “we cannot accept premium[s] from individuals or entities who are associated with the marijuana industry.”
The letter from Mutual of Omaha to Derek Peterson, denying him life insurance coverage.
The letter, dated June 13th, contains significant grammatical errors that affect the meaning of the response, such as, “WE ARE REGULATED BY THE AGENCIES OF THE,” which calls into question the reasoning behind their decisions, whether it be a fear of a specific government threat or simply an excuse.
“This was to get some additional coverage for me personally, my family,” said Peterson. “On a personal level, to have something like this happen, where I can’t get protection for my family … it just seems ridiculous and archaic at this point.”
On his application, Peterson stated that he uses marijuana, in accordance with Mutual of Omaha’s policies that require an applicant to disclose any and all relevant information regarding the health of the insured.
Peterson’s entrepreneurship within the cannabis industry includes retail businesses in Oakland, California and Nevada, as well as a significant medical cannabis growing operation in Oakland. Due to Terra Tech Corp’s status as a publicly traded company (TRTC), Peterson has experience working with the SEC and other government entities. Access to banking services has been notoriously difficult for employees of the cannabis industry, but obtaining life insurance policies has not been a known issue until now.
While 25 states have legalized medical cannabis and four have legalized recreational cannabis, federal prohibition has kept large financial institutions from interacting with cannabis businesses and individuals. While banks may be attempting to protect their reputation, the results of denying these services have been deadly.
Financial expert Julie Hill of the University of Alabama School of Law points out that “knowingly engag[ing] in a monetary transaction in criminally derived property of value greater than $10,000.”
“These and other laws make it very risky to accept any money that you know comes from a marijuana business, regardless of whether you are a bank,” she said. “This is one account that probably won’t make them much money, yet it could potentially be a really large headache,” she said. “It’s easier to say ‘No, thank you’ than to try to figure out if it would actually cause negative repercussions.”
While the Senate has been making strides in allowing cannabis business to access financial services, banks are self-regulated and are legally allowed to create their own policies, even if they are based on reputational concerns.
Photo credit: Terra Tech Corp
The biggest obstacle faced by marijuana dispensaries throughout America is the lack of banking of options. Because banks have refused to work with dispensaries (among other legal cannabis businesses), this industry has long been a cash business without a safe-haven.
Federal legislation aimed at loosening these banking restrictions has yet to make traction, but Oregon lawmakers may be the first to take this serious matter into their own hands. Last week, the state’s house voted 55-4 (following an 18-6 Senate vote) in favor of House Bill 4094 allowing Oregon banks to provide financial services to state-regulated marijuana businesses by removing the risk of prosecution.
The bill “exempts financial institutions that provide financial services to marijuana related businesses, researchers and laboratories from any criminal law of this state that has element that may be proven by substantiating that person provides financial services to person who lawfully possesses, delivers or manufactures marijuana or marijuana derived products.”
Now, the legislation moves into the hands of Governor Kate Brown who has stated that she would sign any bill that will eliminate formerly standing, unjust penalties for these banks and credit unions. Hopefully this bill inspires other states like Colorado and Washington to take similar action to finally allow their growing industry to stash their cash safely, just like any other legally operating business.
Meanwhile, in Washington D.C., Oregon Representative and weed warrior Earl Blumenauer continues the plight to get the federal government to loosen up its tedious restrictions on this issue.
Cannabis growers and sellers had their hopes dashed in July after the Federal Reserve refused the Fourth Corner Credit Union’s (FCCU) application to open a master account with the nation’s central bank.
FCCU would have been the first bank established to receive deposits from cannabis businesses. Without a Fed master account, the credit union cannot perform the functions of a bank. Without a bank, cannabis entrepreneurs are forced to operate an all-cash business that is a target for criminals and a constant source of anxiety for those who must hoard and protect revenues without the security FCCU would provide.
At the core of the problem is the federal government’s continued listing of cannabis as a Schedule I substance under the Controlled Substances Act of 1970. The outlawed designation of the plant means that the banks that accept deposits generated from cannabis sales could be held in violation of federal money-laundering laws. Fearful of federal reprisal, established banks have been wary of taking cannabis money despite the huge amount of it being generated in states such as Colorado and Washington, where sales of cannabis are legal at the state level.
Mark Mason, the South Carolina lawyer behind the creation of FCCU, was not surprised by the Fed’s denial of the credit union’s master account application. Mason reported,
“I felt all along like they were trying to figure out a way to deny our application,”
The Fed’s refusal to allow cannabis businesses access to the banking system is an untenable position. With state-sanctioned dispensaries generating huge amounts of revenue—all of it in hard currency—the temptation for robbery is increasing, and business owners are arming themselves or hiring armed security companies for protection. Stashes of cash are spread out and hidden around the states at undisclosed locations to mitigate the risk of theft.
Much of the trouble is the result of inherent contradictions in the Cole Memorandum, the statement issued by the US Justice Department in 2014 to signal that federal drug laws would not be enforced against cannabis businesses if the businesses did not violate any of eight priorities listed in the document. Among the priorities are “preventing revenue from the sale of marijuana from going to criminal enterprises,” and “preventing violence and the use of firearms in the cultivation and distribution of marijuana.”
However, the memorandum also states that “Financial transactions involving proceeds generated by marijuana-related conduct can form the basis for prosecution under the money laundering statutes (18 U.S.C. §§ 1956 and 1957).” Ironically, the memorandum’s statement that banks can be punished for taking cannabis money has led to enormous stacks of cash and the increasing presence of firearms to protect them, making violation of its own enforcement priorities increasingly likely. Subsequent Treasury Department statements to the banking industry have done little to assuage banks’ anxiety over working with the cannabis industry.
As a result of the Fed’s denial of FCCU’s application for a master account, cannabis businesses will for now have to continue to operate unbanked. FCCU has the support of some politicians in states where cannabis is legal, who recognize the public-safety issues and the impediment to taxation that results from a cash-only economy for cannabis sales. Colorado politicians have sponsored legislation that would clarify rules for banks.
In the meantime, the FCCU has filed suit against the Fed, saying that it deserves equal access to the financial system. Peter Conti-Brown, a legal studies professor at the University of Pennsylvania’s Wharton School of Business, believes the credit union faces a formidable challenge in arguing that the Fed lacks the power to deny it a master account. “They are going to face the longest of odds until there is a clear and permanent change to federal policy,” he said.
As both medical and recreational legalization sweeps the nation, with red states like Alaska and Ohio getting into the game, patients and advocates are cheering their entry into the 21st century. Unfortunately, a slew of ancillary laws that dramatically affect cannabis consumers and businesses have yet to catch up.
In July, an Arizona Court of Appeals ruled that the smell of marijuana alone cannot serve as probable cause for police to search one’s home or vehicle. In 2010, the state legalized a medical program in the form of the Arizona Medical Marijuana Act.
The court based its decision on the fact that searches of legitimate medical marijuana patients based on smell alone would deem them “second-class citizens,” “losing their rights to privacy and security, including privacy within their own homes.” The judge decided that a warrant cannot be justified by behavior that might be legal.
In late August, an Oregon Court of Appeals refused to declare the smell of burning cannabis “unpleasant.” The court ruled that cannabis smoke isn’t necessary offensive to all people (like, say, rotten food or feces).
Also in late August, the city of Washington, D.C., where recreational possession and consumption is legal, made it illegal for employers to test job candidates or employees for marijuana. It would certainly be illogical for a legal activity like smoking or vaping cannabis to result in a punitive action like loss of a job opportunity or dismissal from a current position.
As a greater number of states embrace legalized cannabis, related laws regarding everything from drug testing and impaired driving to banking services and insurance are in desperate need of revision. Make no doubt, prohibitionist forces are doing everything within their power to slow the acceptance and destigmatization of cannabis in the United States.
Drug Testing and Banking Services
Drug testing and banking services are probably the two greatest issues facing patients, consumers, and business owners in states where the herb is legal. Despite progress, such as the court decisions above, patients and entrepreneurs still face many hurdles in pursuit of a society that truly allows — and even encourages — the capitalization of medical and recreational marijuana.
In June, the Colorado Supreme Court ruled, in a 6-0 decision, that it is legal in the state for a company to fire any employee that tests positive for marijuana. The irony of the situation is obviously that Colorado has had legal medical cannabis since 2000 and has allowed recreational cultivation, possession, and consumption since January of 2014.
The Court justified its decision with the definition of the term “lawful” under Colorado’s Lawful Off-Duty Activities Statute. According to the justices, the existing state law refers to activities lawful under both state and federal law. In his opinion, Justice Allison H. Eid wrote:
“Therefore, employees who engage in an activity, such as medical marijuana use, that is permitted by state law but unlawful under federal law are not protected by the statute.”
Most merchant banking companies have refused to provide their services to cultivation facilities, dispensaries, and retail stores because they are afraid that the federal government will nullify their FDIC insurance. A prominent feature of most dispensaries is an ATM; unfortunately, it’s an all cash business. Because banking regulations haven’t caught up with the progressive cannabis laws of states like Colorado and Oregon, patients, customers, and business owners suffer under the security burden of piles of cash.
Of course, this hoard of cash is ironic, given that dispensaries and pot shops are intended to rid communities of the influence of cartels and the black market. Bundles of Benjamins obviously serve only to attract crime.
The Pressure is On
Short of establishing their own banking services, cannabis-related companies in states like Colorado and California are hard pressed to operate like a normal business. Even the IRS is behind the times, with laws that prohibit certain major tax writeoffs for businesses that trade in a federally illegal substance. Because of this, some dispensaries are effectively paying 60-70 percent tax rates. This lack of financial incentive, if it pervades, may drive entrepreneurs and vendors out of the cannabis business, serving the ends of prohibitionists like New Jersey governor Chris Christie.
Drug testing and banking services are, without a doubt, the most pressing issues facing the burgeoning cannabis industry at this time. Reasonable citizens who would otherwise consume marijuana in a legal environment may avoid the activity due to the risk of losing their jobs — unfairly hurting small businesses who might depend on their patronage. Small businesses and investors may pass on opening a cannabis-related business simply due to arcane tax regulations and an inability to utilize merchant banking systems.
One unlikely solution to all of these headaches is federal legalization, or at least a reclassification of cannabis out of Schedule I. Banking regulations, tax rules, and employer drug testing must be reconsidered, with a recognition that tens of millions of Americans can legally — at a state level — grow, possess, and consume cannabis. Until this happens, the greenrush of the twenty-teens will be at least partially paralyzed.