Special report – Joint accounts: recreational marijuana and the U.S. banking system
08 Feb 2017

“It was frustrating to us … we were trying to be legal, but they were almost forcing us to launder money.”

In referendums last year, Nevada, Massachusetts, Maine and, most significantly, California voted to legalise marijuana for recreational use.

The states in which recreational marijuana is already legal—Oregon, Washington, Colorado and Alaska, plus the District of Colombia—have, by most accounts, enjoyed a peace dividend, with the change to the law upping tax revenues and reducing pressure on policing.

But the booming marijuana industry faces an unusual setback: banks and other financial institutions are reluctant to handle its money. Because the drug remains illegal at the Federal level, growers and dispensaries are either barred from the banking system entirely or face a disproportionately high cost of business. The alternative—dealing exclusively in cash—is even more problematic, demanding expensive security and incurring a significant risk both of falling victim to fraud and unwittingly committing it.

This year all eyes will be on California, which pioneered the legalisation of marijuana for medical use twenty years ago. It will now become the largest state economy to allow recreational use, with forecasters predicting annual sales of $7 billion from January 2018 onwards.

Policymakers have given themselves the year to legislate around the legal complexities that have plagued both the marijuana industry and law enforcement in Oregon, Washington, Colorado, Alaska and DC. With a change in law at Federal level still looking unlikely, they have some serious difficulties to resolve when it comes to those $7 billion of cannabis cash.

Major banks are not the only businesses foregoing potential revenue because of the Federal ban on marijuana. Credit card companies and many landlords, whose mortgages are held by the self-same banks, also refuse to deal with retailers and producers.

Irina Panayi, owner of Pi Organics, a 3,000 square-foot marijuana growing facility just outside of Denver, Colorado, says she simply avoids the financial system.

“No-one will finance you for construction of the building, for the licenses or anything else,” she said. She asks that whenever practically possible customers bring cash to the company offices, from where it is swiftly moved to a safe.

“If you need to pay your electric bill or water or whatever, you need to buy money orders or go directly with cash,” she said. Reminiscent of the Wild West era of centuries past, simple administrative tasks like these involve careful planning, with the staff involved carrying firearms for protection.

Colorado has so far granted 1,315 business licenses for recreational marijuana, which became legal in 2012, and 1,513 licenses for medical marijuana, legal since 2000. Colorado’s treasury received just shy of $18 million from the industry in December 2016 alone. The volume of payments in cash forced the State Treasury to build new secure facilitates, in marked contrast to the general move by local government across the U.S. to handle an ever greater proportion of payments electronically.

Holding two or three months’ worth of takings in cash on their premises, as stores were forced to do when they first started trading, represents a serious security issue, says Joseph Sewell of Seattle-based retailer Cannabis City. (As a benchmark figure, according to, Main Street Marijuana of Vancouver, Washington State, sold $1.6 million of product last December.) Although Sewell does his best to avoid it, stock, up to $15,000 worth at a time in his case, must often also be purchased in cash. And by law retailers must have cameras and staff numbers that dwarf the security measures required by other businesses with comparable levels of income.

Amanda Averch, director of communications at the Colorado Bankers Association (CBA) which represents many of the State’s biggest banks, says that the financial services industry is concerned about how cash heavy marijuana businesses have become.

“It makes them a huge target for would-be criminals, and it has been a worry for public safety for their customers and employees as well,” she said.

In June 2016, security guard Travis Mason was shot and killed during an attempted robbery at the Green Heart Marijuana Dispensary in Aurora, Denver.

“We have said from the beginning that such a scenario was not an ‘if’ but a ‘when’, because it is just too tempting for people,” Averch added.

Thanks to a February 2014 guidance from the Financial Crimes Enforcement Network (FinCEN), one of the U.S. Treasury’s anti-money laundering agencies, marijuana businesses do have some access to the banking system. The guidance sets out how financial institutions can offer services to the industry without falling foul of their obligations under the Bank Secrecy Act, the legislation that forms the bedrock of the U.S.’s anti-money laundering regime. Various key priorities are laid down for institutions handling marijuana money, including ensuring that the drug is not sold to minors and preventing legal sales being used as a cover for the trafficking of illegal drugs or other illegal activity.

In Colorado about a dozen banks now offer services to marijuana firms, although Amanda Averch of the CBA says that they “have been advised not to grow that [element of their] business” and to prevent individual accounts expanding significantly. “The majority pre-existed recreational marijuana and are part of the medicinal marijuana business,” she added.

Generally larger banks which do business in several states have stayed away from marijuana, while smaller institutions and credit unions have been more willing to take the risk.

“Small banks and small credit unions participate because it has a real effect on their bottom line, and they put their faith in those Federal announcements,” said Robert McVay, a lawyer at Seattle-based firm Travis Bricken.

Even so it is clear that there are limits. Fourth Corner, a marijuana focused credit union in Denver, has been struggling to get a banking license since 2014. Participants say that marijuana money is officially tolerated only as a minority asset within a much larger business.

Joseph Sewell of Cannabis City is more optimistic. He says that during the two years that cannabis has been legal in Washington there has been a noticeable loosening in restrictions, and that firms can now rely on credit unions.

“The problem with the bank accounts, as far as our industry is concerned in Washington State, is that if you go to one of these banks, you will find that it is quite intensive and expensive,” he said, describing paying $1,500 to have his business investigated by a bank which also required an initial deposit of $7,000 cash.

“[But] more credit unions have gotten involved, so it has become a little more competitive. We can use those. We can write cheques. We can use debit services, though we can’t use Visa transactions. If you come in and buy $27 worth of product from me, I will ring it out as a $30 withdrawal from a debit card and give you $3 change.”

During the first six months of recreational marijuana legalisation in Washington, from January to July 2014, retailers and banks struggled with a lack of clarity. But after that, things slowly began to settle. Cannabis City was licensed in April and bank support was available three months later.

“Around 18 banks and credit unions are all serving the space in some capacity. That number will continue to grow,” said Lance Ott, who runs marijuana-focused consultancy Guardian Data Systems. He added that he had attended board meetings where such unions had consulted by phone with the Federal Deposit Insurance Corporation and been told that they were not at risk, as long as they complied with FinCEN guidelines. “They said your constituents have voted to legalize cannabis in the state of Oregon and you are a community bank so in the agent’s opinion the bank has a responsibility to serve its local community.”

Panayi, in Colorado, says that improvements have not yet reached her: the $22,000 banks there charge for cannabis-linked accounts are more than enough to hire an extra worker.

“The strong smell of the plants lingers on notes, so they have to clean their cash with air fresheners like Febreze.” – Amanda Averch

Sewell also described peers opening up trading accounts under misleading names in order to get their business started while background checks continued offstage.

“It was very common at the start because the only other choice was laundering money. It was frustrating to us as an industry because we were trying to be legal, but they were almost forcing us to launder money,” he added.

Panayi described fellow growers saying they grew arugula or other green crops in order to open cheaper and more convenient bank accounts.

Marijuana businesses which have chosen to register under false details may resort to literally laundering money, said Averch. The strong smell of the plants lingers on notes, so they have to clean their cash with air fresheners like Febreze.

Seattle lawyer Robert McVay says there are marijuana businesses applying for bank accounts using vague or misleading terms, calling themselves merely “retailers” or “general goods stores.”

In California, marijuana businesses go a lot further. “People there run a separate management company and claim to provide management and payroll services and cash deposit services for our clients,” McVay told KYC360. “The reality is that they are providing all those services only to one or two marijuana businesses and not disclosing that to the bank. That is definitely not something we want any of our clients to do.”

One fraud that is growing at present is that of virtual ATM services, whereby an intermediary sets up a voucher printer inside dispensaries. Customers buy the vouchers with credit or debit cards and then exchange them at the dispensary counter for cannabis products.

“They are masking the true nature of the sale, because you are purchasing a voucher. And if I can use my credit card in a dispensary to purchase a voucher, why can’t I use it to purchase cannabis directly?“ said cannabis consultant Lance Ott.

Even worse, the intermediary firms providing the vouchers have been known to suddenly disappear, leaving the dispensaries in the lurch without access to thousands or hundreds of thousands of dollars. Sometimes this occurs because overseas correspondent banks discover that the businesses are misdeclaring.

“You have miscoded applications. You have a lot of offshore business out there which is just ridiculous. They are charging these folks 5-10% per transaction. That is highway robbery,” Ott warned.

California’s treasurer, John Chiang, moved briskly when the referendum result came in. Within days of legalisation he commissioned a 16-member working group, which held a three-hour meeting on Dec. 19 to hammer out new rules on marijuana and banking. The state promised that these would be in place in time for the rolling out of licences in 2018.

A first step, now already in place, was a local law allowing existing marijuana businesses to pay taxes in more places. Officials also wrote to President Trump to seek clarification on access to banking for recreational dispensaries. California’s tax and fee collection agency, the Board of Equalization, is building more cash handling facilities, reversing a 2014 motion to move fully to electronic payments; although staff told public hearings that they dislike working with large amounts of cash.

In Nevada things are developing more gradually. Governor Brian Sandoval set tax rates and created a task force on the issue, which will begin meetings this month. Massachusetts seems to be pushing in the other direction entirely from California, with the local governor, Charlie Baker, delaying marijuana retailing by six months to mid-2018 via a recent state bill. Maine’s legislature is debating a bill that would set a deadline for the publication of business licensing rules for October, but bar businesses from opening their doors until February 2018.

Unless the Federal government makes a decisive ruling on the drug, 2017 looks set to be a year where state legislatures craft ad hoc solutions, seeking to create conditions that reduce physical risk and leave fewer loopholes for fraudsters. Whether or not these will work is hard to predict ahead of time, but the fact is that whatever the hassle of paying bills and banking profits, budding entrepreneurs are unlikely to be deterred. Demand is as high as ever, and there’s money to be made.

Author profile: Alexander Manda is a London-based journalist. He has been writing about finance, economics and energy for 20 years.

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