Last week, Colorado became the first place in the world to legally sell regulated and taxed marijuana for adult recreational use. Despite the winter weather, long lines and heavy demand led some stores to jack up their prices or even sell out of product. The early success has elevated expectations for a new “green” economy, with a projected market value of $10.2 billion by 2018, according to Arcview Market Research.
But one crucial detail threatens to hold the industry back.
Because the federal government still classifies pot as a dangerous drug, corner cannabis stores and cultivators cannot secure access to traditional banking services, and do a shocking amount of their business in cash. Banks are reluctant to work with pot-related businesses, out of fear that the government will prosecute them for laundering illegally obtained money. This heightens the potential for crime at pot shops, imposes heavy costs on businesses seeking legitimacy, and could cripple the industry just as it gets started.
“I run a state-approved business, and I don’t have the ability to walk into a bank and open a bank account,” business owner Alex Cooley told Salon. Cooley’s Solstice Grown is the first legally permitted cannabis production facility in Washington state, and he sells to multiple distributors. Cooley’s story is familiar in the industry, where everyone is a phone call away from losing access to banks. Solstice had an account with Boeing Employees Credit Union for several years, under what Cooley described as a “don’t ask, don’t tell” arrangement. But when the credit union read about Cooley’s work to become a permitted cultivator, and his advocacy for the state initiative that legalized cannabis for adult use, it canceled his account. “We operated, by their own description, ‘an exemplary account,’” Cooley said. “It’s frustrating, because they were saying to us, ‘we found out about you because you’re trying to be legitimate. So now we’re going to close your bank account.’”
Almost every aspect of a business is affected by a lack of stable access to financial services. Customers cannot pay with a credit or debit card. Shop owners have nowhere to store paper money except in safes or under their mattresses. They cannot pay employees through normal payroll services. They cannot access a line of credit to expand their business. Running a marijuana shop often resembles a bygone era of trudging around dollar bills to pay off creditors. “One of the most memorable stories was about the owner of a medical marijuana store, who walked into a state revenue office to pay his taxes with $40,000 in cash in a big sack,” said Rep. Denny Heck, D-Wash., who is working in Congress on a fix for the banking issue.
Financial institutions don’t want to run afoul of the Anti-Money Laundering Act, which can charge fines of up to $500,000 per transaction for working with companies who sell illegal products. Though Colorado and Washington have been cleared for adult recreational use sales, and 21 states (plus the District of Columbia) have legalized pot for medicinal use, marijuana remains illegal under the federal Controlled Substances Act. Even a state-owned bank, which one Washington lawmaker has proposed, would have to abide by federal banking laws. The discrepancy between state and federal law puts financial institutions at risk of money laundering prosecution, and they want precise assurances before assuming that risk. “They want the safe harbor to be so abundantly clear,” said Rep. Heck. “But at the end of the day, we want banks and credit unions to be excellent risk managers.”
The irony here is rich. A year ago, British-based bank HSBC was fined $1.9 billion for actual money laundering for Mexican drug cartels, suspected of killing thousands of innocent civilians. HSBC had no problem doing very profitable business with the illegal drug trade, and they basically got away with it, with no criminal prosecution and a paltry fine. But in Washington and Colorado, you have legal businesses operating within state law, and no bank will touch them. “I guess they don’t think we’re big enough dollar-wise for them to risk it,” said Alex Cooley of Solstice. “But it’s crazy, in Washington, Bank of America is the state bank. They’ll take our tax revenue from the state but they won’t take our money.”
Bank reluctance also involves paperwork. Under current law, banks must submit suspicious activity reports (or SARs) to regulators every time they encounter a transaction that may involve money laundering. Even after eliminating the possibility of prosecution over legal marijuana shops, banks may still have to file SARs. “Banks want to get rid of reports anyway,” said Rep. Heck.
All-cash operations expose pot shops as a robbery target, as well as the vendors they pay in dollars, and even the customers, who must carry cash to purchase the product. Whilestatistics on crime around marijuana businesses are mixed, working in cash obviously raises the potential. “I’m less safe and my staff is less safe by people thinking and believing that we may have $30,000 in cash on us,” said Alex Cooley. “It’s not fair to put me in harm’s way because banks are afraid of working with us.”