Drug Laws Ease but Bankers Still Say 'No' to Dealers

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As entrepreneurs go, John Davis is pretty much run of the mill. He strives to keep his customers happy. He wants to grow profit. He pays his taxes.

Perhaps the one remarkable aspect of his Seattle business, the Northwest Patient Resource Center, is what it sells: marijuana.

As a medical distributor of the drug, Davis has been in business legally for several years already. But it's still hard for an outfit like his to embark on a solid banking relationship.

Even with Washington state's recent vote to legalize marijuana, it doesn't appear that navigating the banking system will get any easier for Davis or other purveyors of pot. On the contrary—almost inexplicably, to some—the situation looks to be getting increasingly difficult, with banks essentially vowing now not to lend to anyone in this line of work.

Bankers (or at least the few who would even discuss the matter on the record) say their stance on dealing with dealers is a matter of compliance: although 18 states allow medical marijuana and new laws in Washington and Colorado legalize modest quantities of the drug in general, growing, possessing or using the substance is still a violation of federal law—a code no bank wants to violate.

"Pardon the pun here, but the issue is that banks are worried about their reputations going up in smoke," quips Rob Rowe, a vice president and senior counsel at the American Bankers Association. "All it takes is one U.S. attorney who decides to enforce federal laws, and they can go after any bank that's banking these businesses as an accomplice."

One of the main hurdles for would-be bankers to marijuana businesses is Section 841 of Title 21 of the United States Code. Also known as the Controlled Substances Act, the specifics of this law ramble on for pages. But the statute quite clearly outlaws marijuana at the federal level, and enumerates punishments and penalties—including imprisonment and fines—for those who traffic the substance, and for their accomplices.

This is the law Wells Fargo spokesman Jim Seitz has in mind in explaining the San Francisco-based banking giant's decision to refrain from doing business with pot dealers even in states that have decriminalized the drug.

"While marijuana legalization initiatives were recently approved in Colorado and Washington, and medical marijuana dispensaries are legal in some states, the sale and use of marijuana is still illegal under federal law," Seitz says. "Our policy is based on applicable federal laws and our own assessment of our responsibility."

Engaging in business with marijuana sellers could invoke the wrath of not only the Drug Enforcement Administration, but also the Federal Bureau of Investigation and perhaps even the Department of Homeland Security.

"[The] manufacture and distribution of marijuana is a felony," says Ronald Friedman, a former federal prosecutor who co-chairs the white collar criminal defense, regulatory compliance and special investigations practice group at Lane Powell, a Seattle law firm.

"Anyone who aids, abets, or facilitates this activity, by loaning money or providing financial services, is open to federal prosecution," he says.

Because marijuana businesses are considered high-risk for money laundering activity, even banks with rigorous anti-money laundering procedures are steering clear so as to avoid additional scrutiny from regulators.

The freeze-out has left pot peddlers in a precarious position. Operating mainly on a cash-only basis, some argue, creates additional paperwork to comply with state tax boards and makes them a target for theft.

Aaron Smith, executive director of the National Cannabis Industry Association in Washington, D.C., says that at a time when the marijuana industry has hailed recent legalization measures as the first steps toward legitimacy, a de facto boycott on the part of banks has forced the industry in many ways to stay in the shadows.

"You have folks who want to be out of the shadows, and they're now being encouraged or forced into cash-only businesses," Smith says. "No other legal industry finds itself in that situation today. None."

Some marijuana entrepreneurs have skirted the status quo with creative strategies. On Dec. 31, a pot-friendly cafe opened in Del Norte, Colo., selling coffee and drug paraphernalia out of one facility leased as a business property, while distributing free marijuana from another, neighboring facility leased as a residential space.

In Denver, meanwhile, an area attorney has opened a members-only establishment, called Club 64, that doesn't sell marijuana but invites patrons to bring their own, getting around the one-year wait for establishments that want to be among the state's first legal pot sellers. (The club is named for the new state measure, Amendment 64, that legalized the possession of marijuana in small amounts for recreational use.)

 

Some other entrepreneurs are trying to directly bridge the gap in financial services available to cannabis businesses.

Guardian Data Systems, a merchant services firm based in Vancouver, Wash., sells a credit-based technology that's designed specifically for marijuana sellers. Owner Lance Ott describes the product as "PayPal for the cannabis industry," and says that entrepreneurs like the tool because it gives them a way to transact business without handling as much cash.

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Comments (1)
What a bunch of crap. Did you see the punishment doled out when
Posted by pikespeakseanatgmail | Saturday, February 02 2013 at 9:49AM ET
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