LAS VEGAS — Despite unprecedented levels of support for marijuana legalization in the United States, businesses that work with this budding industry repeatedly voice the same complaint: the inability to obtain and sustain banking relationships because pot is illegal under federal law.
During the recent Marijuana Business Conference here, stereotypes were busted left and right. While the first images that come to mind when hearing "marijuana business conference" might be long hair and tie-dyed clothes, the well-dressed crowd easily could have fit in at any credit union get together.
George Jage, president of Marijuana Business Media, which hosted the conference, pointed out the industry has existed for many years, "but the cash went to gangs, cartels and other criminals." "As it converts from a black market to a white market, the speed of acceleration is five times what is normally seen in startup industries," Jage said. "It is a matter of when, not if, financial institutions do business with the industry, especially with the companies that are not touching marijuana products."
To the latter point, Jage noted Marijuana Business Media is an event producer for the industry, not a grower or distributor — yet it has had to change merchant processors. He suggested CUs should look to break through the taboo and recognize there are many ancillary businesses that represent opportunities.
"This whole industry is moving forward as fast as it can. There is a big opportunity, but the boat anchor is the banking industry," he said. "Marijuana businesses are finding solutions as best they can, but they should not need to because we have a banking system in this country. There is a huge opportunity for credit unions to break through and help with cash management challenges."
If nothing else, Jage continued, CUs in states where recreational marijuana use has been legalized — Colorado, Washington, Oregon and Alaska — as well as the 23 in which medical marijuana use is allowed, should recognize there is a safety issue in their communities. "There is a need because these business owners have so much cash," he said. "They are trying to pay tax bills with cash. Gradually some financial institutions are realizing the people in the business are respectable. I would like to see credit unions get involved as they typically are more member-focused."
One vendor at the conference suggested financial institutions are "afraid" of the regulatory issues related to serving these businesses.
"There are some pockets of financial institutions that will take the business. At least one credit union is banking one of my clients," said Gordon Gates, managing partner for Cannabiz Accounting, Huntington Beach, Calif. "Credit unions need to know this business is not about money laundering. There will be work due to all the cash, and the credit union will have to fill out Suspicious Activity Reports."
There is momentum toward change on the banking side, according to Gates. "All of this cash and the problems the follow — politicians are seeing they need to relax the laws."
The marijuana industry even has its own venture capital firms, several of which were exhibiting at the conference. One example is New York City-based Rootdown Capital, which says it has 10 years' experience in providing alternative financing to canna-businesses.
Alan Nussbaum, Rootdown Capital's national sales executive, said many financial institutions recognize the opportunity in the marijuana industry, but they still have problems looking past the risk.
"There is a lot of risk in funding any business, especially one with many changes to come. It is prudent to know where you are investing," he said. "We work with companies to find better solutions."
Credit unions could be the answer to the problems, Nussbaum said, especially if several companies get together and form a credit union, such as Fourth Corner CU, a new Colorado state charter aimed at serving the legal marijuana industry that reportedly will open for business in January.
Fincen Guidance Helpful, But...
In February the Financial Crimes Enforcement Network issued guidance for CUs and banks looking to serve marijuana businesses. The guidelines were meant to encourage FIs to transact with the industry provided businesses met certain criteria — but many say this step was not enough.
Even before the guidance, FIs were filing suspicious activity reports that related to marijuana businesses. The new instructions created three categories of marijuana-related reports. FIs were instructed to file a "marijuana-limited" suspicious activity report in instances where the customer is not thought to be violating state law or any federal law enforcement priorities, such as the diversion of pot into states that ban the drug.
More recently, the Office of the Comptroller of the Currency said banks that do business with the marijuana industry and follow the Fincen guidance should be able to keep clear of the conflict between state and federal law.
Lance Ott, principal, Guardian Data Systems, Vancouver, Wash., was one of the 72 speakers at the Marijuana Business Conference. As he took the stage in a packed auditorium he said, "Wow! There are a lot of people here. I figured this would be a small workshop."
Ott told the audience the Fincen guidelines have been helpful, but noted many marijuana-related businesses still have having trouble getting basic accounts, much less merchant accounts that would allow them to accept debit and/or credit cards.
"There are a number of red flags to watch out for, including deposit velocity and offshore accounts," he told attendees. "If the processor is offshore, it is illegal and can result in criminal money laundering charges."
The financial services industry is "waiting to see if the Fincen guidance is enough," Ott continued, adding, "there is nothing in the guidance that protects financial institutions from future prosecution."
As for current options available to canna-businesses: "Cash is still king," Ott said, which he quickly noted is "problematic from a public safety perspective" due to the risk of robberies and burglaries. Dispensaries, he said, expect to be robbed every two years. "Kiosks are becoming more popular," he told the crowd, "as are closed loop cards a la Starbucks."
Ott told CU Journal and that all players in the marijuana industry need to work together to bring meaningful change.
"We have come a long way in a short time, but there is more work to be done, which is why there are so many people here at this conference," he said. "Merchant services are what these businesses want. There have been some processors that have said they are willing to load funds on closed loop cards. Credit unions could get involved in closed loop programs, as long as they have knowledge of the risks. "As long as they follow BSA and the Fincen guidelines, they should have no concerns," Ott added.
Banking Options Remain 'Elusive'
Rachel Gillette, executive director of NORML, the National Organization for the Reform of Marijuana Laws, also is an attorney who practices business law. She represents many marijuana business tax cases before the IRS.
Asked what would get more credit unions involved in offering services to canna-businesses, she said, "The short answer is to change the classification of marijuana under federal law. It currently is a Schedule 1 controlled substance, and that is what makes it very difficult for marijuana businesses to get banking relationships. Those that do only take on a few accounts because they do not want to accept too much risk."
This atmosphere "remains a continuing problem," Gillette said, "even in light" of the February guidance from Fincen. "Even those who do business with the marijuana industry get their accounts shut down. I have heard of accounts for employees of marijuana businesses getting their personal accounts shut down."
Options for canna-banking remain "elusive," Gillette said, adding, "Until the federal government amends the Controlled Substances Act, it will not get better."
Brian Arevalo is executive director of NORML in Las Vegas, where Nevada voters overwhelmingly approved medical marijuana in November 2000. More than 14 years later, however, dispensaries by and large do not have financial accounts.
"It is a very frustrating system," Arevalo said. "Most have to make do with short-term solutions. At the end of the day they want to be legitimate and conduct business legally."
