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.

"There aren't many opportunities to do what we do without running a cash business," says Ott, who signs off his emails with a "High Regards" and says he has taken marijuana for medicinal purposes. "We wanted to give people the option of operating their businesses in a different way."

Davis, the Seattle grower, says he devised a strategy to get access to banking services and to trick banks into granting accounts. The approach hinges on revealing as little information as possible.

"When the bank asks you what kind of business you're going to run, you should say, 'We're not sure yet, but we know we're going to make money,'" says Davis, who teaches classes on how to run a cannabis business. "It's not lying, but it's not entirely telling the truth, either."

Davis also suggests that any operation doing business as a pot seller should be set up under a holding company with a name that doesn't refer to reefer at all."Banks don't require that you tell them what the DBA is, so if your parent company is something like, 'World Corp.,' you should be safe," Davis says. "If you go in there with words like 'cannabis' or 'marijuana' in your business title, the bank is going to dismiss you right away."

But Davis' students may want to consider the potential flaws in this strategy.

For starters, even the most rudimentary Know Your Customer policies should allow banks to sniff out half-truths and outright bogus information that a would-be client supplies about its basic operations.

Davis says he understands that if banks were to find out the true nature of these businesses, they could close the accounts immediately. Experts say banks potentially could do much worse-blacklisting certain business owners, filing Suspicious Activity Reports with the Financial Crimes Enforcement Network or pressing fraud charges. After all, banks themselves are at risk of running afoul of regulators if they allow themselves to get duped by a customer.

But at this point in drug-legalization history, Davis sees few alternatives for marijuana sellers who want access to financial services."Right now, there's just no way to do this if you're up front," he says. "Until the feds do something, until banks follow suit, we're stuck."

Davis and other marijuana entrepreneurs could be waiting a while for resolution to the issue. Though the Obama administration says it will not bring federal charges against sellers complying with laws in their own states, the Treasury Department has not yet clarified guidelines for banks as to what they legally can do for businesses in this sector. (Treasury officials declined to comment for this story.)

In November, a Colorado congresswoman introduced new federal legislation that would allow states to pass their own laws on controlled substances. But the bill has been stuck in committee since then, and there have been no indications from the federal government that changes to the Controlled Substances Act are imminent.

So the growing acceptance of marijuana as a legal substance, at least in some states, continues to complicate the compliance picture for businesses attempting to stay on the right side of state and federal laws.

Without some sort of clarification, the ABA's Rowe says, banks will continue to eschew would-be customers in the marijuana business.

And for marijuana sellers seeking a greater sense of legitimacy, and perhaps also for banks eager to find new sources of growth, that's just a drag.


Matt Villano is a freelancer. He is based in Healdsburg, Calif.

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