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What do we do with all the Green?
Legalization of marijuana in 28 states across the US has caused off-grid pot growers to jump for joy, but ongoing issues with depositing the large amounts of cash generated from the business, (and uncertainty on Trump’s stance) has put a damper on the industry.
Pot growing requires a lot of power and is therefore an expensive off-grid venture – cannabis is something that needs regularity, 12/12 light without interruption and regular temps – it is hard to create a stable indoor environment without large solar panels and batteries to guarantee access to power. While new technologies to assist in the process are being developed by NOW Corporation, these wind turbines, called exoPower, are still in the trial stages.
Although difficult, off-gridders like Hezekiah Allen, who grew up in rural Humboldt County and tended a small medical marijuana farm in Northern California, managed to run a profitable business for years, but was forced to bury his cash in the same way many cannabis corporations did in the past.
“I had three different safes buried on a 200-acre parcel,” Hezekiah said. “Fifteen steps from the oak tree, a lot like a pirate. I had a little map. Pretty inconvenient and not the best cash management system. Bankers on the north coast talk about mildewy money. They can tell it’s been buried.”
Times have changed. Hezekiah left his growing operation to serve full time as an advocate for marijuana farmers, and now works to get their profits out of the ground and into banks as the executive director of the California Growers Association.
“We don’t want to lie anymore, we don’t want to have to hide what we are doing,” Hezekiah said. “We want to be open and transparent about what we are and want to do. [Banking] is an area where there are some really bad behaviors being reinforced.”
Although California voters approved the legalization of recreational pot, these businesses are still faced with one major unresolved issue: banking. As marijuana is still illegal under federal law, it is also illegal for banks to work with any marijuana-related businesses. This is forcing the majority of the state’s legal cannabis community to continue to operate in the shadows, despite the state legalization.
While the Obama administration in 2014 issued stringent guidelines that allow banks to pot-related businesses if they are following state laws, most banks have not been willing to risk the lingering threat of criminal prosecution or spend the resources it takes to comply with the additional rules of business.
Rob Rowe, vice president and associate chief counsel of regulatory compliance for the American Bankers Association, said it all comes down to risk assessment – and with the added uncertainty around Trump’s stance on the matter, it doesn’t seem like the outlook will improve any time in the near future.
“Bankers have said that in the current environment, with the enforcement and examiners looking at everything bankers are doing, they aren’t really predisposed to take on anything risky,” Rob said. “And banking a marijuana business is risky.”
The medical marijuana industry has grappled with this for years in California and elsewhere. Now, entrepreneurs and conglomerates going after a slice of lucrative recreational pot sales will have to confront the banking challenge.
Costs of running business
No banking access means businesses must pay employees, bills and taxes in cash. Clients are unable to pay using credit or debit cards, and there is no way to process business loans or real estate mortgages. The company effectively has no paper trail – no official records to build credit or establish a financial identity. And these businesses – whether they be licensed recreational sellers, medical marijuana farms, or trade associations – are forced to stash a lot of cash, making them a target for violent crime.
Michael Julian, CEO and president of MPS Security, which caters to marijuana-related businesses, said business owners are forced to get creative with finding places to hide their money.
“They have tens of thousands, if not millions, of dollars,” Michael said. “And it’s not as secure in a vault in their establishment, in a closet at home, in their mattress, in the trunk of their car, whatever.”
A recent survey by the California Growers association found 75 percent of its members don’t have a bank account, and the ones who do have had three or more accounts closed in the course of doing business. A 2015 survey by Marijuana Business Daily of more than 400 cannabis professionals nationwide also found 70 percent of businesses that deal directly in marijuana operate without traditional banking services. As for firms that support the business but don’t handle the plant, 49 percent don’t have bank accounts.
The long-running conflict between the banks and the industry has been ongoing since 1996, when California became the first state to legalize medical marijuana. The conflict ballooned when recreational pot sales started in Colorado and Washington in 2012, but with more and more states entering the recreational market, including California, Massachusetts, Nevada, Maine, Oregon, Alaska and the District of Columbia, the problem will be compounded. Adding in the states that allow medical marijuana brings the total to 28 states, plus D.C., with cannabis laws on the books.
According to experts, the only real solution is for Congress to remove marijuana from the list of Schedule I narcotics, putting the drug on par with an FDA-regulated medicine rather than heroin or cocaine. Until that happens, state-legal marijuana-related businesses are treated under the letter of the law the same as cartels trafficking methamphetamine.
Banking on marijuana
In 2013, the Obama administration released a document called the ‘Cole Memo’, which stated it would generally not prosecute marijuana businesses that were following state law and didn’t engage in certain activities, such as selling to children, crossing state lines or funding criminal organizations. In a separate memo, months later, the administration modified the way banks conducted business with state-legal operations, making it easier under new guidelines from the Financial Crimes Enforcement Network (FinCEN), the federal agency that monitors banks for fraudulent activity, such as money laundering. But banks were also reminded that marijuana remains illegal under federal law and is subject to prosecution.
Under the guidelines, banks serving marijuana-related businesses must file suspicious activity reports, or SARs, so the transactions are transparent and can be tracked by the government. Three kinds of reports dictate the level of suspicion against the businesses: ‘Marijuana limited’ SARs indicate the business is following state law and no red flags suggest it is breaking any other laws; ‘marijuana priority’ suggests the business may not be following other laws and may be involved in suspicious activity; and ‘marijuana termination’ alerts to a bank account that has been shut down for suspicious activity.
The SARs must be filed when an account is opened and then quarterly after that, listing every transaction that has been made. Banks are also told to investigate and track marijuana businesses they are serving, making sure they are not violating any guidelines.
The American Bankers Association stated on its website that the level of scrutiny was “far beyond” that expected of any normal banking relationship.
“Because of the standards in place, if we do this we have to have someone almost embedded in the customer 24/7, and we’re not 100 percent certain we saw everything we need to see,” Rob said. “We’ve got to have such close tabs and use so much resources to closely monitor everything with these businesses, it’s just not economical.”
However, according to data from FinCEN, some banks have taken on the risk of working with marijuana-related businesses; in the first six months that the new guidelines were in effect, banks across America filed 502 SARs marked as ‘marijuana limited,’ according to Dynamic Securities Analytics statistics. During the same period, FinCEN received 123 ‘marijuana priority’ SARs and 475 ‘marijuana termination’.
Rob said banks generally keep quiet about it due to the perceived consequences of doing business with the volatile industry.
“Bankers will say that we know someone who is (serving a marijuana business), but it is the exception to a general policy, a one-off thing,” Rob said. “I’ve heard from dispensaries that say we don’t want to call attention to it because we had trouble getting an account and don’t want to lose what we’ve got.”
Mike Cindrich, an attorney who represents marijuana-related businesses and is executive director of the local chapter of NORML, a marijuana advocacy group, said there are ways around the banking ban on marijuana-related businesses – but he wouldn’t recommend them. One such way would be to set up limited liability corporations that are management companies providing a list of services, from payroll to accounting to bookkeeping to property management. The money from the marijuana business flows to the company – usually with a nondescript name that doesn’t disclose its ties to marijuana – and is deposited in the company’s bank account. This is technically money laundering, and illegal, but some companies have found success with the tactics. Others have been busted by banks and their accounts closed.
“When you start doing something that looks like money laundering, funneling cash from a non-profit to something that looks like an LLC, now someone is looking at felony charges,” Mike said. While he “sternly advises against it,” Mike said he could see how marijuana operators feel like they are being backed into a corner by the government.
“They’re not leaving the cannabis community with many options here,” he said. “It’s a complete nightmare for these businesses. People who don’t want to be legitimate, it’s very easy for them to not report this cash. If we want legitimacy and for these businesses to come out into the light, then we should allow full banking because it allows this money to be accounted for, taxed, tracked, traced. If this is something the feds really want to keep an eye on they’d change the banking laws altogether and make this happen.”
The cannabis industry has been suspicious of President Trump’s election, waiting to see if the new administration will address the growing legal marijuana market and how it conflicts with banking laws.
Trump voiced support for legalization but brought up some concerns about the drug during his campaign. He did not make it a major issue, and the industry believes Trump will focus on his bigger priorities – terrorism, immigration, the border wall.
Attorney General Jeff Sessions, the former Republican senator from Alabama who once said “good people don’t smoke marijuana,” is a bigger worry. As head of the U.S. Department of Justice, Jeff has control over how the government enforces federal law and could reverse the Obama administration’s willingness to look the other way as long as dispensaries followed state law.
The Attorney General said he would review the Cole Memo and commit to “enforcing federal law with respect to marijuana, although the exact balance of enforcement priorities is an ever-changing determination based on the circumstances and the resources available at the time.”
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