By Jason Marcuz
Tim Cullen of Colorado operates a genuine marijuana business which earned him millions of dollars last year. He is, however, unable to find a bank willing to take the millions. In the last six years, he has gone through 14 different checking accounts. Just recently, a local bank shut down his accounts, including a college savings fund for his young son.
Starting next year, the most populous state in the US will allow licensed recreational marijuana sellers to start cashing in on this multi-billion-dollar industry. California voters recently passed Proposition 64 which makes it legal for individuals to grow and use marijuana for personal use.
Marijuana remains illegal under federal law
Federal law still prohibits credit unions and banks from taking pot money. In Colorado, everyone involved with the state’s legal marijuana industry encounters banking problems. State tax collectors receive large wads of banks notes, businesses cannot access credit and customers have to pay using cash. Banks simply do not want to work with any pot related businesses.
Back in 2014, the Obama administration provided strict guidelines allowing banks to deal with pot-related businesses. Banks are allowed to serve marijuana-related businesses that adhere to state laws. Even then, no banks are willing to deal with such businesses for fear of the threat of criminal cases. Banks are also unwilling to invest resources needed to comply with the Obama guidelines.
Many bankers claim that the current environment, which involves strict checks and examination of bank activities, does not allow them to take on such a risky venture. And they consider marijuana business as risky.
This is not new to the marijuana sector in California. The industry has had to grapple with this situation for years, even though nationwide sales were at $5.4 billion in 2015.
There are currently 23 states that allow the use of medical marijuana with four among them allowing recreational use. Later this fall, more states will subject their residents to a vote that seeks to legalize adult use of marijuana. These states include Nevada, Arizona, and Massachusetts. In Vermont, the Senate has already passed a bill that does this. Most of these states will be looking to Colorado for banking solutions. However, the state has few solutions to offer. The situation is unlikely to change until there is a federal solution.
Operating a cash business
With banks shunning the pot industry, many in this sector operate on a cash basis. Business owners can bank their money. This poses a challenge when they have to pay operating expenses but cannot write a check. Everything else including salaries, taxes, and bills, are all paid in cash. Clients are unable to use debit or credit cards to pay for purchases, and there is no possibility of getting small business loans.
There are plenty of other challenges encountered due to lack of banking access. One of the first marijuana retail outlets in Colorado, the Colorado Harvest Company, has three stores at different locations. Each store is strategically located very close to cash machines. This is to enable customers to take out cash they need to transact at the store.
And each day, an armored car stops by each of these stores to pick the days revenue. This is not the only pot business that is affected. More than 40% of Colorado marijuana businesses lack access to banking services. A local congressman is now pushing to have banks accommodate legal pot businesses.
According to one of the pioneers of the pot industry in Denver, there are signs that more marijuana businesses are accessing banking services as fewer now pay taxes in cash. Even then, they are only able to access very limited services, and they tend to retain as much cash as they can.
Challenges posed by cash business
All this cash lying around makes marijuana businesses potential targets for crime. According to Denver Police, over 200 burglaries have been reported at marijuana businesses. Other crimes have also been reported, including shoplifting.
The state is also not able to properly track the finances of licensed marijuana businesses for tax enforcement purposes. A lot of pot businesses create shell companies which they then use to access banking services. This appears to some people as a form of money laundering.
Pot business owners experience certain challenges when doing their accounting. Without important documents such as invoices, bank receipts, and others, it is difficult to prepare proper financial reports. And even then, many banks still close bank accounts if they discover their owners are in any way affiliated with the pot industry. Even transmitting funds that are associated with the marijuana industry is illegal.
What solutions are available?
Problems encountered by the cannabis industry would disappear if the US congress were to remove marijuana from the list of most dangerous substances. Proper legislation, complete with rules and regulations, will make it easier for players in the industry to operate efficiently and gain access to banking services.
There is at least one bank in Massachusetts that is offering services to the legal marijuana sector. Century Bank and Trust is a family-owned bank in Massachusetts that openly provides services to medical marijuana outlets. The bank has established a cannabis section in its cash management sector and currently serves nine cannabis related businesses in Medford, MA.
Apart from guidance from the regulators, advocacy is helping create awareness about the need for proper banking services in this sector. Tax officials in California, for instance, have floated the idea of a state-run bank to oversee the marijuana industry. Credit Unions in states like Vermont are open to serving a lot more than their current single pot dispensary. Currently, though, they offer only depository accounts.
New services are also emerging that are aimed at eliminating the cash transactions. A private company has been formed that is transferring money electronically between marijuana businesses and their customers. This firm currently operates in Oregon and Washington states. These and other such solutions are providing much-needed services and relief to marijuana business owners all across America.
