Medical and recreational marijuana businesses are having trouble with the green they make: not their product, but their profits. Many financial services companies are prohibited from dealing with cannabis-related businesses because of federal regulations. Others choose not to because of the controversy that continues to rage about marijuana legalization.
The Department of the Treasury and Department of Justice issued new “guidance” to banks in February about opening deposit accounts for marijuana-related businesses. The guidance clarifies how the agencies will enforce the Bank Secrecy Act on financial institutions in states where medical or recreational marijuana has been legalized. Historically, a bank must perform due diligence to know their customers and determine if deposits and withdrawals are related to criminal activity. If banks suspect criminal activity, they were required to file a Suspicious Activity Report. If the bank determined that the account was laundering money or dealing with drug money of any sort, they were required to close the account.
The new policy states that a bank choosing to open an account for a state-licensed marijuana dispensary or grow operation must still file SARs on those accounts so federal law enforcement can track the activities, but only on a periodic basis instead of filing on every transaction. The bank must also perform due diligence to make sure the dispensary or grow operation is properly licensed and not laundering money for criminal enterprises.
The additional paperwork is scaring off banks and credit card processors, said Rachel Gillette, Boulder attorney and executive director of Colorado NORML, state chapter of the National Organization for the Reform of Marijuana Laws.
“Federal banking guidance didn't make them feel comfortable, apparently, because they're still not taking accounts,” Gillette said. “NORML is a user advocacy organization, but the banking issue is one that affects consumers. They have to go into these establishments carrying large quantities of cash. So, it's in everyone's best interest to solve the banking issues.”
Mortgage companies and commercial real estate lenders are also avoiding cannabis deals, said Chris Courtland, mortgage consultant in Colorado Springs. Lenders fear that if federal law enforcement agencies seize the property under civil asset forfeiture laws, they will be unable to foreclose and collect on the mortgage. The lender would then have no recourse to collect on the loan.
Wells Fargo, FirstBank and Vectra bank have already told commercial landlords who have existing leases with marijuana dispensaries that they must evict those tenants before refinancing, according to an article by David Migoya, published Feb. 18 in The Denver Post.
“That's why a lot of these marijuana guys are looking for stand-alone buildings,” Courtland said. “The nice thing is you're creating more business for the builders.”
Courtland is working with a hedge fund in San Francisco to figure out if it's possible to make financing available for real estate and equipment leasing for properly licensed cannabis businesses. “The funds brought it up to us when we mentioned we were in Colorado,” he said. “The CEO of the fund has been dealing with the issue in California, too. There's not a lot of organization in being able to lend to these businesses yet.”
Brokerages are also staying away from the pot business – 401(k)s and other retirement accounts are not available to marijuana businesses or their employees. “Our position has been that since it's still federally illegal, it's considered money laundering,” said Leasha Larsen, Southern Colorado regional leader for Edward Jones Investments. The new banking guidance is not likely to change the policy of these broker-dealers because of the political ramifications for the national companies. “We evaluate each account opportunity on an individual basis,” said Jackie Knolhoff, Edward Jones home office public relations spokeswoman in St. Louis, Mo. “Because the state and federal governments have a difference of opinion about the use of marijuana, this is a situation that we would most likely avoid.”
“The bottom line is all these problems can be solved if the federal government would stop covering their ears and eyes, and reschedule or de-schedule marijuana,” Gillette said. “That simple act would solve all these tricky areas.”