Fearful of Prosecution, Banks Still Shunning Marijuana Dispensaries
by Josh Long - June 16, 2014
Editor’s Note: This story is the second part in a series of articles and video documentaries that surveys the state of the legal marijuana and hemp industries. To read last week’s article, go here.
DENVER—On April 14, the day before the deadline for filing taxes with the Internal Revenue Service, Medicine Man’s bank shuttered its account.
“So then we had a backup bank because we always do. And so we moved all our money to the new bank and they closed our account," said Andy Williams, president of Medicine Man, a large dispensary in northeast Denver for medicinal and recreational marijuana. “So paying our federal income taxes this year was quite a struggle."
American banks want little to do with the burgeoning industry for recreational marijuana in Colorado, forcing businesses such as Medicine Man to deal in cash and implement rigorous security measures to protect its property and people.
Banks aren’t just afraid to do business with marijuana dispensaries. Consider the Nevada Cannabis Industry Association, whose account with Citibank was closed in just one week, said Leslie Bocskor, founding chairman of the association. The reason? “The association had cannabis in the name," he observed.
“Imagine having 50 employees or more … and having to pay payroll every two weeks. It’s a lot of work. We have a $1 million bill coming up for our latest expansion. How the heck do I pay that? Using a suitcase of money?" Williams asked during an interview in his office at Medicine Man, a sprawling dispensary that features a massive room for growing plants called “The Green Mile."
“That’s not a very safe way to do it. It’s a real public safety issue not just for me but for you too. If I go out to pay my tax bill and I have a briefcase full of cash and somebody tries to rob me and you’re nearby, now your life’s in danger too," Williams said. “We take a lot of steps for security here, but the perception in the criminal mind is that we’re just swimming in cash and we’re an easy target … perception is reality when it comes to that."
Risks for Banks High Despite DOJ, FinCEN Guidance
Marijuana remains a Schedule I drug under U.S. law, subjecting banks to criminal prosecution for doing business with cannabis operations.
In February 2014, the U.S. Department of Justice and Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury issued guidance, seeking to give banks some assurances that they could lend money to marijuana operations that are in full compliance with state marijuana laws.
One banking executive explained why the industry is still scared to associate with marijuana businesses.
“Ironically the answer is on page 2 of the February 14 Department of Justice memo, which basically says banks are still subject to prosecution for violating federal law," said Robert Rowe, vice president and senior counsel of the American Bankers Association’s Center for Regulatory Compliance, in a phone interview. “All the bankers I have talked with about the guidance have said that they still feel that because the risk of prosecution is too great they are very reluctant to offer services to any marijuana-related business."
The Justice Department points out financial transactions involving marijuana-related proceeds can form the basis for prosecution under the Bank Secrecy Act, the money laundering statutes and the unlicensed money transmitter statute.
Rowe said the risks facing banks are not confined to lending money to businesses that grow, sell and distribute cannabis.
“One of the questions that comes up frequently is, what happens if we have a customer who may have been a customer for a number of years who goes to work for a marijuana-related business and now their payroll is being generated by technically illegal funds? What do we do with that customer? Or what happens if one of our customers applies for a mortgage loan and her husband is employed by a marijuana business?" Rowe asked.
“And then the most commonly asked question is, how do you deal with a customer who is a commercial real estate developer who may have a number of commercial properties that they have put together over time and it turns that out one of the tenants on one of those properties is a marijuana business?" the banking lawyer continued. “Does that mean that the collateral for the loan is at risk because it’s subject to the asset forfeiture rule under the Department of Justice rules and regulations or do we now have to worry about the payments on the commercial loan because it’s coming from a tenant who is engaged in the marijuana business?"
Banks are choosing not to associate with marijuana businesses, Rowe said, because the risks are too great. For instance, he cited guidance from FinCEN that would place the burden on financial institutions to verify marijuana dispensaries are not serving people under the legal age.
“When I talk to bankers, the assumption is that the only way you could even begin to come close to complying with that requirement would be if you had an embedded employee who was at the business 24/7 and even then you are not going be guaranteed that you are going to have 100 percent compliance," he said. “That’s just one example. But there are eight different steps that the bank would then become required to oversee the business to make sure that they are not engaged in anything that would run afoul of the federal guidelines."
FinCEN said banks considering offering services to marijuana-related businesses should undertake the following steps:
· verify with state authorities that the business is licensed and registered;
· review the license application and related documentation;
· request from the state licensing enforcement authorities available information concerning the business and related parties;
· develop an understanding of the company’s normal activities including the types of products that are sold and customers who are served;
· monitor publicly available sources for adverse information associated with the business and related parties;
· monitor suspicious activity;
· and update information obtained as part of the bank’s due diligence.