American banks want little to do with the burgeoning industry for recreational marijuana in Colorado, forcing businesses like Medicine Man to deal in cash and implement rigorous security measures to protect its property and people.

Josh Long, Associate editorial director, Natural Products Insider

June 16, 2014

9 Min Read
Fearful of prosecution, banks still shunning marijuana dispensaries

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."

Robert Rowe of the American Bankers Association

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.

Lawmakers move to solve marijuana banking quandary

In a May 8, 2014 letter to Sens. Diane Feinstein (D-Calif.) and Charles Grassley (R-Iowa), FinCEN director Jennifer Calvery said the purpose of its marijuana guidance was to “enhance financial transparency" but the “guidance has no impact on the application of federal criminal laws.

“Given law enforcement’s priorities with respect to marijuana-related financial crimes, some financial institutions may accept the risks associated with providing financial services to state-regulated marijuana-related businesses," Calvery wrote.

Last year, in an effort to solve the dilemma facing marijuana businesses that are in compliance with state laws, a pair of Democrats with the only two states that have legalized marijuana for recreational use—Reps. Ed Perlmutter of Colorado and Denny Heck of Washington—proposed reforms of banking laws along with a group of 16 other lawmakers. Eleven of the 16 co-sponsors hailed from Colorado, Washington and California, which was the first state to legalize pot for medical use 18 years ago through the Compassion Use Act of 1996.

Rep. Ed Perlmutter

Depository institutions and their employees could not be prosecuted solely because they provided banking services to a business covered under the legislation. Leslie Oliver, a former spokesperson for Perlmutter, said the bill was assigned to the House Financial Services Committee and the Judiciary Committee. Neither committee has the bill scheduled for a hearing, a current spokesperson for the congressman confirmed.

According to GovTrack, the legislation has just a 1% chance of being enacted.

"We need to address the public safety, crime and lost tax revenue associated when these legal and regulated businesses are operating in a cash-only system," Perlmutter said in a statement when the Marijuana Business Access to Banking Act was introduced. “We also need to provide financial institutions assurance that they can make their own business decisions related to legal, financial transactions without fear of regulatory penalties or criminal prosecution."




Colorado legislation still needs federal approval

In early May, Colorado lawmakers passed a marijuana banking bill that would allow state-licensed marijuana businesses to create uninsured financial cooperatives. Gov. John Hickenlooper signed the bill on June 6, although the local banking industry doesn’t think it will solve the problem.

Colorado Gov. John Hickenlooper

That’s because the cooperatives would need approval from the Federal Reserve before the state would issue them a charter, said Jennifer Waller, senior vice president at the Colorado Bankers Association. Waller said it’s not likely the Fed would grant approval due to the same anti-money laundering laws and other restrictions that prohibit banks from financing marijuana entities.

The State of Colorado doesn’t have the power to give marijuana cooperatives access to the financial system such as being able to conduct wire transfers and process credit cards because it is a creation of the federal government, she said in a phone interview.

The Colorado Bankers Association supports a change in federal law to solve the banking dilemma facing marijuana businesses. “It’s clear you could face federal prosecution if you bank the marijuana industry," Waller said.

Colorado, Washington governors seek relief

On May 23, 2014, Hickenlooper and Washington governor Jay Inslee wrote to federal banking regulators, requesting that they provide follow-up guidance to examiners and depository institutions.

“Banks and credit unions in Colorado and Washington are waiting for the Federal Banking Agencies to furnish the instructions given to bank and credit union examiners before deciding whether and how to provide banking services to state licensed recreational marijuana businesses," Hickenlooper and Inslee stated in the letter to Federal Deposit Insurance Corp. chairman Martin Gruenberg and other high-level banking officials. “In the meantime, product sales have begun in Colorado and will soon begin in Washington, exposing all involved to the significant risks of criminal activity associated with accepting, storing and transporting large quantities of cash that can be ameliorated by access to the banking system."

Dylan Donaldson, owner of Karing Kind, a recreational marijuana dispensary north of Boulder, Colorado, agrees that maintaining relationships with banks and processing merchant accounts remains a significant hurdle for the industry.

“That’s probably one of the biggest logistical challenges that this whole industry faces. We deal in cash a lot. It’s hard to pay bills. It’s hard to hold a bank account … It’s hard to process credit cards. It’s hard to do a lot of things if at all," Donaldson said in an interview outside Karing Kind. “Unfortunately, we haven’t seen the reform that we would have liked to have seen. The State of Colorado is trying to push co-ops through. But again those require federal approval and until the feds really approve something that the banks are comfortable with, it’s still going to be a logistical hurdle that every business in this industry faces. That’s still a big challenge and one that this industry desperately needs fixed sooner than later."

About the Author(s)

Josh Long

Associate editorial director, Natural Products Insider, Informa Markets Health and Nutrition

Josh Long directs the online news, feature and op-ed coverage at Natural Products Insider, which targets the health and wellness industry. He has been reporting on developments in the dietary supplement industry for over a decade, with a focus on regulatory issues, including at the Food and Drug Administration.

He has moderated and/or presented at industry trade shows, including SupplySide East, SupplySide West, Natural Products Expo West, NBJ Summit and the annual Dietary Supplement Regulatory Summit.

Connect with Josh on LinkedIn and ping him with story ideas at [email protected]

Education and previous experience

Josh majored in journalism and graduated from Arizona State University the same year "Jake the Snake" Plummer led the Sun Devils to the Rose Bowl against the Ohio State Buckeyes. He also holds a J.D. from the University of Wyoming College of Law, was admitted in 2008 to practice law in the state of Colorado and spent a year clerking for a state district court judge.

Over more than a quarter century, he’s written on various topics for newspapers and business-to-business publications – from the Yavapai in Arizona and a controversial plan for a nuclear-waste incinerator in Idaho to nuanced issues, including FDA enforcement of the Dietary Supplement Health and Education Act of 1994 (DSHEA).

Since the late 1990s, his articles have been published in a variety of media, including but not limited to, the Cape Cod Times (in Massachusetts), Sedona Red Rock News (in Arizona), Denver Post (in Colorado), Casper Star-Tribune (in Wyoming), now-defunct Jackson Hole Guide (in Wyoming), Colorado Lawyer (published by the Colorado Bar Association) and Nutrition Business Journal.

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