Pot businesses in Colorado cannot bank and no solution is ahead
Colorado's medical-marijuana dispensaries can sell the stuff just fine-and would-be vendors of the recreational variety hope to do the same once rules are put in place later this year.
But there is little that those businesses can legally do with their cash other than put it in a safe or bury it. No bank, credit union or financial-services company can knowingly accept business accounts with any trace of a marijuana connection. If they do, it's a federal crime.
The result is a legal industry that operates in something of a gray market in Colorado.
"It's a cash-only business for some; others use a small bank and are very quiet about it since no one wants to draw attention," said Joe Megyesy, a blogger and organizer behind Amendment 64, which legalized the sale and use of small amounts of pot in Colorado. "It's a problem."
Dispensaries struggle with issues as basic as payroll, operational funding and security. They cannot get a loan, a checking account, a credit card or anything that other legal businesses can do easily.
Little is known about where their money goes — pot-related revenue for fiscal 2011 in Colorado was an estimated $186 million, a number that doesn't count those who aren't paying state taxes. Predictions for the looming recreational market range as high as $300 million a year.
"Without access to financial institutions, legitimate businessmen and women are left walking around with thousands of dollars in cash, not only putting them at personal risk, but also leaving millions in state tax revenue uncollected and making it impossible for state or federal authorities to undertake an audit," Rep. Jared Polis, D-Boulder, told The Denver Post in a statement.
Polis has introduced a bill to defederalize marijuana, which could have the effect of opening bank doors to marijuana-based businesses. Similar efforts have failed.
A state task force put together by Gov. John Hickenlooper shortly after voters last November approved recreational use of weed determined there's no way around the conundrum without federal action.
Federal drug laws put marijuana on the list of controlled substances with cocaine and heroin. Possessing it is a crime, as is selling it or handling any of the resulting financial proceeds.
In essence, institutions that bank marijuana-specific businesses are, in the eyes of the federal government, money launderers.
"There seem to be no alternative solutions available right now that would allow banks to have a legal business relationship with those businesses involved with marijuana in any way," said Don Childears, president and CEO of the Colorado Bankers Association. He is a member of a subcommittee of Hickenlooper's task force that looked at banking issues that marijuana businesses face.
"If (federal regulators) spot any of those accounts, it's pretty clearly expressed that it's not a good idea," he said. "It's explicit that you jeopardize having your insurance revoked, and if you don't have that insurance, you're closed, out of business."
The task force has asked President Barack Obama for a special exemption for the industry, though expectations are low.
Seventeen other states, plus Washington, D.C., have approved some form of marijuana possession. Colorado and Washington are the only states to also approve recreational possession.
U.S. Attorney General Eric Holder in December told Congress that it wouldn't be a priority to go after bankers who did business with marijuana distributors, but he didn't say it wouldn't happen at all.
"The danger a bank faces is an active U.S. attorney who wants to prosecute," said Robert Rowe III, vice president and general counsel for the Center of Regulatory Compliance at the American Bankers Association. "And it's fair game for them to do that if they wanted to. Political minds can change very quickly."
There have been some unsuccessful attempts at a congressional fix, even a federal court case that looked to move pot from a Schedule I drug — which the federal government says has "no currently accepted medical use" in the U.S. — to a prescribable pharmacological one. The appellate judges voted 2-1 not to change what Congress had established.
Polis in July 2011 unsuccessfully offered a law to allow banks to carry business accounts of medical-marijuana distributors without having to report the activity. In November, Rep. Diana DeGette, D-Denver, offered a bill to pre-empt federal agencies from enforcing laws in states where cannabis is legal. That died too.
Polis in February took another run at a solution, proposing to defederalize marijuana and allow states to decide on its legality. It sits in several subcommittees awaiting hearing. If approved, the result would likely allow bankers to open the doors to marijuana-based businesses.
The National Cannabis Industry Association estimates that half the dispensaries nationwide lack bank accounts, but it's difficult to determine how the other half manage to have them. Neither bankers nor dispensary owners will openly acknowledge their relationship or how they keep it going.
Anecdotes swirl of Western Union money orders sent to personal accounts; wads of cash sent out of state via express delivery; dividing thousands of dollars in deposits among several accounts in various names to avoid detection. Some say they rely on gift cards, debit cards and money orders to meet expenses.
Safety is a concern, especially as owners are barred by federal law from owning a firearm if they're a patient, or would be considered an armed trafficker.
"There's even the concern of paying their rent," lawyer Christian Sederberg said. "That's if a landlord takes it; most won't. Cash isn't necessarily king any longer, so they have to get money orders."
One outspoken business owner, Jill Lamoureux in Denver, has said she was able to bank only because she kept the name of the institutions to herself. That was in 2011. She's no longer in the business, all the accounts closed.
Crimes at dispensaries are on the rise. The first six months of 2012, the most complete data available, Denver police recorded 35 burglaries, compared with 20 for the same period in 2011. In all, there were 44 reported crimes at dispensaries in those months for 2012 and 26 the year before.
Without a bank account, it's difficult for any business to pay employees or, for that matter, its taxes. Colorado revenue officials are happy to accept the funds since state law allows it — $5.4 million last year alone. But the Internal Revenue Service collects taxes on the sales.
The IRS relies on a 1982 law Congress passed at the height of the Reagan administration's battle against the illicit drug trade, banning any tax deductions related to trafficking in controlled substances. That would include state-legal marijuana dispensaries, which then forces those small-business owners to pay taxes on gross sales.
"Even though the federal government does not recognize the legitimacy of marijuana as medicine, and in fact makes it difficult for these businesses to operate by limiting their IRS deductions, banking, etcetera, they are all too happy to take tax money from these state-legal stores," said Brian Vicente of Sensible Colorado, one of the drafters of the state's marijuana-legalization question.
Marijuana businesses, and those that would be, have come up with as many creative ideas to solve their problems as the varieties of the weed they offer.
The notions have ranged from the creation of a sellers' credit union to the use of a currency system where purchases are made in tokens rather than cash.
Colorado Springs State Bank was one of the leaders in banking pot-based business, accepting accounts from dispensaries. But the bank closed about 300 accounts after the U.S. Department of Justice issued a memo in 2011 raising the potential of money-laundering charges for such activities.
Nearly immediately, the industry was turned into a cash-only enterprise little different in application from the street-corner dealer. The difference: The dealer likely has a bank account.
"If you're selling meth, you might well have a personal bank account," said Shawn Coleman, formerly employed in the banking industry and now a lobbyist for Amendment 64 proponents.
"That relationship is between the bank and you as an individual," he said. "For a marijuana business to have that relationship, it's likely the same case, on the quiet, or the bank knows exactly what's going on but has some other relationship with them, perhaps real estate, that's more lucrative."
It's unlikely anything can be solved in the short term, Rowe said, in large part because it's a political issue with few champions.
"It is an issue that Congress runs from because of the very strong feelings on both sides," Rowe said. "It's one of those political hot potatoes, and the banking industry sees no upside in taking a front-row seat in the charge. Bankers simply say there are too many other fish to fry.
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