The Twin City Bank in Longview, Washington has been serving cannabis dispensaries and other marijuana-related business since recreational dispensaries opened there in 2014. But in January, bank president and CEO Neil Zick started getting calls from nervous customers who were suddenly thinking about closing their accounts.
“I have had a few customers who think they should take out their money and put it in a coffee can in the backyard,” he said. “I have been advising them that that is not a good plan.”
His customers were reacting to the January 4 announcement from Attorney General Jeff Sessions that opened the door for federal prosecutors to target marijuana businesses, even if they are in compliance with state laws.
Specifically, Sessions rescinded an Obama-era policy called the Cole memo (named for its author, then Deputy Attorney General James Cole) that directed federal prosecutors not to target weed businesses operating in accordance with state law. Though marijuana remains illegal under federal law, the memo allowed companies following state cannabis laws to conduct business relatively free of concern about arrest.
With the Cole memo in place, the Financial Crimes Enforcement Network or FinCEN, the agency that combats money laundering, created rigorous reporting standards that require banks to report on financial transactions they think are cannabis-related and to assess whether that transaction complies with state law or is suspicious. That guidance allowed financial institutions to work with state-regulated cannabis businesses without fear of being charged with money laundering.
But Session’s Jan. 4 announcement also identified money laundering and the violation of other banking laws as a possible area of interest, putting financial institutions and their clients in the weed business at risk of federal prosecution. If FinCEN abandons its guidance, banks would have to drop their marijuana clients as too risky.
That would force the industry, which has only recently been able to access banking services, back to using only cash, increasing the risk of crime and violence.
Back to cash
David Sloan, owner of Herbs House, a Seattle medical and recreational dispensary, said that in January his bank, Salal Credit Union, quickly sent out an email assuring customers that it was still operating as usual and that it would let its customers know if anything changed.
With Washington State’s tight regulation of the industry and support from state and federal legislators, Sloan did not think that his bank or his business was at risk. But he is also aware that the federal government can change its stance at any time. “If you are not concerned then you are not paying attention,” he said.
Last month a bipartisan group of 16 Senators asked the Department of Justice to maintain its guidance so banks could continue serving the industry. Senator Jeff Merkley, Democrat of Oregon, co-authored the letter. He has also proposed legislation that would make it legal for banks and credit unions to provide full banking services to the cannabis industry.
“An inability to access the banking world means you create a massive all cash industry that is an invitation to money-laundering, gang activity, unlawful diversion of funds and an invitation for people to steal those gym bags full of cash when dispensaries deliver funds,” Senator Jeff Merkley wrote. “I don’t understand why the attorney general and the DoJ want to increase crime in America.”
According to a Reuters report, Sessions never coordinated his decision with FinCEN. The agency, surprised at his announcement, has had little time to adjust. In February, Treasury Secretary Steven Mnuchin told the House Finance Committee his agency was reviewing the guidance but, we “want to make sure we can collect our necessary taxes and other things in other than cash.”
Rachel Pross, the chief risk officer with Maps Credit Union in Salem, Ore., which serves cannabis businesses there, said in an email, “we are encouraged by Secretary Mnuchin’s remarks.”
If the agency changes its guidance, it may take a while before banks learn what those changes mean. Zick said that he will only understand if he needs to modify his banking practices when he is visited by bank examiners with the Federal Deposit Insurance Corporation, which happens every 18 months.
Agencies in conflict
Julie Hill, a University of Alabama Law School professor who specializes in cannabis and banking regulation, said it’s still not clear how federal agencies will react.
“The FDIC and OCC [Office of the Comptroller of the Currency] don’t have their own guidance and they now have dueling pronouncements on marijuana,” Hill said. It is possible that other agencies could develop their own more rigorous requirements that could make cannabis banking more complex and costly, she said.
Even with the FinCEN guidance in place, many cannabis businesses struggle when it comes to banking. Dispensaries in some states, including California and Nevada, still lack banking services. And accounts are expensive at the few banks that do serve the industry.
FinCEN estimated that about 400 banks were serving the weed businesses, based on an analysis of reports filed by banks at the end of September. But some experts are skeptical that the number is that high. The tally includes banks from all 50 states and some U.S. territories even though cannabis is only legal for recreational use in nine states and Washington DC. Medical use is allowed in 29 states.
Sloan with Herbs House said that his dispensary initially used U.S. Bank—an account it had from the time the business was a café. Then in 2015 the bank abruptly closed the account. Luckily he was able to open a new account with Salal, which caters to dispensaries.
The Marijuana Policy Project, an advocacy organization, had its account shut down by PNC Bank last year. The bank was concerned that some of the organization’s donors were in the marijuana business according to the advocacy group’s spokesperson.
One effort to add to the pool of financial institutions willing to work with the industry has been unsuccessful. Fourth Corner Credit Union was chartered in Colorado to provide services to cannabis dispensaries. It had no problem with state regulators. However, it needed to get a master account from the Kansas City Federal Reserve Bank that would allow it to access national banking networks. The bank was turned down.
“If we had asked for forgiveness instead of permission, we’d be open today,” said Mark Goldfogel the bank’s executive vice president of industry relations.
The credit union sued, arguing that the Federal Reserve Bank should have automatically granted the approval without investigating. Fourth Corner eventually changed its mission—now it will serve only businesses that support the industry like accountants and landlords. Its application was approved just this month, however it is still waiting for deposit insurance.
As Godlfogel discovered, the federal government’s tolerance for cannabis banking is limited, even with the FinCEN guidance. Its interpretation of the law does not apply to other agencies. They can honor it or not. Hill said that it is just the lowest bar—an assurance that a business is not laundering money. Other agencies can put their own requirements in place, adding more hurdles.
Banks that do service the industry have hired more staff to meet FinCEN’s reporting requirements so they charge cannabis clients high fees. Herbs House was paying nearly $700 a month for its account before prices fell thanks to competition from another bank.
Goldfogel says that costs in Colorado can be many times higher, which is limiting access to banks. “Mid-sized and smaller businesses are often choosing not to be banked at all, or if they want to, they can’t find a bank they can afford,” he says.
Even the weed businesses that can get banks accounts face another banking challenge: customers must often pay with cash. Credit cards and debit card companies will not allow cannabis businesses to use their networks. Those without accounts store and move even more cash making them targets for robbery.
To enable customers to access cash, many dispensaries placed ATMs in their businesses. Hill said that once the ATM companies realized that the cash was being spent on marijuana, they removed the machines. Sometimes nearby ATMs would also be relocated.
Those businesses that have banks accounts have a few more creative options. Sloan said that early- on Herbs House began using cashless ATMs. Customers would swipe their debit cards at the counter and enter their PINs. The cost of marijuana would be entered and rounded up to the nearest $5 or $10. The customer would be given change for the difference. The purchase cost would then be transferred to the dispensary’s bank account. However, Sloan said the fees got too high, climbing from $2.50 per transaction to $4.50 per transaction.
In the absence of debit or credit cards, Herbs House eventually found another way for customers to pay. They could use credit cards, not to buy marijuana, but to purchase cryptocurrency. A startup called POSaBIT allows people to purchase bitcoin with their credit cards at the register.
The customer purchases bitcoin, and then chooses to buy cannabis with the bitcoin, so the transaction is allowed over the credit card networks. The process is cumbersome said Sloan, requiring people to scan an identification card or input a driver’s license or passport number and click through multiple screens. But it is still better than cash.“For customers to be able to use credit cards, that was a huge win for us,” said Sloan.
Another approach is an app called CanPay, which works like PayPal. The businesses it works with must have a bank account and customers need to link CanPay to their bank accounts. It uses the same network banks use for transfers, which has been friendly to cannabis transactions. CanPay launched in 2016 and is now in nine states with about 100 dispensaries as clients.
Dustin Eide, CanPay’s CEO, said that banking relationships with dispensaries are necessary for his business. The banks he works with have not backed away from the industry since Sessions’ announcement, but he has seen others hoping to get into the business put plans on hold.
“The FinCEN guidance is critical. As long as that is in place you won’t see a lot of upheaval,” he says. But, he cautions, that could easily unravel: “any actions by the DoJ against financial institutions run the risk of disrupting banking to the industry.”