MA: Cash-Heavy Marijuana Industry Faces Banking, Security Challenges

Photo Credit: Michael Short

Armored cars. Remote cash collection machines. Blockchain technology. A state-run marijuana bank.

All of these things are being discussed as potential solutions to a major marijuana industry challenge: a lack of banking services and an industry that is likely to be unusually cash-heavy.

“These stores can do $1 million (of business) a month,” said James Smith, an attorney and founding partner at Smith, Costello and Crawford who represents cannabis companies. “You don’t want that to be cash. … The state doesn’t want it, the industry doesn’t want it, even the federal government doesn’t want it.”

But no one has yet figured out how to prevent it. “Everyone’s trying different things, there’s no solution,” Smith said.

Massachusetts is preparing for the first legal marijuana stores to open this summer, with the licensing process beginning next month. Legal marijuana is estimated to be a $1.07 billion business in Massachusetts by 2020. But one pressing question is how does that money move around in a safe and secure way.

A spokesman for the Cannabis Control Commission, which oversees the state’s marijuana industry, said in a statement, “The Cannabis Control Commission is aware of the administrative, compliance, and public safety challenges that other states have faced in the absence of traditional banking institutions within the cannabis marketplace. We are working collaboratively with state banking and credit union associations as well as relevant sister state government agencies to explore solutions and stand up a safe, professionally managed industry.”

In today’s climate, almost no other industry does a significant amount of business in cash.

But the marijuana industry is unique. Marijuana remains illegal federally, which means federally chartered banks cannot accept marijuana money. Credit card companies also will not provide services for marijuana purchases.

Today, only one bank – Century Bank in Medford – is known to do business with Massachusetts’ medical marijuana companies. People can pay for medical marijuana with debit cards. Both the bank and the debit cards charge large fees.

Jon Skarin, senior vice president of the Massachusetts Bankers Association, said all banks are subject to federal law. Attorney General Jeff Sessions’ decision to rescind Obama-era protections for businesses and individuals complying with state marijuana laws added to banks’ hesitance to get involved with the marijuana industry.

The problem is likely to get worse for the recreational side of the business, since certain federal protections that are in place for medical marijuana do not exist for recreational marijuana. Skarin said the banking industry would prefer that these businesses operate within the traditional banking system, but that is difficult.

“There’s a very limited number of depository intuitions that have chosen to do business with the marijuana industry,” Skarin said. “It remains to be seen in Massachusetts if that’s going to change.”

In Colorado, a couple of state credit unions handle most of the marijuana businesses, Smith said. “Hopefully we’ll have a credit union or bank assist us,” he said. “It hasn’t happened yet.”

Much of the money that comes into marijuana dispensaries is cash. Kevin Conroy, a partner at the law firm Foley Hoag who represents several marijuana businesses, said many customers want to pay cash for marijuana to maintain their anonymity and avoid the records that come from using a debit card.

“They like the privacy of the transaction,” Conroy said. “They like the fact there’s not a specific record or receipt given to them.”

But at the same time, a cash business carries a greater risk of robbery and makes it harder to track transactions. Although marijuana dispensaries have cameras and strict security requirements, employees paid in cash risk being robbed when they leave.

Conroy said dispensaries must have proper controls for handling cash – including security systems for handling and storing cash and transaction tracking systems. The state requires seed-to-sale tracking of marijuana plants, and the Cannabis Control Commission has been working on purchasing and developing software that can be used to track the plants.

“All of the dispensaries have security consultants who help them set up systems to ensure cash is in a safe place when on site, and there’s a very safe way for cash to be moved from the site to where it needs to go,” Conroy said.

Smith said businesses have gotten “creative” in dealing with large amounts of cash. For example, if a dispensary owns its own property, the dispensary might create a separate real estate company to manage the property, then pay rent in cash to the real estate business, which has a bank account.

“There’s a lot of creative thinking,” Smith said. “Nobody is happy with a bag of cash.”

Cannabis Control Commission Chairman Steve Hoffman has floated the idea of creating a state-run bank to provide financial services to marijuana businesses, but state policymakers have shown little interest in the idea.

The state Department of Revenue, which will have to collect taxes from marijuana businesses, put out a request for public input on what regulations it should establish related to marijuana tax laws and cash collection. The Department of Revenue is working with the Cannabis Control Commission to develop tax collection processes.

One creative solution submitted to the department came from Michael Latulippe, an advocate for medical marijuana patients who used to work in the tech industry. Latulippe suggested that the state adopt blockchain technology to track cannabis sales. Blockchain was created to track transactions of the cryptocurrency bitcoin. It provides a way to create a permanent ledger of transactions without a central server.

Latulippe said this would allow dispensaries to make a permanent record of every cash transaction as it occurs, to lessen the potential for money to be lost or diverted. The technology can also accommodate “smart contracts,” in which a software program would arrange for tax money to be automatically sent from a dispensary to a municipality during each transaction.

“Every transaction, whether it was cash or not, would be put in the system,” Latulippe said. “It could basically ensure no transaction goes untraced.”

This would address the bookkeeping concerns, but would not affect how the cash would be stored or moved around.

To deal with that problem, at least one company is actively looking at setting up remote cash deposit services for the marijuana industry, according to a company lobbyist.

This is similar to a service already provided in other industries. For example, if a supermarket collects utility bill payments, the supermarket might use a cash deposit machine run by a third party company, then that company would collect the money and send it to the utility company through the mail or a parcel service.

Other options for companies include hiring private security firms and armored cars to transport cash.

A spokeswoman for the Massachusetts Division of Banks declined to comment.

On its website, the division issues guidance saying the state will not go after banks that operate under Obama-era federal guidelines, which establish priorities for marijuana enforcement – such as preventing distribution to minors or diversion to gangs. But the department is currently reviewing that guidance in light of Sessions’ decision to rescind the federal guidelines.

The Division of Banks does note on its website that if a marijuana-related business cannot access banking services, the alternative is the daily handling of large amounts of cash. “Not only does this create very serious safety concerns and invite increased criminal activity, but it is also a very expensive and impractical way to conduct business,” the department writes. “Operating in cash also makes the tracking of funds and collection of tax payments very difficult.”