Big Read: America's legal pot economy is forced underground

By Suzanne Woolley, Polly Mosendz

Marijuana plants grow in a greenhouse at the Los Suenos Farms facility in Colorado. Photo / Matthew Staver
Marijuana plants grow in a greenhouse at the Los Suenos Farms facility in Colorado. Photo / Matthew Staver

Punctuated by sharp intakes of breath, Max Simon repeated himself softly, trying to mask a deep frustration. "We ... are ... a ... media ... company. We produce media."

Like many start up founders, he has his spiel down. He gave it nine times, to nine different bankers. Eight rejected him. But it wasn't venture capital he was seeking. It was a checking account.

Simon, 34, is the founder of Green Flower Media, a production company in Ojai, California, that sells educational videos about marijuana on topics ranging from medicinal use to cannabis industry investing. He likens the platform to a cannabis-centric Lynda.com, the online-course company owned by LinkedIn.

Shortly after Green Flower sold its first batch of videos, Simon received an e-mail from Chase Bank saying it was closing the company's corporate account.

It took a series of calls to discover why: The account, he was told, was marked "high risk" because the company is part of the marijuana industry.

For the next several months, Green Flower didn't have a bank, placing it in a financial netherworld that can make life nearly impossible for any going concern. Simon withdrew money from a different business to ensure that employee checks didn't bounce.

"We have no relationship with the plant whatsoever," he said. "We don't even touch the plant." Simon was rejected by banks and credit unions of all sizes before finally being offered an account with a financial institution, which he declined to name so as not to draw additional scrutiny. (Asked why Simon's account was closed, a spokesman for Chase said only that "as a federally regulated institution, we follow federal laws.")

As America's cannabis industry joins the legitimate economy, its evolution is being handicapped by a lack of basic banking infrastructure-a fact directly tied to its uneven legality among the 50 states and the ever-present threat of criminal action by the tut-tutting federal government.

While logistical issues facing dispensaries are well known, obstacles to setting up the most basic of commercial operations extend far afield, hobbling scores of vendors and service providers who could help the industry emerge from the shadows.

This could get a lot messier next week.

On November 8, Arkansas, Florida, North Dakota, and Montana (which is voting to restore what legislators have rolled back) will ask voters to decide whether they should join, in some fashion, Washington, D.C., and the two dozen states where cannabis is legal for medicinal use.

Arizona, California, Maine, Massachusetts, and Nevada will vote on whether to join the four states (and the nation's capital) where it's allowed for recreational use by adults. If just California voted yes, and its 39 million residents suddenly found themselves able to purchase marijuana freely, the size of the industry could triple, to $18 billion, forcing regulators and banks to re evaluate their institutional trepidation.

From video companies such as Green Flower to marketing outfits to makers of plastic and paper packaging: Once banks get wind you're part of the $6 billion-plus legal marijuana industry, the doors often slam shut.

In the US, banks willing to provide services to cannabis companies are still hard to find. Photo / iStock
In the US, banks willing to provide services to cannabis companies are still hard to find. Photo / iStock

In Cleveland, Patrick McManamon got the bad news when his wife's debit card was declined at Target. PNC Financial Services booted McManamon from his personal account, his corporate account, and the 70-year-old account of a related family business.

In 2010, he had founded Cannasure Insurance Services, an insurance business specialising in policies for the cannabis industry. It has nothing to do with actual pot plants; recreational marijuana is illegal in Ohio. McManamon tried to find another bank. It wasn't easy.

"I had to make payroll. So I opened a bank account and just said I was in the insurance space," he said. "After probably about a year, they figured out what we were doing."

He moved on to a small regional bank, which dropped him nine months later. The next bank took his business for six months. By his fifth bank, McManamon realized he'd have to get a little sneaky.

"We started to notice that banks were asking the question, 'Are you doing any cannabis-related work?' If they ask, we aren't going to lie," he said. So he created another holding company with an innocuous name (he declined to disclose it or the bank). As backup, McManamon also keeps as much as $20,000 on hand at two other banks he can tap in an emergency.

"It's an enormous amount of stress, not being able to make payroll, not being able to make rent, because you don't have access to a checking account," he said. "It's something we shouldn't have to worry about." (PNC said it avoids cannabis industry-related accounts, declining further comment.)

We started to notice banks were asking the question, 'Are you doing cannabis-related work?' If they ask, we aren't going to lie.

In 2012, Colorado and Washington became the first states to legalise the sale of recreational cannabis. Faced with creating a new infrastructure to regulate a heavily taxed vice industry, things moved slowly.

A year later, the Justice Department handed down the Cole Memorandum, named for its author, Deputy US Attorney General James M. Cole, which laid out the ground rules, barring among other things distribution of recreational cannabis to minors, shipping across state lines, and possession on federal property.

The task of determining how to handle money earned by the newly legalised industry fell to the Treasury Department's Financial Crimes Enforcement Network, which issued guidelines in 2014.

"Thorough customer due diligence is a critical aspect of making this assessment," the guidance stated. FinCEN left it up to the banks to decide whether the risk was worth the reward, and it didn't differentiate between companies that physically handle marijuana and those that have no direct connection to a physical plant.

Since the guidance was issued, just 301 banks have chosen to serve the cannabis industry, less than 3 per cent of the nation's 11,954 federally regulated banks and credit unions.

The US government's role in regulating banks has even made it difficult for cannabis companies to rent office space. Washington state pot edibles company BotanicaSEATTLE found that landlords who carried a mortgage from a national bank were leery of renting to it. Throw in zoning laws regulating where a company can operate, and it took Chris Abbott, the company's co-founder, about six months to find a place to hang his hat. Even Simon's Green Flower, which has no dealings with physical pot, couldn't get a lease.

Companies in the cannabis industry are also at a disadvantage because, as a Schedule I drug under federal law, marijuana can't be bought with a credit card, and dispensaries can't have their own corporate cards. Often ancillary businesses, such as the dispensary's vendors or non-marijuana suppliers, don't have access to banks or credit cards, either.

Agents working on behalf of Green Flower contacted about 40 credit-card middlemen, which operate as a gateway between companies and credit-card providers, before one agreed to work with it-though with costly conditions. Green Flower pays $100 in monthly fees, as well as 4.95 per cent, plus 25 cents on every credit-card transaction it accepts.

The merchant processor also imposed a 10 per cent reserve and capped the company at $40,000 in monthly transactions. After six months without incident, the processor increased the cap to $250,000 and reduced the reserve to 5 per cent.

"At some point, when you're in the cannabis space, you almost accept it as par for the course," Simon said of the onerous provisions. "But it certainly was shocking."

Nine more states vote next week on whether to legalise some aspect of marijuana use.
Nine more states vote next week on whether to legalise some aspect of marijuana use.

It's easy to understand the cost-benefit analysis that big banks, or even landlords, are applying.

Who wants to risk running afoul of the federal government if you don't have to? And nationwide banks such as Citigroup and Bank of America won't touch the industry because they are directly regulated by Washington. They have high sensitivity to reputation risk or stigma, explained John Vardaman, general counsel for Hypur, which sells compliance and other software designed for working with "high-risk," cash-intensive businesses.

Still, there is some good news for pot purveyors.

"For small and midsize banks looking for new revenue streams, there's an increasing awareness that this is a market worth pursuing," Vardaman said. These small banks, however, must first take on enormous regulatory and compliance burdens.

Colorado, as the cradle of marijuana legalisation, is one place where pot-friendly financial services have taken root-but it hasn't been a casual undertaking. Safe Harbor Private Banking, a division of Partner Colorado Credit Union, has six private bankers, two compliance officers, and a vice president dedicated to handling just 95 cannabis industry clients, who have a total of 250 accounts. This year, that team had to file 3,500 reports to FinCEN, some dozens of pages long.

Credit union President Sundie Seefried was reluctant. "My thought was, 'I'm not touching that,'" she said. "But I had some attorney friends with clients in the cannabis industry, and they challenged me. They asked me to give them one good reason why we wouldn't bank the industry."

So Seefried talked to their clients about how they were banking and learned how their bank accounts had been closed. She heard horror stories, including one of a company forced to run a 500-person payroll in cash; people toting $40,000 in backpacks to grocery stores to buy money orders; accounts with non-cannabis related names and bankers who advised customers to deposit less than $9,000 at a time to avoid getting too close to federal reporting requirements.

There were huge deposits made at bank machines in the middle of the night to avoid inconveniencing other customers and thus inviting scrutiny, and cash shipped in the back of cars, stuffed into safe-deposit boxes, or socked away in hidden home safes.

"I realized," Seefried said, "we're making criminals of this industry."

Among the banks that work with cannabis clients, some have only a handful of them, and most don't advertise for more business. Vardaman said, "The banks we work with are still somewhat reluctant to have it known that they're entering this space."

"I always recommend that banks don't advertise," said Tom Fleming, co-founder of the cannabis compliance-software firm Link to Banking and a former assistant director of FinCEN's Office of Compliance. "Everyone in the industry will be at their front door the next day."

Salal Credit Union, based in Washington state, has received about 3,000 inquiries since it became known two years ago that the bank was taking on clients in the cannabis industry.

Entering the cannabis banking arena also requires an affinity for complex federal regulations and the courage to face draconian penalties if a mistake is made. Seefried pointed to the possibility of fines running into the millions of dollars for violating the Bank Secrecy Act.

After spending close to a year developing a risk mitigation strategy, Seefried began interviewing potential clients. This included setting up Safe Harbor Private Banking as a separate division to protect the credit union's reputation with customers and community members who may not be as open-minded.

Concerned with the credit union becoming a target for robbery, she required clients to hire armoured car services to count and vault their money. The armoured car company would tell the bank how much to credit the customer's account and then ship the cash-now the credit union's money-to the Denver Federal Reserve.

Seefried said that, as a credit union, she wanted to enter the industry as a low-cost provider. She charges licensed dispensaries, cultivators, and makers of marijuana edibles 0.3 per cent against deposited funds, up to a maximum fee of $3,500; accounts held by ancillary cannabis businesses are charged $150 a month. She's heard of other banks wanting to charge as much as 7 per cent to manage cannabis-related money.

Cannasure's McManamon said he was once offered a checking account on the condition he pay a $1,200 fee every month. Salal charges minimum monthly fees of $50 for ancillary cannabis clients, $250 for a cannabis producer or processor, and $350 for a cannabis retailer, with additional costs based on overall transactions, cash pickup, and wire transfer frequency.

Seefried defends putting non-retail cannabis industry businesses, such as Cannasure, under the same scrutiny as sellers. They still take in money earned through cannabis sales, she said. "What if my ancillary client has a customer that is unbanked-how do I know that money they're paid with isn't illicit?" she explained. "You have to know their customer's customer."

At Salal, bankers visit their clients regularly and do quarterly and monthly account monitoring, as well as an annual review. Carmella Murphy Houston, Salal's vice president of business services, oversees a department of nine people dedicated to these customers. "We do charge a premium for these accounts because of this added due diligence," she said.

The return on assets at Partner Colorado was 0.45 per cent year-to-date, Seefried said, well below the 0.77 per cent average return reported in the second quarter of this year for credit unions nationwide, according to data kept by the NCUA (PDF). Salal fared better, boasting a 0.85 per cent ROA this quarter, up from 0.29 per cent in the third quarter of 2014, shortly after it started taking on pot industry clients. This boost is due in part to how many of those clients Salal has taken on: It has doubled its business clients, from 250 customers to 500.

"It is self-defeating for the government not to encourage people to use bank accounts and accept their cash"

Thorough customer due diligence is a critical aspect of making this assessment.

For Henry Wykowski, a veteran cannabis industry lawyer, a $70,000 cash deposit was the beginning of the end of his relationship with Comerica Inc.

A federal prosecutor when Jimmy Carter was president, Wykowski had banked with Comerica for two decades and kept a sizable client trust account there. Some of his clients, including Oakland, Calif.-based Harborside Health Center, paid him in cash.

So he asked his banker if cash deposits from clients he knew well would be problematic: He was assured they would not. The bank set up a room for him with cash counters whenever he came in, and deposits ran smoothly.

Wykowski may not have actually told Comerica his clients were cannabis companies. But when the lawyer went in with one of the founders of Harborside, a man whose legal name is Dress Wedding, any mystery was quickly eliminated. Everyone knew Wedding from a Discovery Channel television documentary series called "Weed Wars"-he sports long hair and a longer beard and was wearing one of his trademark tie-dyed dresses. He also had a backpack filled with $70,000.

Wykowski was able to make half a dozen additional big cash deposits, some as much as $100,000, before the letter arrived: His account was to be closed. His local branch thought it was a mistake, but the order came from the corporate office. Wykowski said he never got a straight answer about why, and a Comerica spokesman said only that the bank doesn't comment on customer relationships.

Now Wykowski tries to get paid by check as much as possible; when he gets cash, he reports it as income but doesn't deposit it. The rest-well, it goes into safety deposit boxes and other undisclosed "safe places."

"This strikes me as ludicrous," Wykowski said. As a prosecutor, "all of our focus was to get the underground economy above ground. The way you do that is to take the cash, because when it is deposited, you can follow its paper trail," he said. "It is self-defeating for the government not to encourage people to use bank accounts and accept their cash."

People in the business have been forced to be "more clever with banking, so a lot have indirect banking so they can pay with checks or wire transfers," the lawyer said. He doesn't want to give an exact definition of "indirect banking," however, since "the Drug Enforcement Agency tries to foil any workarounds we come up with."

For a while, Wykowski said, one strategy was to hire an armoured car service that would deposit the client's cash in its own general account, then wire it to the client's banks, and that the DEA found out and wrote a letter to the armoured car company saying it would pull its license if it didn't stop.

The DEA said in a statement they didn't send such a letter but did have "some telephonic discussions with multiple armoured car companies." These discussions, the DEA said, were to advise the companies "of things we were observing in the 'state legalised' marijuana business." The DEA does not have direct jurisdiction over licensing decisions made by state authorities. (The armoured car company didn't return requests for comment.)

Even elite cannabis investing networks struggle to keep banking relationships. Troy Dayton is chief executive officer of the Arcview Group, a network of 550 high-net-worth individuals with more than $85 million plowed into 131 cannabis-related businesses. Earlier this year, Arcview's bank of six years gave it 30 days to take out its cash, the only explanation being they were involved in the cannabis industry, Dayton said.

Industry experts wonder whether the ultimate solution to the payment processing issue is a closed-loop payment system, an American Express of pot, if you will. Many companies are working on different kinds of "electronic wallet" solutions, but fees can be high, and some efforts are in early stages. One option Seefried offers her customers is a debit card tied to checking called CanPay; right now, it's used at four locations in Colorado and one in Washington state.

Arcview's Dayton said these are all localized band-aids on a national problem that needs a national solution and won't be resolved until the federal government ends what he calls "marijuana prohibition."

Wykowski figures there will eventually be a "catastrophic robbery" in which people will get hurt. "It will be a big wake-up call to the state, as well as the federal government, that they are unnecessarily putting people in danger," he said.

"Let's get real," he said. "We're here, we're staying, we're too big to close down, and if you do close us down, you're opening up the country to the Mexican cartels. You may as well have this role filled by people who are trying to follow the law and pay taxes."

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