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Special Report: With No Clear Sign Posts to Guide Them, Banks Still Wary of Marijuana Trade

June 2016 SCVBJ

Posted: June 9, 2016 2:00 a.m.
Updated: June 9, 2016 2:00 a.m.
A sign hangs over the door of a vacant building in which a credit union was going to be established to cater to the needs of the marijuana industry in Denver. Federal banking regulators have told banks how to accept marijuana money, but the U.S. Federal Reserve, which stated in a response to a lawsuit filed this week in Denver, has no intention of allowing a new credit union designed just to serve marijuana businesses to be created because "its very existence is prohibited by federal law."Associated Press photo A sign hangs over the door of a vacant building in which a credit union was going to be established to cater to the needs of the marijuana industry in Denver. Federal banking regulators have told banks how to accept marijuana money, but the U.S. Federal Reserve, which stated in a response to a lawsuit filed this week in Denver, has no intention of allowing a new credit union designed just to serve marijuana businesses to be created because "its very existence is prohibited by federal law."Associated Press photo
A sign hangs over the door of a vacant building in which a credit union was going to be established to cater to the needs of the marijuana industry in Denver. Federal banking regulators have told banks how to accept marijuana money, but the U.S. Federal Reserve, which stated in a response to a lawsuit filed this week in Denver, has no intention of allowing a new credit union designed just to serve marijuana businesses to be created because "its very existence is prohibited by federal law."Associated Press photo
A Cash Transaction Unit, a high-security operation with bullet-proof payment windows set up specially for marijuana businesses paying their monthly taxes in cash, is installed in a retrofitted office space at the Oregon Department of Revenue at its Salem, Ore., headquarters. Associated Press photo A Cash Transaction Unit, a high-security operation with bullet-proof payment windows set up specially for marijuana businesses paying their monthly taxes in cash, is installed in a retrofitted office space at the Oregon Department of Revenue at its Salem, Ore., headquarters. Associated Press photo
A Cash Transaction Unit, a high-security operation with bullet-proof payment windows set up specially for marijuana businesses paying their monthly taxes in cash, is installed in a retrofitted office space at the Oregon Department of Revenue at its Salem, Ore., headquarters. Associated Press photo
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It’s legal to sell medical marijuana in California, but finding a place to stash the stacks of moneyearned in cannabis trade has been a persistent problem for the industry.

While the state does not prohibit banks from doing business with the marijuana trade, the federal government still considers marijuana illegal, and because of that, many bankers are unwilling to bring marijuana businesses on board.

For marijuana growers and distributors, being shut out of the banking system can be a hardship. It means you must run a cash-only business, and there are no safe, airtight bank vaults to store your money in. You can’t accept credit or debit card payments – card companies fear liability for money laundering charges – or open a checking account, andyou may also be forced to pay bills and taxes in cash.

Businesses that take in large quantities of cash have to keep it on site, or else transport it to another holding location, which creates a security risk.

Banking that cash would eliminate the security risk from the pot dealer, but for a myriad of reasons bankers stay away from that kind of trade.

“Every bank in California knows that when federal regulators come marching in to do their examinations, if they come across these types of clients, it’s an issue that the bank would, in essence, be indirectly ‘conspiring’ with these businesses to run their money through the bank,” said Frank Di Tomaso, executive chairman and CEO of the Bank of Santa Clarita.

And so, the process of eliminating troublesome accounts begins as soon as a new customer files an application.

Screening
Most banks screen out marijuana businesses through their usual vetting process for new commercial accounts. Spotting businesses that are in the marijuana trade can be easy. Applicants may admit at the outset that they’re dealing in the cannabis trade, or they may make revealing statements during the interviewing process.

But others might not admit they’re in the pot business, or they may alter their business name on the applications to hide what they’re doing. Usually, that doesn’t pass muster.

“They (bank regulators) expect us to go out and do a site visit of the location of where their business is to make sure it is what they say it is,” says John Vescovo, Bank of Santa Clarita’s chief risk officer. Site visits, interviews with the clients and looking at their websites usually yield enough information to confirm the kind of business that’s being operated.

To evade scrutiny, many pot dealers put their money in personal bank accounts. But if they routinely deposit large sums of cash, bankers will start taking a closer look at what they’re up to.

Banks will sometimes run a ChexSystems background check on new customers, and if they find that the potential customer has been opening and closing a lot of accounts, that sends up a red flag.

“We know that’s because the other banks for whatever reason don’t want to do business with them,” says Vescovo.

Even if a bank takes all of the measures to screen out pot dealers, it’s likely that many personal accounts holding marijuana money go undetected for periods of time. But, some customers still get caught red-handed.

“We’ve had people who’ve tried to deposit cash that smells like marijuana,” says Vescovo.

Missed tax dollars
Adding to the complications from operating a cash-only enterprise, marijuana businesses must pay their taxes in cash, and that can mean that a lot of money must be hand-carried to a Board of Equalization office.

“I had a deposit at one of my offices for half a million dollars,” says George Runner member of the California State Board of Equalization. To accommodate marijuana businesses paying cash, they’re allowed to schedule appointments in advance, especially when a large amountof currency is involved. The board also has a contract with the California Highway Patrol to provide security when those sizeable deposits come in.

According to a Board of Equalization report, in 2014 dispensaries in California brought in about $570 million, which resulted in about $49.5 million in taxable income. The state estimates that if recreational marijuana is legalized, it could bring in more than $1 billion annually in tax revenues to California.

With such large amounts of cash being generated by the cannabis industry, it’s no wonder that banks seem to stay interested in the marijuana trade’s potential.

Regulatory hurdles
“It’s a subject that comes up at every regulatory conference I’ve attended in the last year or so,” says Tamara Gurney, president and CEO of Mission Valley Bank. But it’s hard to get a definitive answer about whether it’s okay to work with marijuana businesses, she says.

Perhaps the most vexing barrier to doing business with the marijuana trade is the regulations. Banks must ensure that the pot businesses they work with adhere to all rules governing the state’s cannabis industry.

Banks must review marijuana customers’ state license applications, request information about the business, develop an understanding of the kinds of products that are being marketed, and monitor publicly available sources for any negative information about the business.

“You’ve got to track from seedling to patient,” says Gurney. “You’ve got compliance that you will not believe. At the end of the day the risk return is just not there at this point in time.”

Barring national legalization of marijuana,many smaller community banks choose to avoid working with cannabis businesses. Some larger banks might be willing to take the plunge, but their chances of success remain unclear.

The Associated Press reports that the number of banks and credit unions across the country willing to handle pot money has jumped from 51 in March 2014 to 301 in March of this year.

But in January, federal banking regulators blocked a Colorado credit union from setting up a “master account” which is essential to operation. The credit union was established with help from the state and would have catered to Colorado’s legalized marijuana businesses.

“There are still some gunslingers out there who know that this is a way to make a buck and they want to be the early adopter,” says Gurney. “So far, I haven’t seen any of them get very far down the road.”

 

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