News Column

Federal Memo on Marijuana Leaves Many Questions

September 2, 2013
Washington State legalized the use and sale of recreational marijuana.
Washington State legalized the use and sale of recreational marijuana.

For some laboring in Washington state's fledgling marijuana industry, last week's announcement by the U.S. Justice Department was a policy shift more nuanced than bold, more a flashing caution signal than a green light.

The department's long-awaited statement on legalized marijuana in Washington and Colorado offered neither outright support nor opposition. Instead the four-page memo to federal prosecutors set boundaries on what the feds would tolerate from the two states creating recreational markets for adults.

At the same time, the memo made it clear that all marijuana remains illegal under federal law.

While the new federal direction might eventually lead to profound changes in marijuana policy across the country, things on the ground in Washington state haven't changed dramatically _ yet.

Final rules will be proposed Wednesday by state officials for a system that will allow adults to buy an ounce of marijuana in regulated stores. Those rules already contain many of the safeguards the federal government is seeking: Don't sell or market to minors, don't evade taxes, don't divert marijuana to other states.

But obstacles remain.

Nothing in the federal memo compels resistant Washington cities to allow marijuana merchants within their borders.

And the reluctance of federally insured banks to touch legal marijuana money is still a major impediment, leaving a multibillion-dollar industry to deal only in cash.

"That's absurd," said Mark Kleiman, the state's top marijuana consultant.

"I'm not ready to put the rosy glasses on just yet," said attorney Hilary Bricken, whose firm specializes in advising marijuana entrepreneurs.

No doubt, the feds did suggest some sweeping changes in Thursday's policy guidelines, including opening the door to legalization in other states.

The biggest, according to Jonathan Caulkins, another state consultant, is that the federal government signaled that large, for-profit operations are welcome, as long as they adhere to the Justice Department's policy guidelines.

That will tend to shift the industry from more craft-oriented to industrial production, said Caulkins, a professor at Carnegie Mellon University. In turn, he said, that might move the industry toward mass marketing.

The new federal policy implies major changes for the state's medical-marijuana system as well.

Bricken reads the memo as saying the same eight safeguards the federal governemtn wants in the recreational system would also apply to the state's largely unregulated, untaxed medical system.

Jenny Durkan, Western Washington's top federal prosecutor, issued a statement after the Justice Department memo was released, saying that the continued existence of unregulated, for-profit medical-marijuana operations is "not tenable" and violates both state and federal law.

"If I'm a medical-marijuana stakeholder I am very worried about how the feds are going to treat my industry," Bricken said. "Very clearly now they have a tolerance point that they haven't had before and it does not include the Wild West, which is what most medical regimes are."

Durkan's statement may be the biggest news to come out of Thursday's Justice Department memo, Kleiman said.

Alison Holcomb, chief author of the state's legal-marijuana law, agreed that changes are coming to medical marijuana next year when the Legislature convenes. Taxes, business licensing and patient-authorization rules are likely to be debated, Holcomb said.

Gov. Jay Inslee concurred, saying the medical system needs to be "better regulated and more transparent."

Jamen Shively, a former Microsoft manager who wants to create a national marijuana brand, sees another big wrinkle in the Justice Department memo: It should make investors feel safer about getting into the marijuana business.

"It is extremely good news. The world looks like a completely different place than it did yesterday," he said Thursday of the new federal policy. "You're going to see a lot of investment."

While the Justice Department memo might have made it somewhat safer to be in the marijuana business, Kleiman said, "it doesn't make it safe."

The memo is only guidance to prosecutors, not a change in law. It creates no rights or remedies, Kleiman noted, and is subject to revision at any time. Especially so, he said, if a conservative such as Mike Huckabee were elected president in 2016.

John Davis, chief executive of two Seattle medical-marijuana dispensaries, expects some entrepreneurs to be emboldened by the new policy. But he foresees that momentum being tempered by the realization that marijuana remains illegal under federal law.

"Most (entrepreneurs) are going to go to a lawyer," he said, "and ask, 'It's legal isn't it?' And the lawyers will say, 'No, you could still be prosecuted for simple possession.'?"

Bricken said that's exactly what she'd advise clients. "I'd tell them it's still a federal crime," she said. "But I will point them to the federal guidance memo and say, 'This is your risk-benefit policy. Proceed cautiously and accordingly."

The most critical area the Justice Department failed to address is banking and financial services.

Without banking, credit-card and armored-transport services, legal marijuana commerce is a cash business vulnerable to heists.

A fix could come through a congressional change in the law. But few are expecting Congress to act quickly on marijuana.

An easier solution would be an administrative order directing the Treasury Department to stop requiring regulatory reports whenever a bank handles what it thinks is marijuana money.

That alone would clear the way for banking by legal marijuana merchants, said Aaron Smith, executive director of the National Cannabis Industry Association in Washington, D.C.

"It's an untenable situation. It's the elephant in the room. I think we'll see a change sooner than later," said Smith, whose group has been lobbying the Treasury Department for such an accommodation.

It might be coming quite soon.

A Justice Department official confirmed that U.S. Attorney General Eric H. Holder Jr. told Inslee Thursday that banking would be the next area the Justice Department would look at. Holder "expressed a willingness to find a solution to this very significant problem," Inslee said.

A Treasury Department spokesman said only that "We're reviewing these developments."

Another looming roadblock are the cities that have tried through zoning or other means to ban marijuana merchants. The Justice Department memo does little to change that, Davis and Bricken said.

"The attitude in most locations is, 'We don't want to be trailblazers. Let's see what happens in Seattle,'?" Davis said.

Despite the new federal policy, Bricken expects many cities to stick with their arguments that federal grants they receive require them to comport with all federal laws, including the prohibition on marijuana. But she believes their chances of "prevailing in court are much weaker now."

It's hard to know, said Candice Bock at the Association of Washington Cities.

"This is one of those arguments only an attorney could love and a judge could decide," said Bock, a government-relations advocate for the association.

Bock sees the Justice Department memo as a step toward removing some of the uncertainty that hangs over cities. But it hardly answers all of their questions, she said, such as how many retail stores the state Liquor Control Board would license in a given city.

"I'm not sure it's going to have a dramatic impact at this point on what cities are doing," Bock said. "It's just one more piece of the puzzle. There are still a lot of missing pieces."


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