June 08--Washington's legalized marijuana industry may quickly become a cash cow for many of its first-generation entrepreneurs. But those fledgling business owners face a unique challenge: when the cash starts flowing, they'll have no place to put it.
In one of the most tangled conflicts between state and federal laws over marijuana, the federal government's rules intended to ban banking by the illegal drug industry are trumping voter-approved legalization of marijuana in Washington and Colorado. So far, no Washington bank is willing to navigate through a gray area of federal policies and laws to offer banking services to marijuana growers, distributors, and retailers. Just two credit unions, Numerica in Spokane and Salal in Seattle, say they'll take marijuana business operators as members. But both of those credit unions say they'll serve only growers and distributors, avoiding retailers whose sales to minors or to out-of-state residents could put the credit unions at risk.
"Retailers are in a difficult situation," said Russ Rosendal, Salal's president and chief executive officer. "Hopefully someone will take those retailers on."
The risk of a large cache of cash stashed away in homes and businesses, with financial transactions carried out using money orders or cash, raises major safety concerns in both states. One winner of the state lottery to open a marijuana retail store in Vancouver says he feels like he'll have "a target on my back" in the absence of a place to secure his money. Among his ideas is to move into a gated apartment complex for added personal safety, said the man, who requested anonymity out of concern for his security.
Brian Stroh, whose CannaMan Farms in Orchards is a state-licensed marijuana-growing operation, says safe money management will be his top priority as retail stores open and he begins selling his product to them. Stroh, a former mortgage lending officer, won't reveal his money management plan. But the absence of a safe depository for money is "the piece that's going to get somebody killed," he worries. "You don't have that in your job description."
Bankers say numerous interconnected federal laws prohibiting banking in the illegal drug trade are quite clear, and that the Obama administration's efforts to find a middle ground don't protect banks from federal prosecution. The Department of Justice issued a memo last summer as "a guide to the exercise of investigative and prosecutorial discretion" in the two states that have legalized marijuana. But the memo, written by Deputy Attorney General James M. Cole, reaffirms the federal government's authority to enforce federal drug laws related to banking regardless of state law, and notes that neither the memo nor state laws can be used in a legal defense against federal prosecution.
"The risk of prosecution is still there," said Jenifer Waller, senior vice president of the Colorado Bankers Association.
In the absence of a change in federal law, then, no commercial banks in Washington or Colorado are willing to take their chances.
"It's kind of a risk-reward analysis, and the risk outweighs the reward," said James Pishue, president and CEO of the Washington Bankers Association.
It's not as if bankers and regulators couldn't see this coming. Medical marijuana is now legal in 22 states and the District of Columbia, and banks have no legal protection in providing financial services to medical marijuana providers. "It's no secret that people in the medical marijuana field have been robbed quite often," said Scott Jarvis, director of Washington'sDepartment of Financial Institutions.
Last month, Gov. Jay Inslee and Colorado Gov. John W. Hickenlooper wrote to top federal regulators including Federal Reserve Chair Janet Yellen to request further clarification of federal instructions to bank and credit union examiners regarding banking issues for the recreational marijuana industry. Jarvis hopes that the top regulators, who guide the Federal Crimes Enforcement Network, will address the issue soon.
"We're trying to make it work," Jarvis said of the banking conundrum. "Security is very much on our mind and on the governor's mind."
'Violates banks' DNA'
A web of rules aim to curtail drug trafficking through the banking system by, among other measures, requiring banks to report large cash transactions and by prohibiting the use of electronic fund transfers for money derived from drug sales.
David Bristol, an attorney at the Vancouver office of Schwabe, Williamson & Wyatt who was chief legal officer for the former First Independent Bank, says bankers' wariness is based in part on the industry's culture. Taking money from people involved in drug dealing that's illegal under federal law "just violates banks' DNA," he said. "Banks have always helped government monitor illegal activity."
Unpleasant memories of the banking industry's recent history with federal regulators also contribute to banks' risk-averse approach to dealing with the marijuana trade, Bristol believes. In the boom years of 2004-2006 leading up to the devastating crash of the nation's financial system, regulators regularly praised bankers for their role in fueling the economy. But when the crash came, that praise turned to criticism.
"Regulators became unpredictable," said Bristol, who helped First Independent recover from a weak financial position before its owners sold to Sterling Bank in 2012. Bankers are now wondering, he says, "should we trust our regulators' words now that they are not going to give us a black eye five years from now?"
Even setting aside the legal issues, the marijuana industry is not a sure-fire sugar daddy for Washington banks, Bristol said. Given today's low interest rates, banks don't make much money on deposits. While marijuana production, distribution, and sales will require short-term funding to even out cash flow, the industry does not require the major capital investments that translate into profitable bank loans, he added.
"It's unclear how banks are going to make money," he said.
Still, Bristol found in his own informal survey that local banking officials are not driven by their own personal or ethical concerns about marijuana legalization, and most would be ready to do business with the industry if legal issues can be resolved.
"Most don't have a moral issue with it, but nobody wants to be first because of the reputational risk," he said.
Credit unions, also federally regulated, face the same legal obstacles as banks. But they are beholden to their members and therefore not beholden to investors. That makes some more willing to take risks, as long as they have support of their members and the board that represents them and can cover costs with appropriate fees.
So far, two Washington credit unions say they're willing to fill part of the void. Salal, with branches in King, Pierce and Snohomish counties, has its origins as a credit union for employees of Seattle health care giant Group Health. "We believe there are clear health benefits around (treating) certain diseases with marijuana," said Rosendal, the credit union's president and CEO.
He noted the credit union's concern for public safety, adding "it's our philosophy to help those individuals banks won't help." Rosendal said the credit union is open to the idea of extending its services to the industry in Western Washington counties outside its core service area.
Spokane-based Numerica credit union says it will also limit its services to growers and distributors, avoiding retailers because of the difficulty of tracking their sales practices. It will offer banking only within its service area, which includes Wenatchee and the Tri-Cities.
"It all comes down to community safety," said credit union spokeswoman Kelli Hawkins. "We feel there's a hazard to the community with all that cash."
In Vancouver, Columbia Credit Union CEO Steve Kenny says his board has discussed the issue and so far is not ready to serve the marijuana industry.
"I have to ask the question: Does it bring value to our members at Columbia Credit Union?" said Kenny. But on the other side, he said the credit union is open to finding a way to serve the industry. "It is a legal business and we do not turn away legal businesses," he said.
An act of Congress
An industry that deals in cash and money orders, but is obligated to meet state rules and make state tax payments, does not seem sustainable. But with retail sales set to begin as early as next month, no one has a solution to avoid an ugly and dangerous financial mess in the great experiment of marijuana legalization.
"It's going around in a circle and everybody's pointing to the person on the right," said Kenny.
Colorado's Legislature has approved an interim approach of creating what is an uninsured marijuana co-op that would provide money management until federal regulatory issues could be resolved. But the money management system requires Federal Reserve approval. Such approval seems unlikely, given the Fed's rules, said Waller of the Colorado Bankers Association, since "dealing with an illegal substance is not permissible activity."
That moves the conversation into what is a common cliche: it will take an act of Congress to fix this problem. "We need to get this thing moving at the federal level, because that's where the action is," said Pishue, of the Washington Bankers Association.
U.S. Rep. Denny Heck, a Democrat whose district covers most of Pierce and Thurston counties, is backing a bill sponsored by Rep. Ed Perlmutter, a Colorado Democrat, that would prevent bank regulators from prohibiting or taking action against state-licensed marijuana businesses. That bill would also provide immunity from federal prosecution or investigation against an institution or its employees based only on their provision of services to those businesses.
Banking associations in both Colorado and Washington favor the bill as a starting point for political action. But with only two states facing the problem, the bill so far has drawn little attention in the House.
Some see hope in an unexpected political movement last month on the equally troubling issue of banking in the medical marijuana industry. The House last month approved a little-noticed amendment to a low-profile bill to restrict the Drug Enforcement Administration from targeting medical marijuana operations in states where it is legal. That measure won support from 49 Republicans, including Washington'sDoc Hastings of Pasco, but still faces several procedural hurdles before it can be ratified.
Bristol, the Vancouver attorney, says that in the present void marijuana entrepreneurs will need to prepare for a potentially dangerous situation.
"My recommendation to a retailer in particular is that they have lots of cameras, a panic button to close things down, and that they use an armored car system," Bristol said.
But when asked where the armored car would take the money, Bristol said he simply doesn't know.
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