Banking on the pot industry
Conflicts with state laws and federal regulations create anxiety for most banks
AT LEAST ONE Massachusetts bank is offering services to the nascent legal marijuana industry in the state despite uncertainty over federal drug and banking regulations that still classify all pot sales as money-laundering, making it a risky venture both for the businesses and financial institutions.
According to marijuana and banking industry officials, family-owned Century Bank and Trust is the only Massachusetts bank that openly serves medical marijuana dispensaries, which are the only legal pot operations in the state right now. Officials at Century, which has developed a cannabis section within its cash management division, declined to comment but those familiar with the bank’s operations said the Medford-based institution services a handful of the nine operating facilities in the state.
Because of anxiety and secrecy on the part of both the industry and bankers, it’s unknown where – or how – the other dispensaries do their banking and the lack of willing institutions will make the rollout of legal marijuana problematic.
“There is a way forward for some banks,” said Scott Moskol, an attorney with Burns & Levinson who represents several medical marijuana businesses. “About four years ago, [Century] saw the handwriting on the walls and developed their own type of program.”
“They are diminishing that level of fear of money laundering.”
Some industry insiders said Century is very picky about which clients they accept and while discussions have taken place, no decisions have been made about expanding the cannabis division to include retail operations once they begin in 2018.
Century does not lend money to marijuana businesses, but merely handles their deposits and allows them to conduct business like any other commercial operation. But because the deposits cannot be federally insured, there is a liquidity risk that could discourage the bank from accepting retail clients when that becomes a reality. Advocates said Congress is going to have to step in.
“Century Bank is going to get to a point where they’re at capacity,” said Adam Fine, an attorney at Vicente Sederberg who represents nonprofits that have entered the medical marijuana business in the region. “It’s a major problem that the industry recognizes. [Banking regulations] are going to have to come through legislative changes. Banks are very conservative by nature.”
Both sides in the recent debate over legalizing marijuana agreed on one thing: It will be a billion-dollar industry in Massachusetts within a few short years. With the passage of Question 4, which will allow a commercial marijuana industry to sprout in a little more than a year, there will be money spent and money to be made.
But because of federal regulations that still classify pot as a Schedule 1 drug – drugs deemed to have “no currently accepted medical use and a high potential for abuse,” according to the Drug Enforcement Administration – that billion dollars in transactions will be conducted in cash. Many banks will not accept marijuana-related business because they cannot get federal deposit insurance because of the drug classification, in addition to a bevy of ancillary wire and transfer issues related to how to handle marijuana money. The uncertainty makes the risk of carrying those accounts far more problematic than the profit they’d generate.
“The biggest issue is the legal uncertainty of it,” said Jon Skarin, senior vice president at Massachusetts Bankers Association, who was unaware of Century’s cannabis division. “It’s still illegal at the federal level so there is a conflict there between what your responsibilities are at the federal level and serving a business in the state.”
Credit card companies, which are also federally regulated, are prohibited from allowing their cards, even debit cards with their logos, to be used for marijuana purchases, and because checks pass through federal wire transfer services, they, too, cannot be used to purchase pot.
The federal regulations also inhibit paying taxes because the IRS mandates that employee withholding taxes be transmitted electronically, which can’t be done for workers in marijuana industry if those nonprofits and businesses can’t get bank accounts. The agency levies a hefty penalty for payments in cash. In a case in Colorado, a marijuana retail outlet challenged the penalty because the IRS said the Catch-22 of prohibiting them from banking was no excuse for paying in cash. A tax court ruled against the IRS but the case has been appealed.
Banks got some direction under the Obama administration when a Department of Justice memo issued in August, 2013, referred to as the Cole Memorandum because that’s the name of the assistant attorney general who drafted it, gave banks the go-ahead to do business without fear of administration intervention as long as they adhered to strict guidelines in vetting their clients. The Treasury Department’s Financial Crimes Enforcement Network subsequently issued new guidelines that eased some of the restrictions of the Bank Secrecy Act that governs money laundering under the Controlled Substance Act.
Even with that, though, banks must still adhere to Bank Secrecy Act regulations and fill out a suspicious activity report for every transaction done with a marijuana-related business. It can be very labor-intensive even with just a few medical marijuana dispensaries in operation; it could be overwhelming when retail operations are underway and the only restriction on customers is age.
Most of the changes made it easier for state-chartered financial institutions such as credit unions to operate in the industry, but banks, whose job it is to minimize and manage risk, have been slow to come around despite assurances from the Obama administration that following guidelines could shield them from prosecution. That’s what makes Century Bank’s decision to become involved heartening to industry advocates.
“The Cole Memorandum didn’t make the banks feel comfortable,” said Fine, the attorney who represents some medical marijuana clients.
It’s a problem that other states such as Colorado and Washington have faced in implementing their legalization laws. Colorado, which has had a continuously evolving regulatory framework, has been unable to ensure their retail and medical outlets can access banking services. Neither the FDIC nor the National Credit Union Administration (NCUA), which provides deposit insurance to its members, will guarantee funds in institutions there. At least 80 percent of the state’s more than 1,200 marijuana-related businesses do not have legal bank accounts.
Washington, however, is an example of how the financial industry has accepted pot clients because of tight regulations that comply with federal statutes. A number of credit unions have stepped up to accept the businesses and the NCUA provides deposit insurance to minimize the risks.
Seattle-based Salal Credit Union, which began as a health care credit union in 1948, now has nearly 240 legal marijuana clients in Washington and neighboring Oregon, which also has legalized recreational use, according to Sheryl Kirchmeier, the credit union’s chief marketing officer. Kirchmeier said there was some anxiety initially among longtime credit union members, including herself, about expanding into the legal pot business. But, she said, many of those concerns have been eased and the industry has been a boon for business.
“We are very fortunate about Washington state having a highly regulated industry,” she said. “Colorado didn’t really have this infrastructure…We have had to build in liquidity options but certainly [the businesses] have contributed to our revenues.”
While many in Massachusetts point to Colorado as the template for Massachusetts in implementing the legalization legislation, Washington is emerging as the state most likely to have regulations that can be replicated here.
“Banking and regulation obviously is a critical point,” said Massachusetts Treasurer Deb Goldberg, who will be in charge of regulating the commercial marijuana industry much like the alcohol business. “The banks have a lot of issues they have to deal with. Washington state did multiple things correctly from the beginning that Colorado is now having to step back and say, ‘We need to make some changes.’ This should be a win-win for us.”Part of that win, though, will be contingent on how the incoming Trump administration treats legal marijuana at the state level. While President-elect Donald Trump has said little on the campaign trail, Sen. Jeff Sessions, his pick for attorney general, has been vocal in his opposition to legalized marijuana. He could rescind the Cole Memorandum, and if Trump picks another conservative for Treasury secretary, all the benign views on enforcement by the Obama administration will disappear and risk and anxiety will once again rule marijuana banking decisions.
“Something people maybe don’t understand is that [the Justice Department] can prosecute, they can seize the assets,” said Skarin of the Massachusetts Bankers Association. “All of a sudden you don’t have collateral for that loan anymore. Up to this point, we haven’t had to deal with that …You’re basically running an uninsured depository institution. The hope that we would have, and most of the banks would have, is some clarity. This isn’t going away.”