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Friday, Mar 29, 2024

Pot Shops Suffer Bank Withdrawal

Medical marijuana dispensary Buds & Roses can owe more than $10,000 in gross sales taxes to the city of Los Angeles in any given month. Paying those taxes, however, is not easy for the Studio City nonprofit. It has the money, but it doesn’t have a checking account. That’s because banks are reluctant to open any account with dispensaries, growers and distributors of marijuana – still illegal under federal law. So a business such as Buds & Roses pays its sales tax in cash, making multiple trips each month accompanied by a security guard because the city only accepts a maximum of $5,000 in cash at one time, explained President Aaron Justis. “They need to allow banking,” Justis said. “It is ridiculous we have not gotten anywhere with that.” Assemblyman Matt Dababneh, D-Van Nuys, chairman of the banking and finance committee, held a hearing Feb. 29 on the issue. The bank question surfaced during the debate over last year’s Marijuana Regulation and Safety Act. “We have made it so this whole system of medical marijuana in the state is cash only,” Dababneh said. “Because of that, there are a number of practical issues for the businesses, for the people who are using these products for medical purposes and also for the larger community that is affected by it.” Among those issues are safety and security – all-cash businesses are tempting targets for robbers and can be victims of employee theft – and the difficulty for state agencies to assess and collect taxes and monitor compliance. Money laundering? The issue of access to banking services for marijuana-related businesses will become more important as more states allow the use of cannabis. Currently, 22 states plus the District of Columbia allow medical use while four and D.C. permit recreational use, or what’s called adult use. This year, seven more states, including California, will be voting on allowing adult use of cannabis. The fourth edition of the State of Legal Marijuana Markets study prepared by New Frontier, a cannabis analysis firm in Washington, D.C., and San Francisco’s ArcView Group estimated that by 2020 the combined medical and adult-use sales of the drug in the United States would be about $22 billion. Still, despite all those billions the industry is expected to generate, lack of access to banking services remains one of the biggest inhibitors to its growth, the study says. All-cash businesses have security risks and inefficiencies compared to digital payment systems. “These pain points underscore the struggle of operating marijuana-related businesses under a framework of conflicting state and federal law,” the study concludes. Banks, even in states where marijuana is allowed, avoid dealing with legal pot businesses because the drug is classified by the federal government as a controlled substance, making its possession basically illegal. Federally regulated banks must adhere to federal laws. In 1986, Congress passed the Money Laundering Control Act to crack down on banks dealing with drug-smuggling cartels. According to the IRS, the law makes it “illegal to conduct certain financial transactions with proceeds generated through unlawful activities, such as narcotics trafficking.” Lisa Selan, a corporate compliance attorney in Calabasas, said the lack of banking provisions in the state marijuana law passed last year is a huge problem. “It’s a daily conversation I have with people both locally and at the state level,” she said. “Banks just freak out about it because it is money coming from a federally controlled substance.” In 2014, the Treasury Department’s Financial Crimes Enforcement Network released a memo outlining a bank’s responsibilities when it comes to marijuana-related businesses, including reviewing the business license, ongoing monitoring of its activities and filing of a suspicious activity report if the business is engaged in making money illegally. The memo, however, offers banks no protection from criminal prosecution. Last year, both the U.S. House and Senate introduced the Marijuana Businesses Access to Banking Act, a bill that would, among other things, grant immunity from criminal prosecution to financial institutions offering services to businesses providing marijuana or leasing real estate to marijuana businesses. The bill never made it out of subcommittee. Rep. Brad Sherman, D-Sherman Oaks, was among the co-sponsors of the bill. At least one state, though, has been able to do what federal lawmakers have not. Oregon passed a law last year exempting financial institutions from any state criminal law for providing services to businesses possessing, delivering or manufacturing marijuana or marijuana-derived products. Lance Ott, founder of Guardian Data Systems, in Vancouver, Wash., a financial adviser and consultancy firm for the cannabis industry, sat in on the stakeholder meetings that created the Oregon law. From his experience, the way Oregon went about addressing the banking issue made complete sense. “Why not pass laws in each state to protect banks from federal interference for serving state legal cannabis businesses?” said Ott, who plans to open a Guardian office in Burbank in the next few months. Marc Ross, an attorney in New York who also teaches a course on business and marijuana law at Hofstra University’s law school, said that ultimately the issue of providing banking services is a federal one. There are public companies in the marijuana business that have registered with the Securities and Exchange Commission. Presumably that is the federal government recognizing legitimate businesses in that space and allowing them to operate, he said. “It seems to me that similar accommodations can be made in the banking industry as long as the other requirements and compliance issues have been met,” he added. Inconsistent rules California was the first state to allow medical marijuana use legally after voters passed the Compassionate Use Act in 1996. A follow-up law in 2003 established an ID card system for patients using the drug. Regulating dispensaries and growers, however, fell to cities and counties, so enforcement was not consistent throughout the state. City of L.A. voters, for instance, in 2013 approved Proposition D, which limits the number of pot dispensaries to the 135 that have been in continuous operation since September 2007. Not until last year did state lawmakers pass and Gov. Jerry Brown sign into law the Marijuana Regulation and Safety Act. It established the Bureau of Medical Marijuana Regulation to create guidelines and licenses for distributors, dispensaries and transporters. The regulations are expected to be enforced starting in 2018. “Once the medial regulations are implemented, you will see more activity amongst the banks in California,” Ott predicted. Until then, the state is still looking into the issue. Both Ott and Selan, who serves as counsel for the United Cannabis Business Alliance Trade Association, a group of medical marijuana collectives, testified at the Dababneh hearing last month. Ott said he was surprised that the committee brought in third-party vendors to testify on a state and federal banking issue. His told the committee it should have looked at what Oregon did to give banks protection. But Mark Farouk, a banking and finance committee staff member, said that his reading of the law is that the protections applied to state law only. “The larger risk is from the federal government and the Oregon law does nothing to mitigate that,” Farouk said. Dababneh doesn’t see future hearings on the bank issue nor any legislative solutions from Sacramento. The changes need to come from the federal government, he said. In addition to the Marijuana Businesses Access to Banking Act, Congress has also worked on a tax reform bill to allow pot businesses to take deductions on ordinary expenses, such as equipment, leases and employee costs. Aaron Herzberg, partner and general counsel of CalCann Holdings, a Costa Mesa dispensary and growing operation, said federal bureaucracy poses an obstacle to bringing the industry into the financial system. “Until the federal government cleans up their act, there will be continued difficulties for the 23 states that have legalized it,” Herzberg said. “It is in direct contradiction to what those states and their citizens want.” The state banking and finance committee’s Farouk is equally skeptical. “I don’t think anyone should hold their breath waiting for them to accomplish anything,” he said of Congress. Until that time comes, businesses try to find practical alternatives to big banks. Guardian, for instance, works with 19 small banks and credit unions to provide clients with financial services. The firm also offers payroll services, equipment leasing as well as financing and point-of-sales guidance. “We act as a consultant and adviser for many clients to establish transparent accounts,” Ott said. Another route is for a dispensary or growing operation to set up a separate management or holding company that obtains a bank account into which the marijuana money is deposited. “That is what a lot of people do in the industry,” Buds & Roses’ Justis said. “It’s a workaround.” Both Justis and Herzberg would not disclose how their respective businesses are accessing bank services. Herzberg said it is ironic that politicians will complain about the nature of the all-cash cannabis industry and that it attracts organized crime but don’t take steps to fight that by regulating and taxing the drug – and make bank services available to all. “You cannot have it both ways,” he added. “You can’t say we want you to clean up your act and clean up the industry but we’re not going to let you have a bank account.”

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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