Marijuana growers claim pot can shrink tumors, relieve chronic pain and alleviate anxiety, so why won’t bankers touch them?
Bankers can be as paranoid as any pot smoker in a state that hasn’t legalized marijuana who sees a police car in his rearview mirror when it comes to dealing with the legal marijuana industry.
The nation’s moneychangers are scared to death of being charged with money laundering if they loan cash to weed entrepreneurs or even handle their customers’ credit card transactions because federal law still classifies cannabis as a Schedule 1 narcotic, just like heroin and LSD.
Steven Gormley is the chief executive officer of Seventh Point LLC, a private equity firm that, its website claims, is “working to acquire a majority share of legal cannabis assets in Los Angeles.”
He told PJM the unavailability of standard commercial banking services is making it “more complicated” for the legal marijuana industry to “operate with full compliance and transparency.”
“It does make it more of a challenge,” Gormley said.
Taylor West, deputy director of the National Cannabis Industry Association, told the Associated Press that access to banking is a leading concern of the 1,100 marijuana businesses his group represents.
“What the industry needs is a sustainable solution that services the entire industry instead of tinkering around the edges,” Taylor said. “You don’t have to be fully in favor of legalized marijuana to know that it helps no one to force these businesses outside the banking system.”
Gormley said the best-case sustainable solution could be as simple as changing marijuana from a Schedule 1 narcotic to a Schedule 3 drug, which is defined as a drug that has a currently accepted medical use, although abuse of the drug can lead to moderate or low physical dependence or high psychological dependence.
“When that happens,” Gormley said, “it will be a gold rush for the banks.”
Enter Sen. Elizabeth Warren (D-Mass.) and nine of her colleagues.
They began a mission to open banks and credit unions to the nation’s $7 billion marijuana industry in December by sending a letter to the Financial Crimes Enforcement Network asking for clearer guidance.
“Most banks and credit unions have closed accounts or simply refused to offer service to the industry and ancillary businesses that service the marijuana industry,” Warren and the other senators wrote.
Warren cited chemists who have had checking accounts closed because of their role in testing marijuana, along with similar treatment for the security industry that helps handle the pot industry’s massive amount of cash, and even lawyers who provide services to marijuana growers and sellers.
“Forcing all these direct and indirect businesses to operate in cash not only creates a huge target for criminals,” the senators wrote, “but also complicates the collection of state and federal taxes. This business environment is an invitation to tax fraud, robberies, money laundering and organized crime.”
Deputy Attorney General James Cole tried to ease bankers’ minds in 2014 by explaining how banks could service the marijuana industry without getting swept up in a RICO sting.
And, as the Orange County Register reported, there has been some movement in a positive money-lending direction.
Gormley said smaller banks and credit unions have begun figuring out how to deal with the marijuana industry without getting in trouble with federal law enforcement agencies.
“It’s taken some creative capitalization and less risk-averse people,” Gormley said. “But it is like a new frontier, similar to what the internet was like in 1997 and 1998.”
But a 2015 American Banker report showed fewer than 300 out of 6,200 financial institutions in America were willing to do business with people growing and selling pot.
California Treasurer John Chiang is afraid the voter-approved legalization of recreational marijuana in his state, which takes effect in 2018, will only exacerbate the problems faced by a pot industry dealing with a lack of financing.
He wants to make sure the incoming Trump administration is aware of the problem.
“We have a year to develop a system that works in California and which addresses the many issues that exist as a result of the federal-state legal conflict. Uncertainty about the position of your administration creates even more of a challenge,” Chiang wrote in a letter to President-elect Trump in December.
In the meantime, Chiang wants to move California into a leadership role when it comes to opening the banking system to pot growers and sellers. He organized the Cannabis Banking Working Group in December— 16 people from California financial institutions, the state’s marijuana industry, and government officials — and tasked it with figuring out a way to open the flow of cash and credit to weed entrepreneurs.
“The cannabis industry is the largest shadow economy in California. Allowing them banking access would facilitate compliance and bring millions of dollars into our economy,” said Fiona Ma, California State Board of Equalization chairwoman and a member of the Cannabis Banking Working Group.
She and the other members of the group found out at their first meeting Dec. 19 that simple questions about how to maintain bank accounts and make deposits become entangled with prison anxieties and fears of robbery because buying and selling pot is now such a cash-intensive operation.
“As we learned today from listening for more than three hours to experts with California’s public agencies, financial services and cannabis industry, there is a dangerous, disruptive disconnect between state law and federal law,” Chiang said.
Of course, the biggest problem is Washington and that Schedule 1 narcotics designation.
“It is clear the machinery of federal government is clunking along behind the trending preferences of the American people,” Chiang said. “The people increasingly proclaim cannabis use acceptable. Yet federal law maintains its use is a crime.”
However, Serge Chistov told PJM all is not lost.
He was an early investor in Honest Marijuana, a wholesaler and grower of recreational marijuana in Steamboat Springs, Colo. Chistov now serves as a business advisor for the company.
Chistov said Honest Marijuana has been able to create a banking relationship, but it wasn’t easy.
“It took some time and effort to do it, and there are banks that are willing to spend money to attract the funds and give a sense of normality to our business,” Chistov said.
Chistov said with all the millions of dollars in marijuana money floating around in Colorado, he can’t believe some smart capitalists won’t be able to figure out a solution to open up new financial lanes for the pot industry.
“It should be natural for this country,” Chistov said. “There is money to be made in a legal fashion. It just requires some ingenuity to do it.”