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Banks are the Weak Link in Marijuana Industry

Legal Dispensaries Face Resistance by Big Banks

Written by Brian Hicks
Posted February 25, 2014

It has been two weeks since the Obama administration officially agreed to let the banking industry open its doors to the budding business of marijuana.

For the first time, legal distributors can secure loans, set up checking and savings accounts, and step out of the black market world of illicit drugs.

Banks have largely steered clear of marijuana businesses in the past over discrepancies between state and federal laws. But now that it is legal to conduct business in 20 states and the District of Columbia, marijuana business is booming, and it can no longer be ignored.

This means WAY MORE MONEY.

In Colorado and Washington, where it is legal to recreationally use marijuana, federal statutes of marijuana's illegality have gone unenforced. In the eighteen other states and D.C., where the sale of medical marijuana is allowed, prohibited under federal law, but has also gone unenforced.

Colorado’s legal marijuana businesses are thriving under these current conditions, already exceeding estimates by the state that said marijuana would bring in approximately $400 million, annually, according to the Huffington Post. That number now is expected to reach $610 million.

But not so fast there Johnny Blaze; marijuana is still illegal as far as the Department of Justice is concerned --and that goes for all fifty states-- it just requires massive resources to carry out. Still, that is where banks lose their confidence in Mary Jane.

The administration announced publicly last year that it would not challenge Colorado’s and Washington’s legalization of the drug, and in August it agreed not to prosecute legal distributors as long as they met a list of requirements, one of which was not to sell to minors.

The Treasury Department issued these new requirements in large part so legal marijuana dispensaries wouldn't be put in danger by being cash-only businesses.

Stone Cold

You would think that would be enough, but it’s not. Banks are ordered to notify federal regulators of any suspicious activity, like illicit activity from drug dealing. Banks must file a “marijuana limited” report that says the dealer is following the guidelines. If that is not the case, a “marijuana priority” report must be filed that would include any suspicions.

That alone isn’t so bad, but if you’re a marijuana business, you’re still going to be hard pressed to find a bank willing to hold your money, no matter what the President says. If you do, they’ll likely fold under pressure and drop your accounts. This has been the case with many business owners in the industry today.

What’s worse, they could even extend this policy to your personal accounts, retirement funds, and any affiliation you or your family may have with them.

You can’t build a solid business that way, especially one that can take upwards of $25,000 in on a single day of operation. Business funds must be secured.

Unable to use credit cards, checks, or debit cards, businesses and their customers are forced to carry cash, which not only extremely inconvenient, but a complete security nightmare.

Dispensaries have had to get creative, finding back doors into the banking system; being obscure and secretive about the nature of their business and using personal accounts that usually raise the red flag once the money starts pouring in. That’s when they get shut down.

These banks are afraid that they will be accused of laundering money for a business that is still technically illegal.

Business owners end up changing credit card processors or switching banks, and it puts a lot of added pressure on their accountants and payroll service providers.

Bogarting Banks

These marijuana dispensaries have a lot of cash to deposit, so you would think there would be plenty of banks willing to take it off their hands, especially in the past two weeks. But the fact remains, due to fears of being implicated as money launderers, it’s still bad for business.

The rules don’t change anything; not here anyway. Wells Fargo (NYSE: WFC) and FirstBank (NASDAQ: FBMI) have gone beyond the solitary marijuana business and also are refusing to refinance commercial loans to landowners who lease to marijuana businesses. Wells Fargo alone has made it a policy not to work with anyone related to the industry.

That is a lot of money to turn away. According to The Washington Post, the legal U.S. industry is expected to rake in $2.57 billion in sales this year alone.

The Justice Department, while trying to curb the appeal for marijuana, also has itself to blame. They’ve made it a personal mission to campaign against money laundering, running down banks and seizing millions of dollars from drug trafficking and terrorism.

It’s for good reason that banks still feel like there is a target on their back. As long as the possession or distribution of marijuana violates federal law, the risk of supporting an illegal operation is still there.

It’s about confidence, and right now, the banks don’t have any when it comes to marijuana, and only Congress has the power to change the law. The administration can talk all it wants. If a new administration moved in, things could change radically.

The Road Home

Marijuana is still classified in the same category as heroin, and as a congressional coalition urges the President to reclassify marijuana, bankers will remain reluctant to do business with dealers, no matter how sweet the pot may be.

This is progress though. Small business loans have started to be easier to access; something that has proven very difficult for the industry in the past.

This train is bound for glory. You can put roadblocks up all over the place and people are still going to get up off their couches to get their marijuana. You can force them to carry bundles of cash, and make businesses high target areas for theft, and still, the people will rise up.

The U.S. marijuana industry will be valued over $10 billion by 2019.

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