Bank­ing a bur­den in the pot busi­ness

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - JAMES RUFUS KOREN

LOS AN­GE­LES — Slip a fresh $20 bill un­der the bul­let­proof teller win­dow of Don­nie An­der­son’s Medex mar­i­juana dis­pen­sary — per­haps for a gram of cannabis or some THCin­fused tof­fees — and the le­gal ten­der is trans­formed into some­thing else: drug money.

Though the trans­ac­tion is le­gal in Cal­i­for­nia, un­der fed­eral law that bill is not much dif­fer­ent from the con­tents of a drug car­tel’s safe — cash that most banks won’t touch.

So how is An­der­son sup­posed to pay his em­ploy­ees, sup­pli­ers or busi­ness taxes? He de­posits cash, in small amounts, into an ac­count held by a lim­ited li­a­bil­ity com­pany that his bank thinks is a prop­erty man­age­ment firm.

“The bank doesn’t know what we do,” he said.

If this sounds like money laun­der­ing, you’re not far off.

Yet con­sider this: That same $ 20 ex­changed at Can­nde­s­cent, an­other cannabis com­pany, takes a di­rect and trans­par­ent route into the fi­nan­cial sys­tem.

When the mar­i­juana cul­ti­va­tor sells its prod­uct to a dis­pen­sary, one ar­mored car drops off the mar­i­juana and an­other picks up the cash pay­ment — and then heads to a down­town Los An­ge­les branch of the Fed­eral Re­serve Bank.

There the cash is de­posited into the ac­count of a lo­cal credit union, one that’s ea­ger to do busi­ness with Can­nde­s­cent.

“Af­ter all the hor­ror sto­ries I’ve heard, it does seem like a lit­tle bit of magic,” said Tom DiGio­vanni, Can­nde­s­cent’s chief fi­nan­cial of­fi­cer.

In­deed, though the same laws ap­ply to An­der­son’s dis­pen­sary and Can­nde­s­cent’s farm, the

● world of cannabis bank­ing is so full of con­tra­dic­tions that one busi­ness can truck money to a fed­eral fa­cil­ity while the other is left to play a high­stakes game of hide-and-seek with its cash.

“It’s the early stages of the Wild West,” said Cal­i­for­nia Trea­surer John Chi­ang, who is lead­ing an ef­fort to re­form cannabis bank­ing, a prob­lem dat­ing back to 1996 when Cal­i­for­nia le­gal­ized med­i­cal mar­i­juana.

With recre­ational use set to be­come le­gal next year un­der Propo­si­tion 64, cannabis sales in the state are ex­pected to top $7.5 bil­lion in 2020, up from about $3.3 bil­lion last year, ac­cord­ing to data provider New Fron­tier and cannabis in­vestor net­work Ar­cview Group.

But while Propo­si­tion 64 broad­ened the le­gal use of pot, it did noth­ing to re­lax bank­ing reg­u­la­tions.

“It left sig­nif­i­cant ques­tions un­re­solved,” Chi­ang said. “How do you han­dle the tax­a­tion of cannabis dol­lars and the bank­ing of bil­lions of dol­lars of trans­ac­tions that are go­ing to take place here in Cal­i­for­nia?”

Last year, Chi­ang cre­ated a group of cannabis and bank­ing in­dus­try trade groups, at­tor­neys, reg­u­la­tors and others, try­ing to fig­ure out how to bring the cannabis in­dus­try into the fi­nan­cial main­stream. But it’s a vex­ing chal­lenge, and one that can­not be solved by the state alone.

Mar­i­juana is le­gal for med­i­cal use in 29 states and for recre­ational use in eight, yet the fed­eral Con­trolled Sub­stances Act lists it along­side heroin and LSD as both dan­ger­ous and hav­ing no ac­cepted med­i­cal use.

And for banks, fed­eral laws are para­mount.

Banks and credit unions can guar­an­tee de­posits be­cause they have fed­eral de­posit in­sur­ance. They rely on Fed­eral Re­serve sys­tems to make wire trans­fers, han­dle elec­tronic pay­ments and process checks. And they all an­swer to at least one fed­eral reg­u­la­tor.

Banks and credit unions also are re­quired to tell fed­eral au­thor­i­ties if they sus­pect that their cus­tomers might be en­gaged in il­le­gal ac­tiv­ity. And when it comes to fol­low­ing those rules, the stakes are high.

“The FDIC could step in and shut down a bank, and it can do that with very lit­tle no­tice,” said Julie Hill, a law pro­fes­sor at the Univer­sity of Alabama and for­mer fi­nance in­dus­try at­tor­ney who has stud­ied cannabis bank­ing. “No­body’s ever got­ten their bank brought back to life af­ter it’s been closed by reg­u­la­tors.”

Be­cause of that, many

banks won’t even take the risk.

“From a fed­eral level, it’s il­le­gal,” Jim Brush, chief ex­ec­u­tive of Sum­mit State Bank in Santa Rosa, Calif., told Chi­ang’s work­ing group in May. “It re­ally doesn’t mat­ter what Cal­i­for­nia does.”

Still, fed­eral of­fi­cials have cracked open the door for banks and credit unions.

In 2013, the Jus­tice Depart­ment said it would fo­cus its mar­i­juana-en­force­ment ef­forts on pre­vent­ing sales to mi­nors, in­ter­state traf­fick­ing and a hand­ful of other crimes.

The next year, the Fi­nan­cial Crimes En­force­ment Net­work, or FinCEN, part of the U.S. Trea­sury Depart­ment, re­leased guide­lines for fi­nan­cial in­sti­tu­tions that want to work with mar­i­juana com­pa­nies. They re­quire ad­di­tional re­port­ing and de­mand that banks mon­i­tor com­pa­nies for ac­tiv­i­ties that re­main Jus­tice Depart­ment pri­or­i­ties.

FinCEN re­ported that 368 banks and credit unions were serv­ing the in­dus­try in March, up from fewer than 300 at the be­gin­ning of 2016. But that’s a tiny frac­tion of the na­tion’s nearly 12,000 banks and credit unions.

Hill said so few in­sti­tu­tions are play­ing along be­cause FinCEN’s guide­lines don’t of­fer clear le­gal pro­tec­tion. And some banks don’t want to be in the un­com­fort­able po­si­tion of polic­ing cannabis com­pa­nies.

“How would you know a busi­ness isn’t sell­ing to mi­nors un­less you’re in the store all the time?” Hill said.

What’s more, with a new ad­min­is­tra­tion in the White House and avowed mar­i­juana op­po­nent Jeff Ses­sions run­ning the Jus­tice Depart­ment, it’s not clear whether fed­eral au­thor­i­ties will take a harder line on the plant.

With many cannabis com­pa­nies un­able to get bank ac­counts, they are of­ten left to

deal in cash, which is in­con­ve­nient and dan­ger­ous.

Take Jerred Kiloh, owner of Higher Path Col­lec­tive. His Los An­ge­les dis­pen­sary had sales of about $4 mil­lion last year, so he owed more than $200,000 in taxes to Los An­ge­les alone, he told Chi­ang’s group.

Imag­ine, Kiloh said, car­ry­ing that much cash.

“Right now, at the down­town of­fice of fi­nance, there’s a six-story park­ing struc­ture 500 yards away,” he said. “I have to walk through what is es­sen­tially a home­less en­camp­ment with a duf­fel bag full of cash, walk across the street, go through se­cu­rity and then some­times stand in line.”

Kyle Kazan, a for­mer area po­lice of­fi­cer who runs a firm that in­vests in cannabis grow­ers and re­tail­ers, said the lack of ac­cess to bank­ing poses big safety risks.

“Real lives are in dan­ger be­cause there’s so much cash in play here,” Kazan said.

Cash pay­ments are a has­sle for gov­ern­ments, too. Todd Bouey, LA’s as­sis­tant direc­tor of fi­nance, told Chi­ang’s group that the city had to buy new cur­rency-count­ing machines be­cause of­fice work­ers were spend­ing so much time count­ing and re­count­ing cash tax pay­ments from mar­i­juana busi­nesses.

“No one comes in with the type of cash they come in with,” Bouey said. “It was tak­ing hours to get through one de­posit.”

Still, Bouey said that only about 20 per­cent of mar­i­juana busi­nesses that pay taxes are do­ing so in cash. Most pay with checks, in­di­cat­ing that they have bank ac­counts — ei­ther openly or on the sly.

Even though they are few, and mostly small, there are banks and credit unions that are hun­gry for cus­tomers and will­ing to qui­etly open ac­counts for cannabis busi­nesses.

The Los An­ge­les-area credit union serv­ing Can­nde­s­cent has been los­ing tra­di­tional mem­bers, and hopes that by serv­ing young, grow­ing com­pa­nies in a boom­ing in­dus­try, it will be able to of­fer check­ing ac­counts, home loans and auto loans to the com­pa­nies’ em­ploy­ees.

“We’ll prob­a­bly max out at about 200 busi­nesses, and we’re ba­si­cally at ca­pac­ity,” said an ex­ec­u­tive, who pro­vided de­tails of the in­sti­tu­tion’s cannabis bank­ing op­er­a­tions on the con­di­tion that nei­ther his name nor the in­sti­tu­tion’s be used. “I don’t need to get in­un­dated with phone calls.”

Finding a will­ing in­sti­tu­tion is just the first chal­lenge. Next, com­pa­nies have to qual­ify for an ac­count — and be able to af­ford it.

At the credit union, cannabis com­pa­nies have to pay an up­front fee of as much as $10,000 to cover the cost of in­de­pen­dent fi­nan­cial au­dits and crim­i­nal back­ground checks for the own­ers.

The credit union also charges re­cur­ring fees to cover the cost of on­go­ing due dili­gence and re­port­ing re­quired by FinCEN. For grow­ers, the credit union charges $5,000 a month. For dis­pen­saries, it’s $7,500.

“We’re ver­i­fy­ing that they’re not break­ing any laws, not evad­ing taxes, not do­ing any­thing that could be a le­gal or eth­i­cal vi­o­la­tion,” the ex­ec­u­tive said. “We as­sume we’re go­ing to be in­ves­ti­gated at some point by our reg­u­la­tors and maybe by the IRS or the DEA.”

Com­pa­nies also have to hire the ar­mored car ser­vices to take their cash di­rectly to a Fed­eral Re­serve Bank branch. “We don’t want cash com­ing to the credit union,” the ex­ec­u­tive said. “If we did, then we’d have peo­ple sign­ing up to rob the place.”

Los An­ge­les Times/GINA FERAZZI

Tom DiGio­vanni, chief fi­nan­cial of­fi­cer of mar­i­juana com­pany Can­nde­s­cent, poses at a green­house in Desert Hot Springs, Calif.

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