The dispensaries are caught in a Catch-22. State officials want to increase accountability by tracking every marijuana plant and every transaction, but without bank records, that becomes difficult.
Still, help may be on the way. At least one consultant is introducing a sophisticated computer tracking system that documents medical marijuana from seed to sale. There is also an effort to create a state credit union that caters to the medical marijuana industry. The one lingering problem: the small matter of finding someone willing to pony up the several million dollars needed to start such a bank.
Denver attorney Jessica Peck Corry of Hoban & Feola says banking for the medical marijuana industry is still an untapped market that could be captured by a bank or credit union that is regulated at the state — instead of federal — level.
“A credit union model specific to the industry would allow businesses to lift the veil of stigma from their operations and work together to help their respective aspirations thrive,” she told Boulder Weekly. “The challenge will come in raising a substantial amount of private equity to get a credit union started, about $4 million based on proposals we’ve seen. This industry is becoming more sophisticated by the day, and we’re hopeful this type of model could become reality within the next year or two.”
The problem with providing banking services to dispensaries lies in the fact that while medical marijuana is legal at the state level, it is still classified as a schedule I controlled substance at the federal level.
Elevations Compliance Manager Cenobio Chacon told Boulder Weekly earlier this year that the Bank Secrecy Act of 1970 requires financial institutions to help the government prevent money laundering, tax evasion and other criminal activities. As a result, he said, any transactions suspected of not being conducted legally must be reported, he says, and the compliance efforts involved in policing clients in industries like medical marijuana are too costly for most banks to undertake.
Tim Powers, vice president of communications for the Colorado Bankers Association, describes it this way: “Current bank regulations require us to broadly know what type of business our customers are operating in, and determine that the business is not blatantly operating an illegal business, or engaging in illegal activity. With regard to medical marijuana dispensaries, unfortunately the banks are caught between conflicting state and federal laws — one saying this action is legal and another saying it is not. Possible non-compliance with our regulations carry strict and costly penalties.
“Many individual banks have approached regulators for guidance on this issue since the inception of Colorado’s medical marijuana law,” he continues. “Some have been told to be ‘very cautious’ and warned of potential compliance issues with current regulations, while recently others have unofficially been told to not open these accounts until rules and guidance has been established.
“It is an unusual quagmire we hope regulators will address soon.”
David Barr, spokesperson for the Federal Deposit Insurance Corporation (FDIC), told Boulder Weekly, “The FDIC has not issued any prohibitions for our banks in their dealings with businesses that are engaged in medical marijuana dispensaries.”
But the banks have seen the writing on the wall.
Not being able to open a bank account has put dispensary owners in a pickle, especially as state officials push for more transparency and documentation of medical marijuana transactions.
Corry says the few dispensaries and banks that are still in business together have a “don’t ask, don’t tell” policy.
“Given that FDIC-insured banks remain wary of opening accounts for medical marijuana-related businesses, Colorado’s industry finds itself in a tough spot,” she says. “The new state rules require full transparency and standard business practices, but federal prohibition makes this difficult. These circumstances encourage cash transactions and money orders. As far as lending, we’ve seen an innovative private lending market thrive. Many of our clients’ businesses are family owned and operated, so we see a lot of lending provided by grandparents, parents, aunts, uncles and siblings.”
One Boulder dispensary owner who did not want to be identified says he has lost five bank accounts in a little more than a year. He says there were two banks in Colorado Springs willing to work with dispensaries, but now there is only one, and it charges $200 a month in fees.
Some dispensaries have turned to brokerage accounts at small companies for their merchant services, like for credit card transactions.
But cash, which is used in the majority of dispensaries’ transactions, is another matter.
“People are doing all kinds of crazy things with cash,” he says. “There are a lot of ways that are not quite kosher.”
Those include creating a bank account under one’s own name or under a business name that doesn’t allude to medical marijuana. Some have started unrelated companies just to have a bank account, which he says “technically is money-laundering. You’re not supposed to do that, but it’s the only way to get around it.”
He adds that some dispensaries have not lost their accounts because their business name is innocuous or because they don’t have a website where banks can learn about their services. It’s another Catch-22, he says, when you need to have an online presence to sell your products, but by doing so you risk losing your bank account.
He points out that dispensaries can’t do employee withholdings for things like federal taxes, Social Security and Medicare without a bank account.
“To run a business without a bank account is almost impossible,” he says. “Everybody’s being pretty quiet about this. Nobody wants to say what they’re doing. We have enough trouble with this business as it is; we don’t need more.”
By several accounts, the lone remaining bank in the state that has publicly declared its willingness to do business with dispensaries is Colorado Springs State Bank. Bank employees referred all questions to bank President Alan Gregory, who did not return calls from Boulder Weekly.
Henri Morin, co-owner of Colorado Patients First, says that Colorado Springs State Bank is willing to put drop boxes in Boulder and Longmont for those who don’t want to make the three-hour round trip to make daily cash deposits. He says he is not sure what other dispensary owners are doing with their cash because they are “very secretive.”
He says he may end up doing business with that Colorado Springs bank because his days of having an account with Wells Fargo are numbered. Morin says he had hoped to open an account at Bank of the West, since he knows of several dispensaries that have had accounts there, but after meeting with bank representatives last week, he’s not optimistic that they will accept dispensaries much longer.
Asked whether his bank recently decided to stop doing business with dispensaries, Bank of the West spokesperson John Stafford said, “I cannot verify that at one time we did business with medical marijuana dispensaries.” He also would not comment on whether the bank has closed any dispensary accounts.
“I don’t know what happened, probably something with the feds,” Morin says of Bank of the West. “It’s amazing. At the beginning, everybody wanted the business, and now there’s no one.”
He also expresses concern that regulations are being decided at the state level by a Department of Revenue advisory committee that doesn’t accept public comment at its hearings.
We are very nervous,” Frank Horwich, co-owner of Boulder Medical Marijuana Center, says of dispensaries that have managed to maintain accounts, whether with banks, brokers or investors. “It makes it just terrifying. … We try to hedge our bets and not have our eggs in one basket.”
He declines to divulge the names of the firms he has accounts with, for fear of losing them.
As for doing business with Colorado Springs State Bank, Horwich says that even with drop boxes, it will take longer than it should for deposits to be recorded, which might present a cash-flow challenge for some dispensaries.
“It’s a nightmare to have that cash lying around,” he says, alluding the risk of burglary. “I have a bunch of cute little girls working in my store, and I don’t want to put them at risk.”
In most cases, the lack of a bank means no real estate transactions, no mortgages, no leases, Horwich says.
“In this business, nobody will under write any kind of financing,” he explains. “I do not know how you can operate without a bank account.”
When asked about the idea of a state-chartered bank or credit union expressly for medical marijuana dispensaries, Horwich says such an entity could corner the market and charge high rates.
“They’d be the most loved and the most hated in the industry,” he says.
Nicholas King, co-owner of Alpine Herbal Wellness and a member of the Department of Revenue’s rulemaking advisory committee, guesses that every dispensary in the state has had at least one of its bank accounts closed.
While some dispensaries are “hanging on” to their accounts because they have a long relationship with their bank, he says, others have lost their accounts because their bank was alerted to their line of work after the Department of Revenue contacted their bank as part of the state licensing process.
King says he has turned to Colorado Springs State Bank for banking services.
“We want to be above-board,” he says.
For now, some are still holding out hope that a private option will pan out.
“We’re cautiously optimistic about the prospect of a private credit union model and have seen some really dynamic models put forth,” Corry says. “While the industry still suffers from dated stoner stereotypes, sophisticated financial planners and strategists are involved in growing numbers.”
Denver consultant Christopher Sterling uses high-end business-tobusiness jargon like “enterprise distribution system” and “client portal” when discussing the tracking system he is pitching to marijuana-growing operations, dispensaries and state officials.
Like the electronic real-time systems and portable scanners used by UPS, Federal Express and Wal-Mart, he says, the software and hardware products he is peddling will provide state officials and others the transparency they desire by documenting medical marijuana from the time it is planted to the time it is sold, using GPS technology and radio frequency identification. “This legitimizes the businesses,” he says.
Corry concludes, “We hope the federal government will acknowledge the value of MMJ businesses for local banks and reverse its current policies. Congressman Jared Polis has been a strong supporter of state MMJ rights and has lobbied his fellow lawmakers to support change here.
“Time will tell.”