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SEATTLE
— In his second-floor office above a hair salon in north Seattle, Ryan
Kunkel is seated on a couch placing $1,000 bricks of cash — dozens of
them — in a rumpled brown paper bag. When he finishes, he stashes the
money in the trunk of his BMW and sets off on an adrenalized drive
downtown, darting through traffic and nervously checking to see if
anyone is following him.
Despite
the air of criminality, there is nothing illicit in what Mr. Kunkel is
doing. He co-owns five medical marijuana dispensaries, and on this day
he is heading to the Washington State Department of Revenue to commit
the ultimate in law-abiding acts: paying taxes. After about 25 minutes
at the agency, Mr. Kunkel emerges with a receipt for $51,321.
“Carrying
such large amounts of cash is a terrible risk that freaks me out a bit
because there is the fear in my mind that the next car pulling up beside
me could be the crew that hijacks us,” he said. “So, we have to play
this never-ending shell game of different cars, different routes,
different dates and different times.”
Legal
marijuana merchants like Mr. Kunkel — mainly medical marijuana outlets
but also, starting this year, shops that sell recreational marijuana in
Colorado and Washington — are grappling with a pressing predicament:
Their businesses are conducted almost entirely in cash because it is
exceedingly difficult for them to open and maintain bank accounts, and
thus accept credit cards.
The
problem underscores the patchwork nature of federal and state laws that
have evolved fitfully as states have legalized some form of marijuana
commerce. Though 20 states and the District of Columbia allow either
medical or recreational marijuana use — with more likely to follow suit —
the drug remains illegal under federal law. The Controlled Substances Act, enacted in 1970 classifies marijuana as a Schedule I drug, the most dangerous category, which also includes heroin, LSD and ecstasy.
As
a result, banks, including state-chartered ones, are reluctant to
provide traditional services to marijuana businesses. They fear that
federal regulators and law enforcement authorities might punish them,
with measures like large fines, for violating prohibitions on
money-laundering, among other federal laws and regulations.
“Banking
is the most urgent issue facing the legal cannabis industry today,”
said Aaron Smith, executive director of the National Cannabis Industry
Association in Washington, D.C. Saying legal marijuana sales in the
United States could reach $3 billion this year, Mr. Smith added: “So
much money floating around outside the banking system is not safe, and
it is not in anyone’s interest. Federal law needs to be harmonized with
state laws.”
The
limitations have created unique burdens for legal marijuana business
owners. They pay employees with envelopes of cash. They haul Chipotle
and Nordstrom bags containing thousands of dollars in $10 and $20 bills
to supermarkets to buy money orders. When they are able to open bank
accounts — often under false pretenses — many have taken to storing
money in Tupperware containers filled with air fresheners to mask the
smell of marijuana.
The
all-cash nature of the business has also created huge security concerns
for business owners. Many have installed panic buttons for workers in
the event of a robbery and have set up a constellation of security
cameras at their facilities beyond what is required, as well as floor
sensors to detect break-ins. In Colorado, Blue Line Protection Group was
formed a few months ago, specializing in protecting dispensaries and
facilities that grow marijuana, and in providing transportation
security. The firm largely uses military veterans who have Special
Operations experience.
Marijuana
business owners have devised strategies to avoid the suspicions of
bankers. A number of legal operations have opened accounts by
establishing holding companies with names that obscure the nature of
their business. Some owners simply use personal bank accounts. Others
have relied on local bank managers willing to take chances and bring
them on as clients, or even offer tips on how to choose nondescript
company names.
But
the financial institutions eventually shut down many of these accounts
after managers conclude the businesses are too much of a risk. It is not
unusual for a legitimate marijuana business to go through a half-dozen
bank accounts in a few years. While they are active, however, these
accounts may have informal restrictions placed on them — some
self-imposed — so they do not draw the scrutiny of bankers who may file
suspicious-activity reports or would be required to report deposits over
$10,000 in cash. The account holders may make only small deposits, and
only at night and at certain branches. Mr. Kunkel of Seattle has such an
account.
At
the largest credit union in Washington State, BECU, about 20 accounts
have been shut down in the last three years after it was discovered they
were for businesses in the legal marijuana trade, Todd Pietzsch, a
spokesman for the credit union, said.
Kristi
Kelly, 36, who owns two dispensaries and several marijuana growing
operations in the Denver area, said six bank accounts of hers had been
canceled in the last 18 months. “Opening the account is not necessarily
the problem,” she said. “Our cash deposit levels flag a bank’s
compliance division.”
Ms.
Kelly, who had just paid $10,000 in cash to the City of Denver for
licensing and application fees to expand her business, said that several
times a week she carried around tens of thousands of dollars in a bag.
“I never felt as illegitimate as the day I had to buy a cash counter,”
she said, adding that she spends three hours or so a day just managing
the cash from her business’s multiple locations.
A.T.M.s
are common in marijuana outlets, but the business owners often have to
use their own cash in the machines in case law enforcement authorities
conduct a raid and seize the money.
Those
marijuana operations that do have bank accounts or use the personal
ones of their owners can use a cashless A.T.M. service in which a debit
card is swiped at a dispensary and the money is transferred into the
recipient’s account.
“It
is operating over the A.T.M. network and not the credit card network,”
said Lance Ott, whose company, Guardian Data Systems, provides this
service. “The A.T.M. networks are not as regulated. This is the
loophole.”
Since
legal marijuana operations, for the most part, cannot get bank loans,
these small businesses have to rely on short-term loans from
individuals, usually with higher interest rates.
To
help, High Times magazine is starting a private equity fund to invest
in marijuana businesses. But many investors may feel uneasy about
marijuana businesses that do not have bank accounts. And without bank
references, entrepreneurs say, it is much tougher to get lines of credit
from vendors.
Leaders
in the marijuana trade point out that giving accounts to businesses
would allow for more transparency and meticulous regulation and would
help ensure that jurisdictions receive the taxes they are entitled to.
Marijuana
entrepreneurs and banks both would like clear guidelines from the
government on how financial institutions can serve the industry. On
Friday, six members of Colorado’s congressional delegation sent a letter to the Treasury and the Justice Department requesting that they “expedite” that guidance.
In
August, the Justice Department issued a memo indicating that it would
not crack down on legal marijuana as long as eight regulatory
requirements were met, like preventing revenue from the sale of
marijuana from going to criminal enterprises and preventing the
distribution of marijuana to minors. The memo did not address banking.
The
Treasury Department’s Financial Crimes Enforcement Network hopes to
circulate recommendations by the end of this month to officials at the
Treasury and the Justice Department for their opinions, an official
briefed on the situation said. There is no timetable for formal
guidelines.
Richard
Riese, senior vice president for regulatory compliance at the American
Bankers Association, said banks wanted clear and comprehensive
guidelines on how to do business with the legal marijuana industry.
Mr.
Riese said, for instance, that banks would want to know that they were
not “aiding and abetting” a criminal enterprise if they provided
services to marijuana businesses. “Banks will need a lot of detail from
regulators to get the satisfaction and comfort they are looking for,” he
said.
Sheelagh McNeill contributed research.
A version of this article appears in print on January 12, 2014, on page A1 of the New York edition with the headline: Banks Say No to Marijuana Money, Legal or Not.
