Marijuana companies struggle to find a place to put their green


Federal regulations force businesses into cash-only operations

For some in the marijuana business, going legit is turning out to be harder than it looks.

A widely recognized benefit of marijuana legalization is the ability to regulate an industry that has previously thrived on the black market. But current financing standards are keeping legal businesses in the complicated, and expensive, practice of all-cash operations — from not being able to accept credit cards to figuring out how to store and keep track of their money and handling payroll.

This industry will struggle to mature because it doesn’t have access to traditional banking, says Derek Peterson, chief executive of Terra Tech, a marijuana production and retail company.

Given marijuana’s illegal status on the federal level, and that the federal government regulates banks, financial institutions are reluctant to do business with companies involved with cannabis. If federal auditors find that institutions are working with a marijuana-related business, those institutions could lose their Federal Deposit Insurance Corporation insurance, thus risking the security of the finances of other businesses in their portfolio.

In an address to the National Cannabis Industry Association’s Cannabis Business Summit in New York in September, Sen. Kirsten Gillibrand, a New York Democrat, identified this risk as one of the primary impediments to patient access to medical marijuana.

“These financial restrictions have prevented transparent financing and have forced many providers to run dangerous cash-only operations,” Gillibrand said in the speech.

Gillibrand is also a co-sponsor of the Compassionate Access, Research Expansion and Respect States Act, a bill that seeks to provide a “safe harbor” for financial institutions to allow them to provide services to legal marijuana companies.

In February 2014, the Treasury Department and Justice Department issued official guidance to banks to ease concerns about breaking federal law in dealing with marijuana companies, but the effort created more confusion and was widely considered to not have gone far enough in offering protection.

The marijuana industry has struck out with big finance. Representatives for J.P. Morgan Chase & Co. JPM, -0.47% and Bank of America BAC, -0.64% the two largest banks in the U.S. by assets, say their policy is to not work with the marijuana industry because the banks are federally regulated.

And smaller, niche banks sometimes can’t handle the business. There are banks that have tried to open their doors to legal cannabis businesses, but like Portland, Ore. -based MBank—which opened marijuana accounts in January but closed them in April—the cost of keeping up with compliance and regulations is too high.

“We thought we could, but we couldn’t,” MBank chief executive Jef Baker told a local news outlet after the accounts closed.

These federal entanglements are keeping banks from a rapidly growing industry. In 2014, the Colorado recreational and medical marijuana industry raked in about $700 million in revenue and the state government received about $63 million in taxes—and that number is expected to double for 2015. GreenWave Advisors, an industry research firm, predicts marijuana to be a $35 billion industry by 2020 if medical and recreational cannabis is legalized in all 50 states and the District of Columbia.

The inability to perform transactions through a bank carries considerable costs for legal cannabis companies, especially if they are attempting to ensure complete compliance with the law.

“They have to pay vendors, payroll, segregate payroll taxes, count out taxes,” Peterson says. “It’s created a very archaic environment for these businesses to operate.”

Steve DeAngelo, co-founder and executive director of Oakland, Calif.-based Harborside Health Center, says the dispensary network has spent hundreds of thousands over its nine years in operation in excess time and money dealing with cash. Harborside currently operates dispensaries in Oakland and San Jose, and is opening a location in Portland, Ore.

“There’s really no reason for it,” DeAngelo says of the extra expenses.

He says Harborside currently has relationships with a number of banks for various services, since no bank is willing to take on the full range of responsibilities, but couldn't disclose details for concern of endangering these relationships.

Harborside has experienced lost business with banks over FDIC concerns multiple times, DeAngelo says, leaving the dispensaries no choice but to transition to cash-only operations during these periods.

Without the help of a bank, protecting business revenue is incredibly difficult. Dispensaries and ancillary businesses must deal with holding large amounts of cash on a regular basis, making them an obvious target for thieves. Peterson estimates that business owners must pay at least $10,000 a month on measures such as vaults and security cameras to deter burglary threats.

DeAngelo says transporting the cash is an especially risky practice. While in-store, Harborside has a camera system manned by live personnel and a security staff, there is not much it can do to protect cash on the road. Armored vehicles that operate nationwide are also reluctant to deal with cannabis companies for similar fear of federal retribution.

However, some companies, like Denver-based MPS International, are stepping in to fill these security needs by providing services solely for marijuana-related companies in states where marijuana is legal, specifically California, Colorado, Washington, Nevada and Arizona.

Third-party vendors dealing with dispensaries also face obstacles to everyday operations. Under federal law, when a party receives a cash payment of $10,000 or more, or a cash payment that might look suspicious, it must file a Form 8300 with the Internal Revenue Service. The two-page form, which is due 15 days after the transaction takes place, requires information such as both parties’ taxpayer identification numbers or social security numbers, the nature of the transaction and the form in which the transaction was paid. If the receiving party fails to file the form, it must pay a $25,000 fine.

Without bank statements, the IRS must act without its primary auditing tool. Thus, the form acts as a secondary record and a general safeguard from unwanted IRS attention on major transactions -- and it draws more attention to the “gray market” aspect of the industry.

“It just increases the stigma of dealing in cash,” said Luigi Zamarra, an accountant and marijuana industry tax specialist, at the NCIA summit.

Another time- and labor-intensive process is paying out taxes and payroll. Dave Wedding dress, co-founder of Harborside, estimates he spent an additional 10 hours every two weeks on payroll when the dispensaries were forced to deal in cash.

“It’s just a significant drain on time and energy,” Wedding dress says.

Terra Tech’s Peterson says these expensive, and at times dangerous, obstacles counteract two of the primary goals of legalization: regulation and tax revenue.

“So much can be kept in the black market arena,” he says. “Not because of choice but because of necessity.”

Furthermore, if it weren’t for the high revenues they’ve been generating since legalization, the overhead would end up crushing cannabis companies out of business.

“In a normal revenue curve, to have these additional overheads, the industry wouldn’t get off the ground,” Peterson says.