Banks to Legal Marijuana Businesses: Your Money Stinks (Literally)

Inside Colorado's marijuana economy.
Jan. 31 2014 12:04 PM

Your Money Stinks

Why banks won’t do business with the marijuana industry. (And why it’s a huge problem.)

(Continued from Page 1)

Another service banks provide is loans—and that’s something Colorado’s marijuana industry desperately needs. Because Colorado imposes residency requirements, background checks, and other limitations on marijuana licensure, pot shops can’t easily raise capital the way other startup businesses usually can—by selling a part of the business in exchange for ready capital. This has led to some novel solutions, such High Times’ recently announced private-equity fund to help cannabis businesses that can’t get business loans.

But marijuana businesses shouldn’t be expecting loans from banks anytime soon. Even if banks weren’t worried about possible money laundering charges, there’s the problem of what they could accept as collateral for a loan. They aren’t likely to take a marijuana business’s tangible property like vehicles or buildings, since that’s all subject to forfeiture if the feds change their minds and start enforcing federal drug laws. Nor, of course, could they accept the business’s inventory (i.e., the pot), or take over the running of the business themselves. A Wells Fargo–run Grateful Meds? Unlikely.

Then there’s the other financial conundrum facing marijuana stores: what to do about credit cards. Historically, credit card companies have been as wary of pot as banks, fearing that any financial transaction with those violating federal law could be seen by prosecutors as engaging in money laundering. Lately, however, some major operators have been fudging the rules. Earlier this month, Visa issued a statement noting, “Given the federal government's position and recognizing this is an evolving legal matter with different standards applicable in different states, our local merchant acquirers [i.e., banks] are best suited to make any determination about potential illegality.” That’s why some Colorado banks are working with pot shops to allow them to take plastic—but doing so requires some questionable financial footwork, such as either processing the card transactions as if they were ATM withdrawals, or possibly even relabeling the transaction so it doesn’t appear to be a marijuana purchase. As Ean Seeb, co-founder of the Denver Relief marijuana consulting company, puts it, “There are people who have credit card services in this industry, but for those who do, somebody somewhere is lying to someone else, and that someone is violating the law.” However companies are getting credit cards to work, the arrangement appears untenable.

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That’s why some people in the marijuana business are dreaming up alternatives to traditional banking services, both to help the industry and to take financial advantage of the void left by banks and credit cards. Some of these concepts involve new technologies, such as point-of-sale “cashless ATM” debit machines that deduct payments (plus a surcharge) from customers’ ATM cards, and payment devices that secure cash in a lockbox as soon as it leaves the customers’ hands. Then there’s the idea floated by some legislators and marijuana stakeholders of creating a state-owned, marijuana-focused bank with no connection to the federal financial system, an undertaking that would be exceedingly difficult (it couldn’t issue debit or credit cards, couldn’t accept checks or funds from other banks, and wouldn’t be insured by the Federal Deposit Insurance Corporation), plus might not even be legal, since many state constitutions appear to preclude state-owned banks.

All of these options are at best stop-gap measures, temporary fixes until the government gets around to solving the real problem—amending the Controlled Substances Act, and possibly other federal statutes such as the USA Patriot Act and the Bank Secrecy Act, to allow for marijuana-related financial transactions. Because, as a recent, little-known Arizona court case called Hammer v. Today’s Health Care II made clear, when it comes to dollars and cents, there’s no getting around the federal criminality of pot. In August 2010, two Arizonans lent $500,000 to a Nevada-based corporation called Today’s Health Care II, or THC, to operate a medical marijuana dispensary and grow center in Colorado. Court documents indicate that THC stopped making payments on the loan and defaulted in March 2011—which led the Arizonans to sue in Arizona state court for the enforcement of the contract. The judge in the case, however, dismissed the suit, buying THC’s argument that the contract was unenforceable because it was entered into for criminal purposes. That’s right: THC successfully argued that it did not have to pay back its loan because it was engaged in a violation of federal law.

While the case was a win for THC, it’s a disaster for the cannabis industry in general. We are a country built on contracts. Banking arrangements are built on contracts, loans are built on contracts, financial transactions are built on contracts. If all these marijuana-related contracts are unenforceable, the economic foundations of Colorado’s fledgling marijuana economy could be on shaky ground.

Next up: So far, everything’s gone relatively smoothly for Colorado’s legal marijuana experiment. But is it all clear sailing ahead? We look at how this could all still go terribly, terribly wrong.

Sam Kamin is professor and director of the Constitutional Rights and Remedies program at the University of Denver Sturm College of Law.

Joel Warner is a former Westword staff writer.

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