Banking on Marijuana

Matt Walstatter and his wife Meghan are purveyors of dope. But they pay their taxes, follow the rules and are doing so in a state where medical marijuana sales are now legal, Oregon. “Our focus is on running a legitimate, compliant business,” Matt Walstatter says. Their problem has been finding the financial services they need to run their business, pay their bills, pay their taxes and operate as if they weren’t criminals. At least 10 banks either rejected them or closed their accounts on finding out they were marijuana retailers. “It’s publicly known [these businesses] deal in large amounts of cash,” says Taylor West, deputy director of the National Cannabis Industry Association in Colorado. “It makes these businesses sitting ducks for robberies and other kinds of crime. There is a real concern that this situation won’t be taken seriously until someone gets killed.”

Few banks are willing to even offer a deposit account to a marijuana business in the growing number of states where marijuana is now legal, and even fewer are willing to speak publicly about doing so. Marijuana is still illegal at the federal level, and banks and their officers and directors could face criminal prosecution for violating the Bank Secrecy Act, which requires financial institutions to report suspicious activity that might signify money laundering or other criminal activities. The U.S. Department of Justice and FinCEN, an arm of the U.S. Treasury Department which enforces the Bank Secrecy Act, have issued guidance clarifying their positions on prosecuting marijuana businesses and the entities that serve them, but that has done little to swing the financial doors open for an industry estimated to have generated $2.7 billion in legalized sales in 2014.

Twenty-three states and the District of Columbia allow medical use of marijuana and four states have passed laws allowing for recreational use among adults. Two of them, Colorado and Washington, have implemented a commercial structure for the sale of marijuana. California’s municipalities all regulate medical marijuana businesses their own way. But few banks want to have anything to do with those new commercial businesses, leading to a strange legal no man’s land. Marijuana retailers and growers are shunned by financial institutions, so they can’t handle credit card transactions, can’t wire taxes to the appropriate government agency, or pay bills without sending their employees out with paper bags stuffed with cash, just hoping they don’t get robbed. Is there a way to safely bank these businesses? That depends on your tolerance for risk and your ability to manage your bank without going up in smoke.

One of the few organizations publicly upfront about banking the marijuana industry, MBank, a $162 million asset, state-chartered bank in Gresham, Oregon, just outside Portland, plans to quit serving the industry at the end of June. “Compliance was a lot bigger than we obviously thought,” says CEO Jef Baker. “My feeling is that it would have to be a larger bank that could effectively run a compliance program.” For now, Oregon is a medical marijuana state, but the law will allow recreational use for everyone over the age of 21 by July of this year, with commercial recreational sales expected to start in 2016. The 20-year-old MBank, jokingly nicknamed “marijuana bank,” also announced plans earlier this year to expand in Colorado, but nixed plans later. With just three branches, Baker said the bank didn’t have the infrastructure to meet the overwhelming demand.

Other institutions also are trying to bank the industry while limiting their risks. Numerica Credit Union in Spokane, Washington, will only bank licensed growers and processors, not licensed retailers, and won’t let them use remote deposit capture, credit cards, night deposits, mobile banking or online bill pay. Don Childears, president and CEO of the Colorado Bankers Association, estimates that eight banks are providing services in his state to marijuana business, but only with longstanding clients, as the state’s voters approved medical marijuana in a referendum 15 years ago. None of the banks want their names public, he says. Their regulators have allowed them to continue to serve those businesses, as long as they don’t try to expand their marijuana clientele, he says. “Our one piece of advice is don’t go into this field until you get a green light from your legal counsel,” Childears says. “I frankly don’t know of an attorney who would tell you to go into this business. It’s quite a mess, but honestly, it’s [Colorado’s] mess. “

The Department of Justice’s guidance in February 2014 for marijuana-related financial crimes did little to alleviate Childears’ concerns. The guidance, called the Cole memo, says the department would focus prosecution on businesses that violate eight principles, such as selling to minors or doing business with illegal drug cartels. Plus, the Department of Justice made it clear that financial institutions could be prosecuted for violations of the Bank Secrecy Act if they fail to follow proper due diligence regarding the Department of Justice’s enforcement priorities. FinCEN simultaneously issued guidance, reiterating that marijuana still is illegal under the Controlled Substances Act, and directing banks to file Suspicious Activity Reports (SARs) on marijuana businesses even in states where it’s legal, as well as conduct proper due diligence on customers who are engaged in the marijuana industry. The American Bankers Association in a memo warned members that the expectations set forth in the guidance “are extensive and require financial institutions to adopt procedures to closely scrutinize all activities of a marijuana business.”

Chris Myklebust, the commissioner of the Colorado Division of Financial Services, which regulates credit unions, says the state is slowly beginning to see banks and credit unions tiptoe into the industry. He recommends that financial institutions do an extensive risk assessment before banking the marijuana industry, including assessing the reaction of shareholders and customers. Childears says he got a call from a shareholder of a bank threatening to sue because the bank hadn’t disclosed its plans to bank the marijuana industry to its investors. Regulators’ input also is needed. Clients should sign affidavits that they aren’t violating any of the principles of the Justice Department’s Cole memo, Myklebust says.

MBank got its clients to sign affidavits and checked with its regulators before banking the business. “The regulatory position is non-objection,” Baker says. “It’s never approval.” The board did its own research and constructed a plan to mitigate its risks, hiring three extra employees just to conduct Bank Secrecy Act-related due diligence on the new customers. “It’s a long row to hoe,” he says. “It almost took us a year just to become knowledgeable enough, developing a program from scratch where none exists.” In order to pay for the extra employees, marijuana-related businesses are charged a start-up fee and a monthly maintenance fee, which varies based on the size of their business. Walstatter and his wife were paying MBank $1,000 per month for a checking account. MBank had 70 marijuana businesses as of mid-April. But despite the sizable income possibilities, it wasn’t enough. Baker says regulators never told him to shut down the business. But his bank’s story shows the complexity of handling a nuanced regulatory position. What will it take for more banks to be comfortable in the increasing number of states allowing for marijuana sales? Until Congress changes the federal law, it may not be very many, according to Childears and West. Congress could allow banks to provide services in states where marijuana is legal, but not legalize marijuana across the whole country. So far, all such proposals in Congress have been nipped in the bud.

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Naomi Snyder


Editor-in-Chief Naomi Snyder is in charge of the editorial coverage at Bank Director. She oversees the magazine and the editorial team’s efforts on the Bank Director website, newsletter and special projects. She has more than two decades of experience in business journalism and spent 15 years as a newspaper reporter. She has a master’s degree in journalism from the University of Illinois and a bachelor’s degree from the University of Michigan.

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