The climate is brightening for cannabis entrepreneurs around
the U.S. After more than a year and a half of legal cannabis in
Colorado, the results appear to be mostly positive. Though some
unexpected health effects have been reported in association
with higher rates of marijuana intoxication, studies show that
use of pot among youth did not increase in Colorado after
legalization as many critics had feared, and the Colorado
Department of Transportation recently reported that highway
fatalities reached a near-historic low in 2014, dispelling
fears of drugged driving. Meanwhile, tourism, housing prices
and tax receipts for the state have increased substantially.
Now that the perception of cannabis has started to change,
business owners many of whom deliver their tax payments
in bags full of cash say its time to address the
real danger of marijuana legalization: operating outside the
Because of federal laws such as the Bank Secrecy Act of 1970
and anti-money-laundering statutes enforced by the U.S.
Treasurys Financial Crimes Enforcement Network (FinCEN),
banks are blocked from even distantly connecting themselves
with activity prohibited by federal law, even in states where
the activity is legal. FinCEN issued guidance last year to help
burgeoning marijuana industry, banks and credit card
companies start to reconcile their practices and expectations,
but experts say the federal governments approach has only
made things more confusing.
All of this is prosecutorial guidance, so it can
change, says Richard Morris, a corporate and regulatory
attorney with law firm Herrick Feinstein in New York.
Its sort of like dealing with a permission that
could be revoked at any time. Whats proper today may not
be proper tomorrow, so I cant tell [a prospective banker]
they wont be a target.
fear of prosecution has led to a nearly 100 percent
cash-based dispensary industry, with business owners handling,
transporting and storing large amounts of currency and raising
the risk of theft from both employees and violent
Jessica McElfresh, a criminal defense attorney based in San
Diego who works with medical marijuana businesses as part of
her practice, says when a legal cannabis business approaches a
bank, one of three things usually happens: A client is honest
with the bank about its business plan, and the bank declines to
issue an account; a client is not completely honest with the
bank about the purpose of its business because it anticipates
the previous scenario, leaving the bank unable to properly fill
out forms and the client omitting vital information; a client
obtains a bank account, but the bank closes it in short order
because of the large number of cash deposits, which put up a
red flag for many banks. Each of these scenarios leads to a
less transparent and safe cannabis industry, says McElfresh.
Its extremely difficult to track activity and
adhere to the federal governments strict regulations
without bank accounts, she adds.
Several efforts to include cannabis accounts in existing
banks or create new cannabis-focused banks and credit unions
have been thwarted. Oregon-based MBank was the only bank in the
state offering checking accounts to cannabis businesses until
it backed away from the industry this spring after just a few
months, citing limited resources to handle the 75 clients
compliance needs. In Colorado, the Fourth Corner Credit Union
recently sued the federal government over the Federal
Reserves decision not to approve an application for a
master account at its Kansas City branch.
This difficulty has led some cannabis businesses to make
creative and in some cases dangerous workarounds.
In addition to being unable to find a bank, cannabis
dispensaries are also largely blocked from accepting credit
cards because of Visa and MasterCard regulations and laws
governing their sponsor banks. One consumer, who asked not to
be named because of the uncertain legality of the situation,
tells Institutional Investor that after a trip to one
dispensary in Boulder, Colorado, the name of what she thought
was a credit union showed up on her bank statement. A quick
search shows that the name actually belongs to a small property
management company. Jeff Foster, founder of Jane, a
Denver-based cash management and compliance firm for the
cannabis industry, says the property management company is
likely being used as a front for this particular dispensary in
order to get around banking rules.
The dispensary probably doesnt even know
thats happening, says Foster. Independent sellers
of credit card processing equipment have been known to bend the
truth with credit card companies in order to get business from
the rapidly growing cannabis industry, according to Foster, who
says the most common cover businesses are flower shops and hair
Jane, which grew out of Fosters experience with
payment management systems and kiosks, aims to separate the
business of handling money from the actual hands-on operation
of a cannabis dispensary. The long-term goal is to make banks
more comfortable working with sellers and growers, but until
then the focus is cash management through the use of in-store
kiosks and armored trucks that transport cash to vaults for
safekeeping. Jane also assists business owners with compliance,
to the extent that the procedures are clear. Foster believes
that all it will take is one bank to create a successful
cannabis financing practice, and the competitive spirit
of the rest of the banking industry will take care of it from
There is some legislation in the works that could
potentially make it easier to bank these people
presidential hopeful Senator Rand Paul of Kentucky has
sponsored such a bill and recently held the first-ever
marijuana industryfocused presidential fundraiser, in
Denver but experts arent optimistic.
Much of what weve seen is neither encouraging
nor likely to succeed, says attorney McElfresh.
There are a variety of bills pending in the U.S.
Congress, but Im skeptical that they will make it out of
committee and be passed.
The climate is frustrating for investors as well. Patrick
Rea, founder of business accelerator CanopyBoulder, says
hes come across many high-net-worth individuals and a few
venture capitalists interested in the sector, but many are
turned off from dispensaries and grow operations by the
confusing regulations and risks associated with all-cash
businesses. The Boulder-based firm matches highly qualified
entrepreneurs pitching investor-friendly cannabis-adjacent
business ideas, such as software, with wealthy individuals
looking to cash in on the nascent industry. The incubator
graduated its first class of companies in June after a 13-week
program focused on management, financing and pitching.
The program has so far been a success, with graduates
presenting their ideas for ancillary cannabis businesses from
software to consumer products at this summers Cannabis
Business Summit in Denver, the same event where Paul held his
fundraiser. The CanopyBoulder second class entered the
incubator this week. But while the accelerator is lending
legitimacy to a specific sector of the growing class of
cannabis entrepreneurs, those involved in actual handling of
legal marijuana grow operations and dispensaries
are getting left behind.
At some point, experts agree, something will have to give at
the federal level. Until then, those in the cannabis industry
will continue to find ways to do business, even if it means
sometimes still behaving like outlaws. Its not unheard of
for cash-heavy cannabis business owners to pay for protection,
according to attorney Morris. Every day that we have this
multibillion-dollar underground economy, we are feeding a
monster, he says.
Follow Kaitlin Ugolik on Twitter at @kaitlinugolik.