BUSINESS THRIVES due, in no small part, to the fact that it helps cater to the economy and helps keep money flowing through the system. What happens, however, when part of that economic machinery ceases to function? What happens when a business is unable to do normal banking? In the case of businesses operating in the cannabis industry, that is exactly the question they have found themselves asking.
The fact that some states have legalized marijuana while others have not is ambiguous. Equally ambiguous is the fact that the federal government still sees marijuana as an illegal drug. This, unfortunately, creates legal gray areas. The governments of the states and the federal government don’ t see eye-to-eye on the issue, and while the federal government technically does trump the state, it isn’ t always( or even often) in its best interest to do so.
Banking is one of those gray areas. Banks in a given state— for example, Colorado— will take legal funds which have been accrued as a result of legal business transactions in the state involving cannabis. In 2016, about $ 1.6 billion in cash flowed through the system. Unfortunately, that is where some problems can start. Since banks must be granted master accounts in order to conduct their business, they are at the whim of institutions like the state federal reserve.
Technically, funds could be seized by the federal government. A lot of the banking that is being done is being done somewhat under the table. National brand banks are not currently showing interest in the business, while smaller banks would run a huge risk for themselves and their clients by admitting to it. Thus, business owners have to find their own way to bank, usually with smaller credit unions. According to Marijuana Business Daily, only around 40 percent of cannabis businesses have bank accounts. Just imagine that for a second: an industry where only 40 percent of the players are able to do banking.
So what are the problems? Well, there are a whole lot, but here are some of the most glaring ones:
• Inability for a business to do normal banking means money can be coming in with nowhere to go out to, posing problems for tracking such money. Since the states require a lot of regulation and tracking of sales, this puts marijuana companies in a tough position.
• Having to deal with cash on premises, or at basically any location that isn’ t a bank, poses a huge administrative burden for the marijuana company.
• There is a safety risk with having large sums of cash around.
• Having large sums of cash around also increases the potential for fraud to creep in.
In Colorado, the issue was solved by the intervention of the Department of Financial Institutions. Its director, Scott Jarvis, spent over a year with regulators from the federal government and took measures to legalize the banking of marijuana proceeds. Unfortunately, according to the Bank Secrecy Act( BSA), which is enforced by FinCEN, banks accepting money from selling substances that are illegal on the federal level must first get approval.
To that end, FinCEN has released documents and guidelines for doing just that, allowing banks and credit unions to operate with marijuana companies without violating the BSA. The problem is, those documents and guidelines aren’ t laws. They may be seen as“ permission” from FinCEN, but they don’ t change the fact that, technically, cannabis funds could be considered money laundering by the federal government. To that end, there are additional regulations which can be followed, including the filing of suspicious activity reports with FinCEN to let them know precisely what is going on.
So what does all this mean? Well, it means that it works, but it doesn’ t work well. These accounts require a lot more work on both the front end and the back end. That leads to extra expenses on the part of banks and their clients, with these types of accounts sometimes running up $ 1,000 in charges per month. That is no small chunk of change for most business owners, which again brings them back to square one at times: either don’ t do business or do it yourself and deal with the cash.
While the issue has been solved for now, in states like Colorado— which have had thriving marijuana businesses for years— and in states like Michigan— which have recently“ gotten into the game”— some state government intervention is still required. The same issues that companies encountered elsewhere when dealing with banks are present here and, thus, the same problems exist. Security, fraud, additional administrative load on business owners— all could be avoided by simply working with banks to allow traditional business arrangements.
The main point is that something has to change with the way banking is being done for marijuana companies to help everyone involved, including the government. It doesn’ t do anyone any good to promote security risks and force business owners to innovate new ways to pay taxes on, and deposit, their legally tendered profits.
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