In Canada last week, a cannabis shopkeeper was forced to brandish his bong to scare off a group of three robbers who were spraying down his store with bear mace in an attempted robbery. While it’s not clear that the cannabis shop in Tyendinaga Mohawk Territory, about two hours north of Toronto, was a cash-only establishment, many cannabis workers face increased odds of violence and robbery when working in cash-only establishments.
In fact, with the legalization of recreational marijuana in Canada passing the legislature in June, the country’s largest financial institutions, such as Bank of Montreal (BMO), have their eyes set on the cannabis sector. Canadian Prime Minister Trudeau stated that the new industry will effectively begin as early as October 17th. With the newly passed Cannabis Act, banks are free to offer financial services to the cannabis sector without the fear of the authorities coming down on their business.
Not in OurMerica
South of the border, however, the situation is quite different. The cannabis industry is pressing Congress to change federal banking laws so that its retailers no longer have to carry and process large amounts of cash, but it lacks the strong lobbying presence in Washington needed to make its voice heard.
The federal government’s toes are not meant to be stepped on. The federal government continues to classify marijuana as a Schedule I drug under the Controlled Substances Act. This means that handling the proceeds of any marijuana transaction is considered to be money laundering. Few banks are willing to bear that level of risk.
On the ground, the lack of financial services available to medical and recreational marijuana shops causes sellers to handle excessive quantities of cash because they cannot process credit card or checking transactions. In other words, as the bills stack up, so does the threat of violence and robbery.
While the Senate passed legislation to shield banks from the Controlled Substances Act if they chose to provide marijuana businesses with financial services, a Republican-controlled committee in the House voted against considering a similar amendment in the lower chamber.
The Rescission of the Cole Memos
On January 4, 2018, Attorney General Jeff Sessions issued a memorandum rescinding guidance to U.S. attorneys that had been issued starting in 2009. In his memo, Sessions said that the federal Controlled Substances Act prohibits marijuana sales, and that marijuana-related activities may hold as the basis for prosecution for crimes such as the Bank Secrecy Act.
“In the Controlled Substances Act, Congress has generally prohibited the cultivation, distribution, and possession of marijuana,” said the memo. These activities also may serve as the basis for the prosecution of other crimes, such as those prohibited by the money laundering statutes, the unlicensed money transmitter statute, and the Bank Secrecy Act.”
Since the release of the memo, financial institutions serving the cannabis industry have felt increased pressure to reconsider their relationships with the cannabis industry. Joseph Lynyak III, a partner at the law firm Dorsey & Whitney, said in an opinion piece on American Banker that up until Sessions rescinded the memo, a small number of banks believed marijuana businesses presented a reasonable risk when balanced against federal prosecution.
“The rescission of the Cole memorandum has now significantly increased the risk of prosecution — and if a high-profile criminal action were brought against a bank in this space, it is not hard to envision banks and credit unions fleeing the burgeoning marijuana market,” said Lynyak.
According to the New York Times, a credit union Partner Colorado has arguably become the industry’s most important banker. With $931 million deposited in 2017, there is a division of the credit union, Safe Harbor Private Banking, that provides bank accounts specifically for the legal cannabis industry.
Safe Harbor performs rigorous client reviews to make sure that the businesses it is working with are not laundering money and can account for every dollar earned and deposited. These financial services are expensive. A client pays $450 the first year and $300 annually afterward for each $100,000 deposited.
With the legal risks and labor-intensive methods used to assess their customers, credit unions like Safe Harbor only have the bandwidth to work with a limited number of well-established businesses. This leaves smaller businesses unable to access financial services even in well-developed legal marijuana economies such as Colorado.
At the same time, many marijuana shops have devised methods to accept credit cards and electronic wallet payments. According to CreditCards.com, the application that many experts agreed is legitimate is PayQwick. At the same time, the majority of the businesses that accept cards are generally using tricks to skirt the anti-marijuana policies enforced by Visa and Mastercard.
With the exception of Washington, Oregon, and Colorado, the financial and regulatory frameworks do not provide the necessary legal framework to allow the other 28 states with legal weed, including the District of Columbia and Puerto Rico, with an alternative to cash.
With no alternatives but safes, stash-boxes, and other cash-storing devices, many businesses must turn their business into a mini-bank by hiring out protection services with armed security guards and armored trucks. Even still, there has been a slew of violent attacks on marijuana businesses over the years since the industry began to resemble its modern form in 2009.
Blue Line serves banks and credit unions by providing currency processing, armed protection, and transportation. The business also performs risk mitigation services that help financial institutions serve cash-intensive cannabis businesses to comply with federal “know your customer” mandates that were issued under the Obama administration.
“The increased demand for our services means an expanding revenue stream,” said Dan Allen, CEO of Blue Line. Demand for Blue Line services nearly doubled from the fourth quarter of 2017 through the first quarter of 2018 when the attorney general made his announcement.
Today the legal cannabis industry in the U.S. is valued at $6.7 billion. By 2021, the industry is projected to hit $21 billion. That’s a lot more cash than most people are prepared to defend with their bong.