Processing Payments for Legal Pot
Denver businessman Kayvan Khalatbari operates a real estate holding company, consulting firm, several pizzerias and the second-oldest medical marijuana dispensary in Colorado.
“I moved here from my hometown of Lincoln, Nebraska, a decade ago and I’ve had the fortune of having a front row seat in the evolution of the cannabis industry,” said Khalatbari, who co-founded Denver Relief in 2009. “Unfortunately, I’ve also had the misfortune of being caught in the middle between state and federal laws, banking laws, tax laws and insurance laws that can't seem to get on the same page.”
Over the past five years, the former engineering student has turned his budding business into a profitable, tax-paying venture, he said. Yet, like many owners of the more than 2,300 licensed medical marijuana centers in the U.S., Khalatbari has hit a brick wall when it comes to banking.
“In 2013, BBVA Compass dropped not only our three Denver Relief accounts, but also my other business and personal accounts,” he said. “My business partners lost their business and personal accounts as well. Congressman Jared Polis wrote a letter to BBVA and his staff met with higher ups with the bank to defend the industry, to no avail. We’re talking about the potential for marijuana sales to eventually hit $3 billion in Colorado alone. Do we really want that in cash on the streets? That's a dangerous prospective.”
With 20 states and D.C. now allowing some form of legal marijuana use, including Colorado's recreational usage law that took effect Jan. 1, the legal marijuana business is expected to generate almost $2.5 billion in sales, tens of thousands of jobs and hundreds of millions in new tax revenue in 2014, according to the Washington, D.C.-based National Cannabis Industry Association.
Despite the industry's growth, federal banking laws have not kept pace.
Under current federal law, credit unions that engage in transactions involving the proceeds of marijuana sales may be in violation of federal money-laundering statutes and other laws.
However, the Department of Justice (DOJ) is expected to release a memo soon to provide clarity on whether the DOJ will allow FIs to do business with legal marijuana merchants, according to sources close to the matter.
Scott Jarvis, director of the Washington Department of Financial Institutions, told the Credit Union Times that some credit unions and banks have expressed concerns that any guidance that may come from DOJ and federal regulators will not be specific enough for them to feel comfortable providing services to marijuana businesses.
While the banking industry waits for clarity, credit union leagues are offering guidance.
“While the state of Colorado may have legalized marijuana for recreational use, at the federal level, it is still illegal,” said Scott Earl, president/CEO of the Denver-based Mountain West Credit Union Association. “Until there is a change in the federal law with regard to this issue, we cannot advise our members with regard to accounts for marijuana businesses in Colorado. We will continue to monitor the situation.”
In September, following the release of a DOJ memo stating the agency would not challenge pot laws that met enforcement priorities, the Northwest Credit Union Association posted this cautionary advice:
“While the department will not interfere with state marijuana laws, it does still consider marijuana a controlled substance under the Controlled Substance Act. Last week's decision doesn't change that, and it has no effect on Bank Secrecy Act reporting requirements. Credit unions must still comply with those requirements if they open an account for a marijuana business. For credit unions, the memo changes nothing when it comes to banking for marijuana accounts.”
Not much has changed since then.
“Financial institutions are still in a holding pattern even if marijuana businesses are legal in their states,” said Lynn Heider, vice president of public relations and communications for the NWCUA. “Federal regulators are working on providing better guidelines, but until those are clear, most financial institutions won't be comfortable setting up accounts for marijuana businesses.”
Pot was a hot topic last month when the U.S. Treasury Department's Financial Crimes Enforcement Network convened the Bank Secrecy Act Advisory Group. It was the group's first meeting since the Justice Department's watershed announcement in August that it would allow voter-approved legal marijuana laws to proceed in Colorado and the state4 of Washington.
The meeting was closed to the press and not subject to the Freedom of Information Act, but the agenda was expected to include a discussion about bank regulations for cannabis businesses, Jennifer Shasky Calvery, director of FinCEN, said during a speech to the American Bankers Association in October.
“The issue is a complicated one given that federal law still applies in those states,” she said. “We have already initiated discussions with our DOJ colleagues.”
Once the federal financial hurdles are cleared, credit unions could benefit by providing services to the legal pot industry, said Betty Aldworth, deputy director of the National Cannabis Industry Association.
“It's a huge, growing industry that could further stimulate the economy and even provide revenue for credit unions and banks that offer services, which is why we hope the federal government will release some guidelines soon. Meanwhile, there's a lot of money just sitting around, which creates a clear and present danger.”
Until the feds make a decision, she said, most FIs are lying low.
“While there are some small banks and credit unions aggressively pursuing options to provide, at least, depository and electronic payment options to marijuana businesses, none are yet willing to speak on the record to my knowledge, ”Aldworth said.
Last year, Colorado lawmakers, citing concern with federal banking laws, rejected a bill that would have allowed licensed medical marijuana growers, dispensaries and patients to join the Medical Marijuana Financial Cooperative, which would have operated much like a credit union.
Other efforts are underway. For example, Kevin Jones, director of the NYC NORML, a non-profit organization that promotes responsible marijuana use and rational public policies, launched a Facebook campaign to garner support for the Real Green FCU.
“When I started the page, the idea was to create a real federal credit union based on membership belief that marijuana should not be prohibited and membership in an affiliated legalization or reform group or organization,” Jones said. “The Real Green Federal Credit Union done the way I wanted, and want, to do it, is completely legal at every level now. It isn't about marijuana industry money, it was conceived as a way to demonstrate that legitimate money deserves the resource of marijuana.”
A recent Gallup Poll found that 58% of Americans support pot legalization, but some experts say many credit unions will probably steer clear of an issue that many still consider controversial.
In 20o9, the $940 million Elevations Credit Union in Boulder, Colo., sent a letter to about 100 business members, asking them to attest to not selling, producing or storing the drug. If members did not respond within 30 days, their accounts were closed.
In 2011, U.S. Treasury officials reportedly seized accounts of two California dispensaries at the $1.8 billion SAFE Credit Union in North Highlands, Calif.
Major credit card processors, as well as PayPal, routinely refuse medical marijuana accounts and American Express announced last May it would no longer handle medical marijuana-related transactions because of fear of federal prosecution.
Visa and MasterCard rules also prohibit merchants Visa and MasterCard rules also prohibit merchants from making illegal transactions, but some Colorado marijuana dispensaries are accepting debit and credit cards.
For example, Denver Relief uses Denver-based Greenhouse Payment Solutions for its “Cashless ATM” system, which allows the dispensary to accept debit cards over the ATM network if a patient has a PIN associated with the card, the company said.
Other payment solution providers have entered the game, such as MediSwipe Inc. (formerly Cannabis Medical Solutions Inc. and Commerce Online Inc.), which provides card processing, cloud computing, patient record digitization and other services for the healthcare and medicinal marijuana industry, according to the company's website.
Forcing legitimate businesses to operate on a cash-only basis without bank accounts is an invitation for robbery, tax evasion and organized crime, said U.S. Rep. Denny Heck (D-Wash.).
Heck, along with Rep. Ed Perlmutter (D-Colo.) and a bipartisan group of 23 members, introduced the Marijuana Business Access to Banking Act (H.R. 2652), which would create protections for FIs that provide services to marijuana-related businesses. The bill is in committee.
“We need to address the public safety, crime and lost tax revenue associated when these legal and regulated businesses are operating in a cash-only system,” Perlmutter told Congress when the bill was introduced July 10, 2013. “We also need to provide financial institutions assurance that they can make their own business decisions related to legal, financial transactions without fear of regulatory penalties or criminal prosecution.”