Pubdate: Mon, 10 Jun 2013
Source: Olympian, The (WA)
Copyright: 2013 The Olympian
Author: C.R. Roberts


A few loose ends remain as the state continues its journey toward 
legalized recreational cannabis.

A few very loose ends.

And if you're looking for a precedent, don't bother. Since the Civil 
War, no state has gone this far in challenging the federal government.

The propagation, transportation and use of cannabis in any form is 
illegal under federal law. Washington and Colorado walk a fine wire 
in declaring pot legal.

To please the federal government, Washington seeks to pre-emptively 
placate its judicial sovereign by limiting access to cannabis, 
keeping use within state borders, limiting advertising of the 
product, and demanding that strict security be imposed as the product 
is grown, processed and sold.

But a larger question persists: How to process the money in a retail 
system selling a substance still illegal under federal law.

Growers, processors and sellers have found that no state bank or 
credit union will knowingly open an account for their enterprises. 
Such has been the fate of people who grow, process and sell medicinal 
marijuana, and such is the fate awaiting recreational entrepreneurs.

The problem blooms because cannabis is illegal under federal law. 
Transactions that relate to the production and sale of marijuana are 
likewise illegal under federal money-laundering statutes. Because all 
banks and credit unions are federally regulated, it is unlikely to 
expect that a financial institution would be willing to risk its 
charter, and future, in trade for a new customer or two.

"The reason that the banks are not giving these services - it's not 
just their deposit insurance. The real issue they're running into is 
their anti-money-laundering regimes," said Robert McVay, who 
represents clients in the industry as a member of the Seattle Canna Law Group.

"I do know that banks have requirements that they know their 
customers, and they ask the right questions. If they find out, 
they're not supposed to open an account. You can never lie, and you 
can never use complicated corporate structuring to obfuscate. We 
don't condone any dishonesty."

Angel Swanson, co-owner of a medicinal-cannabis access point in 
unincorporated Pierce County, said last week that she and other 
sellers deal in cash. "If you went to a bank, you have to lie," she 
said. "If you lie, you open yourself to all kinds of liability."

Some sellers have tried to skirt the law by establishing holding 
companies or other financial fronts. Eventually, Swanson said, these 
are likely to be discovered for what they are.

"We do cash," she said. "It's virtually impossible otherwise. It's 
absurd, and it's dangerous."

Swanson will travel to Washington, D.C., in early July to lobby the 
banking issue on behalf of the National Cannabis Industry Association.

Even as retailers worry about banking, a larger horse has left the barn.


The state intends that all taxes and fees derived from growers, 
processors and sellers be placed into a "dedicated marijuana fund," 
the benefits of which will be distributed to the Department of Social 
and Health Services and other agencies for purposes of research, 
education and administration. The state's general fund also will benefit.

The marijuana fund, according to the initiative, "shall consist of 
all marijuana excise taxes, license fees, penalties, forfeitures, and 
all other monies, income, or revenue received by the state liquor 
control board from marijuana-related activities. The state treasurer 
shall be custodian of the fund."

The state intends to levy an excise tax of 25 percent of the 
wholesale selling price by a producer, plus 25 percent of the selling 
price by a processor and a further 25 percent on the price of a sale 
by a retail seller. Producers, processors and retailers also will pay 
a license fee. Cities, if they prefer, may also charge a business and 
occupation tax.

Estimates of the amount of money the state could raise have varied. 
The state Office of Financial Management has estimated the annual 
total proceeds at close to $500 million. However, the retail price 
charged to the consumer will ultimately depend on market forces. If 
the retail price is set too high, consumers might continue to rely on 
the lower-priced black market rate. If prices are set too low, state 
receipts could fail to meet goals.

By contract, the state has hired Bank of America to administer this 
and other accounts. By administering the state's cannabis account, 
the bank, it could be argued, is laundering drug money under federal statutes.

Even if the state deems such activity as legal, the federal 
government currently does not. The bank, it could be argued, would be 
involving itself in an ongoing conspiracy to violate federal law - 
just as any city that collects B&O tax from medical-marijuana sellers 
could be said to be doing likewise.

Two ideas have emerged to solve the problem. The federal government 
could issue waivers to states, giving them permission to stray from 
the law, similar to what President Bill Clinton did in granting 
states freedom to experiment with welfare requirements.

Or, Attorney General Eric Holder could sign cooperative agreements 
with the states, allowing them to condone the sale of marijuana so 
long as they run tightly controlled operations with federal 
oversight. It is unclear what the Obama administration will do. The 
White House has had no comment, referring questions to the Justice Department.

Justice Department spokeswoman Allison Price recently said, "The 
department is continuing to review the legalization initiatives 
passed in Washington and Colorado."

"A lot of us are waiting for that shoe to drop from back East," said 
Scott Jarvis, head of the state's Department of Financial 
Institutions, which regulates state-chartered banks and credit unions.

Asked repeatedly for comment about the legality of its relationship 
with the state, Bank of America spokeswoman Britney Sheehan has said 
only, "It's a more complicated issue than you might think. It may be 
too premature to comment."

"There's no credible argument that they (Bank of America) are not 
participating in it," said Steve Victor, city attorney for University Place.

Under his leadership, University Place has effectively banned 
cannabis-related businesses from the city.

Victor likens the state's position to the legalization of fully 
automatic weapons, or the banning of federally required 
emission-control devices on cars.

"Machine guns, it's the same thing," he said. "What if we did not 
want emission-control devices? It's all the same thing."

He notes that other cities have allowed marijuana to be sold under state law.

"What it amounts to, those who are participating are doing so because 
they want to," he said. "They are choosing to accept the risks. 
There's no credible argument that any municipality has to accept 
this. It's illegal under federal law." The closest legal precedent he 
can find goes back to the 1974 National Maximum Speed Law, a federal 
mandate that highway speed be limited to 55 miles per hour. In 
violating the law by issuing its own statute allowing higher speeds, 
at least one state faced the loss of federal highway funds.

The next precedent goes back to the Confederacy, and the Civil War.

"I can't think of anything to compare it to but secession," Victor said.


Said Candice Bock, government relations advocate with the Association 
of Washington Cities, "It illustrates the rock and a hard place that 
cities find themselves in on this topic, balancing federal law, state 
law and a lot of unknowns."

"Obviously the state will be collecting funds," she said. "Cities 
will be looking to follow the state's lead. It would sure be good to 
get some direction from the federal government."

Jon Walker, legal adviser to Tacoma police, believes the situation is 
ripe for conflict between local and state governments and the federal 
government. "It does look like trouble. You get into sovereignty 
issues between the state and federal government.

It's a tough situation for local governments, and we're going to be 
on the front lines," he said.

Walker also noted the problems attorneys might face advising their 
clients to become involved in criminal activities by drafting various 
business contracts. An attorney would defend a client without 
conflict, but would advice on establishing a business constitute a 
breach of the law in itself? Would it constitute a conspiracy if an 
attorney or a notary helped prepare a document that established a 
partnership, or perhaps a lease, related to the marijuana business? 
Would that present an ethical problem? "I don't know," Walker said.

The state Treasurer's Office, which would administer taxes and fees 
collected under Initiative 502, remains sanguine.

"We're complying with the state law in a manner that we see as 
reasonable and rational collecting taxes on business," said spokesman 
Chris McGann. "We don't see taxes or fees collected by the Liquor 
Control Board as ill-gotten gains. We comply with the law voters gave 
us. The way that the banks interact with the industry is up to them."

Growers, processors and sellers will be required, say rules recently 
issued by the Liquor Control Board, to have "commercial general 
liability" insurance policies that cover claims of harm that might 
befall a consumer. The state Office of the Insurance Commissioner 
sees no conflict.

"Based on our recent review of the regulation, yes, it would be legal 
because it does not conflict with Washington state policy," 
spokeswoman Stephanie Marquis said.

Which leaves the state Attorney General's Office. The agency was 
recently asked if it has considered its relationship with Bank of 
America in terms of Initiative 502. The bank will process the state's 
money, and that money will derive from an activity illegal under 
federal law. The AG's Office was asked if it can continue that 
relationship, given the illegality of cannabis under federal law. 
These were among a handful of other specific questions, including 
whether the office has been in contact with the federal Office of the 
Comptroller of the Currency, which regulates Bank of America.

"We have been exploring all banking alternatives and are eagerly 
awaiting guidance form the federal government," spokeswoman Janelle 
Guthrie replied. "We are working all sides of the issue and preparing 
accordingly." She did not list those preparations.

And should the state continue with its journey, it's not just the 
Obama administration that will speak to the legality or illegality of 
marijuana legalization. The statute of limitations on federal drug 
crimes continues for at least five years, so a subsequent 
administration could charge crimes committed before it took office.

"All of the guideposts are obscured. We're in a sandstorm," Steve 
Victor of University Place said.

First Amendment questions

One could argue that the Initiative 502 rules limiting advertising 
violate the First Amendment. Growers, processors and sellers may not, 
says Section 18 of the initiative, "place or maintain, or cause to be 
placed or maintained, an advertisement of marijuana ... in any form 
or through any medium whatsoever" within 1,000 feet of school 
grounds, playgrounds, recreation centers, child care centers, public 
parks, libraries or game arcades, nor on or in a public transit 
vehicle or transit center.

This appears to inhibit cannabis entrepreneurs from advertising in, 
for example, The News Tribune - which commonly appears directly 
within, and certainly within 1,000 feet of, schools, libraries and so on.

"I do think there are some First Amendment implications," said Tim 
Ford, a constitutional expert with the state Attorney General.

"For us, we'll need to look at the potential business and weigh that 
against the reader experience," said John Dzaran, vice president of 
advertising at The News Tribune. "We're going to look at the business 
side. It may not be a problem. The law seems to have been written for 
billboards, and the newspaper is mobile."
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