Pubdate: Mon, 13 Jan 2014
Source: International New York Times (International)
Copyright: 2014 The New York Times Company
Note: Was International Herald-Tribune until Nov. 2013
Author: Serge F. Kovaleski


Dispensaries Are Forced to Cart Cash Around to Pay Taxes and Employees

Because it is very difficult for them to open and maintain bank 
accounts, Americans running medical marijuana dispensaries face 
hurdles in paying taxes and workers. In his second-floor office above 
a hair salon in northern Seattle, Ryan Kunkel is seated on a couch 
placing $1,000 bricks of cash - dozens of them - in a rumpled brown 
paper bag. When he finishes, he stashes the money in the trunk of his 
BMW and sets off on an adrenalized drive downtown, darting through 
traffic and nervously checking to see if anyone is following him.

Despite the air of criminality, there is nothing illicit in what Mr. 
Kunkel is doing. He co-owns five medical marijuana dispensaries, and 
on this day he is heading to the Washington State Department of 
Revenue to commit the ultimate in law-abiding acts: paying taxes. 
After about 25 minutes at the agency, Mr. Kunkel emerges with a 
receipt for his $51,321 payment.

"Carrying such large amounts of cash is a terrible risk that freaks 
me out a bit because there is the fear in my mind that the next car 
pulling up beside me could be the crew that hijacks us," he said. "So 
we have to play this neverending shell game of different cars, 
different routes, different dates and different times."

Legal marijuana merchants like Mr. Kunkel - mainly medical marijuana 
outlets but also, starting this year, shops that sell recreational 
marijuana in Colorado and Washington State - are grappling with a 
pressing predicament: Their businesses are conducted almost entirely 
in cash because it is exceedingly difficult for them to open and 
maintain bank accounts, and thus accept credit cards.

The problem underscores the patchwork nature of federal and state 
laws that have evolved fitfully as states have legalized some form of 
marijuana commerce. Though 20 states and the District of Columbia 
allow either medical or recreational marijuana use - with more likely 
to follow suit - the drug remains illegal under federal law. The 
Controlled Substances Act, enacted in 1970, classifies marijuana as a 
Schedule I drug, the most dangerous category, which also includes 
heroin, LSD and ecstasy.

As a result, banks, including statechartered ones, are reluctant to 
provide traditional services to marijuana businesses. They fear that 
federal regulators and law enforcement authorities might punish them, 
with measures like large fines, for violating prohibitions on money 
laundering, among other federal laws and regulations.

"Banking is the most urgent issue facing the legal cannabis industry 
today," said Aaron Smith, executive director of the National Cannabis 
Industry Association in Washington. Saying legal marijuana sales in 
the United States could reach $3 billion this year, Mr. Smith added: 
"So much money floating around outside the banking system is not 
safe, and it is not in anyone's interest. Federal law needs to be 
harmonized with state laws."

The limitations have created unique burdens for legal marijuana 
business owners. They pay workers with envelopes of cash. When they 
are able to open bank accounts - often under false pretenses - many 
store money in Tupperware containers filled with air fresheners to 
mask the smell of marijuana.

The all-cash nature of the business has also created huge security 
concerns for business owners. Many have installed panic buttons for 
workers in the event of a robbery and have set up a constellation of 
security cameras at their facilities beyond what is required, as well 
as floor sensors to detect break-ins. In Colorado, Blue Line 
Protection Group was formed a few months ago, specializing in 
protecting dispensaries and facilities that grow marijuana, and in 
providing transportation security. The firm largely uses military 
veterans who have Special Operations experience.

Marijuana-business owners have devised strategies to avoid the 
suspicions of bankers. A number of legal operations have opened 
accounts by establishing holding companies with names that obscure 
the nature of their business. Some owners simply use personal bank 
accounts. Others have relied on local bank managers willing to take 
chances and bring them on as clients, or even offer tips on how to 
choose nondescript company names.

But the financial institutions eventually shut down many of these 
accounts after managers conclude the businesses are too much of a 
risk. It is not unusual for a legitimate marijuana business to go 
through a half-dozen bank accounts in a few years. While they are 
active, however, these accounts may have informal restrictions placed 
on them - some self-imposed - so they do not draw the scrutiny of 
bankers who may file suspicious-activity reports or would be required 
to report deposits over $10,000 in cash. The account holders may make 
only small deposits, and only at night and at certain branches. Mr. 
Kunkel of Seattle has such an account.

At the largest credit union in Washington State, BECU, about 20 
accounts have been shut down in the past three years after it was 
discovered they were for businesses in the legal marijuana trade, 
Todd Pietzsch, a spokesman for the credit union, said.

Kristi Kelly, 36, who owns two dispensaries and several marijuana 
growing operations in the Denver area, said six bank accounts of hers 
had been canceled in the past 18 months. "Opening the account is not 
necessarily the problem," she said. "Our cash deposit levels flag a 
bank's compliance division."

Ms. Kelly, who had just paid $10,000 in cash to the City of Denver 
for licensing and application fees to expand her business, said that 
several times a week she carried around tens of thousands of dollars in a bag.

"I never felt as illegitimate as the day I had to buy a cash 
counter," she said, adding that she spends three hours or so a day 
just managing the cash from her business's multiple locations.

A.T.M.s are common in marijuana outlets, but the business owners 
often have to use their own cash in the automated teller machines.

Those marijuana operations that do have bank accounts or use the 
personal ones of their owners can use a cashless A.T.M. service in 
which a debit card is swiped at a dispensary and the money is 
transferred into the recipient's account.

"It is operating over the A.T.M. network and not the credit card 
network," said Lance Ott, whose company, Guardian Data Systems, 
provides this service. "The A.T.M. networks are not as regulated. 
This is the loophole."

Since legal marijuana operations, for the most part, cannot get bank 
loans, these small businesses have to rely on short-term loans from 
individuals, usually with higher interest rates.

To help, High Times magazine is starting a private equity fund to 
invest in marijuana businesses. But many investors may feel uneasy 
about marijuana businesses that do not have bank accounts. And 
without bank references, entrepreneurs say, it is much tougher to get 
lines of credit from vendors.

Leaders in the marijuana trade point out that giving accounts to 
businesses would allow for more transparency and meticulous 
regulation and would help ensure that jurisdictions receive the taxes 
to which they are entitled.

Marijuana entrepreneurs and banks both would like clear guidelines 
from the government on how financial institutions can serve the 
industry. On Friday, six members of Colorado's congressional 
delegation sent a letter to the United States Treasury and the 
Justice Department requesting that they "expedite" that guidance.

In August, the Justice Department issued a memo indicating that it 
would not crack down on legal marijuana as long as eight regulatory 
requirements were met, like preventing revenue from the sale of 
marijuana from going to criminal enterprises and preventing the 
distribution of marijuana to minors. The memo did not address banking.

The Treasury Department's Financial Crimes Enforcement Network hopes 
to circulate recommendations by the end of this month to officials at 
the Treasury and the Justice Department for their opinions, an 
official briefed on the situation said. There is no timetable for 
formal guidelines.

Richard R. Riese, senior vice president for regulatory compliance at 
the American Bankers Association, said banks wanted clear and 
comprehensive guidelines on how to do business with the legal 
marijuana industry.

Mr. Riese said banks would want to know that they were not "aiding 
and abetting" a criminal enterprise if they provided services to 
marijuana businesses. "Banks will need a lot of detail from 
regulators to get the satisfaction and comfort" they seek, he said.

Sheelagh McNeill contributed research.
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MAP posted-by: Jay Bergstrom