Pubdate: Fri, 28 Nov 2014
Source: Los Angeles Times (CA)
Copyright: 2014 Los Angeles Times
Contact:  http://www.latimes.com/
Details: http://www.mapinc.org/media/248
Author: David Pierson

CASH CROP

Shunned by Banks, Legitimate Pot Sellers Must Deal in Currency, 
Posing Safety and Logistical Problems

OAKLAND - The suppliers arrive at one of the nation's largest 
marijuana dispensaries carrying hundreds of pounds of cannabis in 
duffel bags, knapsacks and baby diaper totes. They leave with those 
same carriers stuffed with wads of cash.

Harborside Health collects the money from thousands of customers, 
spending $40 to $60 a pop for oneeighth of an ounce of pot. No credit 
cards or checks are accepted.

That's not by choice. Though Harborside's business is legal in 
California and a growing number of other states, most banks still 
won't touch the marijuana industry, fearing the federal prohibition 
that remains in place.

That's a huge security problem for Harborside and hundreds of other 
dispensaries forced to deal in cash by the truckload. The 
fast-growing Oakland company stores its weed and money in a phalanx 
of high-grade safes, inside a vault with 18-inch walls of reinforced 
concrete. Thirty-six cameras and two security teams - one to watch 
the other - guard the business.

To pay local and state taxes, employees carry bags filled with bills 
to government offices, changing routes every time. "We've gone 
through three armored car services already, and that doesn't even 
include the many that refused to work with us," said Steve DeAngelo, 
who co-founded Harborside in 2006. "The biggest concern to us is the 
threat to the well-being and safety of our staff and patients."

As the marijuana industry expands into a multibillion-dollar 
business, the need for proper banking services continues to 
intensify. Attempts by the Obama administration earlier in the year 
to ease the problem have so far failed to spark widespread change.

Without banks and credit cards, financial transparency remains 
elusive. Taxes and basic accounting are complicated. Paying vendors 
and employees is both a headache and a danger.

Unless Congress takes action, the problem will grow. Twenty-three 
states now allow some form of legal cannabis, including Alaska and 
Oregon, where voters approved measures for recreational use in the 
recent midterm elections.

Cash is already sloshing around an estimated 2,000 medical and 
recreational dispensaries operating in the U.S. today, up from about 
1,400 three years ago, according to the National Cannabis Industry 
Assn. California is home to about three-quarters of them.

The Obama administration issued guidelines in February aimed at 
forging a path for banks to work with marijuana businesses in states 
where it's legal. It requires banks to issue reports ensuring that 
their cannabis-related clients are reputable, but it doesn't absolve 
banks of civil charges if those reports prove untrue.

As of August, only 105 banks and credit unions were working with 
legal cannabis sellers, according to remarks by the director of the 
Treasury Department's Financial Crimes Enforcement Network. The 
agency did not respond to requests for an update of those numbers.

"The guidelines certainly did not throw open the doors to banking, as 
we had hoped," said Taylor West, deputy director of the 
Denver-headquartered National Cannabis Industry Assn. "We have 
continued to see financial institutions feeling vulnerable."

West has heard whispered anecdotes of measured progress.

"It happens extremely quietly," she said. "Most institutions that are 
starting to work with cannabis businesses are insisting that it stay 
confidential."

Lenders willing to partner with pot shops tend to be smaller 
community banks or credit unions.

Even with an estimated value of more than $2 billion, the marijuana 
industry still isn't big enough to entice major national banks to 
take a chance.

"There's tremendous risk and little reward," said Rodney K. Brown, 
president and chief executive of the California Bankers Assn. "The 
bottom line is it's still against federal law ... and you're subject 
to both prosecution and loss of a bank's charter."

Representatives for Wells Fargo, Bank of America and JPMorgan Chase 
said they adhere to federal laws when choosing customers. Citi did 
not respond to requests for comment.

Andre G. Herrera, senior vice president of banking and compliance for 
Hypur.com, an electronic payment platform, said small banks are 
enticed by growing marijuana profits and willing to take the legal 
and reputational risk.

"Smaller banks need deposits," he said. "Smaller banks are typically 
community banks, so they have a sense of purpose serving their community too."

The bank services cost a premium, given the risk, Herrera said.

Herrera said a steady number of small lenders have also been signing 
up for Hypur's compliance software, which alerts bank managers to 
suspicious activity, such as large transactions. It's also able to 
track cash from the moment a sale is made, easing record-keeping challenges.

Not every dispensary is clamoring for a bank. Smaller operations 
working on the margins often view bank accounts as vulnerable to 
official seizure.

"They're not motivated to open a bank account," said Allison 
Margolin, a Beverly Hills criminal defense attorney with expertise in cannabis.

She cited a growing sense of fear among dispensary operators in Los 
Angeles, where the city attorney's office has closed hundreds of 
shops to comply with Proposition D, a local measure approved in 2013.

Oakland, on the other hand, has largely embraced medical marijuana 
and Harborside - even fighting in court to prevent federal forfeiture 
action against the facility's landlord. Harborside is one of the 
city's top five contributors to sales and business taxes.

That case is ongoing, as is a legal battle with the Internal Revenue 
Service, which alleges the dispensary owes $2.5 million in back 
taxes. Harborside argues it's being discriminated against for 
claiming routine business deductions.

DeAngelo opened Harborside in hopes of creating a national model for 
how to run a dispensary. That includes participating in charities, 
offering employees health insurance and ensuring the facility doesn't 
invite criminal activity.

In eight years of operation, the facility has faced only two 
attempted burglaries. During one attempt, cameras caught two youths 
throwing a rock at a window. They were immediately turned away by 
security floodlights and a siren.

Harborside hopes to persuade other communities to welcome expansion 
operations - and create competitive pressure to force out less savory 
pot shop operators, said DeAngelo, 57, a longtime cannabis activist 
who was the subject of a Discovery Channel reality show called "Weed Wars."

But coming out of the shadows requires bank accounts. Harborside has 
had limited success with banks, working through eight institutions 
over the years for brief amounts of time.

The dispensary currently holds a business account with a small 
state-chartered bank that allows the dispensary to handle 
transactions it can't pay with cash - namely, paying federal taxes 
and packaging suppliers in China.

Discretion is paramount. Though DeAngelo says his bank knows the 
nature of his business, it helps having a generic name for the 
dispensary that won't raise eyebrows.

"You have to be careful with the amount of cash and the number of 
transactions you use," said DeAngelo, who declined to name the bank 
for fear of jeopardizing the relationship. "We try and pay as much as 
we can in cash and run a minimal amount through the bank."

The heavy reliance on cash is one reason Harborside faced an 
especially painful IRS audit.

California medical marijuana laws require dispensaries to operate as 
nonprofits. DeAngelo says the money that comes into Harborside covers 
costs, and the rest is returned to the community in free services, 
charitable donations and even free weed to those who can't afford it.

"They want detailed financial records," he said. "But all these cash 
transactions make it difficult, if not impossible, to give them what 
they require. It puts us in a Catch-22."
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MAP posted-by: Jay Bergstrom