Pubdate: Mon, 08 Jun 2015
Source: Albuquerque Journal (NM)
Copyright: 2015 Albuquerque Journal
Author: Marshall Martin
Note: Attorney Marshall G. Martin in private practice in Albuquerque. 
He has experience in complex litigation, including securities, 
antitrust and lender liability law. He also has represented banks and 
private and publi


Banking, Federal Taxation Issues Restrict Marijuana Enterprises From 
Usual Business Practices

This is a marijuana update.

Legal marijuana sales continue to draw national attention. 
BloombergBusiness recently estimated that the industry's revenues are 
nearly $3 billion annually - almost all in cash.

The industry has attracted financing from investment funds. Willie 
Nelson and former New Mexico Gov. Gary Johnson have entered 
businesses to support funding and legalization. The New Yorker 
magazine recently featured the first Marijuana Investors Summit held 
in Denver and more than 800 people attended the affair to learn about 
financing marijuana. The underlying theme of the conference, as 
reported by The New Yorker, was that federal legalization will occur 
at some time in the future and all those marijuana businesses, retail 
or medical, will become takeover targets for national companies.

Although it is not likely that New Mexico's current governor will 
welcome legal pot - and there has been little pressure for it in the 
Legislature - with the state's current stressed financial condition, 
legal recreational pot appears to be an attractive tax generator.

There are two major hurdles for any marijuana business: banking and 
federal taxation.

Under current federal tax laws, a marijuana business cannot deduct 
normal business expenses like other businesses. For example, a 
marijuana business cannot deduct lease rentals, employee wages, 
utility charges or supplies. To a marijuana business, the tax 
restrictions have a serious effect on profitability. Some members of 
Congress from legal marijuana states have proposed relief - albeit 
that the legislation may not move forward.

The banking problem is equally serious. We are not talking about the 
inability to get loans. We are talking about a business that cannot 
deposit cash proceeds in a bank account and write checks. It cannot 
use credit or debit cards.

Aside from the risk of crime to a strictly cash business, the absence 
of normal banking impairs governmental monitoring. Last year, the 
Treasury Department's Federal Crime Enforcement Network, or FinCEN, 
issued guidelines for banks in legalized marijuana states under which 
the banks could open banking relationships with marijuana businesses. 
FinCEN followed a Department of Justice memorandum that directed 
federal U.S. attorneys to concentrate their resources on limited 
high-priority marijuana-related conduct - implicitly omitting normal 
banking operations - but not barring prosecution.

The FinCEN guidance requires active due diligence about all aspects 
of the marijuana business before an account is opened. Thereafter, 
the business must be monitored periodically and reports on the 
account filed under the Suspicious Activity Report, or SAR, 
procedures. Even then, nothing in the Justice Department memorandum 
promised complete immunity from later prosecution.

As BloombergBusiness reported, the big banks are not interested. 
BloombergBusiness says that Citigroup, JP Morgan Chase and Wells 
Fargo have all said they will not deal with marijuana enterprises. 
Most seriously, none of the banks' federal regulators will publicly 
discuss their regulatory position. BloombergBusiness quotes the 
Office of Comptroller of the Currency as ducking the issue. The 
Federal Reserve and FDIC have not stated a position.

For the near term, smaller local banks will have to fill the gap, but 
they must be extremely diligent in their compliance. Even if they do 
so, they will still face the risk that the OCC, FDIC or Federal 
Reserve or a state regulator will say no. New Mexico's banking 
department has taken no public position on the issue.

Big banks are concerned about the bad press that would come should a 
U.S. attorney file a criminal case against them. They could rely on 
the Congress' 2014 bipartisan spending bill, which prohibits the 
Justice Department's expenditure of funds for prosecution of medical 
marijuana businesses. However, a U.S. attorney in California has 
stated that the law would not block her filing criminal cases in her district.

When the U.S. Congress acts to treat legal marijuana businesses like 
other businesses for tax and financial purposes, the uncertainty will 
go away, to be replaced by normal market forces. Despite those 
uncertainties, the marijuana business continues to grow.
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MAP posted-by: Jay Bergstrom