Pubdate: Mon, 29 Jan 2018
Source: San Francisco Chronicle (CA)
Copyright: 2018 Hearst Communications Inc.
Author: Peter Fimrite


Bay Area marijuana retailers who went fully mainstream this month were
forced to act like gangsters anyway as they rumbled down freeways and
across bridges in sport utility vehicles and sedans and, in at least
one case, a Tesla, bearing cash piled in shopping bags and suitcases.

The money was headed for the collectors at the San Francisco and
Oakland offices of the California Department of Tax and Fee
Administration, which are handling tax payments under the 2016 state
law that legalized recreational cannabis.

Everyone agrees the bundles of moola are a lure for criminals, but
merchants who can't access traditional banking have no other way to
settle up. A month after California's first recreational marijuana
shops opened, the industry is mired in a fiscal free-for-all with few
answers on how to handle the explosion of cash from rising sales and
increased taxes.

Industry leaders estimate that 70 percent of the more than 1,600
recreational and medical dispensaries in the state are still dealing
in cash. They must lug stacks of 20s, 50s and 100s to the tax
collector every month, payments that are growing after California on
Jan. 1 initiated a 15 percent cannabis tax on top of sales taxes.

The Wild West situation stems from marijuana remaining illegal under
federal law, which prompts banks that might open accounts and extend
loans to fear money-laundering charges.

In the latest bid for a solution, state Sen. Bob Hertzberg, D-Van
Nuys, introduced legislation Thursday that would allow state-chartered
banks, credit unions and other financial institutions to open accounts
and issue checks for marijuana retailers.

Members of Congress have also sought protections, and Oakland and San
Francisco have studied the idea of a public bank, but U.S. Attorney
General Jeff Sessions has pushed in the other direction, signaling he
favors a marijuana crackdown.

Frustrated state Treasurer John Chiang urged California in November to
hire armored cars to help pick up the taxes, which industry experts
predict will top $1 billion a year. But many courier services are
fearful of being targeted by the federal Drug Enforcement
Administration, and nothing has been done.

Instead, 90 percent of all cash tax payments to the state are now made
by the cannabis industry, officials said.

"Certainly it's an impediment to doing business," said Erich Pearson,
the founder of the San Francisco Patient and Resource Center, or
SPARC, the city's largest cannabis outlet. "A lack of banking has all
sorts of logistical and operational challenges ... so you have safes
and cameras and security."

The issue has intensified since Jan. 1, when the state put new taxes
on retailers, growers and manufacturers. California businesses must
normally pay a penalty for dealing in cash, but those in the cannabis
trade can obtain a waiver, officials said.

Recent events in San Francisco and Oakland have only worsened the
cash-only dilemma. The San Francisco tax collector closed in the fall
after the office was accidentally flooded, forcing dozens of marijuana
purveyors to drive to Oakland or Sacramento. The office reopened Jan.

Earlier this month, the Oakland tax office became so swamped with
currency that officials notified retailers it would only accept
$20,000 in cash a day - a move that would have required some
businesses to make multiple trips. The limit was rescinded shortly
after The Chronicle inquired about it.

Tax authorities could not provide data on how much cash they are
receiving and from how many businesses, but shop owners in San
Francisco said it was not uncommon for them to haul in $80,000 at a

While no recent robberies have been reported publicly, dispensary
workers across the country have fallen victim to cash heists over the
years, including an Orange County dispensary owner who was kidnapped
in 2012 and sexually tortured by four thieves trying to force him to
hand over money. Another risk is that police or federal agents might
confiscate gains considered ill-gotten.

"It's a burden for the whole industry," said Erick Alfaro, director of
operations for the Green Cross in San Francisco, whose boss Kevin Reed
had to make two trips to Oakland in his Tesla to pay taxes this month.
"Walking around with that large amount of money is definitely a danger
and a safety concern for us."

Before January, medical dispensaries were required to pay state sales
taxes that amounted to around $50 million annually, plus varying local
taxes. Officials said only about a third of dispensaries paid all they
owed - a shortfall that became one of the arguments for

The newly raised taxes will pay for marijuana research and regulation
as well as programs to prevent drug abuse, protect the environment and
test for pesticides.

Despite the windfall, bank managers contemplating opening cannabis
accounts remain wary, and got no encouragement from Attorney General
Sessions, who on Jan. 4 rescinded a memo issued under President Barack
Obama's administration that instructed the Department of Justice to
leave cannabis businesses alone in states where the drug is legal.

"It would be ridiculous for banks like ours to bank in marijuana,"
said Jim Brush, the president and chief executive of Summit State Bank
in Santa Rosa, a state-chartered institution subject to federal regulation.

"Anytime we think there is anything to do with marijuana, we have to
report that as suspicious activity because its illegal," Brush said.
"I have heard of some banks that have started it, but usually within a
few months they aren't doing it anymore. The fines can be

Before Sessions rescinded the Obama administration directive, known as
the Cole memo, 400 banks in the country had cannabis customers,
according to a September 2017 study by the federal Financial Crimes
Enforcement Network.

It isn't clear how many banks have cut ties since. Industry experts
say the institutions that remain are mostly small credit unions or
banks where branch managers negotiate side deals without telling their
corporate bosses about the clients' marijuana connection.

Such arrangements can be fleeting, and many merchants have been forced
to move from one institution to another as audits flag their accounts.
Henry Wykowski, an attorney who represents Oakland's Harborside
dispensary and more than 100 other cannabis businesses in California,
said he was bounced by Comerica Inc. after 25 years as a client,
apparently after they found out he was depositing legal fees paid in
cash by the dispensary.

Other outlets wire money to banks or use debit cards and ATM
processing machines supplied by independent merchant-services groups,
like CreditWeed and Green Kinex. But the fees can be 5 percent or more
per transaction.

"We do receive inquiries from different companies offering credit card
terminals, but there are quite a bit of fees," said Alfaro, who
recently received an offer with a 10-percent overall charge. "That
wouldn't be a really efficient way for us to run our business. It
would be like them being a part-owner."

Wykowski said the restrictions may open doors for drug cartels, which
have experience dealing in cash and providing the kind of muscle
needed to protect it.

"Not allowing cannabis businesses to engage in banking is actually
detrimental to the federal government because there are now billions
of dollars on the underground economy and all of it is cash that you
can't track," Wykowski said. "Most businesses have found some type of
accommodation, but the accommodation we have found is putting duct
tape on the leaky pipe rather than replacing it."
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