DEA and Banks Playing ‘Smokeyman Go’ with Cannabis Merchants
It’s a high stakes game, and it starts with a call to the bank that might go something like this: “Hi, this is Herb Green. I own the Cannabis Club in Seattle and was just following up with you to establish a commercial account…”
Click. Dial tone.
Green looks at the growing pile of cash taking up residence in a Fort Knox brand, L-series safe sitting in the back office of his Cannabis Club and sighs. A new haircut reveals a swath of gray hair. It’s probably the result of the stress from running a popular and profitable cannabis business, stress that Green had not planned for. What to do with the cash?
In Washington, selling recreational and medicinal marijuana is legal, but banking the profits is almost impossible. This puts legal business owners like the fictitious Green in a position where they are forced to break the law as it pertains to paying taxes.
For the unaware, the IRS only accepts electronic payment from merchants for payroll taxes, and in order to make an electronic payment, a business owner must have a bank account. Since the U.S. Drug Enforcement Agency still considers marijuana commerce of any type a crime, many banks are unwilling to provide services to cannabis companies. This has created an impossible scenario for owners that want to pay their taxes and operate a legitimate business. Although merchants have been told that there are banks out there willing to work with cannabis companies, those banks aren’t advertising; it is left to the business owner to pound the streets like a Pokemon Go player to ‘find an egg’ — but in this case, the egg represents a bank willing to let the merchant open an account.
Successful cannabis entrepreneurs are in a bind. Banks are handcuffed by federal laws that were reinforced just days ago by the DEA. From the viewpoint of the Feds, marijuana is considered to have “no currently accepted medical use” and has a “high potential for abuse.” From the view of business owners like Green, the DEA’s stance is archaic. Not only has cannabis proven an effective medicine against pain, it is considered non-addictive. Yet the DEA’s stance directly affects the merchant’s ability to pay taxes, simply because that stance makes banks nervous.
This trend is a potential time bomb. In states like Colorado and Washington, not only is cannabis legal, it is a recognized industry. Hemp Fest, the largest annual festival in Seattle, kicked off a couple of days ago to record crowds. Weed Week, a Startup Week for both cannabis businesses and consumers, is set to take place in five different cities this fall. This event could create intense focus on the cannabis startup industry by featuring events geared toward entrepreneurs, such as a ‘pitch fest’ to qualified investors, and other events geared towards cannabis enthusiasts, such as the 4.20 km (2.6 miles) Fun Run. There are also enough panel discussions listed to keep anyone busy.
Weed Week is just one indication of the vibrant startup scene related to cannabis. It is where you will find companies like Leafly, which won the Geekwire ‘App of the Year Award’ in 2014, was acquired by Privateer Holdings (a cannabis-specific fund) in 2015 and was just named the fastest growing private company in the Pacific Northwest. Leafly’s original founders have since moved on to create Headset, a cannabis intelligence platform. As a result of this emerging startup scene, the cannabis industry will continue to grow and pump out real companies designed to capitalize on emerging business opportunities. So long as the DEA continues to pump fear into the financial industry, however, legitimate merchants operating in states where recreational and medicinal cannabis is legal will continue to play the Smokeymon Go game in search of legitimacy from banks and the IRS.
The Situation is not dire, however
As I wrote in an article published recently by American Banker, a few local credit unions and banks in states where marijuana is legal have stepped up to provide financial services to the industry, although the costs for both financial institutions and marijuana providers can be high. Financial institutions providing such services include Fourth Quarter Credit Union, O Bee Credit Union, Group Health Credit Union and Salal Credit Union in Washington State; and First Security Bank of Nevada. The majority of these banks and credit limit involvement to working with recreational producers, processors and retail outlets.
Yet even participating institutions reveal concern about the risk they face in terms of what they charge marijuana outlets for services. According to the manager of Seattle’s Ganja Goddess, the recreational marijuana store is one of a few in Washington State that accepts debit cards for payment. It then charges the customer a $5 service fee per transaction, the same fee the bank charges Ganja Goddess.
As the store’s manager stated in a recent interview, “after a ton of searching we finally found an egg and it hatched into a bank account!”
Let’s hope that Smokeyman Go is a game that will go away.
