Jerry Derevyanny is one of the executives of Northwest Cannabis Solutions. The company is the biggest producer and processor of marijuana in Washington, and they sold around $30 million of their products from 2014 to 2017. Derevyanny, however, pays his employees in cash. Around 190 people are working full time for the company, yet they all get cash during paydays.
In Denver, Colorado, Babak Behzadzadeh keeps his cash in a leather bag. Behzadzadeh is the owner of Avicenna Products and Green Sativa.
Both companies have been earning around $250,000 to $350,000 every month. Every day, all sales go into that bag.
Cannabis business owners are finding it hard to get an account at big banks. This is the reason why they end up hiding cash under floorboards or hidden in mattresses. Others hire security agencies to move the money around.
But security is only one facet of the problem. These businesses are only able to accept cash payments, they will not be able to offer credit card payments. They can’t because they have no bank accounts.
All that money is spent to buy inventory or to pay employees. Others go to groceries and get money orders for all that cash. Most of the time, the money is just sitting there. It is like an open invitation to get robbed.
Imagine this, in legal states, businesses who want to pay taxes can find it a burden. For instances, weed entrepreneurs in Oregon have to go travel to Salem to pay their taxes, no matter where they are and how far they need to travel to do so. Every month, they show up at a heavily guarded site in Salem to pay their taxes.
Banks to Cannabis Business Owners: We Don’t Want Your Money (Or We Are Afraid to Take It!)
It does seem that big banks are hesitant to let marijuana business owners open an account with them. Processing, growing, and selling cannabis might be legal in some places such as Colorado and Washington state, but the banks are looking at federal guidelines. Federal laws classify marijuana as a prohibited drug, and as such, accepting deposits from weed businesses is considered as money laundering.
The Big Banks are closing accounts left and right once they find out that it is for a cannabis business. As long as the federal prohibition against marijuana is in place, companies in the industry just cannot use banks.
That is absurd, considering that close to two-thirds of all states have been allowing the sale of pot, whether for medical or recreational reasons. States and cities have been earning from weed taxes and have been using them to fund some initiatives in their jurisdictions. Yet because marijuana remains a Schedule 1 drug at the federal level, banks can still get prosecuted for money laundering if they accept deposits from weed businesses.
One of the most significant disadvantages of not having a bank account is the laws on asset forfeiture. The police are allowed by asset forfeiture laws to seize cash and other properties and keep much of that seized assets for their own departments. They prefer to take some money because unlike cars and houses, cash needs less paperwork.
Law enforcement does not even need to show that the cash comes from criminal activities. They do not need to charge suspects. All they need is to declare their suspicion that it comes from drug money and they can seize the cash.
In Detroit, the police departments there have already taken so much cash that pot dispensaries in the area have closed. In a state with around 500 dispensaries in 2016, there are only around 200 left today.
So, What Is Happening Now?
Most marijuana companies cannot work directly with federally chartered banks. As such, they cannot take out loans, and even establish credit in any form. Even the legalization of marijuana has not assured banks that it is not risky to take pot money.
Most cannabis shops work as a cash-only operation. Customers pay in cash, workers get paid in cash, inventories are bought with cash. Cash all around. Credit card companies are also hesitant to have cannabis entrepreneurs as clients. They will not open accounts for them. As a result, pot businesses cannot take credit or debit cards.
But while the focus has been more trained on businesses, having cash-only pot businesses also poses a problem for the different legal states. For one, an all-cash business is rife for tax manipulation. Because the paper trail is less for cash transactions, it is effortless for companies to declare a lower amount of sales.
According to a Wharton paper, half of the cannabis dispensaries were burglarized or robbed in 2015. The thieves were able to hie off with around $20,000 to $50,000 each time. It is very lucrative, says Denver district attorney Mitch Morrissey. Morrisey laments that hitting a 7-Eleven you are probably going to run off with $20, but on a good day, you can rob a dispensary and get $300,000 for your effort.
Here’s an interesting tidbit. If the odds of a marijuana dispensary getting robbed stands at 50 percent, what are the chances that other businesses have of getting robbed? Banks have a 34 percent odds of getting rob, while convenience stores have a probability of 20 percent of thieves getting in.
What the Banks Are Asking from Cannabis Businesses
The Bank Secrecy Act requires clients to prove that any deposit of more than $10,000 comes from legal sources. This has prevented drug cartels and other criminals from using banks to store their illegal stash. For any transaction exceeding that amount, the banks are required to file a Currency Transaction Report. Even if the amount deposited is smaller than $10,000, banks are still required to file a Suspicious Activity Report if the account holder is depositing high amounts repeatedly. If you deposit more than $10,000 frequently, your account will be flagged as a high-risk entity and the government might be alerted.
So depositing the money into an individual account would not be feasible under the Bank Secrecy Act, and you cannot open an account under your business name. Why not use a fake business name? While you can get banking services using a false business name, this will only open you to money laundering accusations with hefty criminal penalties.
Small Banks and Credit Unions to the Rescue?
The problems that big banks do not want to deal with are being tackled by smaller banks and credit unions. In Washington state, for instance, cannabis has been legal since 2012, and a lot of cannabusiness owners are demanding for banking services.
Washington’s local papers have called cannabis-related businesses as sitting targets. They have loads of cash with nowhere secure to stash it. Over time, however, smaller banks in the state saw the high demand and came up with a solution.
As of February 2014, there were only 15 banks who accepted weed clients. By September 2016, that number has increased to more than 300. In Washington, 95 percent of excise tax payments coming from cannabis are not paid for in cash.
That is comforting, Washington collects at least $20 million in cannabis taxes every month. In 2017, the Washington State Liquor and Cannabis Board has decreed that cannabis businesses should not pay their taxes in cash unless of course, they can show proof that they tried but failed to get banking services.
The board, ironically, explained that the reason for this directive is because it was “dangerous” to have that much cash. It is dangerous for them, but they are not willing to help marijuana business get banking services. In fact, having 95 percent of companies pay in other forms than cash does not mean that they already have bank accounts. Some of them just convert cash into money orders, which does not require you to have an account with the bank.
In Washington, 12 financial companies accept cannabis business owners as clients, as well as two banks and three credit unions. The state could do more. They have already appealed to the big bank’s executives to take cannabis cash.
Where do cannabis entrepreneurs in the state bank? Here are some businesses you can partner with:
1. Numerica Credit Union in Spokane has at least 200 clients from the cannabis industry. Their main reason for doing so was because they wanted their community to be safer.
2. Salal Credit Union in Seattle handled more than 300 accounts from cannabis businesses. As of June 2014, they estimated that cannabis cash and deposits made up for 80 percent of their net worth.
3. O Bee Credit Union takes it a step further, even using the slogan, “Let’s Be Buds” to help attract cannabis entrepreneurs into their fold.
4. Partner Colorado has a Harbor Private Banking division that gives marijuana businesses a chance to have a checking account. The credit union reports getting $931 million in cannabis money deposited in 2017 alone, making it the biggest bank for cannabis entrepreneurs.
5. Severn Savings Bank in Annapolis, Maryland, has also started accepting deposits from weed businesses. However, the accounts come with hefty fees, and they cannot borrow money from the bank. They also cannot write checks. It may not be a full-service banking account, but it still offers a lot of convenience such as being able to pay their employees using the bank’s automatic debit system, rather than in cash. Or use a debit card to buy supplies and inventory, or even use wire transfers to pay.
There are now services that allow you to get banking services without having a bank account. For one, you could adopt a point-of-banking system. The card-swipe technology is PIN-based and works similarly to a debit or credit card reader. The customer will enter his or her PIN and the machine will print a receipt of the transaction. After presenting the receipt, the funds are transferred from the buyer to the seller electronically. In short, it works like a cashless ATM. You get proof of the sales without holding on to too much cash.
Another alternative is the use of cryptocurrencies such as Bitcoin or PotCoin. You probably have heard about Bitcoin, so let us talk about PotCoin. The cryptocurrency was first introduced in 2014.
With Potcoin, both the customer and the vendor would need to enroll and be approved to use the cryptocurrency. Like BitCoin, it also uses a blockchain, where transactions are open and accepted by everyone in the blockchain. So rather than paying in cash, your customers pay in PotCoins. You can then use the PotCoin to buy inventory from other merchants who are enrolled in this system. Or you can encash it.
The Best Solution
While there is obviously a gap when it comes to cannabis money and banking services, there really is nothing much that can be done right now. Big banks are not going to take the risk of being flagged as in violation of banking standards. Fortunately, credit unions and smaller banks are just happy to fill the void. However, these financial institutions are just small in nature, and at most, they are able to serve marijuana businesses in their areas.
The best possible solution is to have cannabis removed from the list of Schedule I drugs and finally make it legal on the federal level. It does not make sense that a majority of the states already allow the growth, use, sale, and processing of marijuana in some for a variety of uses, and still see it as a highly dangerous and addictive substance.
Barring that, there should be guidelines that would leave it to the state whether or not to prosecute a bank or financial institution that takes marijuana money.
It is high time that the federal government gets its act together, while states should start pushing for laxer laws when it comes to cannabis money. If this should ever come to pass, there would be a lot of groups that would be benefitted. Customers would have more options to pay for marijuana products, businesses would have access to banking services. Communities would be safer, and entrepreneurs could finally get a loan at bigger banks. Lastly, states would have an easier time figuring out whether or not a cannabis business is declaring the true amount of sales, which means that they are not evading paying their taxes.