The Obama administration on Friday gave the banking industry the green light to finance and do business with legal marijuana sellers, a move that could further legitimize the burgeoning industry.
For the first time, legal distributors will be able to secure loans and set up checking and savings accounts with major banks that have largely steered clear of those businesses. The decision eliminates a key hurdle facing marijuana sellers, who can now legally conduct business in 20 states and the District.
So far, the Obama administration has dealt with the legal dilemmas posed by Colorado and Washington — where state laws now allow recreational marijuana use — largely by choosing not to enforce the federal statutes. Eighteen other states allow the sale of medical marijuana — though federal law does not allow that, either.
Last year, for example, the administration said it would not challenge Colorado’s and Washington’s legalization of the drug, as long as they kept a tight rein on marijuana businesses. The administration agreed in August not to prosecute legal dealers as long as they met eight requirements, including not selling to minors.
This was not, federal officials said, a change in the law itself. Marijuana was still illegal, as far as the federal government was concerned, in all 50 states. Instead, it was just a declaration that the Justice Department had bigger things to worry about.
On Friday, the administration went a step further by laying out a path for banks to bring marijuana commerce out of the shadows and into the mainstream financial system.
The Treasury Department issued new rules that could make it easier for banks to do business with marijuana dispensers. In separate guidance, the Justice Department directed U.S. attorneys not to pursue banks that do business with legal marijuana dispensers as long as the dealers adhere to the guidelines issued in August.
A senior administration official, who was not authorized to speak publicly, acknowledged that the decision could draw legal protests from anti-legalization groups. Some lawmakers have complained that the administration is enabling an industry that is in violation of federal law.
“Marijuana trafficking is illegal under federal law, and it’s illegal for banks to deal with marijuana sale proceeds under federal law. Only Congress can change these laws. The administration can’t change the law with a memo,” Sen. Chuck Grassley (R-Iowa), ranking member of the Senate Judiciary Committee, said in a statement.
Financial institutions have feared that they would run afoul of money laundering statutes by accepting money from an activity considered illegal under federal laws. That has made it difficult for the growing crop of legal marijuana dispensers who must operate exclusively in cash, placing them at greater risk of being robbed.
As it stands, banks have to notify federal regulators of suspicious activity, such as moving money from illicit activity like drug dealing. To address that glaring conflict, Treasury said banks now must file a “marijuana limited” report that says the dealer is following the government’s guidelines, including ensuring that sales revenue does not wind up in the hands of criminal enterprises. But if the bank believes the dealer’s revenue is not coming exclusively from legal sales, then it has to file a “marijuana priority” report to alert regulators.
“This is very good news,” said Steve Horwitz, owner of the Ganja Gourmet in Denver.
Last week, Horwitz’s bank, Wells Fargo, discovered that he sells marijuana-laced food and closed his business account.
“The opposition and difficulties to being in this industry are just unimaginable,” he said. “Every time you think you’re going forward, you go back 100 yards.”
Horwitz said he has already had to change credit card processors and banks once, and was at a loss as to what his next step should be.
“Just fifteen minutes ago, me, my office manager and my budtender were discussing this,” he said. Horwitz has heard that other shop owners have opened personal accounts or set up shell companies in order to bank. But he wasn’t sure how he would manage things like payroll or taxes with those options.
Now, he hopes Wells Fargo will rethink its decision. “We’re good customers,” he said. “We pay extra money for cash deposits, and we move a lot of money. It’s in their interest to keep us.”
Wells Fargo did not comment on Horwitz’s case but said it is the bank’s policy not to work with marijuana businesses. “We are reviewing the guidance” issued Friday, said Mary Eshet, a bank spokeswoman.
Financial firms could be handsomely rewarded for banking legal marijuana business. The legal U.S. industry is expected to reach $2.57 billion in sales this year, according to ArcView Market Research.
But the government’s new rules may not be enough to assuage bankers’ fears.
The Justice Department has embarked on an aggressive campaign against money laundering, going after banks, including HSBC, for allowing millions of dollars from drug traffickers, terrorists or countries under sanctions to illegally move though the U.S. financial system. Against that backdrop, bankers may turn away business that could paint a target on their backs.
Nothing in the guidance protects a bank from future prosecution if a new administration decides to prosecute state-licensed companies for violating federal drug laws, analysts say.
“This guidance doesn’t alter the underlying challenge for banks,” said Frank Keating, president and chief executive of the American Bankers Association. “Possession or distribution of marijuana violates federal law, and banks that provide support for those activities face the risk of prosecution and assorted sanctions.”
As long as marijuana is classified in the same category as heroin, bankers will remain reluctant to do business with dealers, even if they are operating within the confines of state laws, analysts say.
A congressional coalition, led by Rep. Earl Blumenauer (D-Ore.) is calling on President Obama to reclassify marijuana. “If we reschedule or de-list marijuana, it would have a series of salutary effects,” Blumenauer said. “We’re fast reaching the point where it is easier for a parent to get medical marijuana for a child with severe epilepsy, than for researchers to get marijuana to study.”
The banks could face a civil penalty if they do not strictly abide by the rules laid out in the guidance, said a senior Treasury official, who was not authorized to speak publicly. But the official also said that the ultimate goal is to mitigate the risks associated with having these businesses operate in an unregulated all-cash system — not to ensnare the financial institutions.
“We’ll focus enforcement on individuals or institutions who willfully and systematically act in contravention of the guidance, not some technical mishap,” the official said.
Until now, marijuana dispensers have had to find backdoors into the banking system. Some set up holding companies with nondescript names that obscure the nature of their business, while others use their personal bank accounts, said Taylor West, a spokesperson for the National Cannabis Industry Association. These accounts, she said, are usually closed once bankers start noticing the large quantities of cash running through them.
Mike Cuthriell has been lucky. The owner of Metropolitan Wellness Center, a medical marijuana dispensary in the District, has used his personal bank account for his business since opening in August. He would not disclose the name of the bank, out of concern for his relationship with the institution.
“When we were incorporated, we didn’t reference the business in too much detail with the bank,” Cuthriell said. “But now we can take advantage of small-business loans, and that’s been difficult for our industry.”
Despite the new banking industry rules, other challenges to the industry remain, he said. Federal tax policy makes it difficult for him to claim deductions on his returns, Cuthriell said.
“While we’re generating revenue, we’re not cash-flow positive yet. And we’re not certain that we’ll be able to write off traditional business expenses, which will have a large impact on our finances,” he said.
Cuthriell said his accountant advised him not to attempt to gain any tax benefits from his business. The Internal Revenue Service could come after his business.
Dina ElBoghdady, Hayley Tsukayama and David Fahrenthold contributed to this report.