DOJ reversal on “hands off” enforcement policy forces hundreds of pot-friendly institutions to hedge their bets on a once-promising $10 billion boom. Are there any loopholes?
The cannabis industry braced for conflict a year ago when Donald Trump won the presidency and brought lifelong pot antagonist Jeff Sessions to the top of the law enforcement pyramid.
They got it on Thursday when Sessions directed prosecutors to ignore a 2013 Justice Department memo that previously left drug policy up to the states.
Now it’s anybody’s guess whether the newest $10 billion industry in the country can survive if the feds decide to wind the clock back to the zero tolerance era.
And it starts with the banks and other financial institutions that have spent the last few years working to bring capital to the industry without tripping federal alarms.
Years of work, up in smoke
The problem boils down to banks leaning on the 2013 memo, known as the "Cole Memorandum" as permanent support against a fundamental fact: marijuana is still illegal on a federal basis and receipts deriving from that technically criminal business are banned from the federal banking system.
Before last week, institutions that wanted to work with legal cannabis vendors had safe harbor as long as they did their due diligence and filed the right suspicious activity reports on every transaction.
Compliance was expensive, but with $10 billion a year flowing through dispensaries, more than 400 banks and credit unions were willing to step up. After all, the vendors would pay the fees — the alternative was working on a cash-only basis forever.
No deposits, no payroll, no checking, no credit. It’s a grim scenario. You’re making cash but you can’t spend it effectively or attract a whole lot of capital.
Unfortunately, the cost of compliance just went up. I talked to people on the forefront of this business and they don’t see a lot of incentive left here.
Losing the safe harbor effectively makes it impossible to serve these customers. Institutions who can find a way around federal deposit insurance can still hold the cash, but they can’t legitimately push it out into the broader system.
And realistically speaking, there aren’t any private insurance companies willing to cover that kind of operation. Even with a specialized “industrial bank” charter, you’d need to set up your own insurance unit in order to go your own way.
It starts getting a whole lot more expensive. Right now, with the feds open to persecuting trivial infractions — even if there’s no problem under state law — nobody’s stepping up to pay the price.
Even Bitcoin no solution
The brain trust has weighed all the options.
Colorado is exploring a credit union model where medical marijuana card holders are the members and can roll their cash into the institution. You don’t need federal depositary insurance in that scenario, but people I talked to say it’s still a stretch.
Forget about recreational sales under that model. The recreational market is a completely different regulatory problem and a harder population to restrict to credit union membership.
The industrial banking charter looks like a dead end. Even if someone stepped up to provide insurance and convince the Federal Reserve to give the institution a master account, marijuana money would still be trapped there.
Tribal banking has the same problem, so there’s no percentage in running cannabis money in conjunction with a casino. The institution could take the money but there’s no clear exit — once again, the cash would simply accumulate.
Converting the dollars to some other currency probably isn’t a solution here. The dispensaries are free to take bitcoin or any other crypto money, but they’ll need to find ways to pay all their bills within the crypto system. Payroll and utilities are currently a stretch.
The good news is that the government will still accept truckloads of cash for tax purposes. The bad news is that nobody’s come up with a way to turn that into a viable business in itself.
Business is what counts here. Conventional depositary banks covet the fees, not the deposits. Over the last decade, deposits have become more burden than something to chase.
After all, you’ve got to find a way to put that money to work. Otherwise, it’s just dead money.
Without a viable revenue model, the risks are just too high now for an established institution to accept. You’re putting your reputation on the line with every “suspicious” transaction you report.
The bankers just don’t want the headache. One way or another, they’ve cancelled their plans to enter the space.
And without them, the dispensaries go back to a cash universe. It’s going to be a cold season in cannabis country.
