By Steven P. Fuhr
Picture being in a business that collects tens of thousands of dollars in cash, daily. You have to transport all this cash without a gun, or face federal felony charges, and few — if any — of the armored car companies will work with you. Worst of all, no bank will hold all your cash, so you can’t pay anyone with a check, take a check, pay your federal taxes, or even make a normal payroll, and the list goes on. You are forced to store millions of paper dollars in a facility that no one will insure for fire or theft, with no ability to earn interest on it or take a loan against it.
And even if you are one of the lucky few who found a way to open a “legal” or “gray” account, the fees can be outrageous. We all know banking is one of the most critical problems facing the cannabis industry today, but many are unaware that Washington is actually leading the country on developing banking solutions for our industry right now.
If you doubt it, just take a hard look at Colorado.
It’s no secret Colorado took off from the gate of legalization much faster than Washington did, but two years after the state voted to legalize cannabis, “legal” banking solutions are still non-existent for cannabis businesses in the entire state. The most viable solution proposed recently by Gov. John Hickenlooper was to open a credit union just for cannabis businesses, which was an idea everyone loved, except investors and the FDIC. The stories of what people are doing with the millions in cash being generated are as unbelievable as they are frightening. This is not to say some cannabis businesses don’t have bank accounts in Colorado, or that our industry hasn’t found creative ways around banking problems in the past.
What a lot of cannabis businesses do — or did until very recently — was simply walk into a bank and try to open an account without saying exactly what their business was. If asked, they would say they were in agriculture or my personal favorite: we sell “organic homeopathic remedies’’ to medical facilities. Some used their personal banker they had a long-standing relationship with, while others just knew of bank managers that never asked. The problem now is the FDIC recently released its own Cole Memo of sorts for bankers. Now there are clear banking rules for cannabis businesses; rules you can bet banks are following.
One basic principle of these new rules is that bank managers must now certify their institution has investigated the state license for every business account they accept. This means going to the Secretary of State’s office and printing a copy of your business license. Yeah, the one that says
you are involved in the production, processing or retail sales of marijuana. What gives teeth to these new rules is bank managers now have to certify these applications under penalty of incarceration personally. Meaning the bank faces more than just a fine if the manager gets it wrong; management of the bank taking the account can potentially go to jail on federal money laundering charges, and bankers are incredibly averse to handcuffs. This is why banks are charging (nonrefundable) fees as high as $1,000 just to apply for the account. It’s an important point to consider when looking at the other rules, and also one of the big reasons so few banks are willing to join the game.
Once the bank determines your company deals in a Schedule 1 federally controlled substance called cannabis, the new rules require them to place a hold on your account, file a specialized suspicious activity report, and do a deeper investigation. Much deeper.
So if you open a new account, expect an immediate 23-week wait before it is activated. If you have a gray account, expect to have it closed in the very near future while they usher you into one of these new accounts.
Expect the bank to do their own criminal background check, and know that some banks have publicly stated if any bank member or officer has any serious criminal charge in their entire life they will not open the account. Some banks are using the same 10-year window the Washington State Liquor Control Board considered. Regardless, no other industry goes under this scrutiny to open a basic checking account, and that’s just the beginning.
Once the account is open, the bank management has to personally certify (think handcuffs) that every penny you put in your account came from a legal, traceable source. Every single penny. This is why banks are charging upwards of $500 a month for the privilege of having a legal cannabis account, plus cash handling fees. They also have to certify they know who the deposits are coming from, so some banks are asking I-502 producers to name just five depositors they will deal with. Then depositors have to pass a bank background check, too. And surprisingly, most banks in Washington won’t take retail accounts at all, making processors the de facto launderer of most retail cash, and the sole party paying these exorbitant cash handling fees.
On Oct. 6, Washington State legislators heard testimony by banking executives from Numerica and Salal credit unions, the first two banks in the country to publicly open their doors to our industry. You can download and listen to this podcast if you have three spare hours.
Both executives expressed cautious optimism that more banking options would open up in the future, but they also stressed this industry creates enormous risk and additional staffing requirements. Just counting all the cash has required a lot more staff. We can all hope this is another problem that will subside once the federal government decides to reschedule cannabis, but chances are high banks will keep a close, expensive eye on our industry for a long time to come.
After months of research and dozens of shut doors, we chose a local bank (which asked not to be named) for three reasons. The first being they seem to be the only bank in the state — and therefore the only bank in the world — that willingly takes retail cannabis accounts. Our hope, as a producer/processor is it will be easier for retailers to pay us without cash handling fees if we all bank at the same institution. Keep in mind the Feds will not allow digital transfers between different banks since they pass through a local Federal Reserve branch, and that is still not allowed. Our bank also has a good range of branches in Western Washington, which is important since all these banks only serve I-502 entities in their local service area, for obvious reasons. Your bank needs to be local no matter what.
However, cash handling fees are the most important factor of all. Banks charge 25-35 cents per $100 of cash processed, in or out, and that 10 cents can make a big difference, particularly for large operations. Some even require you to transport all cash in one of their contracted armored trucks, at around $300 per trip. These fees can add up to well over $20,000 annually for a small Tier 2, and well into six-figure territory for a large Tier 3, so it really can pay to shop around and get the best rates. Fees may even be negotiable, but only slightly at this point.
In just the last few weeks, two big changes have occurred on the banking front to our benefit. BioTrackTHC announced a new “cash traceability” feature that the Liquor Control Board actually uses for its own internal audits. The Liquor Control Board also announced it will be reporting revenues for each individual I-502 operation publicly, adding even more transparency to our industry. Some accounting firms are even offering “traceability audits” that will certify your source of funds. Hopefully, these changes will translate into lower bank fees over time. As you research banking options, know that big national banks will probably not join this industry until cannabis is rescheduled, because depositors in states where cannabis is not legal (yet) may sue to protect their deposit from federal seizure.
This is why the national bank taking Washington’s tax deposits (U.S. Bank) will not take deposits from any I-502 entities, but smaller local banks will. It’s also why the bank we chose to work with asked not be named publicly (although if you write to me, the bank gave me permission to tell people privately). Which brings me to one final factoid that really surprised me when doing my research: something we all need to remind ourselves of when it feels like every bank is shutting the door in our face. The Federal Reserve announced that 155 banking institutions have currently opened their gates to cannabis businesses under these new guidelines. Only two have publicly announced their willingness to work with us, which means 153 are quietly taking our money right now, with many more on the way.
Steven Fuhr is the managing member of aGroPack LLC. He can be contacted with questions and comments at firstname.lastname@example.org.