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Cash, Crime, and Cannabis: Banking Regulations in an Illegal Market

November 20, 2017

Over the span of recent decades, the federal legalization of marijuana has been a popular topic of discussion within the political arena. One aspect less frequently introduced is the financial impact legalization has within the banking sector. At the moment, most cannabis companies are unable to take out federal loans or establish any form of credit, since marijuana is federally illegal and therefore federally regulated banks are unable to work directly with marijuana businesses. A few states have legalized the use and distribution, of cannabis, both recreationally and medicinally, but this legal standing is insufficient for distributors to access services provided by national banks. All of this has led to volatility within the marijuana business structure and a business model built in violation of banking standards.

Cash Only Businesses

The uncertainty of marijuana banking legality and the current riskiness of the industry causes most cannabis shops to operate as cash only businesses with customers paying for cannabis in cash, workers getting paid in cash rather than with paychecks, and dispensaries having cash as a primary source of capital. Furthermore, cash businesses often have to pay taxes in cash or via money order. [1] The lack of information on cannabis banking policies makes many banks and credit unions apprehensive to work with cannabis business owners, leaving only a few willing to take on the risk of opening an account that accepts cash deposits from dispensaries. Most credit card companies also refuse to open business accounts for marijuana dispensaries and growers, and without debit or credit cards, businesses must deal entirely in cash. Dealing with large amounts of cash creates many problems and inefficiencies for marijuana businesses.

Risky Business

Not only are cash businesses conducive to tax manipulation, they also hurt many individuals, because of the risk of crime. In 2015, one in two cannabis dispensaries were robbed or burglarized, with the average thief walking away with anywhere from $20,000 to $50,000 in a single act. [2] Mitch Morrissey, district attorney of Denver, notes a direct increase in crime cases related to the marijuana industry, and sees the reasoning behind the robberies stating: “You hit a 7-Eleven, you’ll get 20 bucks. You hit a dispensary, you’ll get $300,000 on a good day.” [2]

(Image: Dispensary Security Infographic, Source: Bubulyan Consulting Group)

(Image: Dispensary Security Infographic, Source: Bubulyan Consulting Group)

 Depositing cash into a personal bank account could work to a certain extent, but banks have many regulations, through the Bank Secrecy Act (BSA) that would hinder this process. Individuals and businesses must prove that any cash deposited over $10,000 came from legitimate sources, therefore making it more difficult for cartels, drug dealers, and the criminals to use banks to store illegal profits. [9] The BSA enforces these measures through a Currency Transaction Report (CTR) that banks are required to send to the government for large cash transactions. [3] Repeated $10,000 or more deposits over a short span of time would classify the business as ‘high risk’ and could alert the government. Even if individuals deposited less than the $10,000 daily limit, banks are still required to fill out a Suspicious Activity Report (SAR) if they notice an individual posting large amounts of cash repeatedly. [4] Much like in the case with CTRs, repeated SARs would also alert the government of potential financial crime, and could hurt the marijuana dispensary. The BSA was inherently created to catch industries like cannabis: businesses that are often involved with tax evasion, and companies that fail to regulate to federal standards. [5]

If depositing into personal accounts doesn’t work, companies could go down another route: money laundering. An example of this would be a marijuana dispensary opening a business account with a bank under a fake business. This fake business would allow the downer to deposit large sums of cash and not be the target of BSA regulations, and would make the business more accountable to pay taxes and give their employees formalized payrolls. Although the proprietor would have access to banking services that could be of benefit, he would face the liability of criminal penalties related to money laundering.[6] Additionally, by money laundering, the business could manipulate income tax, which would hurt the American economy.

Suggestions for Policy Measures: The Cole Memo

In 2014, Attorney General James M. Cole, released The Cole Memo, a memorandum that  provides recommendations to the Department of Justice (DOJ) regarding the nature of priorities in cases of marijuana enforcement. The Cole Memo suggests that the DOJ prioritize certain cases, such as “Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels” and “Preventing violence and the use of firearms in the cultivation and distribution of marijuana.” These guidelines reinforce the idea that “the Cole Memo provides guidance to DOJ attorneys and law enforcement to focus their enforcement resources on persons or organizations whose conduct interferes with any one or more of the following important priorities”[8]. The guidelines propose that banks should be allowed to work with cannabis businesses as long as they abide by state regulations to ensure profits are being obtained through legal sales to prevent tax-free profits and sales to minors. Furthermore, the Cole Memo proposes a requirement for banks to submit a “Marijuana Limited SAR” for monetary transactions involving cannabis that are lawful in-state.  The Cole Memo further recommends that, although it is federally illegal for banks to process cannabis transactions, banks should not be punished for processing cannabis transactions from legitimate companies in states that have legalized marijuana; instead, the DOJ should allocate their resources towards punishing illicit sources of marijuana, such as transactions on black markets.

The Cole memo guidelines, while not written into formal legislation, have made a few credit unions and banks feel comfortable handling cannabis-related banking transactions, and provide support to cannabis companies, including payroll processing, direct deposit employee payments, and a system with which customers may purchase the drug with debit cards. Some credit unions are even providing cash pick up services, minimizing the amount of cash that is kept at the stores, and therefore reducing the risk of crime. [9] However, it is once again important to note that the Cole Memo is not actual policy, and only provides a soft framework under which the DOJ should handle cases pertaining to marijuana businesses.

(Image: Understanding the different SARs. Source: Ark Risk and Compliance)(Image: Understanding the different SARs. Source: Ark Risk and Compliance)

California Faces Difficulty

Although a few banks are taking on the risk of working with cannabis companies, many are still waiting for a formal, federal policy to be enacted before involvement. This is primarily because the Cole Memo only serves as a guideline, and does not give banks and credit unions full amnesty to work with legal marijuana businesses. Policymakers from states that have legalized marijuana are putting pressure on the federal government to address the lack of active banking policy for cannabis.

California State Treasurer, John Chiang, and his Cannabis Banking Working Group, comprised of representatives from banks, taxing authorities, local and state government regulatory agencies, law enforcement, and the cannabis industry, are looking for practical and timely ways to address the state-federal conflict over how to bank money generated by the cannabis industry. [10] In December 2016, Chiang addressed his concerns to President Donald Trump, writing: “there was hope that the Cole Memo would provide some certainty to financial institutions and give access to banks for the cannabis industry. Anecdotal evidence, however, suggests that the Cole Memo has not produced those results.” With California currently in its transition period to legalizing marijuana in 2018, Chiang and many other policymakers are eager to get more clarification on what the Cole Memo so they can better direct their state banks. [11]

Conclusion

The lack of clarity and established laws between the federal government, states, and the individual firms is causing uncertainty within the cannabis industry. This uncertainty was addressed by the Cole Memo, which gave the United States Treasury suggestions on how to approach banking regulation for cannabis, however, since its release in 2014, there have not been any formal policies furthering its work. Policymakers could look to the Cole Memo as a starting point for enacting formal banking and marijuana legislation, which would specifically outline federal banking standards for cannabis. With further pressure from state leaders such as John Chiang, measures to craft a federal mandate for marijuana banking policy, could be on the rise.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

References

  [1]https://www.cnbc.com/2017/04/18/marijuana-companies-sending-a-huge-cash-roll-to-irs-on-tax-day.html

  [2] http://www.sivallc.com/the-growing-need-for-a-cannabis-dispensary-security-plan-infographic/

  [3] https://www.ffiec.gov/bsa_aml_infobase/pages_manual/olm_017.htm

  [4] https://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_015.htm

  [5] https://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_019.htm

  [6] https://www.int-comp.org/careers/a-career-in-aml/what-is-money-laundering/

  [7] https://www.dea.gov/druginfo/ds.shtml

  [8] https://www.fincen.gov/resources/statutes-regulations/guidance/bsa-expectations-regarding-marijuana-related-businesses

  [9] https://www.salalcu.org/business/cannabis-industry/

  [10] http://www.treasurer.ca.gov/news/releases/2017/20170503/24-advisory.pdf

  [11] http://www.treasurer.ca.gov/cbwg/resources/trump.pdf

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  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>
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  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>