By Patti Murphy
ProScribes Inc.
Legal marijuana sales are booming in more than two dozen U.S. states. And it is a cash business due to federal laws that preclude banks and other regulated financial institutions from doing business with companies involved in the production and sale of marijuana. It's not just a problem for U.S. companies. Recent reports suggest the hard line taken by the federal government on pot businesses is having international repercussions.
Legal marijuana sales (medical and recreational, combined) in North America topped $6.7 billion in 2016, a whopping 30 percent increase over 2015, according to Arcview Market Research, which tracks the business. The growth, experts agree, is unprecedented, blowing past even that charted during the dot-com craze when growth at "a blistering pace of 22 percent" was charted, according to an article recently published by Forbes magazine.
In May, Colorado reported collecting nearly $128 million in taxes on recreational and medical marijuana sales. State officials in California have said they expect to collect about $1 billion a year in taxes on sales of recreational marijuana, which became legal in July.
Despite all the money involved, federally regulated banks and credit unions won't touch cash from pot sales. In fact, most want nothing to do with these businesses. Efforts to circumvent the problem via state-chartered credit unions have been stymied, too. State regulators in Colorado approved a charter in 2014 for a credit union specializing in marijuana businesses, for example, but the credit union's application for a Federal Reserve master account (a prerequisite for clearing card-based and other payments) was denied.
At the heart of the problem are 20th century federal laws that classify pot as a controlled substance on par with deadly narcotics like heroin. Federal banking licenses can be withdrawn from any institution found to be doing business with individuals or companies engaged in federally prohibited activities. And anti-money laundering laws make many leery of accepting large cash deposits.
The Patriot Act, passed in the aftermath of the Sept. 11, 2001, terrorist attacks, also comes into play, as provisions of that law make it a federal crime for U.S. financial institutions to do business with known dealers of controlled substances. The rationale behind adding tough money laundering rules to the Patriot Act was to thwart terrorists. But the rules also have created untenable situations for companies trying to establish themselves in the nascent legal pot business at home and abroad.
Earlier this year, when Uruguay became the first nation to legalize pot – with state-controlled production and sales – major U.S. banks informed their Uruguayan correspondent banks they would sever relationships with any that served Uruguayan pharmacies selling pot. Since pot represented just a small portion of overall sales, many pharmacies halted state-sanctioned sales of pot.
Meanwhile, the Toronto Stock Exchange signaled it could stop settling trades for marijuana companies with U.S. operations and investments. Bloomberg.com reported in August that dozens of cannabis-related firms with operations in the United States currently trade on the TSX and other exchanges north of the border and that, combined, these firms have issued more $1.58 billion ($2 billion CAD) worth of securities.
National legislation approving the production and distribution of cannabis by government-licensed companies was approved in Canada earlier this year; that same legislation outlawed pot growing by individuals. Canadian authorities are projecting that within a decade, legal pot sales could exceed $1.2 billion there.
The situation is replete with ironies. One rationale for legalizing pot sales, for example, has been to curtail illegal sales. This was a stated purpose in both Uruguay and Canada, which have implemented strict regulatory and licensing regimes for production and distribution of cannabis products.
Meanwhile, the U.S. Department of Justice seems to be of two minds when it comes to banks' merchant relationships. Recently, the DOJ made clear it has no intention of continuing Operation Choke Point, a controversial program initiated under the Obama Administration that discouraged financial institutions from doing business with a range of controversial businesses, including online gambling sites, payday lenders and gun dealers.
"All of the Department's bank investigations conducted as part of Operation Chokepoint are now over, the initiative is no longer in effect, and it will not be undertaken again," Assistant Attorney General Stephen Boyd stated in an August letter to members of the House Judiciary and Financial Services Committees.
The Federal Deposit Insurance Corp. also deep-sixed a list of "high risk" businesses it deemed subject to Operation Choke Point, the letter stated. "We share your view that law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor," Boyd told lawmakers.
Nearly simultaneous with this move, however, the DOJ signaled it may resuscitate efforts challenging state initiatives legalizing medicinal and recreational pot sales – efforts that were shelved by the DOJ under the Obama Administration. In letters delivered in late July to governors in four states (Alaska, Colorado, Oregon and Washington), Attorney General Jeff Sessions warned he has "serious concerns" about legalized pot sales.
Several governors responded insisting the Attorney General's concerns are ill founded. "The State of Colorado has worked diligently to implement the will of our citizens and build a comprehensive regulatory and enforcement system that prioritizes public safely and public health," Colorado Governor John W. Hickenlooper responded in a letter to Sessions. "We believe the objectives underlying our regulatory and enforcement system are aligned with the federal government's desire to control the production and sale of marijuana and to protect public safety and public health."
For now, however, legal marijuana sales remain primarily a cash business. It's costly and dangerous for those operating pot dispensaries. Many report having to hire armed guards to protect their workers and the vaults full of cash. They also pay higher taxes since federal employee withholding rules impose 10 percent surcharges on employer payments not filed electronically.
Cash is a fast way to transact business. But when the Fed and others talk about the need for faster payments, they're not talking about cash. With $6.7 billion in 2016 sales, it's not a whopping big business, but as more states legalize pot sales that number will grow exponentially. Imagine the revenue opportunities created for banks, ISOs and their acquiring partners if all those cash sales migrated to credit and debit cards. 
Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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