By Patti Murphy
ProScribes Inc.
It's fairly uncommon for public policy debates to collide with payments. But it does happen. The Dodd-Frank Act, which included the Durbin Amendment limiting fees charged retailers for debit card processing, was one memorable collision. The Justice Department's January decision to reverse its four-year-old position against pursuing legal action against companies engaged in cannabis businesses that are legal and regulated under state laws is another.
This policy change effectively denies access to banking and electronic payment systems by businesses that are expected to generate nearly $10 billion in sales this year – sales that are legally sanctioned by states where they operate. The policy reversal has serious legal and security implications for those businesses, and for the banks and nonbank payment companies that want to serve them.
By now everyone is aware of the problems that have emerged from the mismatch of state and federal laws regarding cannabis. Despite being legalized for medical and/or recreational uses in more than two dozen states and the District of Columbia, marijuana and other cannabis products are illegal under federal law. Cannabis is classified by the federal government as a Schedule 1 drug, on par with heroin and cocaine.
The upshot: financial institutions, with federally insured deposits and subject to federal examinations, have been loath to establish relationships with businesses that grow, process or sell cannabis products. This places all parties in precarious positions. I've met cannabis growers who hire guards to accompany them for trips to pay their taxes, tens of thousands of dollars in cash. I've also met owners of state-legal pot shops with no secure places to stash thousands of dollars in daily cash receipts because no banks will allow them to open accounts. These businesses are forced to pay employees in cash, too.
In 2014, with growing numbers of states legalizing cannabis, and federal law enforcement resources stretched, the Justice Department and the Financial Crimes Enforcement Network (FinCEN) addressed the mismatch of state and federal laws. This included guidance giving the green light to banking businesses that sell cannabis products, with heightened oversight.
A few dozen banks and credit unions now serve these businesses subject to heightened regulatory oversight and compliance with anti-money laundering rules. Most use financial technology companies that automate and streamline compliance, and provide payment workarounds like mobile debit apps that use blockchain technologies and/or the automated clearing house (ACH) system. But even those relationships are in peril now with the Justice Department encouraging U.S. prosecutors to go after cannabis businesses, even if they are legally sanctioned in states where they operate.
The move is replete with ironies. As a candidate, President Trump was quoted as saying medical marijuana was a states' rights issue. The new marching orders handed federal prosecutors in January apply to medicinal and recreational uses alike. Also, most Americans – 61 percent of adults, according to a recent Pew Research Center survey – approve of cannabis legalization. Then there's the issue of access to banking. The federal government has been keen on reducing the rolls of America's unbanked, with some success. According to the Federal Deposit Insurance Corp., the number of unbanked households fell by 2.1 million between 2011 and 2015. Now unbanked households are being replaced with unbanked businesses.
Perhaps the biggest irony, however, is that at a time when the Federal Reserve and a majority of payments experts are pushing for faster, safer electronic payments, the DOJ wants to block burgeoning lines of business from gaining access to these systems. It is not just about access. All the cash these business owners are forced to carry around – and their cash-flush customers – raises very real public safety concerns. In fact, reports of armed robberies of cannabis dispensaries, some resulting in deaths, are on the rise, according to numerous published reports.
California's state treasurer, John Chiang, addressed public safety concerns in a report late in 2017, as well as the "nightmare" the mismatch of state and federal laws creates for revenue collectors. One recommendation he came up with was to hire armored car services to help collect cash tax payments from cannabis businesses. "In addition, the inability of cannabis operations to get banking services means that many of them may remain in the underground economy and not become transparent, regulated, tax-paying businesses, as California voters intended," Chiang wrote in a report titled Banking Access Strategies for Cannabis-Related Businesses.
For their part, state officials in Hawaii ordered medical marijuana shops there to stop accepting cash in 2017. The move, they said, was meant to "create a safer environment" for dispensaries, their customers and employees. Hawaii hired financial technology company CanPay to deploy a mobile debit app that clears dispensary payments through the ACH in compliance with the 2014 DOJ and FinCEN guidance. But now, in the wake of the DOJ's new stand, even workarounds like CanPay are iffy.
A group of 19 state attorneys general – all from states that have legalized medical and/or recreational use – have written congressional leaders urging legislative action in the wake of the DOJ's policy reversal. "Despite contradictions between federal and state law, the marijuana industry continues to grow rapidly," the attorneys general wrote.
They pointed to data suggesting legal sales of cannabis products will exceed $20 billion a year by 2021 – revenues that exist outside the reach of regulators. "The grey market makes it more difficult to track revenues for taxation purposes, contributes to a public safety threat as cash intensive businesses are often targets for criminal activity, and prevents proper tracking of large swaths of finances across the nation," they wrote.
Several members of Congress – Republicans and Democrats, alike – also have balked at the policy reversal, specifically singling out Attorney General Jeff Sessions, who pushed the change. Among them, Senator Cory Gardner, R-Colo., who claims he received assurances during Sessions confirmation process that the DOJ would not step up enforcement against state-legalized cannabis businesses. "With no prior notice to Congress, the Justice Department has trampled on the will of the voters of CO and other states," the senator tweeted.
And it has trampled on the rights of businesses and their customers to take advantage of modern, secure and regulated payment systems. 
Patti Murphy is Senior Editor at The Green Sheet and President of ProScribes Inc. Email her at patti@greensheet.com.
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