October 2013 Bar Bulletin
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October 2013 Bar Bulletin

Pot Businesses on the Banking Fringe

By Christina Schuck


Last November, Washington voters passed Initiative 502 (I-502), legalizing the possession and use of marijuana by those at least 21 years old. I-502 also licenses and regulates the production, processing and retail sale of marijuana.

Currently, Washington and Colorado are the only two states to have legalized the recreational use of marijuana. However, marijuana remains illegal under federal law, although the Obama Administration has announced that it will not enforce federal marijuana laws with respect to legalized operations in Washington and Colorado. As a result, despite the Washington State Liquor Board's carefully crafted regulations, marijuana businesses will likely remain on the "fringe" for one important reason: Banks are afraid to take their money.

In a recent statement to CNBC, Wells Fargo summed up the problem: "In view of the complex, inconsistent legal environment relating to medical marijuana dispensaries, Wells Fargo has opted not to bank these businesses ...."1

Banks are concerned for good reason. As a Schedule I drug under the Controlled Substance Act,2 marijuana is one of the most tightly regulated drugs under federal law and its sale is prohibited. Under the Bank Secrecy Act (BSA),3 banks must file a Suspicious Activity Report (SAR) with "the appropriate Federal law enforcement agencies and the Department of the Treasury"4 when the bank knows, suspects or has reason to suspect that a transaction involves funds from illegal activities.5 Even if a business producing and/or selling marijuana complies with state law, it is still violating federal law. Consequently, the bank must report the transaction.

In addition to running afoul of the BSA, banks risk prosecution for money laundering. Money laundering generally refers to actions concealing or disguising the illegal source of income, avoiding record-keeping or tax laws, or simply using proceeds of criminal activity, knowing the criminal origin of the funds.6 18 U.S.C. 1956(a)(1) prohibits the knowing participation in transactions involving criminal proceeds with the object or knowledge to promote or conceal a crime. Thus, banks knowingly transacting with a marijuana-based business could be considered money launderers.

Without access to bank accounts, marijuana businesses often operate on a cash-only basis. This makes them prime targets for armed robbery and puts owners, employees and customers at risk. Such elevated risks also further burden limited public safety resources.

Operating as a cash-only business also makes it difficult to pay employees, bills and, most importantly, taxes.7 It also makes a business difficult to audit.8 In Washington, that means the State could miss out on significant tax revenue, a principal impetus behind the new law. Specifically, I-502 applies a 25-percent excise tax on producer to processor, processor to retailer and retailer to consumer. Business and occupation taxes also apply.9

Deputy Attorney General James Cole and King County Sheriff John Urquhart highlighted these concerns in their testimony to the Senate Judiciary Committee in early September, urging changes in banking regulations to allow banks to take on marijuana businesses as customers.10 This followed an announcement, noted above, from the Department of Justice (DOJ) in late August that the Department would not challenge the Washington and Colorado laws legalizing marijuana use and possession, so long as the states adopt a strict regulatory scheme.11

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