A large U.S. bank unexpectedly closed Andy Williams’ business account on April 14, 2014, one day before his federal taxes were due.
He had hundreds of thousands of dollars in the account, and it would remain in limbo for two weeks while the bank went through its termination process. Mr. Williams, meanwhile, scrambled to cancel his check to the IRS and figure out how he would pay taxes without a bank account.
It was not the first time a bank had suddenly closed one of his accounts. From 2011 to 2015, six of his business accounts were terminated — and none lasted more than nine months.
“This happened regularly until we had no more banks left to go to,” Mr. Williams said. “For a long time, we didn’t have a bank. We were paying contractors $100,000 in cash. And every two weeks our employees were paid in cash.”
Mr. Williams runs Medicine Man Denver, a state-licensed marijuana dispensary in Colorado, where pot is legal. He launched the business in 2009 to capitalize on the demand for medical marijuana, and he expanded it after voters in 2012 legalized weed’s use as a recreational drug.
But most banks and credit unions, which are subject to federal regulatory agencies, refuse to host accounts for marijuana-related businesses — including growers and dispensaries — even in states where it is legal. The drug remains outlawed at the federal level, so accepting deposits from such businesses comes with risks and requirements that most banks are reluctant to undertake.
Mr. Williams told banks he was in the retail industry without specifying what he sold.
“We never lied on a bank application, but we would never tell them we sold marijuana,” he said. “We just said, ‘retail,’ and they never asked any further questions.”
Flush with cash
But the high number of cash transactions caught the attention of bank investigators, who soon discovered he was in the marijuana industry and decided they didn’t want the potential hassle his business might bring.
Without a banking account, some cannabis businesses have to fund everything from payroll to taxes in cash. Those companies also cannot accept debit or credit card payments, apply for mortgages or even get small-business loans — all matters that are regulated by the federal government.
It also leaves the businesses with stacks of cash piling up in their offices — and criminals have taken notice.
Last spring, police in Phoenix estimated that six area medical marijuana dispensaries were robbed in a two-month span, according to local media reports. The year before, June was a particularly brutal month with several robberies or attempted robberies in Denver, Los Angeles, Detroit and San Diego.
The violence culminated with the death of an Aurora, Colorado, dispensary security guard, who was shot during a robbery on June 18, 2016. In Riverside, California, the next week, two dispensary workers were wounded in separate holdups less than 48 hours apart.
“I have felt threatened, but I’ve never had anything bad happen because we move the cash in armored cars with armed guards,” Mr. Williams said. “It costs a fortune, but we don’t want to put our employees at risk by having them move cash.”
States are also having to adjust to the cash-rich business.
When Oregon began collecting marijuana taxes in 2016, it spent over $2 million to construct a facility secure enough to handle a large volume of cash transactions. The facility, which opened in November, required eight workers to count the money, along with large adding machines, safes, security cameras and two retired Oregon State Police officers to patrol the building.
Of the nearly $37 million in Oregon taxes that were paid in cash last year, $34 million came from the marijuana industry.
‘Useless paper’ that smells
Even those not in the cannabis industry struggle with the difficulties of having clients without bank accounts because most marijuana businesses pay their insurers, landlords, accountants and attorneys in cash.
Ken Berke, president of PayQwick, a California company that works with banks to process payments for marijuana businesses, said one of his clients, a landlord for a cannabis business, was asked by a bank to stop bringing the $30,000 in cash he collected every month to a local branch.
Among the bank’s complaints, Mr. Berke said, was that the money smelled like weed and they needed to spray it with an odor eliminator and designate a teller to count it in another room.
“He bought a safe, but he calls the cash ‘useless paper’ because it just sits there,” Mr. Berke said.
Only about 400 of the 10,000 banks and credit unions across the country offer services for marijuana businesses, according to the Financial Crimes Enforcement Network, or FinCEN, a Treasury Department unit. But the number might be slightly higher because some account holders have not disclosed that they are in the marijuana business.
A 2013 Obama administration memo is among the guidelines that banks use to do business with marijuana companies.
The document, known as the Cole Memo, required banks to keep close tabs on marijuana account holders for suspicious activities such as selling to minors or transporting the drug illegally across state lines. If a customer is found to have committed a crime, then the bank could face liability depending on the extent a bank account was used.
The Cole Memo said banks that do their due diligence need not fear becoming the targets of federal investigation.
No other industry requires the same level of due diligence, but most banks feared the increased liability and compliance costs and opted to stay away.
“For the bigger banks, there is not a large enough dollar value to justify the risk,” Ryan Lowther, who heads the cannabis practice at San Francisco law firm Farella Braun + Martel. “The increased burden of doing due diligence on your customers is just not cost-effective.”
Without the Cole Memo
Banks’ concerns have increased since Attorney General Jeff Sessions rescinded the Cole Memo this month, industry analysts said. Financial institutions now fear that the Cole Memo’s protections could be dissolved.
By rescinding the Cole Memo, federal prosecutors in states where marijuana is legal now have the freedom to decide whether and how aggressively to enforce the federal law that classifies marijuana as illegal for all purposes.
Marijuana use for at least some medical purposes is legal in 29 states and the District of Columbia.
Nevada, Washington, Colorado, Oregon, Alaska and the District of Columbia had been allowing recreational use. Maine and Massachusetts are expected to implement legalization later this year. California began allowing recreational use on Jan. 1.
“Sessions’ actions will have a chilling effect on banks that were looking to get into the weed industry and slow down banks that were already banking cannabis’ businesses,” said Ken Berke, president of PayQwick, a Calabasas, California, company that works with banks to process payments for marijuana businesses. “Their legal counsels were probably already on the fence and will now want to step back and not do it.”
Mr. Williams, who has had accounts at two small community banks since 2015, said he has already been affected by the Cole Memo’s recision. Within days of the Justice Department’s announcement, a bank canceled a business loan scheduled to close this month. Mr. Williams now will turn to the private equity market, where he said he could pay an interest rate of roughly 14 percent instead of the 6 percent rate the bank had promised him.
“Any time the federal government shakes up the industry like this, it scares investors away and makes capital more expensive, which is their intention,” he said. “This will cost me growth and Colorado jobs.”
The lack of federal clarity surrounding cannabis banking has forced states to tackle the issue themselves.
California officials met late last year with 65 banks and credit unions to discuss the creation of a central bank to hold accounts from other banks that do business with marijuana companies, according to a Los Angeles Times report.
While federal regulators were included in the discussions, no agreement was reached.
Efforts at the federal level have also dried up. Members of Congress tried to introduce bills that would let banks serve marijuana businesses without fear of penalties in 2012, 2013 and again in 2015. The proposals languished, and the 2013 version failed to get even a committee hearing.
In April, Rep. Ed Perlmutter, Colorado Democrat, introduced a version of the previous bills. It has not advanced since a June hearing by the Committee on Banking, Housing and Urban Affairs.
Patrick Moen, a former agent with the Drug Enforcement Administration who now serves as general counsel for Privateer Holdings a private equity firm that invests in the cannabis industry, said he believes the stigma still associated with the drug is why the bills haven’t gained much traction.
“I can’t explain why this hasn’t gotten more support other than certain elected officials don’t want to be seen as supporting this industry,” he said. “But you can support banking in this industry without supporting the entire industry.”