Pubdate: Mon, 30 Apr 2012
Source: Seattle Times (WA)
Copyright: 2012 The Seattle Times Company
Contact:  http://seattletimes.nwsource.com/
Details: http://www.mapinc.org/media/409
Author: Jonathan Martin

TROUBLE AT THE BANK FOR MEDICAL POT SHOPS

Under Federal Pressure, Financial Institutions Refusing to Serve 
Booming Industry

Conscious Care Cooperative has a solid footing in a growing industry, 
with three storefronts in Seattle and a loyal customer base. But for 
much of the last two years, the nonprofit medical-marijuana provider 
has lacked one business basic: steady access to a bank.

The cooperative has bounced among five financial institutions, and 
four others rejected the cooperative outright, said CCC's president, 
Nate Chrysler. In one case, a bank closed the account without notice.

"They froze our funds, and we didn't know it until the checks started 
bouncing," Chrysler said.

The medical-marijuana industry in Washington, after two years of wild 
growth, is struggling to move out of the gray market and into 
business legitimacy. Already on shaky legal footing because of 
conflict between state and federal law, dispensaries are now bogged 
down by troubles with banking and federal taxes.

In some cases, dispensaries - unable to find a willing bank - are 
operating solely with cash. That complicates everything from payroll 
to tax preparation while heightening the risk of robbery.

Some dispensary owners say they've resorted to euphemisms - such as a 
"holistic healing center" - when trying to open a bank account.

That's in part because federal authorities have warned banks that 
handling receipts from marijuana sales remains illegal under federal 
law and could violate money-laundering laws.

The conflict is not isolated to Washington, one of 16 states - plus 
the District of Columbia - to allow therapeutic use of marijuana for 
certain patients.

Aaron Smith, executive director of the Washington, D.C.-based 
National Cannabis Industry Association, estimates that half of 
dispensaries nationwide lack a bank account, which he blames on 
pressure from federal banking regulators.

"It is a widespread problem that threatens the entire industry," he said.

Advocacy groups are lobbying Congress for changes to banking law and 
the IRS code that acknowledge the legitimacy of an industry estimated 
at $1.7 billion.

Despite President Obama's indication during his campaign that he 
would be more laissez-faire, his administration has been more 
aggressive in targeting the booming industry than previous 
administrations. In an interview with Rolling Stone published last 
week, Obama reiterated that his administration would not prosecute 
patients, but gave no assurance to businesses.

"I never made a commitment that somehow we were going to give carte 
blanche to large-scale producers and operators of marijuana - and the 
reason is because it's against federal law," Obama said. "I can't 
nullify congressional law."

Dispensaries as "collective gardens"

Washington voters approved medical marijuana in 1998, but it has 
developed into an industry - from storefront dispensaries to mobile 
THC testing labs to cannabis-infused sodas - only in recent years.

Industry advocates failed in the past two years in Olympia to get 
clear protection for dispensaries.

Instead, most dispensaries operate under a broad - some prosecutors 
would say mistaken - interpretation of state law that allows groups 
of up to 10 patients to grow 45 plants in a "collective garden," and 
to share the costs. Dispensaries run those gardens, and patients join 
just long enough to obtain marijuana.

The state does not license or regulate dispensaries - leaving that to 
cities - but does want them to pay taxes. The Department of Revenue 
collected $755,764 in sales and business taxes in 2011 from 50 dispensaries.

With an estimated 135 or more dispensaries statewide, many 
medical-marijuana providers aren't paying. Seattle, the state's 
marijuana mothership, has issued 79 business licenses to 
medical-marijuana organizations, according to a Seattle Times 
analysis of city data.

The state has begun taking a closer look, auditing two dispensaries, 
said Revenue spokesman Mike Gowrylow.

Banks avoiding "unknown risk"

Green Hope, a nonprofit patient network in Shoreline, has been 
without a bank account since last fall, when Walla Walla-based Banner 
Bank dropped them, said co-founder Laura Healy.

She now pays employees in cash, and uses cashier's checks or prepaid 
Visa cards to purchase supplies. She said she's tried "every bank in 
town" since then, but all refuse to open an account when she 
describes Green Hope. Other cash-only dispensaries opt to put ATMs in 
the lobby.

"I have a business license and federal tax ID number, but not a bank 
account," Healy said. "They on one hand treat me like a normal 
businesses, then on the other hand treat me like a criminal."

Of the five banks contacted for this story, only BECU answered 
questions about medical-marijuana accounts. Banner Bank, which 
dispensaries once saw as welcoming, did not respond to repeated inquiries.

BECU spokesman Todd Pietzsch said those accounts often involve large 
cash deposits, which require heightened scrutiny and reporting under 
federal banking and money-laundering laws.

"We took a look and found there's a lot of unknown risk and 
uncertainty in this business," he said. "At this point in time, it's 
probably not in the best interests of our membership" to bank with 
medical-marijuana businesses.

Money-laundering violation?

Federal bank regulations do not specifically prohibit doing business 
with the medical-marijuana industry, and Attorney General Eric Holder 
told Congress in December that the Justice Department would not make 
it a priority to go after bankers who did.

But in June, Holder deputy James Cole issued a memo warning that 
"those who engage in transactions involving the proceeds" of 
marijuana sales "may be in violation of federal money-laundering 
statutes and other financial laws."

The U.S. Attorney's Office in Seattle has not contacted banks 
regarding medical-marijuana accounts, said Emily Langlie, spokeswoman 
for Seattle-based U.S. Attorney Jenny Durkan.

The Cole memo sent a chill through the banking industry, said Sam 
Kamin, a University of Denver law professor who has written about 
marijuana regulation. "It's a great threat because it allows the 
federal government to do what it wants without using scarce resources."

Months after the Cole memo, Colorado Springs State Bank, which 
marketed itself to Colorado's huge medical-marijuana industry, closed 
an estimated 300 accounts.

Lance Ott, executive director of Guardian Data Systems, a 
Vancouver-based financial consulting firm, said he knows of no 
financial institution in Washington that openly banks the industry. 
Most of the major credit-card processors, as well as PayPal, also 
refuse medical-marijuana accounts.

"That doesn't mean there aren't people who don't have a friend 
willing to work with them. A lot of it is behind the scenes," said 
Ott. "The banks need to show liquidity on the balance sheets."

Doing taxes with "room full of attorneys"

Squeezed between federal regulators, reluctant banks and an ambitious 
industry, some medical-marijuana operators have looked into forming 
their own bank. Chrysler, of Conscious Care Cooperative, said he and 
business partner Trek Hollnagel investigated starting a credit union 
last year, but opted not to.

Colorado lawmakers this year debated launching a credit union as 
well, but the plan died, in part out of fear of a federal backlash.

In Congress, several lawmakers, including Rep. Barney Frank, D-Mass., 
introduced bills to ease banking access and to amend an IRS provision 
that restricts business deductions for medical-marijuana operations.

A campaign to change the tax law, run in part out of Seattle, started 
when an Oakland, Calif., dispensary, Harborside Health Services, was 
hit with a $2.5 million bill in October for back taxes. That bill 
hinged on an interpretation of IRS section 280e, which prohibits 
business deductions for drug traffickers.

The Harborside audit has reverberated through the industry. The 
director of one Seattle dispensary, speaking anonymously for fear of 
drawing federal attention, said he prepared his 2012 taxes with "a 
room full of attorneys."

"They're really making it very difficult to try to do business," said 
Oscar Velasco-Schmitz, an ex-Microsoft software engineer who runs 
medical-marijuana Dockside Cooperative in Fremont. "It's trying to 
run a business with a handicap, a government-imposed handicap. These 
are growing pains."

He, like Chrysler, declined to name their current bank. After going 
through five bank accounts, Chrysler said, "Best not to say."

[sidebar]

Marijuana law: where it stands

Current law: State law approved by voters in 1998 allows medical 
professionals to recommend marijuana for patients with conditions 
including cancer and intractable pain.

What's next: Initiative 502, on the November ballot, would legalize, 
regulate and tax recreational use of marijuana. Separately, Gov. 
Chris Gregoire has asked federal regulators to reclassify marijuana 
so it can be prescribed and sold in pharmacies.
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MAP posted-by: Jay Bergstrom