Pubdate: Sun, 16 Dec 2012
Source: Arizona Republic (Phoenix, AZ)
Copyright: 2012 The Arizona Republic
Contact: http://www.azcentral.com/arizonarepublic/opinions/sendaletter.html
Website: http://www.azcentral.com/arizonarepublic/
Details: http://www.mapinc.org/media/24
Author: Josh Brodesky, The Republic

CASH-ONLY BUSINESS PRODUCES PROBLEMS

Bankers Steer Clear of New Dispensaries

The medical-marijuana era might have arrived in Arizona, but
dispensaries are stuck doing business like street-level dealers: cash
only.

Checking accounts and credit-card machines for state-licensed
dispensaries have become casualties of a crossfire between state and
federal laws. Although Arizona voters approved marijuana in 2010 for
certain medical conditions such as chronic pain and cancer, it remains
illegal under federal law.

That means banks and credit unions, which are federally insured, steer
clear of Arizona's new health buzz, citing federal regulators. Medical
marijuana proponents say banks also won't lend to the marijuana
industry out of fear of federal seizures.

The cash-only conundrum is a nightmare for dispensaries, which have to
set up safe houses and potentially use armored transport for the cash
they collect. Just like any other business, dispensaries have to pay
bills and taxes and meet payroll, but that's a lot trickier without a
checking account or a revolving line of credit.

It also poses a safety risk for cash-wielding customers, who may
become robbery targets. And Arizona's health director said the lack of
bank accounts will make annual audits of dispensaries more challenging
and potential fraud easier to pull off.

"I have personally been in all of the major banks, and all of the
smaller banks, and a fair amount of the credit unions, and they've
been told not to do business with us," said Bill Myer, of Arizona
Organix in Glendale, which opened earlier this month and is the
state's first dispensary.

A second dispensary in Tucson, Southern Arizona Integrated Therapies,
is also taking only cash. Rouben Beglarian, president of the
dispensary, said he's managed to land a business account with Wells
Fargo, but he still can't get a credit-card machine.

"We are a small operation," he said, noting the dispensary is taking
patients by appointment only. "We're not going to keep much cash on
hand."

Wells Fargo could neither confirm nor discuss whether it had provided
a bank account to Southern Arizona Integrated Therapies. But it did
issue a statement saying, "Wells Fargo has opted not to bank these
businesses."

"While marijuana legalization initiatives were recently approved in
Colorado and Washington, and medical marijuana dispensaries are legal
in some states, the sale and use of marijuana is illegal under federal
law," the statement says.

State officials can license up to 126 dispensaries, and in August the
Arizona Department of Health Services selected nearly 100 dispensary
owners.

Dispensaries must be non-profits, and independent accountants will
audit them each year.

Will Humble, director of Arizona's Department of Health Services, said
the dispensaries will be regulated in a number of ways to ensure
inventory control and that they truly are non-profits. He said outside
auditors will examine staff and board compensation, but he also said
having dispensaries operate only in cash does open the door for fraud.

"When you operate a cash business, it certainly makes it easier to
shift resources around," he said.

To keep tabs on transactions, dispensaries are required to log each
sale on the date it's created.

"You walk in with your card, they verify the validity of your card,
discuss how much you need and they sell that to you," he said. "But
before you take possession, and you pay for it, they log into our
database how much they sold to you."

Dispensaries log volume, not purchase price. It's a way of tracking
inventory.

Myer said he found the cash-only situation ironic given all the
controversy around medical marijuana.

Dispensaries would be much better regulated, he said, if all
transactions were documented through credit and debit cards. And many
dispensaries are being run by young entrepreneurs who may not have
much business experience.

"Now you are making people manage a $1 million to $3 million business
out of their pocket, which makes them more susceptible to not paying
taxes," he said.

With revenues at that level, dispensaries certainly need merchant
services, but banks simply can't risk supporting businesses that
violate federal law, said Paul Hickman, president and chief executive
of Arizona Bankers Association.

"I don't know what's going to happen at the end of the day," he said.
"I certainly understand and am sympathetic to their plight. At the
same time, this industry has to deal with the regulatory structure as
it exists."

Because all banks are required to have insurance, the FDIC is a
primary or secondary regulator, he said. Even state-chartered banks
doing business only in Arizona need insurance provided by the FDIC.

But Ryan Hurley, an attorney with Rose Law Group in Scottsdale, said
banks could provide merchant services. The hangup is really over
lending, he said. Banks are wary of lending to marijuana dispensaries
because of the threat of federal seizures.

"It doesn't come down to the fact that they are FDIC insured," he
said. "They have potentially legitimate concerns that the federal
government might come in and seize that property, in which case their
loan is worthless."

Branding also plays a role, said Lance Ott, of Washington-based
Guardian Data Systems, which provides merchant services, particularly
to businesses that might have stigmas.

No bank wants to be identified as a lender for a dispensary that the
federal government has shut down.

"They don't want to take that kind of risk at this point in time," he
said.

For dispensaries, short of changes to federal law, there is no clear
way around an all-cash business.

In the past, some out-of-state dispensaries have set up credit-card
machines by pretending to be other types of businesses, Ott said.
They've categorized themselves as restaurants or dentists or flower
shops when they make charges. But eventually those dispensaries get
caught and banned from using creditcard machines again.

Ott has helped create a PayPal-like system for dispensaries to avoid
doing business in cash. But he said the system - known as PaySafe
Solutions - has been slow to catch on with dispensaries. Many
dispensary owners would prefer to wait it out and eventually link with
Visa or MasterCard.

Using a personal checking account or setting up a phantom LLC is also
out of the question.

Given the sizable cash deposits, "the bank examiner will find out
what's going on," Myer said.

That leaves cash - and the insecurity that comes with doing business
that way.

Ben Myer, of Arizona Organix and Bill Myer's son, said the dispensary
has bought safes and security equipment from a now-closed bank branch.
He wouldn't provide details about how the cash will be transported or
where it will be stored, but he has looked at how it's been done
outside Arizona.

"We have in a sense modeled after different dispensaries back in
Colorado and figured out what you do and how you operate," he said.
"It's created a lot of hurdles. But people are determined in this
industry, and we just find ways to make it work." 
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MAP posted-by: Jo-D