Pubdate: Tue, 14 May 2013 Source: San Francisco Chronicle (CA) Copyright: 2013 Bloomberg Contact: http://www.sfgate.com/chronicle/submissions/#1 Website: http://www.sfgate.com/chronicle/ Details: http://www.mapinc.org/media/388 Author: Alison Vekshin, Bloomberg BANKING BAN TESTS POT DISPENSARIES Every month, Elliott Klug or one of his business partners walks into the Colorado Revenue Department with a messenger bag holding thousands of dollars in cash and watches as state employees start counting. Klug, co-founder of Pink House Blooms, a chain of five medical marijuana dispensaries in Denver, has to pay his sales taxes in cash because federal law bars banks from offering accounts to pot shops, even as Colorado allows and taxes them. "It highlights the awkward situation we've been placed in," says Klug, 36. "We are paying taxes, but despite our best efforts to be good citizens, we're still paying in cash." Colorado is among 18 states that allow the medical use of marijuana, and 11 that permit sales through dispensaries like Klug's. But federal law labels the drug a controlled substance and requires banks to report related transactions as suspicious activity. The inconsistency creates a gray area for dispensary operators, who have to choose between operating as a cash-only business, susceptible to robbery, or finding creative ways to open checking accounts and accept credit and debit cards. "They're encouraging cash operations, which are a threat to public safety, and much more difficult to track and audit," said Aaron Smith, executive director of the Washington-based National Cannabis Industry Association, referring to the conflicting rules. Dispensaries pay federal, state and local taxes, in addition to state and local licensing fees "that often run up to tens of thousands of dollars annually" - and many government agencies don't accept cash, Smith said. Seeking a solution "We're just looking for a solution where we can bank legitimately like any other industry," Smith said. "Wherever you stand on the marijuana issue, it serves everybody's interest to have banking access." Colorado lawmakers recently approved bills to regulate and tax recreational pot purchases. A task force on implementing the law recommended that the Legislature consider all alternatives to help businesses access banking services. Klug said that until 2011 he had checking accounts with Wells Fargo, which "welcomed us with open arms and then changed their minds." The San Francisco bank "opted not to bank these businesses in view of the complex and inconsistent legal environment," said Jim Seitz, a spokesman. The bank conducts regular internal reviews, and "if we identify a situation in which a policy is not being followed correctly, we act accordingly," he said. Klug now uses cash to pay about $45,000 a year in licensing fees to the state and remits about $35,000 a month in sales taxes to Denver and the state. Shell businesses Some dispensaries get around the rules by setting up a shell business with an innocent-sounding name and not divulging that it's tied to medical marijuana, said Dale Gieringer, director of the California office of the National Organization for the Reform of Marijuana Laws, a pro-pot group. California was the first state to legalize medical-marijuana use in 1996. "As long as the bank doesn't find out, you should be safe," Gieringer said. "Or you can use a family account or a personal account. Some people have another business on the side and they use that account." If the subterfuge is discovered, "the bank terminates services with no explanation," Gieringer said. Bank officials say they are complying with federal law. At Wells Fargo, "our policy of not banking marijuana dispensaries is based on applicable federal laws and our own assessment of our responsibility," said Seitz. Some financial institutions look the other way. "There are some locally owned banks that medical marijuana companies are utilizing," said Daria Serna, a spokeswoman for the Colorado Revenue Department. Risks for banks Banks risk losing their deposit insurance or their federal charter if they violate the law, said Robert Rowe, senior counsel at the American Bankers Association, a Washington-based industry trade group. The Federal Deposit Insurance Corp., which insures customer deposits at U.S. banks and regulates some state chartered banks, "has advised regional and field staff that banks should file Suspicious Activity Reports on transactions and deposits related to proceeds from the sale of controlled substances," Greg Hernandez, a spokesman for the agency, said by e-mail. "It is the FDIC's expectation that banks conduct prudent due diligence regarding their customers and should know and understand the types of businesses the customers operate," Hernandez said. "Knowing that cash flow comes from an illegal activity should raise concerns of bank management, which is expected to evaluate the account relationship to determine whether the account should be maintained or terminated." - --- MAP posted-by: Jay Bergstrom