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."
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MAP posted-by: Jay Bergstrom