At the start of the year, Colorado’s cannabis economy seemed on the verge of gaining access to checking accounts, business lines of credit, wire transfers, and all manner of other standard financial tools that growing businesses need. State banking officials had approved a charter for the first-ever pot industry bank, a long-awaited credit union called The Fourth Corner (TFCCU).
Fast-forward eight months, though, and TFCCU still isn’t taking deposits. Instead, it’s suing a pair of federal bodies that have denied it the administrative approval it needs to operate. And all the while, the state’s pot shops, growers, and edibles producers are stuck dealing exclusively in paper money.
“We only operate in daylight hours,” Jaime Lewis, owner and founder of a Denver marijuana edibles manufacturing company called Mountain Medicine, told ThinkProgress. Because she has to deal exclusively in cash, she has to factor the threat of robbery into almost every business decision. “We rotate pay schedules for employees, and rotate pickups for customers. We have a buddy system where we walk them to their vehicles to make sure they get back to their cars safely.”
Lewis has worked in the marijuana business for a decade, moving to Denver from California to start Mountain Medicine about five years ago. Her experience had prepared her for the realities of operating a small business without access to a bank account, but she’d hoped things might have changed by now.
“The idea was, once legalization hit and it was proven in the state of Colorado that with a state-regulated system this industry can be favorable for the economy, can pull it out of the black market, that there would’ve been a conversation around giving us access to banking,” said Lewis. The state’s black market is withering, but many of the people who have replaced it still find themselves riding around with personal bodyguards and suitcases full of cash.
Because she does not operate a dispensary, with newspaper ads and signs in the window to attract foot traffic, Lewis probably faces lower overall security risks than frontline retailers. But she knows couriers who ferry large amounts of cash and cannabis on their person, and she herself has to go pay her vendors, her utility bills, and her taxes in cash. “I definitely never travel alone,” she said. “It is ironic that we are respected as an industry in the state yet still treated like criminals in some aspects.”
Industry observers told ThinkProgress that the safety issues business owners like Lewis face are only the most obvious of several drawbacks to Colorado’s pot economy from the banking freeze-out.
“A lot of people hear ‘Cash Only’ and think that means they can’t accept credit cards and it’s frustrating for customers. That’s true, but the real complications come on the backend. You’re paying your staff in cash, your utility bills, your mortgage, your taxes,” National Cannabis Industry Association associate director Taylor West said in an interview. “These businesses are operating at a very fast pace, and not being able to handle transactions electronically is just incredibly difficult.” West recalled visiting a grow operation shortly after recreational sales became legal, and “literally an employee ran by us chasing a $20 bill that was just blowing down the hallway. That’s what happens when you’re dealing with stacks of cash.”
All of that marketplace friction undermines the industry’s growth, which reduces the benefits it can provide to Colorado as a whole, according to Jessica Rabe, a market strategist at Convergex who follows Colorado’s marijuana trade on behalf of investors. “It also impedes the state’s ability to collect taxes, because all of that business is in cash. And going forward, these marijuana stores don’t have the same tax deductions as other businesses, so they end up paying double or triple the amount of taxes they would otherwise,” Rabe said.
Starting a business is inherently risky, and the tax code for small businesses is designed to foster growth by allowing owners to deduct business expenses. Without those deductions, pot businesses are essentially being asked to both pay their workers and vendors, and pay taxes as though they hadn’t seen those costs come off the top of their revenue. It can be a killshot for a young business — especially one with no access to bank credit or investor capital.
“It makes it very difficult to stay in business,” Rabe said. “There’s sort of a crossroads that these stores face.” It’s either pay a potentially-fatal tax bill now and hope for refunds when the federal government catches up to the states on marijuana, or pay your taxes as though the standard business deductions did apply to you and brace for a potential showdown if you get audited.
Even for industry veteran Lewis, that kind of decision is wrenching. “It’s difficult just being a business owner in general, right?” said Lewis. “Take marijuana out of it, just running a company is stressful. You have people’s livelihoods on your head.”
“What line do you want to ride on that? Do you adhere to the letter of the law, or do you treat yourself like you should be treated, as a normal business?” she said. “We’re asking to be taxed like any other business. We’re not asking for any favors.”
All these issues funnel back to the basic question of access to the financial industry. If companies like Lewis’ could get a floating line of credit, it’d be a lot easier to absorb temporary mistreatment at the hands of the tax code without having to worry about going under if federal action to refund marijuana businesses’ overpayments is not forthcoming.
The feds haven’t been completely passive. The entire TFCCU effort was premised on a pair of guidance memos issued by Obama administration agencies, seeking to chart a path for bankers to work with marijuana companies in legalization states without risking federal prosecution. Those documents offered a framework for aggressive banking compliance systems, but only TFCCU attempted to translate those recommendations into a working financial institution.
Traditional compliance work requires banks to monitor activity in their depositors’ accounts and flag transactions that meet certain criteria so that government investigators can follow up. But as a nontraditional banking outfit, TFCCU also crafted a nontraditional compliance model that it hoped would satisfy the concerns of the federal agencies that oversee credit unions.
“We’re taking compliance from behind the desk and putting it out into the field. It has to be active, outbound, and thorough,” TFCCU CEO Deirdra O’Gorman told ThinkProgress. O’Gorman declined to discuss specifics because the plan should give TFCCU a competitive edge whenever pot banking comes fully into the light. Yet despite the credit union’s lengthy consultation with experts and bespoke, unprecedented compliance proposal, federal officials balked.
It could take years for TFCCU’s lawsuits against the National Credit Union Administration and the Federal Reserve Bank of Kansas City to be resolved. But even before the credit union’s surprise denial, other banks had declined to work with the industry despite the Obama administration’s attempt to map out how pot industry banking could be done without risking arrest.
Such executive guidance could change as soon as the next president takes over. Similarly, attempts to attach amendments to spending bills that would prohibit the Fed or the Justice Department from going after bankers over legal pot businesses haven’t been enough to console banks.
“A lot of this is a question of whether or not banks are comfortable,” Drug Policy Alliance (DPA) policy manager Michael Collins told ThinkProgress, “and what we’ve heard is they’re not comfortable until the law is changed.” Still, the piecemeal efforts from the administration and gestures from appropriations lawmakers “give people a sense that Congress is on board with this change,” Collins said. “We feel that if a bill dealing with marijuana and banking were put on the floor, it would pass. But the question is how you get that bill through the committee process.”
But until a permanent legislative solution, or a surprise court victory for TFCCU, Colorado’s multi-million-dollar-per-month pot economy will remain entirely shut out from basic banking.
“It leaves things in the cash mode,” Art Way, DPA’s state director in Colorado, said in an interview. Way’s seen a slight shift away from armed guards at dispensaries as business owners have become more comfortable with advanced security technology. But with that much cash on the move as part of normal business operations, at some point your profits move past your electronic locks and security cameras and out into the messy world. “I know there’s a lot of guys with guns,” Way said.