In recent weeks, dispensaries across the state received notice from Colorado Springs State Bank that they have until Sept. 30 to clear out their accounts. The bank, which is owned by Texas-based Herring Bank, was the last bank to openly welcome the dispensaries’ business.
The bank’s top officials were even featured recently on YouTube saying they were open to the medical marijuana industry.
“I’ve been with them close to a year,” said Don McKay, owner of Southern Colorado Medical Marijuana dispensary and one of about 300 Colorado Springs State Bank account holders who received account closure letters from the bank. “I have no idea what we will do — it’s going to put us in a spot.”
The move leaves dispensaries scrambling to find another way to keep themselves from operating as cash-only businesses. Without bank accounts they lose access to credit card machines and will have to pay their bills in cash.
There is talk among industry leaders of opening a credit union specifically for the medical marijuana industry, but no solid details.
“We sure have a want for (a credit union) but, I don’t know if it will happen,” said Jared Doi, owner of Pure Intentions Wellness Center. He has changed banks a few times in the 11 months he’s been open because the banks stopped serving his kind of business, he said. He currently is a customer of Colorado Springs State Bank and received his notice to clear out.
“We are running out of options,” he said. “They are leaving us high and dry and making us quite the targets.”
It seems that even as medical marijuana grows to a $1.7 billion industry, banks fear accusation of money laundering and drug trafficking.
It’s the ultimate “Catch-22” said Jenifer Waller, Colorado Bankers Association senior vice president. While use of medical marijuana and dispensaries are legal in Colorado, the federal government does not recognize state’s authority and considers it illegal business, she said.
The Federal Deposit Insurance Corp., one of three banking regulators, has not issued specific guidance for banks on doing business with the medical marijuana industry, said FDIC spokesman Greg Hernandez.
However, Federal law requires banks to report suspicious activity.
“FDIC does not have an opinion on medical marijuana and does not tell banks they should or should not have these accounts,” Hernandez said. “The only way it is an issue for FDIC is if they are not adhering to anti-money laundering act.”
Further complicating the issue is the clash between federal and state law. In June, the U.S. Deputy Attorney General James Cole issued a memo to all states attorneys that said, “Persons who are in the business of cultivating, selling or distributing marijuana, and those who knowingly facilitate such activities, are in violation of the Controlled Substances Act, regardless of state law.”
The memo said state laws or local ordinances are not a defense to civil or criminal enforcement of federal law, including the Controlled Substance Act.
“Those who engage in transactions involving the proceeds of such activity may also be in violation of the federal money laundering statutes and other federal financial laws,” the memo said.
It’s the only time Waller can think of when federal and state laws clash to a point where it prohibits banks from doing business with an entire legal industry.
“We have to abide by federal law,” she said.
Alan Gregory, president of the Colorado Springs State Bank, once solicited medical marijuana dispensaries, a niche market that grew to nearly 300 clients very quickly, he said.
“It grew fast and it became increasingly complex,” Gregory said. “It reached a point where we felt the complexities outweighed the long term strategic benefits for the bank.”
It would take a change in federal law, removing marijuana from the controlled substance list, to make it clear that bankers would not face federal sanctions, Gregory said.
“We got to a point where we were concerned about whether we could do it in a manner and not risk violation of federal law,” Gregory said.
Something has to give, said Brian Vicente, spokesman for Sensible Colorado, a drug policy advocacy group. There are 16 states that either have medical marijuana dispensaries or allow individuals to grow marijuana for themselves. That number is projected to grow to 25 states within three years, he said.
“They are not going away,” he said. “If you are running a business you have to put your money somewhere.”
The National Cannabis Industry Association was formed to lobby lawmakers on the banking issue, said Aaron Smith, executive director of the association. There are hundreds of thousands of medical marijuana patients who need safe, regulated establishments, Smith said.
“We are working in D.C. to amend this ridiculous policy,” Smith said.
In May, U.S. Rep. Jared Polis (D-Colo.) introduced the “Small Business Banking Improvement Act of 2011” which would allow financial institutions to work with medical marijuana businesses without fear of running afoul of federal banking regulations. It is one of three bills introduced that specifically address banking and taxation for the medical marijuana industry.
“It’s absurd to me,” Smith said. “We need to pay taxes. How can we pay the IRS if we can’t write a check?”
Locally, the Colorado Springs Medical Cannabis Council and Sensible Colorado are working with state agencies, including the Department of Revenue’s Medical Marijuana Enforcement Division to find a solution to the banking problem.
“They are not criminals, they are small business owners,” said Mark Slaugh, membership director of Colorado Springs Medical Cannabis Council.
There is misplaced skepticism on dispensaries, said Judith Negley, owner of Indispensary, which has three locations. In Colorado, the dispensaries are highly regulated including background checks, FBI checks, a 22-page application and six pounds of paperwork, she said. Therefore, banks should not feel vulnerable holding their accounts, she said. But, she was among the account holders at Colorado Springs State Banks who was asked to leave.
“It’s devastating on a number of levels,” said Negley. “It’s difficult to pay employees and payroll taxes if you don’t have a bank account. This affects the industry at its very core.”
Under no circumstances would Colorado Springs CPA Etienne Hardre, senior manager at Next Exit Advisors, advise a small business to use a personal bank account for the business.
“You would be co-mingling funds,” he said.
That is of particular concern if someone wanted to sue a business.
“How would you show how much money the business has and how much money the person has?”
Using a personal account for business puts a business owner’s personal assets at risk, he said. Without a business bank account, businesses will have difficulty tracking and categorizing expenses and income, which is necessary during an audit.
In the meantime, there are a small number of credit unions and some banks who are working with the dispensaries, but no one is willing to name names for fear that they would get pressured to close the accounts.
“The idea that we have to slink around — it bothers me on a fundamental level,” Negley said.