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The U.S. government has opened a new line of business for America’s biggest banks, and for once they don’t want it. Little wonder: it’s cash from legalized marijuana.

The financial-crimes arm of the Treasury Department is making it easier to deposit the fledgling industry’s growing revenue, at last count nearly $3 billion annually and almost all in cash. The government wants to tax the revenue and keep it away from organized crime. And it figures banks with strong compliance departments can best help it track the money.

At the same time, federal bank regulators have remained silent on the issue, raising the specter that banks could run afoul of federal drug laws if they accept the cash. That’s left the banking industry dazed and confused about what to do even as legal marijuana sellers in 23 states and the District of Columbia are faced with mountains of cash piling up in warehouses and basement vaults.

“More than 200 million Americans live in states where there is some form of legal marijuana,” said U.S. Representative Earl Blumenauer, an Oregon Democrat, who is pushing a bill on marijuana taxation. “It’s a disservice to these business people to deny them normal access to banking services.”

Marijuana Cookies

It’s been just over one year since the Financial Crime Enforcement Network, also known as FinCEN, first provided instructions to banks on how they can both accept marijuana business dollars and still comply with the law. Since then, the industry has been surging. It’s getting financing from investment funds and pot icons like Willie Nelson and the estate of Bob Marley are pitching new products. Yet few banks have opened their doors, prompting some 100 business people from the cannabis industry to descend on Washington last month to lobby Congress for greater access to banking.

The pressure couldn’t come soon enough. With billions in cash from lawful sales of weed and marijuana cookies and sweets stranded outside the banking system, cash can’t be monitored by banks for possible illegal activity. Local officials in communities where marijuana is legal are also concerned that large stashes of cash in warehouses, businesses and homes could create public safety issues, possibly leading to violent robberies or worse.

To minimize those risks, FinCEN officials, in meetings with bank executives to discuss a broad array of business activity outside the banking industry, are reminding them about the marijuana directive, according to a person familiar with the matter.

FinCEN Directive

In a nutshell, FinCEN’s directive provides a workaround of federal drug laws, requiring banks to file compliance reports, also known as suspicious activity reports, or SARs, on each customer. In the SARs, banks must categorize those businesses in one of three categories: those in good standing, those that warrant closer monitoring and those on customers whose accounts the banks have cut off.

FinCEN said that it isn’t encouraging banks to use its marijuana directive, but simply seeks to make banks aware that it’s out there should they want it. “We recognized the potential public danger” of unbanked billions in cash, said Steve Hudak, a FinCen spokesman. “We exercised the limits of our authority to do what we could to address the risks. We’re not advocating, nor discouraging banks to take this business.”

Treasury is able to offer this guidance only because the Justice Department has agreed not to go after marijuana sellers in states where it has been legalized as long as those businesses don’t trigger red flags such as selling to children or diverting cash to criminal cartels. So far, less than 200 small banks and credit unions are accepting cannabis cash across the country, according to FinCEN, which has received about 1,700 reports on companies in good standing, categorized as “marijuana limited suspicious-activity.”

‘Prohibitive Industry’

Yet at larger banks, Treasury’s overtures have fallen on deaf ears. Citigroup Inc. and JPMorgan Chase & Co. say they won’t provide services to businesses that engage in activity that is illegal under federal law. KeyCorp chief executive officer Beth Mooney, said that marijuana is still considered “a restrictive or prohibitive industry,” and said the bank hasn’t had any conversations with regulators about the issue.

John Stumpf, CEO of Wells Fargo & Co., said marijuana’s federal illegality stops his bank from even thinking about accepting the business. “That’s out of my sights right now,” he said.

It’s a view shared by some of the biggest regional lenders, including U.S. Bancorp and Huntington Bancshares Inc.

“You’d be hard-pressed to find a large bank that’s willing to take that risk right now,” said Jeff Bahl, a portfolio manager who helps oversee more than $7.9 billion at Bahl & Gaynor Inc., including bank stocks. “The rates of return just aren’t there to justify the reputation risk and the risk that five years from now banks might get in trouble for loans that regulators are now encouraging.”

On The Fence

So, Treasury is setting its sights on banks that operate in states where marijuana is legal, according to the person familiar with the FinCEN bank meetings. Yet these banks are also remaining on the fence, more mindful of their regulators than the concerns of Treasury.

“The FinCEN and DOJ guidance was intended to help banks on how to avoid criminal prosecution if they offered marijuana companies banking services,” said Don Childears, head of the Colorado Bankers Association. But “ultimately, regulators could shut them down if they don’t comply with federal guidelines.”

The Office of the Comptroller of the Currency, Federal Deposit Insurance Corp. and the Federal Reserve haven’t given banks assurances that they won’t run afoul of banking regulations that prohibit such deposits under federal law.

No Guidance

The OCC, which supervises 1,620 banks in the U.S., hasn’t issued guidance on how to handle marijuana accounts because it doesn’t encourage or discourage any particular business, said Bryan Hubbard, an agency spokesman.

“We expect banks to assess the risks posed by individual customers on a case-by-case basis,” Hubbard said, adding that it’s the banks’ job to put in the protections they need to manage those ties. When it comes to marijuana banking, agencies including the OCC and FDIC direct banks to Treasury’s guidance. The problem for banks, though, is that the OCC, the Fed and the FDIC supervise them, not the Treasury.

“For banks, the consequences of getting it wrong are pretty serious,” says William Baude, an assistant professor at the University of Chicago Law School. “And all this is happening because there is an absence of statutory authority and guidance from the regulators.”

Spokesmen for the FDIC and Fed declined to comment on the marijuana regulatory situation.

Legal Risks

The cannabis industry is looking to Congress for answers. U.S. Representative Ed Perlmutter, a Colorado Democrat, introduced legislation last month with 17 co-sponsors that would remove legal risks for banks providing services to the marijuana industry. And in a first this year, senators including Kentucky Republican Rand Paul introduced pot legislation that deals with the risk of federal prosecution for medical-marijuana users in states that have decriminalized the drug. It would also relax financial regulations, allowing banks and credit unions to offer services to the burgeoning industry.

“We need a full, industrywide, sustainable fix for this crisis,” said Taylor West, deputy director of the National Cannabis Industry Association.

Until that happens, the piles of cash will keep growing. When marijuana-related accounts close in Oregon, banks are obliged to deliver cash back to customers in armored trucks because it would be difficult to find another bank to take a check, according to a person familiar with the matter.

It’s vital to let these businesses have access to banking services like simple check writing “rather than carry around shopping bags full of $20 bills,” Oregon Congressman Blumenauer said. “Forcing legal businesses to be conducted on an all-cash basis is, politely, insane,” he said.

Related:

• Marijuana Insurance Industry: How High Can It Go?
• Marijuana Report: Federal Government’s Role
• Insurers, Employers Still Figuring Out Legal Marijuana’s Effects

Topics USA Legislation Cannabis Oregon