Hazy Future for the Marijuana Industry Under a Trump Justice Department | NBC Chicago
Decision 2016

Decision 2016

Full coverage of the race for the White House

Hazy Future for the Marijuana Industry Under a Trump Justice Department

Marijuana is now legal for medical or adult use in 28 states, accounting for more than 60 percent of the U.S. population

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    NEWSLETTERS

    Amendment 2, Florida's medical marijuana initiative, could pass on Election Day, and some are preparing for the possibility. (Published Wednesday, Nov. 2, 2016)

    Americans may not have agreed on much in this election, but they were united around one issue: marijuana legalization.

    Eight states legalized marijuana in some form on Election Day. California, Maine, Massachusetts, and Nevada showed up to support recreational marijuana, while Arkansas, Florida, and North Dakota passed ballot initiatives legalizing medical marijuana. Only in Arizona did voters reject cannabis in 2016.

    Marijuana is now legal for medical or adult use in 28 states, accounting for more than 60 percent of the U.S. population, according to the National Cannabis Industry Association (NCIA), an advocacy group that lobbies for federal marijuana reform.

    "Tuesday night’s results send a simple message – the tipping point has come," said NCIA executive director Aaron Smith.

    But jubilation over marijuana's victory was tempered by the election of Republican Donald Trump and GOP majorities in both the Senate and House.

    “The prospect of Donald Trump as our next president concerns me deeply,” Ethan Nadelmann, executive director of the Drug Policy Alliance, said in a statement. “His most likely appointees to senior law enforcement positions — Rudy Giuliani and Chris Christie — are no friends of marijuana reform, nor is his vice president.”

    Marijuana remains illegal under federal law. Under President Barack Obama, federal authorities largely took a hands-off approach to state-level legalization efforts. But an incoming administration more skeptical of drug reform could easily reverse that approach.

    Still, analysts and advocates alike say, the industry may be too big and valuable for a Trump administration to stop, especially after voters in California — home to the world's 6th largest economy — legalized the recreational use of marijuana.

    "It's obviously a different ball game than what we anticipated under a [Hillary] Clinton administration," says Taylor West, NCIA deputy director. "But regardless of who the president is and who is controlling the Senate, this is still an issue that Congress is going to have to wrestle with."

    The industry continues to face some unique challenges. Shut out of banks, businesses can't get loans and shops are stockpiling cash, creating a significant security threat.

    CASH CROP
    In August, the Drug Enforcement Administration reaffirmed marijuana's classification as a Schedule 1 drug, the same category as heroin, with no recognized medical use or value — and without access to financial institutions. Subsequently, financial institutions have been prohibited from doing business with dispensaries, growers, distributors and other marijuana-related businesses that are operating legally under state laws, forcing them to run cash-only businesses.

    The amount of money changing hands is substantial. By the end of 2016 the legal pot market is expected to reach $2.6 billion in sales, according to The ArcView Group, a cannabis-focused investment firm that gathers market research. 

    U.S. Rep. Ed Perlmutter, of Colorado, who has pushed for reforming federal banking laws, calls it “an issue of public safety.”

    “As a result of being denied access to the banking system, there are millions of dollars in cash moving around the streets of Colorado,” Perlmutter said. “These businesses are forced to operate as cash-only enterprises, inviting crime such as robbery and tax evasion and adding to the burden of setting up a legitimate small business.” 

    The owner of one Denver-based marijuana business, who asked not to be named for fear of being targeted, said because she is forced to operate in all cash, she has to factor the threat of robbery into every business decision.

    "We only operate in daylight hours, we rotate pay schedules, and we have a buddy system where we walk employees to their cars to make sure they get there safely," she said, adding that her vendors, utility bills and landlord are all paid in cash. "I never travel alone."

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    In 2013, the Obama administration said it wouldn’t prosecute financial service companies that choose to serve state-sanctioned marijuana businesses, as long as they can assure that their clients are in compliance with the guidelines set forth by the Justice and Treasury departments. The administration stopped short of offering blanket protection against enforcement.

    National banks have remained wary of being implicated for money laundering and have avoided the industry for fear that if an account turns out to be a front for the illegal drug trade — no matter how diligent the vetting process is — it could put the institution at risk of losing its FDIC insurance, or its employees may face imprisonment.

    Still, those guidelines have been enough to encourage a small number of community banks and credit unions to start offering basic services in states with thorough "seed-to-sale" enforcement programs, which track pot from cultivation to purchase.

    Carmella Houston, vice president of business services at Salal Credit Union in Washington state, said they monitor accounts closely to makes sure clients are complying with the DOJ's Cole Memo priorities, which require states to prevent legally grown marijuana from crossing its borders, sales to minors and the use of legal sales as a cover for illegal activity.

    "With seed-to-sale traceability, we can ensure federal compliance," Houston said. 

    Salal began serving state-licensed businesses in Washington in 2014. It is one of a handful of credit unions openly serving the industry, though, according to Houston, several others are doing it "not openly." Applicants go through a thorough review process to obtain an account with Salal. 

    "We not only review the business, but also the owners, develop an understanding of the types of products being sold, and where the initial start up funds came from to launch their companies," Houston said.  

    The enormous regulatory and compliance burdens don't come cheap. Salal charges clients fees based on the number and amount of transactions.

    Between March 2014 and March 2016, the number of banks and credit unions across the country willing to handle pot money under Treasury Department guidelines jumped from 51 to 301, The Associated Press reported, citing federal data.

    Merchants, however, say there are not nearly enough banks willing to take their cash. In the meantime, "potrepreneurs" are developing creative, non-cash payment options.

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    'POTREPRENEURS'
    PayQwick has been dubbed the PayPal for pot.

    Much like the online payment system, PayQwick allows customers to use its platform to pay for cannabis and marijuana-related services via loadable cards, a smartphone app and, soon, debit and credit cards.

    Dispensary owners can use the online payment platform to pay vendors, landlords and employees. Customers can use the preloaded PayQwick card to make purchases and collect rewards. 

    The Calabasas-based company operates in Washington and Oregon, where state regulations enable PayQwick to comply with the Cole Memo guidelines, according to CEO Kenneth Berke. Berke hopes to expand to other states once a strict tracking system is in place. 

    “The key to our platform is seed-to-sale traceability. Colorado is still a little bit of the wild, wild west because it doesn’t have the traceability system,” Berke said. “We assure every dollar deposited into a PayQwick account comes from the legal sale of marijuana. Every dollar going through the PayQwick system can be tracked back to legitimate marijuana sales."

    Applicants undergo a rigorous screening process and the company conducts its own compliance checks four times a year, Berke said. Clients who aren’t following the rules or refuse inspections are dropped from the system. 

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    GUARDIANS OF GREEN
    Even with some relief from cash stockpiles, security concerns still plague canna-businesses. Many continue to operate unbanked and their product is lucrative in the black market and across state lines, leaving them vulnerable to robberies.

    The concern for safeguarding cannabis businesses has led to a boom in the security industry in states like Colorado and Oregon.

    Derek Porter, a former special operations Marine who worked on an anti-terrorism security team before he founded Security Grade Protective Services in 2012, says there is a need for well-trained security teams that are used to handling important cargo.  And many former veterans are finding employment on patrol at dispensaries and marijuana growers.

    "Veterans are a much better fit because they have a great work ethic and are still in a heavy security mindset," said Porter who noted about 70 percent of his employees are vets. "For a lot of these guys, they're doing work they see as familiar to the patrols assigned to them in Iraq and Afghanistan."

    In July 2016, Travis Mason, a former Marine, was shot and killed during a botched robbery at an Aurora, Colorado, dispensary where he worked as a security guard. Mason's killing alarmed the industry and security firms like Porter's saw an increase in requests for armed guards.

    Transport is another complication. The cannabis has to move from the cultivators to the stores, and cash needs to move between businesses and to state authorities for tax payments.

    "Cash is a pain, time consuming and costly for everyone," Porter said. "We need to pay guards to go pick up the cash. It’s a risk for them to have a large amount of cash on hand. We count the money twice on our end, and then we have to take it to the bank and they have to count it."

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    TAXING FOR THE TAXMAN
    Security isn't just a concern for those directly involved in the cannabis industry. The government is also reckoning with the risks and impracticality of bundles of cash.

    In states where marijuana is legal for recreational and medicinal uses, businesses are subject to state sales taxes. 

    Oregon, for instance, has collected $6.84 million from the pot tax’s first two months of 2016 — exceeding expectations for the entire year — and more than half of the state’s pot dealers paid that in cash, the AP reported. Of the $15 million-plus Washington collected from marijuana sales in February, nearly $4 million was cash carried through the lobby of the liquor board’s headquarters in Olympia.

    In California, 100 percent of the taxes collected on $662,956,249 of taxable medical cannabis sales, roughly $59 million, was paid in cash, according to the state Board of Equalization (BOE). And without any access to banks or credit unions, marijuana businesses in the state have also incurred a 10 percent penalty when taxes over $10,000 were paid in cash. The penalty will be waived starting Jan. 1, 2017.

    "Security is a concern," NCIA's West said. "Aside from the financial problems, the safety is one of the biggest. Employees are at risk since people know where and when there will be large amounts of cash."

    To curb the risk of robberies, the California BOE says it changes its marijuana tax day collection, also known as "cash day," monthly, avoiding routine habits that could place taxpayers and employees at risk. 

    Meanwhile, tax collection offices are doing what they can to manage the heaps of pungent cash pouring into their buildings. Offices in Oregon and Colorado have bolstered security, hiring more guards and investing in safety glass and security cameras.

    HAZY FUTURE
    The marijuana industry remains eager for a federal solution to their banking problem.

    Now, they’re awaiting signals of how a Trump Justice Department will approach cannabis. Hope Hicks, a spokeswoman for the Trump campaign, didn’t respond to a request seeking comment.

    "I’ve been urging my colleagues in both the House and Senate to quickly address this issue in the next Congress," congressman Perlmutter said. "We must allow legitimate marijuana businesses access to banking services and in order to keep our communities safe.”

    California's "Yes" vote could tip the scale for federal reform given the size of the state's economy and the economic impact of the marijuana industry there. Arcview estimates that legal annual California pot revenues could exceed $7 billion by 2020.

    "This is the beginning of the end of the war on marijuana in the United States," said said California Lt. Gov. Gavin Newsom, who helped craft the state's ballot measure.

    A recent Gallup poll found that a record 60 percent of Americans support making cannabis legal. West said that bills to amend marijuana laws have gotten bipartisan support, but they haven't moved out of committee because committee chairs don't want to talk about it.

    "They aren't feeling the pressure to take on the issue," West argues. "But when you have 101 members of the House and 18 senators representing millions of constituents in legal adult-use states, Congress won't be able to keep looking the other way and pretending it isn't happening."