Keeping Drug Money Safe: Federal Banking Reform & Recreational Marijuana Laws


“It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).

On January 1, 2014, Colorado became the first state to legalize and sell recreational marijuana. Washington, where voters have also legalized recreational marijuana, will follow suit later this year. Both states’ laws allow anyone over 21 to purchase a certain amount of marijuana, depending on the purchaser’s residency, while marijuana remains illegal under federal law; this creates a federalism debacle.

The Justice Department has agreed to not challenge recreational marijuana laws as long as Colorado and Washington implement measures addressing the department’s biggest concerns: preventing marijuana from reaching the hands of young teens and crossing into neighboring states’ borders. To appease the federal government, Colorado has implemented various limitations on marijuana possession and consumption, including restricting consumption of marijuana to private residences and banning all public use. In all cases, child-resistant packaging is required in all sales of marijuana. Colorado has also banned marijuana possession at the airport and shipping marijuana in the mail. Furthermore, any person hoping to become a dispensary owner must have lived in Colorado for at least two years, pass a background check, obtain multiple licenses, and pass multiple inspections.

While many realize that there are extensive state regulations that present obstacles for those trying to open a dispensary, one of the notable and lesser known issues dispensary operators are facing is the inability to legally open bank accounts.  Banks are governed by federal law—specifically, the 1970 Bank Secrecy Act, which serves to prevent bank facilitation of money laundering. The Act requires banks to report all cash transactions of over $10,000. These transactions are then reviewed for potential criminality. As a result, most banks do not want to take the risk that they could be implicated for money laundering. As such, without a shell corporation to disguise the nature of the business, dispensary owners are forced to utilize personal accounts or operate entirely in cash. Even when owners do obtain bank accounts, most accounts are eventually shut down by  bank managers who see these accounts as high risk. As such, it is not unusual for a legal marijuana business to have dozens of bank accounts in a short period of time.

Therefore, the financials of the recreational marijuana business are complicated for both dispensary owners and state officials, as the large amounts of cash circulating present many risks. In the first week of operation, recreational marijuana has generated over five million dollars in retail sales across a mere 37 stores, with sales projected to reach $600 million this year. Colorado voters approved taxing marijuana at 25 percent—a 10 percent retail tax and a 15 percent wholesale tax—with local counties free to add on additional taxes.  Based on these numbers, if initial sales across all 37 stores were divided equally, each store would have roughly $135,000 in cash sales per week, per store, or over $540,000 a month. To put this in perspective, the current retail sales of $5 million at the 25 percent tax rate would result in $1.25 million tax dollars arriving at the Department of Revenue, in cash, for a mere week of sales. To further put the scope of this problem in perspective, Colorado is only one of nineteen states that permits some form of legal marijuana use, and therefore only represents a small portion of the market.

The large amounts of cash dispensary owners are transporting and storing creates inherent dangers, one of which is giving dispensaries and their employees the allure of a lucrative payoff for thieves. In fact, many believe owners and shops will become the new targets of cartels. Further, business is booming for high-tech marijuana security services because of the large amounts of cash that cannot be kept in financial institutions. In addition to the potential criminal perils of an all-cash business, owners cannot write off business expenses on their taxes or accept credit cards. Employees and expenses must be paid in cash, and therefore records must be diligently kept outside of the banking system.

While many of the risks of an all-cash business are relatively obvious for the state, such as ensuring robberies and violence do not increase, states also must ensure that taxes collected on legal marijuana are properly reported and collected safely. In the course of collecting taxes, the Department of Revenue will inevitably encounter business owners without bank accounts who have no other option than to pay substantial sums in taxes in cash, requiring further security for the state as well. If the state wishes to verify that the reported taxes are correct, there will be no records other than receipts and individually kept accounting records, making the state’s job very tedious. In the rare case that a dispensary owner successfully eludes bank managers and is able to open bank accounts, it is likely bank managers will eventually become savvy, leading these businesses to have dozens of bank accounts in a short period of time.  Therefore, officials will be forced to sort through records from many different bank accounts and financial institutions to reconcile the accounting within those accounts with receipts to calculate the amount of tax to collect. Finally, after collecting these taxes, states still fear that by the time tax money becomes available, the tax revenue could disappear because the federal government could change its position.

As a result, Representative Ed Perlmutter of Colorado is attempting to obtain banking reform for marijuana business through his proposed Marijuana Business Access to Banking Act (H.R. 2652), while other lawmakers are urging banks to allow these businesses access to the federal banking system without legal reform. Although the Justice Department issued a vague report in August indicating that prosecutors would not pursue dispensary money so long as dispensaries did not violate the various conditions mentioned above, this report was not enough to quell the fears of bank managers. Accordingly, the Department is currently working on an updated memo. Unfortunately, this general statement will likely not change the banks’ interactions with marijuana businesses because banks are still required to report suspicious transactions and are subject to sanctions consistent with federal money-laundering legislation. As such, a greater reform is needed to reduce the dangers associated with such a high-grossing cash business and, in the true spirit of Judge Brandeis, to properly allow states the ability to serve as “laboratories” for recreational marijuana reform.

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