5 September 2016
The Alaska Journal reports on the state’s banking and cannabis industry woes…
Marijuana businesses and the State of Alaska have something in common: banks won’t help them reap the rewards of the Green Rush.
In the same week that Alaska banks and credit unions closed the business accounts of several licensed marijuana business owners, U.S. Bank told the Alcohol and Marijuana Control Office it can no longer accept credit card payments for licensing fees.
The bank would not give details on its Alaska-based decision.
“Although legalized in many states, marijuana remains illegal under federal law,” according to a statement from U.S. Bank. “As a federally regulated bank, U.S. Bank complies with federal law. We are committed to serving our valued clients while complying with the highest standards of legal and regulatory compliance. As a matter of policy, we do not comment on customer conversations or relationships.”
U.S. Bank’s cancellation of credit card activity came as a surprise to the Department of Revenue. No other industry has the same kind of cash dependence as cannabis, and the department is having to construct a cash room in Anchorage just to allow for tax drops.
Both credit card companies and banks themselves fear federal scrutiny and as a result the marijuana industry remains largely cash only.
Marijuana is still a Schedule I controlled substance under federal law after the Drug Enforcement Agency’s August decision to not take it off the listing alongside heroin. Federal judges and financial regulators have told banks to move ahead in states where it is legal, leaving banks with two options: drown in the compliance paperwork or risk a federal crackdown.
‘We can’t tell them what to do’
Nationwide, more than 300 banks now accept money from marijuana businesses. Alaska’s banks, however, remain cool to the idea.
Kevin Anselm, director of the Division of Banking and Securities in the Department of Commerce, Community & Economic Development, wants to have a more cheery outlook for the industry but has nothing to offer.
“I wish I had better news,” she said. “It’s really tough for an absolutely legitimate business in the state of Alaska. It really is a struggle on all fronts.”
Alaska’s financial institutions simply don’t have the wherewithal to do what others in the Lower 48 can.
“In Washington and Colorado there are a number of banks and institutions that have decided to go into these markets,” she said. “That has not been the decision up here. A lot of it is we don’t have the structure to make it easy for the banks, to move money, cash or otherwise.”
Alaska has three federally chartered banks that fall outside state authority. Anselm said she’s approached each of the remaining state chartered banks and credit unions with no luck convincing them to do business with cannabis.
The Commerce Department puts together informational seminars to support banks looking to get into the industry under federal guidance specified in the Cole Memorandum and Financial Crimes Enforcement Network, or FinCEN, basically an informal promise to not prosecute banks for taking pot money as long as they keep the business clean: no gangs, no organized crime, no money laundering, and no kids.
Still, the advice meets reluctant ears.
“We’re trying to give them all the support they need, but we can’t tell them what to do,” Anselm said.
Assembling and reporting the background information is daunting. There are three separate suspicious activity reports banks must file for every single marijuana account transaction. The cost and manpower to process them simply isn’t worth the trouble, according to banking leaders.
Steve Lundgren, president of Denali State Bank and of the Alaska Bankers Association, said marijuana in Alaska brings extra costs and extra risk without any real potential for extra profit.
“We have discussed, as a group, and no member bank I’m aware of is planning or proposing to directly bank with marijuana businesses,” he said.
Federal law aside, filing or not filing the right paperwork can result in a stiff fine or even a spike in insurance rates from the Federal Deposit Insurance Corp.
Filing the right paperwork means extra staff and fees; Colorado and Washington banks add thousands in service fees to the accounts of marijuana businesses, Lundgren said.
While Washington, Oregon and Colorado banks are slowly coming into the fold, banks in Alaska think the state’s unique characteristics make it a poor investment.
“It’s not going to be a big money maker,” Lundgren said.
Lundgren said Colorado and Washington get millions from marijuana because they are populous and within driving distance of neighboring states. Those are two features Alaska doesn’t have.
Lundgren also takes a long view. He said the Alaska market will fall prey to full national legalization at some point. Once marijuana can be transported across state lines, Alaska marijuana businesses could suffer as product gets shipped in at lower costs from large-scale growers in the Lower 48, much like most of the produce.
“I think there will be so few businesses up here, even if we charged thousands of dollars in services fees it’s probably not going to be enough to mitigate the risk,” he said.
Other states have had better luck with banking, but the solutions don’t necessarily apply to Alaska.
Rick Riccobono is Washington’s Director of Banks. The notorious “cash only” cannabis stigma, he said, is largely mythical. The reality is more nuanced.
“People say it’s a total cash business in Colorado and Washington,” he said. “Quite the opposite. We’ve actually gotten this thing pretty far along.”
Riccobono said roughly 90 percent of all marijuana-related taxes and fees pour into the state treasury electronically, not with cash. Washington, he said, has at least three credit unions and two banks that accept money from cannabis operations. Recently, one even made a loan to a business, which Riccobono said is a first.
Banks and credit unions at first refused to handle Washington’s marijuana-related monies, including taxes and licensing fees. A cannabis business law firm and the State of Washington had the same response: take all of our money or none of it.
“The state was pretty clear. If you’re going to do any of our business, you’re going to do all of our business. But we did kind of go a round or two with them on that,” Riccobono noted with a laugh.
Still, marijuana businesses can’t pay taxes directly to Washington state with credit cards. Part of the problem is with the credit card companies themselves rather than the actual banks.
Visa, MasterCard and other credit card companies have a strict no marijuana purchases policy. Like other businesses with reputations as less than family friendly — strip clubs, for example — marijuana vendors in Colorado ended up miscoding the transaction as “herbal tea” or “food” to cloak the purchase. Naturally, credit card companies threaten to drop the bank when they find out.
Washington uses workarounds. In both, credit cards are allowed, but the transactions are non-marijuana transaction codes that credit cards companies can accept.
The first, called PayQwick, serves as a closed loop system similar to PayPal.
Retailers stock a prepaid card with money and all transactions take place within that system.
The product might be marijuana, but the prepaid card system meets industry standards for credit card companies who depend on a wide range of similar setups.
“There’s a code for that,” Riccobono said. “It’s totally permissible to load a prepaid card in a loop. They couldn’t cut that out, or then they’d have to cut PayPal. They’d have to cut Target.”
The second electronic system, used by marijuana retailers, has a customer credit card buy the digital currency Bitcoin and accept Bitcoin payments.
Retailers cash their accounts out at the end of the day and deposit the money into their bank.
Banks then make electronic transfers directly into the state treasury for taxes and fees.
Alaska, however, isn’t like the Lower 48.
The two private systems that Washington state uses to facilitate electronic marijuana tax payments can’t work here, according to Brandon Spanos, deputy director of the Tax Division of the state Department of Revenue. Either they don’t exist or the tax structure doesn’t allow for them.
PayQwick isn’t registered to work in Alaska. The Bitcoin system relies on retail taxes, which don’t exist at the state level in Alaska. The state will only collect excise taxes of $50 per ounce from cultivators. In the absence of those two closed loop systems, Spanos said the state may switch its credit card processing vendor altogether.
“There are other processors that don’t scrutinize the payments like U.S. Bank does and are willing to process credit card transactions that are legal in that state,” said Spanos. “We are looking into those options.”
Spanos said Alaska hoped for a 50-50 split between cash payments and electronic payments for taxes, but recalibrated that hope after the Alaska banks and U.S. Bank’s actions in recent weeks.
“The further we get down this path the more it looks like we’ll get less than that, just because the banks taking early action in shutting down some of the accounts,” said Spanos.
“We are just a less populated state. In Colorado, they simply change their name and go to another bank. I anticipate that happening less frequently. There are fewer banks, and they’ll figure out quickly who the marijuana players are.”