WASHINGTON — After the Utah Legislature passed a law late last year that would legalize medical marijuana, Gov. Gary Herbert praised both sides of the issue for coming together to craft what he said was a model for other states to follow.
But the Utah Medical Cannabis Act doesn't solve a problem that’s vexed every state that has legalized cannabis: Most banks and credit unions don’t want to work with marijuana-related businesses and risk running afoul of regulators.
As a result, working in the cannabis industry is largely a cash-only operation vulnerable to violent crime and fraud — and a headache for governments having to process thousands of dollars in taxes paid in cash.
"Cash is pretty dumb in our line of work," Utah state Treasurer David Damschen said. "You want to get away from cash as much as you can for accounting reasons, for safety and security reasons, and efficiency reasons."
The banking dilemma has surfaced in all 33 states that have legalized cannabis, which is against federal law. And taken to its extremes, the conflict triggers reams of reports by financial institutions on their customers that appear at once rational and absurd.
“The problem is that banks are stuck in the middle with unfortunate consequences for everybody involved,” said Aaron Klein, policy director for the Center on Regulation and Markets with the Brookings Institution. "If you follow this to its end conclusion, America starts to resemble, you know, East Germany, where everybody's being reported on by everybody else for suspicious activity."
Utah leaders were aware of the problem when they, under pressure of a ballot initiative that legalized medical cannabis, passed a bill last month setting up a structure that involves the state in every step of growing, processing and selling medical cannabis.
To find a fix, Damschen is consulting with his counterparts trying to manage a situation that is predicted to only get worse as more states legalize marijuana. Government, banking and cannabis industry officials agree the only effective, long-term solution is changing federal law.
The legalization of marijuana is “a phenomenal nationwide grassroots movement that our Congress and administration need to take note of and they need to take action to acknowledge the will of the people in various states that have moved on this,” Damschen said.
Cart before horse
Asked if he wished the banking problem had been addressed before medical marijuana was legalized in Utah, Damschen laughs, then diplomatically explains that the people have spoken and his job as the "state's banker" is to find a way to make it work in Utah.
"I'm going to do the best I can to implement the laws of the state and to work to satisfy the desires, the needs and interests of Utah voters. That's who I work for," said Damschen.
So far, his discussions with counterparts in other states have shown the near-term solutions aren't promising or easy. He's learned that the states of Washington and California explored and ditched the idea of establishing a state-chartered bank that would exclusively serve clients in the cannabis industry.
Consultants told California in December that the option would be too risky and costly, according to a report in the trade publication American Banker.
Meanwhile, California will continue its wild ride in the new era of legal cannabis that it ushered in with the legalization of medical pot in 1996. Some marijuana-related businesses still deal strictly in cash. Others have bank accounts but the financial institutions may or may not know how the customers make their money, the Los Angeles Times reported in 2017.
The report told of instances where some businesses pay their six-figure tax bills in cash. It mentioned an infamous 2012 case of a dispensary owner being sexually mutilated by abductors who wanted his earnings that were buried in the desert.
"Burying cash might seem ridiculous in the 21st century, but it's not unheard of in the cannabis industry," the Times reported.
Utah lawmakers have been discussing the problems around banking and marijuana businesses since 2015 when a medical marijuana bill was introduced, but never passed.
The health and safety of cannabis has dominated the public debate, but state banking regulators and lawmakers were also wrestling with the financial services dilemma faced by other states, said Utah Senate Majority Leader Evan Vickers, R-Cedar City and co-sponsor of the state's 2018 medical marijuana law.
"People approached me along the way and thought they had a solution and for the most part there really hasn't been a solution," he said.
When a citizen's initiative to legalize medical marijuana successfully placed the measure on November's ballot, Damschen penned an op-ed in April acknowledging the support for legalizing medical marijuana. He also outlined the looming mess for financial institutions.
"Putting aside the arguments for and against cannabis as a medical treatment, the fact remains there are businesses in other states operating lawfully under state law that are now under murky federal law and guidance," he wrote in The Salt Lake Tribune. "Without clarity at the federal level, states that have legalized the drug are faced with an impossible scenario."
In August, state Department of Financial Institutions Commissioner Edward Leary joined 13 of his counterparts in a letter urging GOP and Democratic congressional leaders "to consider legislation that creates a safe harbor for financial institutions."
But momentum to pass a bill that addressed the health and safety concerns of medical marijuana moved ahead, as state officials hoped to address the banking dilemma by adopting workarounds used in other states, along with temporary protections Congress had provided for legal medical marijuana programs.
"Nonetheless, we continue to urge Congress to pass clarifying legislation that creates a safe harbor for banks that serve cannabis businesses complying with state law," said Paul Edwards, the governor's deputy chief of staff.
To be sure, banks and credit unions can provide financial services to customers working in the cannabis industry. The number of banks and credit unions offering those services has climbed annually from zero in 2014 to 486 as of September 2018, the latest data available by the U.S. Treasury's Financial Crimes Enforcement Network.
That's just 4 percent of the more than 11,000 federally insured banks and credit unions in the United States.
The growth spurt came after the departments of Justice and Treasury issued guidelines in 2013 and 2014 that relaxed enforcement of federal law. The guidelines detailed how banks and credit unions can take on marijuana-related business clients in states where cannabis is legal.
Basically, the banking guidelines and regulations amount to intense supervision and lots of paperwork for the customers and the financial institutions to keep everyone out of trouble and alert regulators to anything suspicious.
"I said it in every interview in the beginning. 'You have to understand: We’re going to be the nosiest banker you ever had,'" a credit union executive told New York Times Magazine in explaining how she approaches customers eager to escape the risks of running a cash-only operation.
Sundie Seefried heads a division of Partner Colorado Credit Union that exclusively serves marijuana businesses in Colorado called Safe Harbor Private Banking and has written a book about how it's done.
The Times report explained how complying with the time-consuming and onerous federal regulations has forced Safe Harbor to increase fees and limit the number of customers.
Seefried recently told attendeesat MJBizCon — a cannabis trade show that attracted 26,000 to Las Vegas in November — that Safe Harbor files 30 times more paperwork for its cannabis-related account holders than its regular members.
“(Federal and state regulators) will send 20-plus examiners into our small credit union to make sure we are not violating the Bank Secrecy Act. That is a show-stopper for a lot of banks and credit unions,” she said.
Another obstacle stifling banking services surfaced in early 2017 when former Attorney General Jeff Sessions rescinded the Obama-era guidelines that backed off enforcement in states where cannabis is legal.
But Utah has another issue unique to other states, where most of the processing and selling of cannabis is done by licensed private businesses. In Utah, growing, processing and testing will be done by licensed businesses. But in an effort to tightly supervise the sale of medical marijuana, Utah law involves state and county health departments.
If a private cannabis pharmacy isn't accessible, for example, patients would order from and pay the state for their prescription and pick it up at the local health department.
"That definitely complicates things for the banking industry that has typically banked those (government) institutions," said Howard Headlee, executive director of the Utah Bankers Association. "It would have been almost easier for us to have (sales) taking place in dispensaries that previously didn't exist. We would simply say, 'OK, we aren't going to deal with those dispensaries.'"
Damschen is still exploring ways he can ensure state agencies don't have their accounts compromised by a bank caught in the middle of state and federal laws.
Headlee has mulled over other problematic scenarios. How should a bank respond if a pharmacist who's a longtime customer gets a license to dispense medical cannabis? What if a bank has a loan on a strip mall and the owner rents space to someone licensed to grow, process or dispense medical cannabis? Should the bank cease doing business with those customers to avoid the risk of costly oversight by federal regulators?
"Our deposit insurance is federal and therefore, we will follow the federal law," Headlee said, noting that violating the regulations invite stiff penalties including closure.
His position echoes that of the American Bankers Association.
"Banks, including institutions that have no interest in directly banking marijuana-related businesses, face rising legal and regulatory risks as the marijuana industry grows," the associationstates in its position urging Congress to take action.
A federal fix
Respective state banking and credit union associations in Utah held training meetings this month to educate members on how the state's new medical marijuana law will affect them.
As Damschen and his team continue to explore solutions, he's keeping a hopeful eye on Congress and the Trump administration to make the problem largely go away before the state has its program in place sometime in 2020.
He points to the new Democratic leadership in the House, which is more friendly to cannabis bills than GOP leaders were, and comments by President Donald Trump in support of legislative solutions, as "tiny green shoots of optimism" that the issue can be resolved.
Since Damschen spoke to the Deseret News, another sign of relief came when Attorney General nominee William Barr committed he would follow the Obama-era guidelines that eased off marijuana enforcement in states where it's legal. In written comments to the Senate, Barr added that the best solution is for Congress to reconcile federal law with state laws where cannabis is legal, according to a recent article in Forbes.
The pressure for a federal solution is mounting as the industry's economic impact grows. According to research by the cannabis industry, sales alone of both medical and recreational are expected to eclipse $10 billion this year and more than $20 billion in 2022. And total economic impact is estimated at nearly $70 billion after 2020.
Of the dozens of pro-cannabis bills introduced in Congress the past two years, those identified by the congressional Cannabis Caucus that would directly address the banking dilemma are the Secure And Fair Enforcement Banking Act in the House and Stengthening the Tenth Amendment Through Entrusting States in the Senate. Several other bills would effectively decriminalize cannabis and indirectly solve the banking problem.
Members of Utah's congressional delegation said they are studying the issue and haven't yet rallied around particular legislation. GOP Rep. Chris Stewart said he wants to also shield states where cannabis isn't legal from changes that accommodate states where it is legal.
Klein said an alternative route that avoids the unpredictable and slow process of Congress would be to simply change the rules and strict penalties imposed by federal regulators.
He said the reporting requirements for banks dealing with marijuana-related businesses border on the absurd, particularly when the transactions involve state agencies and licensed businesses that aren't hiding in the shadows.
“Does Uncle Sam really need banks to tell them there are cannabis shops in Colorado?" he said, then rhetorically asked what federal regulators are supposed to do with that information. "What, do you indict the governor? Are you going to freeze the assets of the state?"