Recreational Pot's Continuing Battle for Legitimacy
The lid on the pot industry was opened halfway on the first day of this year, when the growth and sale of marijuana for recreational use became legal in the state of Colorado.
And the state couldn’t be happier with the decision.
In the first three months of this year, Colorado has already collected $7.3 million in taxes on recreational pot alone — more than medicinal marijuana’s taxes of $5.3 million — with an additional $1 million a month collected from licenses and fees. Who knew there was that much profit just going up in smoke?
While medicinal pot sales still outpace recreational sales in marijuana quantity, the tax rate for recreational pot is higher, and recreational sales are growing faster. Estimates put the pot industry in Colorado at over half a billion dollars annually... if they could just get the lid on the industry open all the way.
But the banks are keeping it down.
Since the non-medical use of pot is still outlawed under federal law, major banks, credit card companies, and even national security companies are refusing to extend their services to Colorado’s recreational pot shops and growers.
Their avoidance creates a series of risks to property, inventory, finances, and even the operators’ personal safety.
Unable to open bank accounts for their businesses, marijuana cultivators and vendors can’t write checks. As a result, they must pay for everything — employee wages, bills, and rent — with cash or money order, adding to their expenses.
Payday can be downright scary for employees walking home with hundreds of dollars in cash in their pockets.
But this is just the beginning of the problem. Unable to offer their customers the convenience of paying by Interac debit or credit card, and with pot prices ranging from $100 to $500 an ounce, vendors find themselves handling tens of thousands of dollars in cash daily.
Over $47 million in sales of recreational pot in the first three months from approximately 60 stores amounts to some $260,000 in monthly sales per shop. That’s an awful lot of cash lying around.
But they can’t beef up security because most security providers are national companies that, like the banks and credit card companies, are refusing their services to pot companies.
Even when using the much more expensive local state-level security system providers, employees still have no protection when making bank runs with thousands of dollars of cash stuffed in their jackets.
Then there’s the issue of where to put the money once they do manage to bring it safely to the bank. Unable to open bank accounts for their businesses, many pot vendors have been forced to create dummy companies or shell corporations, which can be considered fraud by definition.
“The pot industry will still face considerable incentive to dodge the law,” a CNN Money article noted last summer in anticipation of the banking restrictions.
Even if they do manage to circumvent bank policies for a while, at some point the activity is found out, forcing vendors to hop from bank to bank at a considerable expense and operational interference. The banks are also legally entitled to seize funds on the grounds of fraudulent transactions, with honest-run businesses losing legitimate earnings.
Pot companies can’t even secure loans, forcing them to turn to the stock market and the less regulated OTC (over-the-counter) market to raise start-up money from investors, incurring extremely expensive legal and accounting fees.
Yet pot merchants, their customers, and their investors have a very powerful supporter in their corner: none other than the state of Colorado itself.
Rest assured, with so much in tax revenue on the line, the Rocky Mountain State is not going to sit idly by.
Creating a New Entity
Colorado’s state legislature has approved the formation of pot industry co-ops, where licensed pot growers and vendors could pool their cash into financial cooperatives.
These co-ops would be entities separate and distinct from their members’ pot businesses and “theoretically” would not be directly associated with the business of pot.
The co-ops would be like agents acting on behalf of the pot industry — middlemen of sorts, who would be free to open bank accounts, offer credit card services, and do everything else that pot growers and vendors can’t.
Whenever a marijuana shop needs to pay a bill, it would simply log into its account at the co-op and transfer funds in the co-op’s name. Credit card and security services used on the premises of each shop would likewise be contracted in the name of the co-operative.
It's pretty clever, but few think it will work.
“I don't see it,” Shawn Coleman, a lobbyist representing marijuana retailers in Denver, expressed his doubts. “The administration has gone as far as they possibly could to help the marijuana industry without an act of Congress.”
Wait a minute... Did he say the federal administration has done as much as it could? What has it done?
In February, the U.S. Department of the Treasury issued guidelines enabling banks and credit card companies to offer their services to licensed marijuana growers and merchants — provided the banks comply with meticulous reporting procedures.
They must file a “marijuana limited” report that vouches for each client’s compliance with the guidelines, as well as a “marijuana priority” report for any suspicious activity not in line with regulations.
In essence, then, the banks are being asked to supervise and vouch for the financial activities of their pot industry clients. You can understand why many banks are still not accepting pot companies as clients, even though they legally can.
Not only do the banks find the reporting much too onerous, but it's risky, too. They could be fined and even charged with criminal negligence if they fail to detect money laundering and unknowingly facilitate illegal transactions. No bank wants that much risk to its reputation and finances.
Although some banks in the states of Colorado and Washington have been accepting marijuana industry clients since the U.S. Treasury’s provision, it’s still rather clandestine. “We don't know who these banks are or who they are serving,” Coleman revealed.
Cleary, the Treasury Department’s guidelines do not go far enough, prompting the state of Colorado to push its co-op proposal.
The Fight for Legitimacy
At this early stage in the pot industry’s development, whether Colorado’s plan for marijuana co-operatives succeeds or fails is really just a sideshow intended to draw the public’s and lawmakers’ attention to the real act playing out in the center ring.
The real issue here is the need for full legitimacy for the marijuana industry.
“I hope at least in the short term this will show the banks that this is a legitimate business,” stressed Brian Vicente, a Denver attorney who advises marijuana businesspeople.
“It's definitely creative, but I don't know whether it’s a solution or just a statement,” questioned Toni Fox, owner of 3D Cannabis Center in Denver.
It’s probably going to end up being just a statement, since the stakes are way too high for the banks to get involved, even with a co-operative.
But oh, what a statement it makes.
Colorado’s bill effectively forces the government, lawmakers, the judiciary, and the financial industry to take a serious look at the schizophrenia that exists in the marijuana industry. You simply cannot have a business activity that is quasi-legal, with a wiggly line separating what is lawful from what is unlawful...
Or even worse, two sets of laws that conflict with each other to the point where a citizen can be fully licensed to carry on a business activity and yet still be barred from services available to other licensed businesses.
Are they licensed or are they not? Are they legal or are they not? Pick one and go with it, and stop putting people’s financial and physical security at risk.
Until next time,
Joseph Cafariello for Wealth Daily
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