In The Marijuana 'Gold Rush,' Federal Rules Are Keeping Banks At Bay

Dec 21, 2018

Another marijuana store, INSA in Easthampton, Massachusetts, opens for business on Saturday.

Selling pot on the legal market is proving to be lucrative. But the legal risks—or at least the perceived risks—are keeping away some banks, credit card companies and accountants.

Standing behind a counter at INSA, Adam Black is selling cartridges of flavored oil containing THC, one of the active ingredients in marijuana.

“For the flavors, we have Shark Shock. That’s the CBD two-to-one, Blue Dream, Berry Gelato and my favorite, Clementine,” Black listed the choices for a customer.

The dispensary not only sells vaping oils like these, but chocolate bars, pre-rolled joints and cannabis buds, known as flower.

“Alright, so we are at $160. You also have 8 loyalty points if you want to use any of those.” Black said.

The customer, who didn’t want to be named, puts a Visa card on the counter. “We’re still cash only,” Black explained. “We got the ATM right there.”

For cannabis companies, cash is king. In fact most don’t take credit cards. And not all take debit.

INSA and some other pot businesses accept CanPay, a payment app. They also have a cashless ATM at the cash register, which issues the customer a paper receipt for a fixed dollar amount. The shop gives the customer a receipt and any change due. 

But most sales involve cash. That’s because pot may be legal in Massachusetts, but not in many states where the credit and debit transactions are processed. 

“The federal government still recognizes these marijuana businesses as effectively drug traffickers,” said Kris Krane, President of 4Front Ventures, which owns medical marijuana businesses in three states, and plans to open more in Massachusetts.

“While the state government considers us to be a business like any other business, compliant with state law and subject to the rules and regulations of that state, the federal government does not,” Krane said.

The U.S. Treasury Department has strict reporting requirements that banks must follow if they work with a pot store or dispensary. They’re required to file marijuana-specific Suspicious Activity Reports every quarter.

“It's a fairly onerous set of reporting requirements,” Krane said, “that they wouldn't need to follow for any other business; a big part of the reason why most banks still are not getting involved in the industry.”

Century Bank, headquartered in Medford, is reportedly the only bank serving cannabis medical dispensaries in Massachusetts. The GFA Federal Credit Union in Gardner serves much of the adult use market.

Six banks and credit unions did not respond to a request for an interview for this story. Another couldn’t talk until after our deadline. Steven Hoffman, chairman of the Massachusetts Cannabis Control Commission, said he isn’t surprised.

“Very few of them are talking publicly about this issue, but it’s a big market opportunity obviously accompanied with substantial risk,” Hoffman said.

But Hoffman said if banks don’t get into the market, it creates serious risk for the public.

“If this business is all or primarily cash,” said Hoffman, “you've got somebody who's running a retail store and they close the doors at 10 p.m. and they leave at 10:30 p.m. with a satchel of $50,000 of cash over their shoulder, and every criminal in the state knows that.”

When Peter Gallagher, the CFO of INSA, first started looking for a bank for the medical dispensary two years ago, it wasn’t easy.

“We probably approached a dozen banks, mostly local banks. And then there were some national banks as well,” Gallagher said. “And the response was, it was a hard ‘no’ from the vast majority.”

Eventually Century Bank took INSA on, but there was a cost: about $5,000 a month to have a bank account. Gallagher also had trouble getting a payroll company. And he had to reach out to several accountants.

“I called them all up and asked if they would be interested,” said Gallagher. “And [I] was very forthright with them, saying, ‘Look, we're in a medical cannabis business, just so you're fully aware.’ And all the accounts except for one didn't want to risk their professional license working with the cannabis industry.”

Fast forward to this year, when INSA needed a bank for its new recreational business. Gallagher said Century Bank turned that down, leaving him scrambling.

“So when I asked, 'What would you recommend?' the answer I got was maybe you should build a vault, which was an unworkable situation,” said Gallagher. “We’ve got enough going on here to be basically building our own little bank.”

But recently, cannabis is becoming a bit more legit. And the big money that could be made is something small financial institutions need. Out of the blue, one offered INSA an account, but Gallagher wouldn’t share its name.

“Your banking relationships in this industry, it's somewhat of a guarded secret,” said Gallagher. “Because it’s a competitive advantage.”

Steve Hoffman said the Cannabis Control Commission recognizes banking is a huge problem. He said the online tracking system that the state requires all adult use stores to use could help the problem, because banks can access the data.

“They literally can look at all the transactions that their banking customer has done and ensure that they know where the product came from what was sold for how much,” Hoffman said. “It really does, pretty much, eliminate the possibility of fraud and allows the bank to do all of their controls rather than having to do it by hand through some paper inventory system.”

Hoffman said this can make it less costly for banks to work with marijuana firms.

For now though, most transactions involve cash. That’s attracting entrepreneurs, like Bob Schnibbe.

“Who made money during the gold rush? The guys selling wheelbarrows, picks and shovels,” Schnibbe said.

Schnibbe hopes to help cannabis companies move cash, and eventually marijuana. His new company Plymouth Armor Group has vehicles with bullet proof glass.

“Light armoring around the entire body and shell of the truck itself, including the bottom. Puncture proof tires, interior cameras, exterior cameras,” he said. “Our drivers will be armed and they will also wear bulletproof vests.”

Schnibbe said the company will make its first pick up and delivery next week.

Dollars to donuts, the way the cannabis business is going, there could be a lot of cash to move. In the first four weeks after pot stores opened in the state, the Cannabis Control Commission reports aggregated gross sales came to $9,291,108.

Even the little guy or gal wants to get in on the action. A “professional line stander” is advertising on Craigslist. For $25 they’ll stand in line for an hour at Northampton’s pot store, with $10 for each half-hour after that.