Bankers’ Hours column: Law unlikely to change marijuana banking
July 8, 2018
In Colorado, the proposed bill in Congress to relieve pressure on states that have legalized marijuana is, understandably, getting a lot of attentions, especially in banking.
One of its key clauses says that banks that accept deposits from pot businesses will no longer considered to be participating in money laundering, which is the current legal construction, since the drug is illegal under federal law.
This has been welcomed by both marijuana entrepreneurs and banking organizations. The credit union trade organizations for the states in the mountain west, as well as in Maine, have issued statements that the bill, if passed, will enable banks to serve the growing cannabis industry.
But it probably won't. To take in marijuana money, financial institutions would be required to do a lot of things they don't want to do, and some that they simply can't. For example, to comply with various laws, most notably the Bank Secrecy Act, a depositary must determine that the depositor is not violating any federal or state law in conducting its business. Business and personal financial statements must be scrutinized, to confirm that deposit activity ties in with assets and liquidity. A bank must even, for example, ascertain that the business is not selling to minors.
This kind of monitoring is simply too onerous, and risky, for any banking operation to undertake. It doesn’t matter how meticulous a bank’s due diligence is, or how well-documented its file, you’re not only liable for what you should have known, but also for what you can’t know.
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This kind of monitoring is simply too onerous, and risky, for any banking operation to undertake. In this context, as Yoda said, "There is no try. There is only do or not do." It doesn't matter how meticulous a bank's due diligence is, or how well-documented its file, you're not only liable for what you should have known, but also for what you can't know.
Bankers I've spoken to say that they'll continue just as they have been, not taking any money from marijuana businesses. There may be a few that will, but probably not for long. They'll be overwhelmed with risk-laden deposits and will likely shut the teller window on the pot business.
The only answer to this legal and regulatory mess is for the federal law classifying marijuana as an illegal drug to be completely repealed.
Then its legalization will be up to the individual states, and in those where it's legal, euphoria will reign among growers, wholesalers and retailers.
For a while, until everybody remembers the old adage: "Be careful for what you wish for. You may get it."
Simply put, the gold rush days will be over. Business 101, and the law of supply and demand, will take over. Some possible developments:
Multinational corporate money will move in to the business. Twenty first century agricultural technology will compete against the current grower segment, which is essentially just emerging into a craft stage from its mom and pop roots. Acres under cultivation will expand exponentially. Already, there's a glut of product in Oregon. Imagine what, say, an outfit like AB-InBev could do with corporate farming in a state where the drug is legal, and the climate is friendly — California, here we come.
Wholesale operations will move into Class A properties, and suddenly those 50 percent loan to value, hard-money mortgages on warehouse teardowns in decaying industrial areas could be at 90 percent, or 110 percent.
Bankers will be happy, yes. It'll be just like taking, and lending, money from and to, say, a bar and grill or liquor store today. And consumers will certainly be ecstatic, as retail prices drop, and drop, and drop.
Which won't make retailers smile, as margins shrink, and, quite possibly, Molson-Coors opens a chain of retail stores in every pot legal state, ones that sell the product cheaper and more efficiently.
When pot is legal under federal law, it'll be completely legal in every state that passes legislation to make it so. Just like whiskey, wine and beer. It'll be big business, which means there will be entrepreneurial casualties.
I've learned to refrain from predicting anything, especially when it relates to the economy, politics or government. But I'll make an exception this once. The federal law will be repealed. About all that will be left of the statute will be the claw marks of Jeff Sessions' fingernails as it's ripped from his clutches.
And, finally, Colorado tourism will take a hit. Admit it: It was kind of fun to be the Marijuana Mecca of the country for a while, wasn't it?
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He'll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.