> Posted by Nadia van de Walle, Senior Africa Specialist, the Smart Campaign

The marijuana industry is burgeoning. While consumer demand has always spurred this black market business, commerce has expanded over the last few years with the legalization of medical use in 23 U.S. states and recreational use in Washington, Colorado, and (just a few days ago) Washington, D.C. It may come as a surprise that cannabis growers and sellers face some steep financial inclusion challenges.

Despite state decriminalization or legalization, marijuana remains a “controlled substance” per federal statutes and unfortunately for “Ganga Station” or “Glorious Buds” it is federal jurisdiction that matters when it comes to the banking sector and disciplining its dealings with what it categorizes as illegal enterprise. As a result, banks must ultimately worry about criminal charges. Most decide the risks associated with pot proprietors as clients are too high. As a result of their limbo position between state and federal law and enforcement, those in the business are increasingly speaking about their frustrations in being unbanked.

Our colleagues often discuss the challenge being unbanked poses to overcoming poverty. Among other things, banking and related services help a person manage risk, give them tools for financial flexibility, and keep their money safe. Businesses that grow and sell marijuana without access to banking services have big challenges. For starters, they have to track their cash flows themselves. Moreover, it’s very inconvenient to not have a checking or savings account into which you can deposit the cash customers pay you – since you cannot accept credit cards. You have to pay your employees in cash. Expanding your places of business and buying a new piece of equipment is tough without a loan from a bank. And there are also additional costs. For instance, the IRS adds a 10 percent fee to those who pay their quarterly business taxes with cash rather than bank wire. In an ironic development, the IRS advised the companies to avoid the assessment by using techniques that amount to money-laundering, according to a petition filed in U.S. Tax Court. Further, there are security risks for a business with piles of cash, and as armored vehicles, guards, safes, and weapons are needed, operational expenses rise.

It’s possible that banks may eventually feel comfortable opening their doors to these businesses. The Justice Department has signaled that it has bigger fish to fry. In Washington and Colorado the Obama administration has simply chosen not to enforce the federal statutes. Additionally, a year ago, the U.S. Treasury’s Financial Crimes Enforcement Network issued guidance for banks that deal with marijuana businesses and the Justice Department advised U.S. attorneys not to go after banks conducting business with legal marijuana dispensers adhering to these guidelines. However, Senators from both sides of the aisle complained that in their states this approach would facilitate fraudulent activity and allow ill-gotten gains to enter the nation’s financial system. They warned that banks accepting these customers were exposing themselves to civil and criminal liability. As a result, most banks have continued to file suspicious activity reports on all marijuana transactions and to refuse such clients.

Cannabis businesses are working creatively to get around such restrictions. For example, some use “cashless ATMs” that provide a scrip receipt to customers that the merchant can redeem as if it were cash. This allows customers to pay with a credit or debit card, even though the merchant has no bank account. And some pot sellers have opened a state-licensed credit union but have not gained access to the federal payments system that would allow them to operate smoothly.

While I certainly don’t want to equate the challenge of expanding quality financial access to the world’s financially excluded with the perils of operating a marijuana business, this example illustrates some of the challenges involved when businesses attempt to operate without bank accounts and when multiple regulators provide conflicting rules.

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