Marijuana firms in cloudy haze over banking woes

(Reuters) – Zach Lazarus, chief executive officer of A Green Alternative, a marijuana dispensary in San Diego, California, has lost count every time he re-opened a bank account after it was closed because of his connection to the cannabis industry.

Lazarus has had to play a game of “whack-a-mole” with banks, likening his frustrations to a popular arcade game in which a player repeatedly gets rid of something only to have it re-appear somewhere else.

“We have had Chase Manhattan and Wells Fargo shut us down … my wife’s personal bank accounts and credit cards have been shut down as well, all because I‘m in the cannabis industry,” he says.

Lazarus and other marijuana business owners in the $8 billion industry resort to cash-only transactions for business and to pay employees because they cannot get access to banks.

Despite making legal inroads in the United States, with California the latest state to legalize marijuana for recreational use starting Jan. 1, owners still feel the pinch.

The main problem is the classification of marijuana as a Schedule I controlled substance by the U.S. Food and Drug Administration, alongside heroin, LSD, and ecstasy – making it almost impossible to get banking services.

Banks are governed by federal laws and doing business or extending services to the firms means tougher scrutiny, often at significant costs, as banks have to do their own due diligence to prove transactions are legal.

They are required to prove that the firms are not selling to minors, funding crime groups, and not using the pretext of selling marijuana to push illegal drugs among other things.

A poll conducted by industry publication Marijuana Business Daily in 2015 showed 60 percent of the companies operating in the cannabis industry reported not even having a basic bank account.

UNDERGROUND ECONOMY

The void makes it hard for cannabis companies to conduct basic financial transactions such as deposit money, receive federal insurance or pay taxes.

“Most marijuana companies have a courier service, or a Brinks truck, or a big wheelbarrow full of cash that they send to the Internal Revenue Service to pay their taxes,” says Stuart Titus, CEO of California-based Medical Marijuana Inc (MJNA.PK).

With an estimated 165,000 to 230,000 full and part-time workers, according to Marijuana Business Daily, many marijuana business owners pay their employees in cash. bit.ly/2nQBeYw

“It is basically a kind of underground, cash-based economy,” said Titus.

Sapphire Blackwood, director of public affairs for the Association of Cannabis professionals, says she got paid in cash at her last firm, a San Diego-based cannabis consulting company.

“Because I get paid in cash, and even though I did no illegal activity, I’ve had to deposit so much cash every week and every so often … I felt like I was being stared at by the banks. It’s frightening,” she said.

Blackwood’s current firm also had banking problems. All the deposit accounts were closed because the word “cannabis” was in the name of the company, she said.

SHADY WORKAROUNDS

Workarounds exist but most are borderline unethical.

Medical Marijuana Inc0.17923

MJNA.PKOTC Markets Group – (Current Information)

+0.02(+15.48%)

MJNA.PK

  • MJNA.PK

A widely-used practice is to create a shell or a holding company whose operations are acceptable to banks, and conduct financial transactions through the holding company.

“In many states that have legalized cannabis, pot companies deposit cash under a different description,” says Tim McGraw, CEO of Canna-Hub, a California-based real estate development and property management company for the cannabis industry.

“A lot of operators set up accounts as real estate management companies or call themselves ‘medical marijuana’ companies when they are anything but,” McGraw added.

Others use personal bank accounts to deposit cash earned from the sale of products, wire payments to employees and pay companies.

However, California’s state treasurer John Chiang wants the state to consider creating a public/government-owned bank that could serve cannabis companies.

Chiang’s office formed a group made up of representatives from law enforcement agencies, banks, taxing authorities, local government and the cannabis industry.

It held several meetings with owners to discuss ways to alleviate banking challenges and make information more available to banks for better transparency.

Talks have also begun to form a multi-state group to lobby Congress to ease federal regulations for marijuana companies and remove the Schedule I drug classification.

But it will be an uphill battle. In November, Attorney General Jeff Sessions at a congressional hearing said former President Barack Obama-era guidelines on cannabis will remain, meaning even though a state can legalize marijuana, it will continue to be illegal on the federal level.

To view a graphic on Legalization legislation jpg, click on this link: tmsnrt.rs/2AC91Hk

Reporting By Aparajita Saxena in Bengaluru; Editing by Bernard Orr

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Foreign Investors in the U.S. Cannabis Industry Face Their Own Special Risks

By Dylan Moore on October 30, 2015 Posted in Federal law and policy, Legal Issues, Medical Cannabis, Recreational Marijuana

Foreign investment in the cannabis industry. It's complicated.

The cannabis industry has always been international. Our first cannabis client was actually a Dutch company that hired us years before either Colorado or Washington had legalized. This client hired us to figure out what it would need to do as a foreign company investing in a U.S. cannabis business in a cannabis industry which this company was certain would eventually be legal. That client was unique for years, but nowadays, many more of our cannabis clients come from outside the United States. So far, they are mostly coming from Canada, the Netherlands, Australia, Germany, and Israel, with a smattering of clients from elsewhere in Europe, Latin America and Asia.

The foreign companies that contact us generally split fairly evenly between those seeking to get involved with ancillary companies and those seeking to get involved in the growing, processing or selling of cannabis. Invariably, they most want to know whether foreigners can invest in the U.S. cannabis industry and, if so, at what risk?

The short answer is a qualified yes for ancillary businesses and a qualified maybe for businesses directly involved with the plant. The immigration issues faced by foreign investors is just one of the many issues they face when investing into the US cannabis industry. But because we have been dealing with this issue frequently of late, we use it to illustrate how foreign involvement in US cannabis can be tricky.

U.S. Citizenship and Immigration Services maintains broad authority to limit entry of foreigners into the United States. This includes the authority to bar entry (or deport) a foreign citizen who has committed a crime, including a mere misdemeanor. Since any business activity involving marijuana remains illegal under federal law, a foreigner doing business with a cannabis company – even one operating completely legally in a state with the robust regulations required by the Cole Memo – is technically committing a crime and therefore may be deported. The Cole Memo dictates federal enforcement policy by prioritizing prosecutorial discretion; it does not create a legal defense for marijuana related crimes, even in states with legal cannabis, and it therefore offers no help to a foreign citizen in a deportation proceeding. Marijuana related activity (including involvement with state-legal marijuana) can also constitute “moral turpitude” in the eyes of immigration authorities and this designation can bar entry into the U.S. and prevent any chance of gaining U.S. citizenship.

Immigration authorities have the power to deport foreigners without having to comply with many of the legal safeguards to which U.S. citizens are entitled. For example, when immigration authorities are determining whether to deport someone for alleged criminal activity, the mere admission of the crime can often be enough to warrant summary deportation, even absent a formal conviction. This means a foreigner can be deported without ever being able to tell his or her side of the story, to explain the extenuating circumstances, or to make any other argument before a judge as to why deportation is unwarranted.

Though we are not aware of any foreign investor being deported for investing in a business that provides ancillary services or products to the cannabis industry, it is always possible that a zealous prosecutor or the USCIS will seek deportation by asserting that even ancillary businesses violate U.S. law by acting as an accessory to businesses that violate the Federal Controlled Substances Act. The deportation risks are greater for foreign investors who put their money into businesses that grow, process or sell cannabis.

Foreign investors must also always be mindful of the laws in their own country as well. And again, though we are not aware of any such prosecution, it is possible that some countries will prosecute their own citizens for having gotten involved in the cannabis industry of another country.

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