This article was first published by Cash&Payment News last 13 February 2019 and is accessible here: https://www.cashpaymentnews.com/issues/february-2019/
The continuing legalisation of cannabis is causing a stir in the US banking world due to the enormous amounts of cash that is being generated by the industry. But there is a ‘disconnect’ between this legalisation, and federal banking laws which still view cannabis as a Schedule 1 narcotic in the same way as other drugs, even though cannabis businesses are required to pay tax.
The result is that the US federal government collected around $4.7 billion in taxes from legal cannabis companies in 2017, the vast majority of which was paid in cash, causing the IRS to be anything but relaxed. The US is now looking at ways to change federal marijuana laws in 2019 to address these challenges.
Medical grade cannabis was first legalised in California back in 1996. Since then, more and more US states have legalised the sale of cannabis for medical purposes and today sees a total of 33 states as well as the District of Colombia all permitting businesses to sell it.
In recent years the industry has boomed, not just in the US but in several countries worldwide. This in turn has generated huge amounts of taxes that are being collected. Whilst this seems to be a great boost for the economy, the huge quantities of cash being paid is creating several challenges for the Internal Revenue Service (IRS). And why are these payments being made in cash? Because most of these businesses do not have a bank account.
Limited access to banking
It is reported that only around 30% of legal cannabis businesses actually have a bank account, meaning the majority are left to use cash for all transactions, including paying employees their salaries and paying their taxes.
A report by the National Cannabis Industry Association (NCIA) advises that, despite significant legal changes and the advancement of the status of medical and recreational marijuana across the country, banks, credit unions, and financial institutions have, in many cases, not been adequately informed about the cannabis industry. Consequently, critical decisions are being made regarding cannabis without accurate information, resulting in banks deciding not to deal with legal cannabis businesses. It seems, therefore, that many perfectly legitimate businesses do not have access to financial institutions and are being denied access to safe banking processes.
For banks that do offer their services to cannabis businesses, current legislation creates onerous procedures they are expected to follow. For example, the government requires them to file a suspicious activity report for every transaction involving a marijuana business. This isn’t limited to the business itself, but to any company it interacts with including accountants or even cleaners. This, unsurprisingly, results in masses of red tape and expense. Most banks simply choose not to deal with this, but for those that do, the huge costs are usually passed on as fees to the cannabis business. Consequently, many businesses that have access to a banking service still choose to deal only in cash.
Paying taxes in cash
To put into perspective what the IRS are dealing with regarding tax payments in cash, it is thought that around $1 billion made up of $100 denomination banknotes weighs almost 1,000 kg. With the majority of the $4.7 billion collected in taxes in 2017 being paid in cash, we can assume that the IRS dealt with cash weighing in the region of at least four tonnes. That’s a lot of cash and a lot of paperwork. And it is rapidly increasing.
There are compliance guidelines provided by the US government as to how financial services can work with legal cannabis businesses, set out in the 2013 Cole memo. This governs federal prosecution of offenses related to marijuana, stating that the Justice Department does not enforce federal marijuana prohibition in states where it is legalised.
There was a review of the Cole memo in 2017/18 under the Trump administration, though it did not create any definitive changes. Even so, it has left many financial institutions wary of dealing with legal cannabis businesses. Of the seemingly few banks that do offer services, many don’t publicise the fact.
The IRS, therefore, will have to continue dealing with huge quantities of cash each year. And it’s not much fun for the businesses either. At the moment, businesses have to schedule an appointment with the IRS to go to its local IRS office and make a cash deposit. For some, this involves arriving with duffel bags or suitcases full of cash. Some business owners have reportedly had to drive 350 miles to pay their taxes. Once arrived, a secure space is set aside to count it all, and there are two IRS employees inside the room at all times.
Needless to say, the process takes a long time.
It is also an inherently risky process, particularly for the business owners who have to take high risks in carrying huge amounts of cash around but also for those involved with storing high volumes of cash. There have been many reports of violent armed robberies, as well as money laundering and tax evasion.
The process of paying taxes in cash is also an expensive one, as all cannabis industry tax returns are in paper form. Reports suggest this makes it nine times more expensive to process compared with electronic returns.
The IRS has previously tried to push businesses towards bank accounts to enable electronic payments, through imposing a 10% penalty for paying taxes in cash. However, a lawsuit in 2014 encouraged them to drop the penalty if the business had unsuccessfully tried to open a bank account.
Last October, Mitre Corporation – a private, not-for-profit company providing engineering and technical guidance for the federal government (according to its website) – was awarded a $1.7 million contract to ‘provide large cash payments for processing cannabis federal taxes’. Details of the contract have not been made public, but industry insiders are assuming that Mitre won’t be actually counting sacks of cash, but rather designing some sort of system to streamline the wildly inefficient way the IRS is currently handling cash payments.
Changes in the law
On 13 February 2019, a hearing was held before the US House Financial Services Committee entitled ‘Challenges and Solutions: Access to Banking Services for Cannabis-Related Businesses.’ It examined the difficulties faced by cannabis businesses when trying to open and maintain bank accounts.
During the hearing, a new bill was proposed called the Secure and Fair Enforcement (SAFE) Banking Act of 2019 which is designed to create protections for depository institutions that provide financial services to cannabis-related legitimate businesses, and for other purposes. According to reports, the hearing was the first one for the proposed bill, which will prevent federal regulators from targeting banks that accept deposits from legal cannabis operators. Such prohibition could involve, for example, limiting FDIC protections for those deposits or trying to prevent loans to those businesses.
New business opportunities
The burgeoning cannabis industry, and the problems it is encountering in meeting its tax obligations in an environment that makes normal payment channels so difficult, is – needless to say – a huge business opportunity for companies offering secure transportation and cash management services.
One such company is Hardcar, winners of the inaugural California Cannabis Awards by Cashinbis for Best Cannabis Security Company last year, which was set up specifically to provide services to the new industry. Others include Fireking Security, Cannaguard, Cannabis Cash Solutions, Armaplex Security, Core Security Solutions and Helix, to name a few.
Even established CIT companies are getting in on the act. Over the border in Canada, where marijuana was legalised for recreational use last October, Brinks’ Canadian subsidiary has entered into a multi-year agreement with Canopy Growth Corporation to provide secure logistics and cash management services for Canopy Growth’s domestic and international cannabis operations.
GardaWorld, the leading Canadian-based CIT company, has also created a business unit targeting the cannabis market, offering end-to-end solutions including physical security on site, secure ground and air transportation, and a range of cash processing services.
The cashless community is also eyeing up the opportunities. Potcoin, for example, describes itself is an ultra-secure digital cryptocurrency solution for the $250 billion dollar global cannabis industry, while Alt Thirty Six is another that has jumped on the cannabis bandwagon, offering digital payments for the cannabis industry.
It may be some time yet before new legislation, if any, is pushed through to help those trying to operate in the legal cannabis industry. The industry itself is a multi-billion dollar one that has shown strong growth in recent years and is expected to continue; the problem of handling huge volumes of cash is therefore not going away any time soon unless legislation is updated to protect legitimate cannabis businesses and provide assurances for financial institutions that they can operate services to the cannabis industry without risk of failing to comply with state laws.
In the meantime, the marijuana industry is certainly giving new meaning to the expression ‘Cash is King’, although not necessarily in a good way. Cash must remain an option in an increasingly cashless world but, in reverse, alternatives to sack-loads of cash for making large payments must be an option too.