Imagine a country whose population is at odds over the use of a controlled substance. A substance that remains controversial, even though it is extremely popular and has been around for hundreds of years. Envision that even though the Federal Government has banned this substance, some states have gone ahead and voted to reverse those laws. Does any of this sound familiar? I’m not referencing the prohibition of alcohol in the United States that occurred from 1920 to 1933 but rather the modern movement towards the legalization of marijuana. The struggles they mirror are indisputable and history again repeats itself. Unfortunately, we haven’t learned from many of the mistakes it made almost 100 years ago and we continue to repeat them again today.
The ratification of the 18th Amendment to the U.S. Constitution outlawed the “manufacture, sale and transportation of intoxicating liquors”. Although the federal government was in charge of enforcing this new law, the burden of implementing Prohibition fell to the individual states. Many state authorities took exception to the additional budget strain this would cause and refused to impose any changes. Today, the marijuana industry is similarly pinned between conflicting state and federal regulations. It should come as no surprise then that marijuana related business owners are scrambling to find ways of managing commerce under the strict regulatory policies of the federal government while navigating the frequently changing state laws.
Much in the same way that the Volstead Act of 1919 laid the groundwork for prohibition by defining what qualified as “intoxicating liquor”, the Controlled Substances Act of 1970 aimed to contain the manufacture and distribution of certain substances. They used five different classifications, called schedules, to categorize them. Schedule 1 designates the most dangerous level of drugs you can find – we are talking about Heroin, LSD, Peyote, Ecstasy, and Marijuana…wait a minute, what? That’s right… marijuana is currently viewed on the same level as other drugs that can become a user’s worst nightmare. As explained on the Drug Enforcement Agency’s (DEA) website: “Schedule I drugs, substances, or chemicals are defined as drugs with no currently accepted medical use and a high potential for abuse.” Yet all of us are aware that marijuana is currently being used for medical purposes all over the country. There are now 24 states ― plus Washington, DC ― that have legalized marijuana for medicinal uses. Fun fact: Alcohol was also easily obtainable during Prohibition with a written prescription from a doctor. The Senate leaned on the DEA early in 2016 to reevaluate their classifications. The general hope was that marijuana would at least be reduced to a Schedule 2 drug which would open the door to allow prescription use such as in the form of edibles across all states. Yet as of this month, the DEA announced that marijuana will remain illegal. They will only relax some guidelines so that more scientific studies can take place.
Now, you may be asking yourself what this little history lesson has to do with your business. At the end of the day, how can you benefit or obtain a role in the marijuana trade? Let me explain why now is the time to get involved in this industry or at least keep a close eye on it. According to USA Today, marijuana sales in 2014 were $4.6 billion and by 2015, they were at $5.7 billion. That growth is due in large part to the increase in recreational sales (for non-medical reasons) where it has been legalized so far in Colorado, Alaska, Oregon, Washington state and Washington, D.C. Marijuana sales collectively are projected to hit $23 billion in 2020 and that is assuming there is no change in the current legality of the drug with our federal government. Now think back to the end of the era of alcohol prohibition. It wasn’t just bootleggers and gangsters getting rich off of the restrictive laws. Many pharmacies were able to make a great deal of money from the sale of medicinal spirits. The Walgreens chain of drug stores, for example, grew from 20 stores in 1920 to 525 stores ten years later. Once prohibition ended, many other minor players in the industry at the time were able to capitalize on the newly restored rights and have evolved into the giant and most powerful players in the game today. So staying in tune with the marijuana industry and playing your cards right within the law could turn out to be a very profitable venture.
There are a few stipulations for marijuana-related-businesses (MRBs) in the banking industry which you need to be aware of. FinCEN, which stands for Financial Crimes Enforcement Network, is a branch of the U.S. Treasury Department whom we will simply refer to as “The Enforcers” for now. So what exactly are they enforcing? The Bank Secrecy Act is basically a statute that outlaws money laundering so any bank who wants to receive cash for a federally banned drug or substance has to get a blessing from The Enforcers first. The Enforcers, along with the Justice Department, operate by a set of guidelines so that banks and credit unions can work with MRBs and not directly violate the Bank Secrecy Act. This process is actually clearly mapped out and very thorough so as long as these instructions are followed, there will not be any problems.
A current bill that most MRBs are waiting to be passed could open the door to financial institutions and possibly card payment services in this industry. The Marijuana Businesses Access to Banking Act of 2015 would stop federal banking regulators from preventing or punishing banks that offer financial services to legal marijuana businesses. The reason this is such a pressing issue is because in the states that have legalized marijuana in some fashion, there are local banks operating within the guidelines set out by FinCEN. Since Visa/MasterCard cannot currently get in the game without running afoul of federal guidelines, these businesses are forced to carry large amounts of cash daily. This is becoming a public safety issue for marijuana business owners. There are some business owners who are using a debit only or credit set up using a voucher system. Some MRBs have resulted in using out of country credit card processors which opens them up to another world of unexpected problems. Although it has not yet passed, the bill has made progress on amendments and Congress has shown readiness to address this issue in the past.
The marijuana related business field is on the brink of becoming an open market for banking. This is an important time in history to keep your ear to the ground and your eye on the prize. We should look back to the Prohibition Era and learn from the mistakes we made as a country and capitalize on the wisdom we gained along the way.
