Michigan wants to help pot businesses bank cash
Lansing — Michigan is pulling in more than $1 million a month in tax revenue from medical marijuana businesses — and most of it is coming in the form of cold, hard cash.
With legal recreational sales on the horizon, state regulators and business groups are working to address one of the most vexing issues facing the budding industry: Banks remain wary of working with cannabis companies because the drug remains illegal at the federal level.
“The biggest hurdle is the fact that it is considered, by federal standards, money laundering,” said Patricia Herndon, senior vice president of government relations at the Michigan Bankers Association.
The lack of banking options leaves cash-only businesses susceptible to crime, complicates state tax collections and limits opportunities for legal companies to expand, according to government and industry officials.
"The biggest thing is safety," said Jerry Millen, co-owner of the Greenhouse Dispensary in Walled Lake, which he believes is one "one of the very, very few" cannabis companies that has a bank. "I want to make sure my employees are safe, my patients and customers are safe, so I don't want to have a facility that just has a large amount of cash lying around."
Millen declined to disclose the name of his bank — some financial institutions already working with marijuana companies are wary of exposure. But he said he is working to establish access for other members of the Michigan Cannabis Industry Association, a trade group that launched in January.
"Without banking, it would make it much more difficult in every aspect, from payroll to just paying bills," Millen said.
The state is also working to facilitate relationships through a pending data portal that could prove the legitimacy of pot businesses and help banks meet federal vetting requirements.
The Legislature last fall approved a law that allows the state to share with banks financial background and transaction information for companies that authorize the disclosure. For designated banks that agree to participate, the state will be able to provide detailed financial information and real-time data about marijuana companies.
The system is close to operational and “I think will help encourage financial institutions to start participating,” said Andrew Brisbo, director of the Michigan Bureau of Marijuana Regulation.
“I think, ultimately, the solution both for tax collections at the state level as well as for support the industry is to help facilitate banking relationships, so they can do business in a more modern-day traditional method.”
Aiding pot tax payments
The Michigan Treasury Department is working with local banks to develop a system to facilitate tax payments from marijuana businesses, Treasurer Rachel Eubanks told lawmakers in recent testimony.
Medical marijuana companies are paying more than a combined $1 million a month in taxes, primarily from the state's 6 percent sales tax, and “collecting those dollars presents a unique challenge” because of the cash nature of the industry, she said.
The Treasury Department has a secure collection center in Lansing and is looking at putting one in Sterling Heights, Eubanks said. In addition, Treasury is working with Michigan-chartered banks to identify "creative solutions to make that process more secure,” she told lawmakers.
The issue is considered critical because tax collections are expected to spike when the state begins licensing recreational marijuana businesses, potentially by the end of the year.
By 2021, Michigan could generate $100 million a year in excise tax revenue and $66.5 million in sales tax revenue from recreational marijuana businesses, according to projections by the non-partisan Senate Fiscal Agency.
For Millen, who operates the first licensed medical dispensary in Oakland County and hopes to expand into recreational sales, having a bank means he can pay taxes by wire transfer or check. Many colleagues cannot.
"They're driving cash — and we don't have to do that, thank goodness," he said. "Because I wouldn't want to be driving around with $20,000 or $30,000 or $40,000 of cash in my car. That's crazy. It's not right. You're setting people up for failure."
A growing industry
Michigan voters legalized medical marijuana in 2008, and the Legislature created a regulated licensing system for businesses in 2015. Voters approved recreational sales in November, and the state is working to develop the licensing system.
Some financial institutions are working with marijuana-related businesses, but “the banks aren’t really advertising that fact,” said Josh Hovey, a spokesman for the Michigan Cannabis Industry Association.
“But it's definitely a major issue,” Hovey said. “Even the association itself needed to go through several different attempts to find a bank that would work with us even though we were not accepting or touching cannabis plants ourselves.”
With a growing number of states choosing to legalize marijuana, the U.S. Treasury’s Financial Crimes Enforcement Network in 2014 issued a rigorous guidance for banks interested in working with marijuana-related businesses.
Banks are expected to verify business licenses, review any applications submitted to the state, understand their expected activities and monitor them for suspicious activity, which they are also required to report to the federal government.
The new state data sharing system could help banks complete the federal due diligence requirements and ensure their work with a marijuana business does not run afoul of anti-money laundering laws, said Herndon of the Michigan Bankers Association.
“There are a number of banks that are interested in getting into this line of business,” Herndon said, but many are looking for assurances they’ll be able to meet federal mandates and not open themselves to accusations of wrongdoing.
The U.S. Treasury guidance essentially requires banks to make sure “there aren’t nefarious financial transactions taking place,” she said. “Those are all within the purview of a bank. Because over the years, they really have become kind of the front-line law enforcement for financial crime.”
The state recently awarded a contract to NCS Analytics of Colorado to develop software that will allow data sharing between the state marijuana bureau, an existing seed-to-sale tracking system, businesses, banks and tax monitoring systems. The cost of the contract will depend on the number and type of transactions processed by the firm, but the initial estimate is $404,866.
Michigan-chartered banks are not exempt from federal rules, Herndon said. They are regulated by both the state Department of Insurance and Financial Services and the Federal Deposit Insurance Corporation rules. “They don’t just get to pick one or the other,” she said.
Will Congress intervene?
While the state is taking steps to facilitate banking relationships for marijuana businesses, “it is truly an issue that needs to be resolved at the federal level,” Herndon said.
A U.S. House Financial Services subcommittee last week held a first-of-its-kind hearing to explore challenges and potential solutions to the banking access question facing cannabis-related businesses, spurring industry hopes for congressional action.
Draft legislation from Reps. Ed Perlmutter, D-Colorado; Denny Heck, D-Washington; Steve Stivers, R-Ohio; and Warren Davidson, R-Ohio, would exempt banks and their employees from federal prosecution or investigation solely for working with state-authorized marijuana businesses.
“Today’s hearing is a big deal for thousands of employees and businesses across this country who have been put at risk because they are forced to deal in piles of cash while Congress stuck its head in the sand for the last 20 years,” Perlmutter said.
Corey Barnette, who owns a growing facility and dispensary in Washington, D.C., told lawmakers his company pays employees, taxes and bills in cash. Were it not for banking restrictions, his company would be adding employees and expanding both operations, he said.
Even businesses that provide services to cannabis-related businesses, such as electricians, plumbers and landlords can have problems opening or maintaining checking accounts, according to committee background.
U.S. Rep. Rashida Tlaib, D-Detroit, said during the hearing she is frustrated that marijuana businesses face “constant discrimination” despite voters in Michigan and other states approving marijuana legalization at the ballot box.
“It wasn’t even close,” Tlaib said of the Michigan ballot initiative, approved last fall in a 56-44 percent vote. “Most people want to legalize marijuana, and that’s not the question. The states have spoken.”
Michigan lawmakers, too, are considering options. Sen. Pete Lucido, who chairs the Judiciary and Public Safety Committee, said he remains interested in a proposal introduced in the House last session that would have created a state-run bank that would be authorized to receive state tax revenue.
Residents who work in Michigan’s legal marijuana industry are “at risk,” and “we should keep them secure by not having people know that they have large sums of cash sitting within a business,” said Lucido, R-Shelby Township. “If people know they have large sums of cash, they become prey to what’s out there in society."
State Sen. Aric Nesbitt, a Lawton Republican who pressed Eubanks on state Treasury tax collection plans, said he’s interested in finding ways to “regularize” the relationship between banks and marijuana businesses licensed by the state to legally operate.
“It’s important that instead of having piles of cash lying around all over the place, you try to get to regularization, especially if you’re looking for ensuring enforcement on tax revenue and auditing purposes and trying to get criminal elements out of an industry that’s historically been run by criminal elements,” Nesbitt said.