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Twenty-nine states have now legalized marijuana for medicinal use and additional states have legalized marijuana for recreational use. But, federally marijuana is illegal in all circumstances in the United States. It's a schedule one substance under the controlled substances act. That clearly applies to people who are in the marijuana industry but it also applies to those who just nibble around the edges of the industry like banks. Understanding the total value of the marijuana industry is a pretty complex question. Projections of the legal market right now are somewhere in the 5 to 8 billion dollar range per year but as new states come online, both for medical marijuana and for recreational marijuana, those numbers are expected to increase significantly over the next few years. But the banking status, the ability of marijuana businesses to access the banking industry to use standard deposit accounts, credit card transactions and to get loans and all those sorts of things is in this very weird gray area. I wrote my paper about banks, marijuana and federalism because people were asking me why don't banks open accounts for marijuana businesses and then other people were asking me what can we do about this problem? We have business that is legal in some states and they can't get access to banks. Isn't there something that either the businesses themselves or the states or the federal government could do to make this happen? And so, I've been asked it so often that I decided the answer ought to just be in a paper. Officially it's still illegal. Current federal law says that banks, all banks who are in any way regulated by the federal government, which at this point is essentially all banks, all financial intermediaries cannot engage in activities involved in illegal activities. So, if marijuana is illegal in all circumstances in the United States, access to a mainstream checkings or savings account makes that illegal funding look legal. So, that is, in many ways, a very basic example of money laundering. The crucial law that causes banks to avoid working with marijuana businesses, even businesses, which are fully legal under state law, is called the bank secrecy act and the bank secrecy act basically says banks should not be accepting deposits, making loans, clearing credit card transactions, etc. with businesses that are engaged in illegal activities. The bank secrecy act is the primary tool that the federal government uses to combat money laundering. Now, there are a lot of different anti-money laundering laws but the basic idea behind them all is that it's illegal to take money from an illegal source and put it into legal use. If a bank accepts money knowing that it came from an illegal business like a, even a state legal marijuana business, that violates anti-money laundering laws. The federal credit unit act and the federal deposit insurance act are the laws that effectively allow mechanistically for the financial institutions of the United States to work. With those laws, come the associated regulations that banks and other financial entities must abide by. They forbid working with drug, uh drug cartels, drug dealers and really any business related to an illicit drug. So, it creates a real federal apparatus that will prevent financial institutions from doing this for fear of retri, retribution from the federal government. The standard explanation for why governments want to impose anti-money laundering laws, which is the general category under which the banks secrecy act and the sequel lie fall is that it's hard to clamp out on certain illegal activities, like the illegal drug trade or prostitution rings or gambling that's uh underground. Partially because these things are consensual activities. The two parties to a drug transaction, neither one of those wants to go to the police and say, Hey, that person just broke the law by selling me drugs. Because of course you're admitting to a crime yourself if you go to the police and complain about that. So, in earlier decades, in the 60's and 70's, federal prosecutors and others, politicians decided well maybe we can make banks help us enforce these laws against drugs and other illegal activities by telling them if they accept those deposits, then they are in fact complicit in those activities and they will be prosecuted as well. Banks work with marijuana businesses take a lot of risks. One of the risks is that law enforcement will decide that they've broken criminal laws, either the laws that say you can't help people manufacture, distribute, or sell marijuana or the anti-money laundering laws and as most people know, the penalty for distributing marijuana is going to jail. So, one of the risks they run is that their employees could be sent to jail or that the bank itself could be criminally charged. Banks face the uh, real prospect of fines from the federal government, lawsuits or regulatory action from the federal government. They can be subject to all sorts of other suspensions of their deposit insurance. Uh, the federal government can freeze assets in institutions that are engaging in this conduct. And ultimately if their federal regulators decide that the, uh bank has engaged in too much risky behavior, federal regulators can just close the bank. And if you back up from the marijuana example and you look at say, a bank that would be willing to engage with a Colombian cocaine cartel. They would actually be engaging in similar conduct in the eyes of the law as a marijuana entity and the idea of what the federal government might do to a bank that engages with a cartel like that, can be very serious and so bankers, who in this case are risk-averse are thinking in those terms. Not as what a regulated dispensary in Denver or Seattle might look like, but what the federal government might think of in terms of the broad range of uh, drug cartels or drug dealers or drug entities that can exist. Consequences for marijuana businesses of not having access to standard banking are potentially quite significant. First, any business in the United States, in order to operate safely and efficiently requires access to financial institutions and that's not simply checkings and savings accounts, but that's access to lines of credit, to business loans, the traditional types of ways in which businesses can grow. They can't pay their employees with checks or with direct deposit. They can't easily accept credit card payments from customers. They can't easily obtain small business or trade credit type of loans. It means they are likely to want to have extra security because having a lot of cash on hand might make you a magnet for robbery, theft and so on. Certainly any cash-only business faces the risk of robbery in a way that a way business that relies less on cash would. Um, there have been examples in some legal states of armed robberies of dispensaries, armed robberies of individuals who are either coming into or leaving dispensaries. And so that public safety risk is not necessarily due to the cannabis industry itself, but is actually due to the federal government's unwillingness to allow these institutions to engage in banking or have access to traditional financial products. Most states that have legalized recreational marijuana, they want to move to a system where taxes from the industry itself funds their regulatory efforts. So, they want the taxes from the businesses to fund the licensing of the business and the background checks of the employees and law enforcement to go out to make sure that they're not selling to minors. That sort of thing but if all the business operates in cash, it can be hard for the state government to properly collect taxes, which can make it hard to use those taxes to properly regulate the industry and so, by not letting the businesses into the banking system, we're making it harder for states that have legalized marijuana to properly regulate it. To keep it from being a problem. But it's also a burden for the consumer to have to use cash in all circumstances and not be able to use basic products like debit cards and credit cards to pay for their cannabis. That's true in medical markets and it's true in recreational markets as well. Because the limitations on banking marijuana come at the federal level. I do not think there is anything that the states can do to solve the problem. Colorado's certainly tried. They've chartered a credit union that would bank the marijuana industry but then that credit union couldn't get deposit insurance or access to the federal reserve system. So, it couldn't really become a credit union. So, I think that the answer for marijuana banking has to come at the federal level. The secure and fair enforcement act is a proposal um, by representatives from states that have legalized marijuana. The safe act would essentially put into a law that as long as you satisfy certain conditions and as long as your activities were legal under your state laws, then you could, the banks in those states, could help marijuana businesses, accept deposits from those businesses, and so on. It would leave marijuana illegal but it would just allow the banking aspect of it to be um, not criminal anymore. So, it would take the current situation, which is gray, and legally not really very comforting for banks and allow them to feel that they had explicit legal protection against the general provisions of the bank secrecy act. One argument that advocates a current policy might make is that marijuana, whether you like it or not, is still illegal under federal law and the federal government has a responsibility to enforce the laws on the books even if that government doesn't like those laws or even if other people doesn't like those laws. Regardless of what you think of marijuana itself. If you're going to have it, if you're not going to enforce criminal law against marijuana businesses, that you ought to let them have access to the banking system because it allows law enforcement to work effectively to regulate them. Most opponents should think about is what makes this industry, that is a reality, even safer? And banking will make it more difficult for cannabis-related businesses to engage in illegal activity and that's something that opponents should applaud.