The production and sale of marijuana is big business, one that is off limits to merchant acquirers and their sales partners. But that may be changing as the federal government and the credit card companies loosen strictures that have relegated marijuana businesses to the underground economy for generations.
No one can say for certain how big the market is, but the state of California estimates $14 billion worth of pot was grown there in 2011, which it said was several times the value of the state's wine crop. In California, marijuana is legal with a medical prescription. Ditto for about a dozen other states. In two states – Colorado and Washington – the laws for purchasing pot (at licensed stores) and smoking pot have been placed on equal legal footing with alcohol. The result has been hundreds of marijuana dispensaries popping up to serve millions of customers. Most typically operate on a cash-only basis. That's because regardless of state laws, it's a federal crime to sell marijuana, and banks, fearful of what federal regulators might think, have declined to (knowingly) serve these businesses.
Now with the federal government and card companies reassessing priorities, it's only a matter of time before acquirers and their sales partners begin calling on these businesses. "The biggest obstacle has been the banks," said Dee Karawadra of Impact PaySystem, a Nashville-based ISO.
The tide began to turn in favor of recognizing state pot legalization efforts last year, when the U.S. Justice Department updated its marijuana enforcement policy "in light of recent state ballot initiatives that legalize, under state law," the production, sale and use of marijuana. The update makes it clear that pot remains an illegal drug under the federal Controlled Substances Act, but that going forward the Justice Department will focus its "limited investigative and prosecutorial resources" on cases involving trafficking across state lines, organized gangs, selling to minors, violence, and the use of public land to grow or smoke pot.
The Justice Department's action was followed in January 2014 by written guidance from the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) explaining how the new Justice Department position effects its enforcement priorities under the Bank Secrecy Act (BSA). The BSA targets money launderers; it requires financial institutions to file suspicious activity reports (SARs) when there are reasons to believe drug money is being deposited. That same law also requires banks to file reports whenever any customer makes deposits totaling $10,000 or more in cash in a single day.
In rendering its guidance FinCEN said financial institutions need to assess the risks of having marijuana-related businesses as customers, just like they would assess the risks of any other business. Just a few of the to-do items would change. For example, banks, as part of the customer due diligence process, would need to verify with appropriate state authorities that the business is licensed and registered to grow and/or sell pot. SARs for cash deposits totaling $10,000 or more are still required. However, FinCEN created two special reporting forms for marijuana businesses: Marijuana Limited and Marijuana Priority; the latter is required when criminal activity is suspected.
The FinCEN guidance eliminates many concerns ISOs and their partners have had about getting involved with marijuana merchants. A statement by Visa Inc. indicating it wasn't opposed to legal pot shops accepting its cards virtually sealed the deal. In that statement, provided to the Denver Post in January, Visa said it "seeks to prevent our network from being used for unlawful purposes." However, the statement continued, "Given the federal government's position and recognizing this is an evolving legal matter with different standards applicable in different states, our local merchant acquirers (banks) are best suited to make any determination about potential illegality."
So the stars seem to be aligning for acquirers to get a piece of billions of dollars in transactions that are done mostly with cash today. Colorado reported that on Jan. 1, the first day of legal recreational pot use in Colorado, 24 registered pot shops scattered across the state collectively rang up over $1 million in sales. The Colorado governor's office has said statewide legal sales of marijuana this year could reach $578 million.
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