By Brett Husak
National Bank Services
Close your eyes and imagine a country at odds over lobbying for the use of a controlled substance that is quite controversial, even though it's popular and has been around for hundreds of years. Envision that, although the federal government has banned this substance for use, some states have reversed the ban, which has led to a country divided. Add to this the fact that a patient is able to purchase this illegal substance with a prescription from a physician. Does any of this sound familiar? Is this describe the prohibition of alcohol in the United States from 1920 to1933, or does it refer to today's movement toward the legalization of marijuana? They're actually keenly similar national struggles; the marijuana issue of today mirrors that of the past prohibition of alcohol in many ways. Ratification of the 18th Amendment to the U.S. Constitution outlawed the "manufacture, sale and transportation of intoxicating liquors." Although the federal government was taxed with overseeing the enforcement of the new law, individual states were expected to implement Prohibition on their own. Many governors took exception to this additional budget strain and neglected to impose changes. Maryland and New York were the most famously anti-Prohibition states, and other states grew indifferent to the laws as more time passed.
Currently, the marijuana industry is pinned between conflicting state and federal regulations. Thus, it is no surprise that marijuana-related business (MRB) owners struggle to conduct commerce under the federal government's strict regulatory policies while also navigating frequently changing state laws. Similar to the way the Volstead Act of 1919 laid the groundwork for prohibition by defining what qualified as "intoxicating liquor," the Controlled Substances Act of 1970 purported to contain the manufacture and distribution of certain substances. Legislators used five classifications, called schedules, to categorize them.
Schedule I describes the most dangerous level of drugs – heroin, LSD, peyote, ecstasy and marijuana … wait a minute, what? That's right … marijuana is grouped with the drugs that nightmares are made of. The Drug Enforcement Agency's website states, "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 have surely heard that marijuana is being used for medical purposes throughout the United States and around the globe. In fact, 24 states plus Washington, D.C., have legalized marijuana for medicinal uses. Fun fact: alcohol was also easily obtainable during Prohibition with a written prescription from a doctor.
What does this have to do with you, as an ISO or merchant level salesperson? When you really look at the industry and associated opportunity, it's obvious that now is the time to get involved in this industry or at least keep a close eye on it. According to USA Today, domestic marijuana sales in 2014 were $4.6 billion; by 2015, they were $5.7 billion. That growth is due largely to increased recreational sales (for nonmedical reasons) where such use has been legalized in Colorado, Alaska, Washington, Oregon and Washington, D.C. Marijuana sales collectively are projected to hit $23 billion in 2020. That's assuming the federal government makes no change in the drug's legality.
Consider the end of the era of alcohol prohibition. It wasn't just bootleggers and gangsters getting rich off of the restrictive laws. Many pharmacies made a great deal of money from the sale of medicinal spirits. The Walgreen Co. chain of drug stores, for example, grew from 20 stores in 1920 to 525 stores 10 years later.
Once prohibition ended, many other minor players in the industry were able to capitalize on the newly restored rights and have since evolved into the giant, 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 current stipulations for MRBs in the banking industry to be aware of. Because a processing account is no good if you do not have a depository, I'll discuss how the checking accounts for these merchants need to work.
FinCEN, which stands for Financial Crimes Enforcement Network, is a branch of the U.S. Treasury Department, which I'll refer to as "The Enforcers" for now. What are they enforcing? The Bank Secrecy Act is basically a statute that outlaws money laundering, so any bank that 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, enforce 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 thorough and clearly mapped out so, as long as The Enforcers' instructions are followed, there will not be problems.
Most MRBs are awaiting passage of two congressional bills that could open the door to financial institutions and card services in the payments industry. Collectively called the Marijuana Businesses Access to Banking Act of 2015, sponsors of the bills in the Senate and House represent two states that have legalized recreational marijuana use. House Rep. Ed Perlmutter, D-Colo., introduced H.R.2076 in April 2015, and Sen. Jeff Merkley, D-Ore., introduced S.1725 in July of the same year.
If passed, the legislation would "prevent federal banking regulators from penalizing or prohibiting a bank that provides financial services to legal marijuana businesses. While a private bank could choose whether or not to do business with such organizations, none of the four government agencies dealing with regulation of banks could ban or punish banks that do."
In short, access to banking will become much easier and convenient for MRBs. This is a pressing issue because for the states that have legalized marijuana in some fashion, local banks are operating within FinCEN guidelines. Since Visa Inc. and MasterCard Worldwide cannot get in the game without running afoul of federal guidelines, MRBs must carry large amounts of cash daily. This is becoming a public safety issue. Some MRB owners are using debit only or credit, as well, but they have been miscoded by their processors; it's only a matter of time until they are shut down. Some MRBs have resorted to using out-of-country credit card processors, which opens them up to a new world of unexpected problems. Although the bills haven't passed yet, lawmakers have made progress on amendments, and Congress has previously shown readiness to address this issue.
The MRB field is on the brink of becoming an open market for banking and credit card processing. This is an important time in history to keep your ear to the ground and your eye on the prize. We can all look back to the Prohibition era that ended over 80 years ago, learn from the mistakes our country made and capitalize on the triumphs discovered along the way.
Following are resources used in researching this article:
Brett Husak is Director of High Risk at National Bank Services. Contact him via email at firstname.lastname@example.org.
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