U.S. pot sellers stash cash as banks leave them high and dry
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[May 24, 2021]
By Shariq Khan
(Reuters) - The U.S. cannabis business has
a very particular cashflow problem -- too much of it.
Marijuana can be sold legally in 36 U.S. states and the District of
Columbia (D.C.) for medical use and in 15 of them and in D.C. for
recreational purposes. But it's still illegal on a federal level,
meaning most banks won't service the industry in case they fall afoul of
money laundering laws.
With the COVID-19 pandemic and increasing legalisation driving a surge
in cannabis use, the sector's producers, manufacturers and retailers are
awash in cash, adding risk and costs to the most basic business
transactions from paying employees and filing taxes to finding somewhere
to store their income.
"All this cash flowing around is just a recipe for disaster," said Smoke
Wallin, chief executive of hemp health products maker Vertical Wellness
Inc. "How do you account for it? Where do you keep it? How do you move
it? Even in a safe, it's a security risk for employees."
Ryan Hale, a U.S. Navy veteran and co-founder of cash management firm
Operational Security Solutions, had to persuade a weed farmer in
California to stop hiding cash in a tree. On another occasion, Hale had
to help a bewildered cannabis retailer who had lost count of the dollar
bills overflowing from his store's lockers.
Legal U.S. cannabis sales grew 30% to $22 billion last year, more than
the $17.5 billion Americans spent on wine, according to data from
Euromonitor. Sales are expected to jump more than 20% this year.
(Graphic: U.S. cannabis consumers growth: https://graphics.reuters.com/CANNABIS-CASH/rlgpdybdovo/chart.png)
The sales boom could have left cannabis companies with a cash pile of
more than $10 billion to deal with last year, according to research
firms Headset.io and New Frontier Research.
Big players can afford unmarked armoured vans and heavily armed guards
to transport money but smaller operators have to rely on themselves.
One weed producer in Los Angeles, who declined to be identified, said he
had to carry $120,000 in a bag and drive for six hours from Los Angeles
to Oakland to pay a supplier instead of taking a flight and put himself
at greater risk of being robbed or the money being confiscated by
airport security.
During the last weekend of May 2020, when protests erupted across the
United States against police brutality and racism after the murder of
George Floyd, there were at least 43 attacks on weed dispensaries along
the West Coast, according to Cannabis media site Leafly's review of
police reports and business owners' statements.
One of the stores attacked was Cookies Melrose in Hollywood, owned by
rapper Gilbert Milam Jr, known by his stage name 'Berner'.
It suffered damages in the "high six figures" when around a hundred
people attacked the store on May 29, a company spokesperson said.
A DIFFERENT BALL GAME
As legalisation of cannabis gathers steam across states -- New York and
New Mexico will allow marijuana for recreational purposes in the next
few years -- politicians are looking at ways to make it easier for the
sector to access banking services.
The House of Representatives passed a bill in April that would allow
cannabis firms to have bank accounts, get loans and accept credit card
payments but it may not make it to the Senate because Senate Majority
Leader Chuck Schumer wants to work instead towards lifting the federal
ban on cannabis.
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An employee holds a jar of marijuana on sale at the Greenstone
Provisions after it became legal in the state to sell recreational
marijuana to customers over 21 years old in Ann Arbor, Michigan,
U.S. December 3, 2019. Picture taken December 3, 2019.
REUTERS/Matthew Hatcher
A full federal green light is the industry's ultimate
goal but it isn't counting on Schumer's pledge to make it happen by
next year.
Shares of U.S. cannabis companies, listed in Canada because they are
barred from U.S. exchanges, are up just 9% so far this year
according to the AdvisorShare Pure U.S. Cannabis ETF and off nearly
29% from a February peak.
In the meantime, marijuana businesses have to hunt for friendly
banks.
Only 515 of the more than 8,200 federally registered banks and one
in 30 credit unions in the United States worked with marijuana
businesses at the end of 2020, according to data compiled by
government agencies.
(Graphic: Cannabis banking in the U.S: https://graphics.reuters.com/CANNABIS-CASH/jznpnrowkpl/chart.png)
The service comes at a premium as the federal illegality increases
the amount of paperwork needed by banks.
Chris Driessen, chief executive of pot producer SLANG Worldwide Inc,
said it cost his firm $40,000 to avail of banking services in
Colorado, just one of 12 states in which the company operates.
Normally, a business checking account will cost less than $100 to
open.
"Standard banking for companies is often 95% cheaper than the cost
to bank cannabis companies," Driessen said.
Maps Credit Union is one of the longest-serving financial
institutions working with the cannabis industry. It has taken in
more than $1.79 billion in cash deposits from the sector in Oregon
since January 2017 but that has entailed filing tens of thousands of
reports required under financial crimes watchdog FinCEN's guidance
for cannabis banking.
"Serving these businesses is not cheap. It's a completely different
ball game," said Rachel Pross, Maps' operations chief, pointing to
its use of costly anti-money laundering software, external auditors
and legal counsel.
As demand for pot grows, investors have poured more than $2.5
billion into cannabis tech startups since 2018 and special purpose
acquisition companies or SPACs that target the broader cannabis
industry, have raised $3.9 billion to date, according to Viridian.
Within the industry, however, some cannabis executives can't get
loans and struggle to even retain personal accounts.
Cookies store chain owner Berner said many banks had declined to be
associated with him since he got into the cannabis line in 2015.
"My clothing business did $32 million last year, but multiple banks
have asked us to leave," he said. "You'd like to go into a normal
banking establishment and just be treated like a normal human
being."
(Reporting by Shariq Khan in Bengaluru; Editing by Arun Koyyur and
Carmel Crimmins)
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