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State preparing for cash — lots of it — when medical marijuana applications come in

Kathleen Gray, Detroit Free Press Lansing Bureau Published 6:00 a.m. ET Nov. 9, 2017


A sign hangs over the door of a vacant building in which a credit union was going to be established to cater to the needs of the marijuana industry on Friday, July 31, 2015, in downtown Denver. A pair of lawsuits filed in Denver this week challenge recent decisions by the U.S. Federal Reserve and the National Credit Union Administration to deny applications from Fourth Corner Credit Union.(Photo: David Zalubowski, AP)


In today’s technologically advanced society, where financial transactions rarely leave the realm of touch screens, the state and businesspeople hoping to break into the lucrative medical marijuana business are preparing for a quaint relic from the past: cash.

Lots of cash.

The conflict between state and federal law has set up a banking conundrum for the medical pot industry. Medical marijuana is legal in 29 states, including Michigan, but it is still considered an illegal controlled substance by the federal government.

Banks are leery of doing business with marijuana entrepreneurs because it could violate their federal charters, said Elizabeth Khalil, a partner at the Dykema law firm in Chicago and leader of the firm's financial regulatory practice, which includes advising clients in the medical marijuana industry.


“The marijuana business is a cash-based business,” she said. “Even where it’s perfectly legal under state law, because it’s illegal in federal law, it’s very challenging to obtain traditional banking services.”

So in Michigan, where state regulators are still trying to sort out the rules that will govern the industry, preparations are under way to accept boatloads, bagfuls and briefcases stuffed with cash when the applications for licenses are made available for the first time on Dec. 15.

More: Medical marijuana applicants will have to show the green before they get a license

More: Michigan: Medical marijuana dispensaries can stay open — for now

The amounts will be relatively small to start out. Application fees will run from $4,000 to $8,000, depending on the license. Later on, the state regulatory assessment will cost between $10,000 and $57,000. And then there will be the 6% sales tax and the 3% excise tax on retail sales of medical marijuana products that the state Treasury Department will have to collect. Estimates of the tax revenue generated from medical marijuana have been pegged at $21 million a year.


But in a world where cash transactions are becoming obsolete, the medical marijuana business is forcing the state to think about how it will accommodate the green.

“Over the last couple of years, we’ve really been moving toward efficiencies through the use of technology,” said Andrew Brisbo, director of the state Bureau of Medical Marijuana Regulation. “So receiving cash runs very counter to that for us to process applications. We’re expecting more cash than what we’re used to.”

That means a bigger and more visible security presence for both the state and the people applying for a license and an infusion of real currency into the state budget.This is a primary concern for people who want to get into the business.

"There is a lot of unchartered territory in this business, but the one that keeps me awake at night is the money handling," David Kelley, a Traverse City businessman who is part of a group that wants to get involved in the medical cannabis business, told lawmakers on Wednesday during a House Financial Services Committee hearing..

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His group has purchased a couple of empty bank buildings that have large vaults to store their medical pot proceeds if they're approved for a license.

"With the amount of cash we’re going to have, we’re going to need large vaults to store it," he said. "We're going to have to pay employees with cash and we’re going to have to come to Lansing with bags of cash and give that to the different agencies. We just don’t feel that there’s another way to do this yet and it does give me a great deal of fear."

No Michigan banks are conducting business with marijuana vendors yet, said R. Lance Boldrey, a Lansing-based attorney with Dykema who is part of the firm’s emerging cannabis law practice.

“For a lot of people it is going to be a cash business and the hope is that something will happen on a federal level,” he said. “Or you’ll simply have some banks that will decide that it’s worth the risk.”

Jordan Kingdon, vice president of government affairs for the Michigan Credit Union League, said bankers and credit unions are being cautious before jumping into the medical marijuana business.

"It’s not just the type of business we’re dealing with yet. We have to do our due diligence," he said. "It’s burdensome for the financial institutions, but we are looking at our ability to take cash out of the system and provide additonal protections.."

Other states that are further along in either medical marijuana or fully legalized pot for recreational use have been dealing with the issue for years with varying levels of success.

In the state of Washington, the transition from the all-cash nature of the business to electronic banking has taken about two years, said Brian Smith, spokesman for the Washington State Liquor and Cannabis Board.

"When we first started, we had hundreds of thousands of dollars in cash  coming through our lobby and nobody wanted that," he said. "A cash-only business is a public safety danger."

But after several state-chartered banks and credit unions started doing business with the medical marijuana industry, Washington now boasts 99% of all marijuana tax payments are coming into the state electronically, Smith said.

Federal banking regulators keep a very close eye on the marijuana business in Washington, which became fully legal in 2014, and "it's fair to say, they won’t tolerate any problems. The banks keep a very short leash on these businesses,"  he said.

In Colorado, the state tried to set up a credit union — the Fourth Corner Credit Union —that would deal strictly with marijuana businesses, but they were shot down by the Federal Reserve, which denied its application for a master account. The case has gone through the appeals process, but there still is no central bank for marijuana businesses in Colorado.


Other credit unions have begun to conduct marijuana business in Oregon and Washington, said Khalil, but have chosen to do so at their own risk.

“It’s not because they’ve found some magic way to get around the law,” she said. “It’s just a matter of forbearance from federal authorities. They’ll take that risk for now, but at any point, they could tell their clients, ‘you’re going to leave our institution,’” if the federal government decides to become more vigilant.

Paul Samways, an accountant and managing partner of Cannabis Accounting in Howell, said banks will find a way to do business with marijuana entrepreneurs.

“There are some alternatives,” he said. “Some investors want to come in and buy a small local bank, and there are plenty of credit unions who need the business deposits.”

There are also prepaid credit cards that can be used or some form of automatic payment plan like PayPal. Ken Burke, president of PayQwick, an automated payment service for medical marijuana users and businesses based in California, pitched his business to Michigan lawmakers this week.

"Tax collection is a huge issue — public safety concerns go through the roof when you can’t bank to this community," Burke said. "We're applying for our money transfer license in Michigan now because we want to take cash out of the business right from the start."

That would help one of Samway's clients, who has gone through nine banks in less than three years because of the differences in federal and state laws on marijuana. He's either been declined or dropped because of his marijuana business.

Jerry Millen, who plans to apply for a state license to open the Green House dispensary in Walled Lake, said he hasn’t had to be concerned about banking issues yet because his business hasn’t done any marijuana sales so far.

“But we’re going to have to figure out something because you don’t want to have that much cash on hand,” he said, noting that there is talk in the industry that the people getting secure transport licenses to transport both marijuana products and cash could actually store the cash for businesses until the banking issue gets sorted out.

He’s not too worried.

“There’s so much money in the industry that the banks will start coming around. If somebody can make money on it, they’ll figure out a way to do it,” he said.

The issue became the main focus of a legislative hearing on medical marijuana earlier this month when Brisbo provided an update on the regulatory picture.

"My local prosecutor says this is going to be a big problem, especially with the amount of cash involved," said state Rep. Chris Afendoulis, R-Grand Rapids.

State Rep. Ronnie Peterson, D-Ypsilanti, added, "Very interested in how it’s all going to be processed. There’s a lot of discomfort with all of this cash."

Brisbo tried to allay their fears, acknowledging that the state will be dealing with a much higher volume of cash than it is used to, "but we’re making the necessary arrangements."

As more states face the possibility of fully legalizing marijuana use — Michigan voters may see the issue on the ballot in 2018 — “the banking problem is only going to get more and more acute,” Khalil said. “Federal law has to change and there has to be an appetite in Congress for a legislative solution. And it’s hard to imagine the status of marijuana would change under this administration.”

Under former President Barack Obama, the U.S. Department of Justice was directed to not spend any money on prosecutions of medical marijuana users in states where the drug was legal. But Attorney General Jeff Sessions, who was appointed to the job by Republican President Donald Trump, has a different take on marijuana. He opposes legalization of marijuana and would like to see the sale of marijuana banned, even in states where the drug is legal.

If that happens, the banking challenge will be the least of the worries for the medical marijuana industry.

Contact Kathleen Gray: 313-223-4430, kgray99@freepress.com or on Twitter @michpoligal

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