Members of an advisory panel tasked with designing a Nevada Cannabis Compliance Board heard last week about the barriers that have left the multibillion-dollar America marijuana industry largely bank-less and — in some cases — literally burying their cash in the ground, pirate-style.

The panel took in presentations Friday from Las Vegas attorney Candace Carlyon and the Nevada Department of Business and Industry about ways to avoid the pitfalls that have emerged because 33 states have legalized marijuana, but the federal government continues to classify it as an illegal Schedule 1 controlled substance on par with heroin.

“The state legalization versus federal prohibition has created an insurmountable conflict for many businesses that would potentially serve marijuana and related businesses,” wrote George Burns, commissioner of the Financial Institutions Division of the Nevada Department of Business & Industry, in his presentation notes. “The conflict is the problem, and ultimately the only definitive solution is for Congress to remove the conflict.”

Banks that dare offer such services to marijuana businesses risk running afoul of a variety of federal laws, including the Controlled Substances Act, USA Patriot Act, Bank Secrecy Act, and the Racketeer Influenced and Corrupt Organizations Act (RICO). Providing banking services to an illegal industry could mean steep fines, asset forfeiture and prison sentences, and banks that get involved with the industry could lose their charters or have their employees barred forever from banking.

To date, no Nevada state-chartered bank, credit union or thrift has taken the risk, although some out-of-state entities are venturing into the market.

Michael Brown, recently appointed director of the Nevada Department of Business & Industry, said he was concerned about the vast amount of cash floating around as a major public safety issue and said addressing the conundrum of marijuana banking was one of his top five focus issues in his new role.

“I'll be looking at how other states are addressing the issues from Massachusetts to Oregon. Next week I'll be consulting these institutions and the Brookings Mountain West Institution at UNLV to see what suggestions or ideas” they have, he said, before quoting former President Calvin Coolidge: “We cannot do everything at once, but we can do something at once.”

Several Nevada lawmakers and the state treasurer have proposed possible workarounds this session, and federal agencies have offered advice that they framed as clarity for marijuana businesses, but there still appears to be little hope for a fix beyond congressional action. In recent years, most of the attempts to bring forth a solution in Congress have died in the legislative process.

“Guidance alone isn’t enough. In order for most financial institutions to be completely comfortable providing services to marijuana businesses, the federal statute must be changed by Congress,” Burns wrote.

The holdups

Because marijuana falls under the jurisdiction of the federal Controlled Substances Act, it’s against the law for anyone — including banks — to handle the proceeds from them. The prohibition applies to all entities public or private that are connected to the payment system, which includes checks, credit and debit cards, and online or wire transfers.

There are multiple roadblocks to banks serving marijuana businesses, Burns explained. One is the Bank Secrecy Act, an anti-money laundering law under which financial institutions must tell the federal government about any suspected illegal activity — a category that would include transactions related to marijuana businesses, even if they are legal under state law.

The law requires reports if someone makes a cash payment of $10,000 or more from a single buyer.

Then there’s the Financial Crimes Enforcement Network (FinCEN), an agency within the Treasury Department that provides intelligence and analytical support to detect money laundering and sets requirements for any bank that wants to offer accounts to marijuana businesses.

Among the requirements — which Carlyon said are far more stringent than the requirements placed on a normal banking relationship — is verifying that the marijuana business does not sell to minors and that none of its products are brought to a state where marijuana remains illegal. These are called “Know Your Customer” rules.

FinCEN issued new guidance in 2014 as multiple states had started legalizing marijuana and as the Obama administration issued the Cole Memo de-prioritizing marijuana enforcement. Technically it allows banks to serve marijuana businesses, but it has not been very reassuring about whether it would prosecute institutions.

For example, FinCEN told Iowa Sen. Chuck Grassley and California Sen. Dianne Feinstein that even if banks followed its new guidance in dealing with marijuana businesses, FinCEN would not protect them from Department of Justice prosecution.

Grassley concluded that FinCEN’s guidance “does not change federal criminal law, affect its enforcement in any way and that there are risks in doing business with the marijuana industry which should give the financial services industry little confidence that it will be protected should an institution be federally prosecuted for getting involved in illegal activities.”

Banks must file what is called a “Suspicious Activity Report” (SAR) with FinCEN if the bank suspects that someone has conducted or attempted a transaction that involves funds derived from an illegal activity. More recently, there has been a new option of filing a “marijuana-limited” SAR if the bank is aware of a transaction conducted with a legal marijuana operation and there is nothing otherwise suspicious about it.

Those marijuana-limited SAR filings nationwide have been steadily on the rise, increasing from about 31,000 in January 2018 to about 49,000 in December 2018.

Carlyon said that beyond the risk of prosecution, complying with FinCEN rules is often cost prohibitive both because of the strict reporting requirements and the logistical concerns of serving a mostly cash business, such as arranging for armored cars and vaults to transport the cash.

How it’s working now

Surveys show most marijuana businesses don’t have access to banking services. Marijuana Business Daily surveyed more than 400 cannabis industry professionals in late 2015 and found that 70 percent of businesses that handle the marijuana plant don’t have a bank account, and almost 50 percent offering ancillary services to the industry don’t have one.

Marijuana industry proprietors say that even when they do manage to open accounts, they often have them shut down by wary banks.

Others choose to hide their involvement in banking, often by opening an account under a name that would not arouse suspicion. A study by the firm MRB Monitor reviewed public records in Massachusetts from 2015-2016 and found 34 percent of applicants trying to open a medical marijuana dispensary had one or more accounts with Bank of America, Citigroup, Wells Fargo, or JPMorgan Chase. All those large banks are ones that say they do not have marijuana customers, Carlyon said.

Some in the industry literally bury their money in the ground — the treasurer of marijuana-rich Humboldt County testified to California officials working on the banking issue that he sometimes receives cash that has been washed because it was underground.

Others use cryptocurrency such as bitcoin. Nevada Treasurer Zach Conine has floated a similar idea that involves customers putting cash into state-owned machines that would give them back cryptocurrency credits that could be used at a dispensary.

Some purchased ATMs and didn’t tell the bank where they would be placed, Carlyon noted, leading to a mass shutdown of hundreds of the machines in 2014.

Others use management companies, which have nondescript names and make payments to vendors and for rent. Proceeds from marijuana businesses flow to them, although that’s technically money laundering and would be a red flag for FinCEN, which looks for businesses trying to disguise their involvement in the marijuana industry.

There are also “closed-loop” systems such as the online platform called PayQwick — a service sometimes referred to as the PayPal of pot. Businesses that apply to open a PayQwick account are audited by the company to determine if they are compliant with the law.

Marijuana businesses can conduct transactions with other companies that have a PayQwick account, and customers can buy pre-loaded cards — similar to gift cards — that can be redeemed for product at participating dispensaries.

In spite of the federal prohibition on marijuana, legal pot businesses still pay taxes to the Internal Revenue Service, albeit unlike other businesses that authorize an electronic transfer. Many personally hand-deliver mounds of cash to the IRS offices, taking pains to disguise their mission to avoid being robbed.

"Even our own IRS, our own federal government, is accepting this money. So go figure," Burns quipped at the meeting.

The possible fixes

One possible resolution, Burns said, is a Nevada law that would allow for a marijuana business focus “thrift” (a bank-style entity also known as a savings and loan association and generally focused on accepting savings funds and issuing mortgages). A law in 2015 — AB480 — partially fulfilled the goal, but anyone creating the thrift would need to privately insure it, which would require a large amount of initial capital and potentially access to the payments system through the Federal Reserve Bank.

One group is close to fulfilling the requirements to earn a charter, Burns said.

Another option is if out-of-state financial institutions that are currently serving marijuana businesses expand into Nevada. The state’s Financial Institutions Division has been fielding proposals from some entities interested in moving to Nevada.

So far, an Arizona-based bank that is already serving marijuana customers in the Phoenix area opened a Las Vegas branch and has taken on several large customers. Meanwhile, a Colorado credit union with experience in the field has applied to expand into Nevada to bank cannabis-related businesses.

If approved, the credit union could be operating in Nevada 30 days after that.

But fundamentally, Burns said, the question is whether any entity makes the business decision that providing banking services to marijuana businesses is worth the cost and risk. To date, no Nevada entities have.

Other states’ explorations of marijuana banking workarounds have offered little hope for a state-based fix.

California’s treasurer commissioned a report on marijuana banking in 2018 that found shortcomings in all the current workarounds, such as the idea of a state-based public bank serving the cannabis industry. Among other problems, California noted that the Federal Deposit Insurance Corporation (FDIC) would not insure the deposits in such a bank, and there are no other alternative, privately funded deposit insurance systems in the U.S. right now.

That idea “should be rejected based on unacceptable risk levels, non-profitable financial forecasts and an overall inability to achieve the desired objectives,” the report said.

Cryptocurrency and closed-loop payment solutions (like PayQwick) also fall short when there’s a need to move money in and out of the network of account holders, report authors said.

“The only effective long-term solution involves legislative and regulatory changes at the federal level to allow the legal banking of cannabis-related funds,” the California treasurer’s report concluded.

What Congress can do

Over the years, several proposals to fix marijuana banking have failed. Attempts in 2013, 2014 and 2015 died in Congress, Carlyon pointed out.

But advocates were heartened that the marijuana banking issue was brought up for a hearing in February before the House Consumer Protection and Financial Institutions Subcommittee.

One proposal on the table is called the SAFE Banking Act, which would bar federal banking regulators from punishing a bank simply because it is servicing a legal marijuana business. It would give banks the opportunity to decide whether they want to take the risk with any particular marijuana-related institution.

Democratic state Sen. Yvanna Cancela, a member of the advisory panel working to design a Cannabis Compliance Board, said her takeaway is that most of the onus is on the federal government.

“It's clear that states are trying to be creative, but that the federal government has to take action quickly,” she said after the meeting. “I didn't realize just how much federal regulations dictate the success of state action on banking, but I'm hopeful that there is room for states to take action, and long term, the federal government really needs to come up with a solution.”