Banks remain on sidelines of marijuana legalization process

WASILLA — With statewide marijuana regulations out and applications in the pipeline, some Alaska retail dispensaries could open as soon as October. But how those businesses will handle their profits, pay state taxes and generally fit into a statewide system of commerce remains to be seen, a banking executive and attorney told the Wasilla Chamber of Commerce Tuesday.

Michael Martin, executive vice president and general counsel for Northrim Bank, outlined the legalization process and its effect on the state banking industry, especially in light of the incongruent nature of federal and new Alaska regulations regarding marijuana.

In the Mat-Su Borough, a temporary ban on marijuana businesses will remain in place for retail and commercial grow operations until after the October elections. The Oct. 4 ballot will include a measure banning all marijuana businesses except for industrial hemp. Currently, the cities of Wasilla and Palmer ban commercial marijuana businesses. Houston is the only location in the borough that will initially allow marijuana operations.

“For a guy like me, it is an enormous thing, and as a banker, there is not a week that goes by that somebody doesn’t call and ask us how we are going to deal with this issue,” Martin said.

The Department of Justice has said it will generally let states enforce their own laws on marijuana. And the division of the Treasury Department responsible for enforcing money-laundering regulations has provided guidelines for banks that want to work with marijuana-related businesses.

But overall, federally regulated banks have largely refused to open accounts. Credit card companies also have prohibited transactions from crossing their networks.

That leaves dispensaries and other related businesses to deal with a constant influx of cash, and nowhere to put it.

Martin said banks in Alaska have decided collectively not to handle marijuana-related businesses. In Washington and Colorado — states with similar marijuana legalization policies — a few smaller banks have looked to grab some market share of the business. But Martin said those have been placed under intense scrutiny by federal regulators.

“For Alaska, the question is how are we as banks and financial institutions going to deal with this come October, and the answer is that nobody really quite knows,” he said.

Martin pointed to the interconnected nature of state and federal government in Alaska as a significant issue for residents. The same thing goes for banks with state oversight balanced with federal regulation with the Federal Deposit Insurance Corporation.

“At the federal level, marijuana is a Schedule 1 drug that is highly regulated. At the state level, it’s legal,” Martin said. “What the Department of Justice has said is that although marijuana is illegal at the federal level, they have their prosecution priorities on what they are going to pursue.”

Martin said among the issues that would rise to the level of federal prosecution for marijuana-related businesses and individuals included drug trafficking, use violence and firearms, cultivation on public lands and DUI.

“They aren’t going to touch retail sale as long as it is regulated by the state,” Martin said, adding that could change with a new administration next year.

“Federally, this area is very much in flux. I personally think the government is just experimenting and waiting to see how these handful of states spin it out and I suspect they will eventually say that they want this tax revenue.”

Right now, Martin said those who have an income derived from the distribution, sale or manufacture of a Schedule 1 drug can’t take business expenses off their income.

“People in Colorado and Washington have been finding themselves in a position of doing all this work and in the end the federal government took all their money anyway. There will be more to see on that.”

Martin also is the Alaska representative for the American Bankers Association. After attending a few meetings in Washington, D.C., he said the industry was a little on edge these days regarding the issue.

“The banking sector will most like be living with a changing set of priorities on the federal level for a while,” he said. “The news I have gotten back from the national association was that until there were at least 20 or 30 states that have legalized marijuana, the federal government is just not going to act. Is that five years, or 10 years? I don’t know.”

On the state level, Martin said the biggest issue will be the collection of tax revenue with banks out of the deposit picture.

“It is a real issue for Alaska,” he said. “In places like Colorado and Washington with more of a road system, those engaged in marijuana related businesses can take their deposits to a DMV and other state offices. That’s going to be hard for people outside Anchorage.”

Companies like PayQwick have shown an interest in Alaska for an alternative transaction system. PayQwick, which has been operating in Washington since last year, allows marijuana customers and businesses to use an app or PayQwick cards to pay for products. The transactions are linked to other bank accounts, and businesses and processors can use the system to make payments to each other as well.

Martin said while Northrim wasn’t taking a political stance on the issue, from a banking perspective, its concerns come from a few areas, like the potential loss of its federal charter or seizure of property the bank might hold as a lien.

Another aspect comes from the extensive monitoring of a potential marijuana-related account.

“The monitoring is really cost-prohibitive for us,” Martin said. “Some banks in the other states charge upwards of $2,000 a month to maintain those accounts. But people were still opening them, because that’s how much money was flying through.”

He pointed to an anecdote of a commercial real estate customer recently who asked if he could lease space to a potential marijuana retail operation.

“He asked if it was OK and the answer was no, it’s not OK,” Martin said. “Because proceeds from the sale of marijuana will go to repay the debt of our customer. Even though it’s one removed, I said it would be a violation of your loan agreement. One of the covenants of the loan agreement is that you are going to abide by the rule of law. The fear from the bank’s perspective is that if somebody seizes that property because of that operation the bank loses its lien.”

Audience member Wasilla mayor Bert Cottle pointed out that just the physical storage of money for the operations also would be problematic.

“People will be able to go to a state website… and find the location of that cash,” Cottle said. Martin said many companies in Colorado and Washington use armored truck services and security company vault storage.

Martin related another anecdote of a commercial customer that had a potential marijuana business approach them about a lease. The owner declined.

“So, it’s such a cash-intensive business that the lessee just said, ‘Hey, what if I bought the building from you,’” Martin said. “I think that’s what you are going to see — much of that financing will happen, it will just happen outside the banking system. Hard money lenders will be there.”

Contact reporter Steven Merritt at 352-2269 or steven.merritt@frontiersman.com