State Rep. Bob Hasegawa, D-Seattle.
OLYMPIA, Aug. 13.—Some people have always thought Sen. Bob Hasegawa’s proposal for a state bank was a bit of a pipe dream. Maybe it could beat Wall Street at its own game, financing public bonds at a lower interest rate. But where on earth would it get the capital?
Well, how about this? What about a state bank of marijuana?
“You know, it would be a ton of money,” Hasegawa says.
Take a deep breath. A state bank for drug dealers? Believe it or not, it is one of the more thoughtful responses to a problem all Olympia has been aware of for months. It is one that has caused big gulps from lawmakers, regulators and players in the state’s budding billion-dollar biz. Where will they do their banking?
It is a bigger problem than most people realize. Federal banking regulations forbid commercial banks from taking deposits they suspect are the fruits of illegal activity. And marijuana does remain an illegal drug under federal law, even though Washington voters decided last year to legalize the drug with Initiative 502, as did Colorado voters with a similar measure. The silence of the feds has been taken as a green light by state regulators and a new crop of eager entrepreneurs. But where will they do their banking? It is as big a problem for Washington state as it is for anyone who deals in the stuff. “The state would not be able to take buckets of cash to the Bank of America,” says Scott Jarvis, director of the Department of Financial Institutions.
U.S. Rep. Denny Heck, D-Wash., right now is pushing a bill that would revise banking rules for the legal marijuana trade. But Congress is an inscrutable thing, and nobody in this Washington is waiting to exhale. Hasegawa is working on a bill of his own that offers a rather different solution – a state-owned institution that would accept deposits from marijuana-related businesses and might someday mutate into the state bank of his dreams. Nobody here, really, has a clue what to do. “We can’t let this business go on as a cash-only business,” says Steve Hobbs, D-Lake Stevens, chairman of the Senate Financial Institutions and Insurance Committee. “That only invites criminal activity. You have to find a way for them to do business – and I don’t know how.”
A Long-Time Problem
Scott Jarvis, director of the Department of Financial Institutions.
Actually, Washington already has a marijuana biz, and it already is a problem. Washington voters said yes to medical marijuana in 1998, putting it among 20 states and the District of Columbia that permit the sale of marijuana for medicinal purposes. Technically speaking, none of the dispensaries ought to have bank accounts, either. Banks operate under know-your-customer rules that require them to know something about the nature of their customers’ businesses, and if they suspect anything untoward is going on, even if it might be legal under state law, they are required to file suspicious-activity reports.
Some dispensaries may be banking anyway, Jarvis acknowledges, perhaps under names or business descriptions that conceal the true nature of their income. “Suppose you are a naturopathic physician and you also serve the medical marijuana needs of your clients. You’ve got an account that says you are a naturopathic physician and there are a lot of things that are the nature of your business – maybe a part of that is marijuana. I don’t know, and maybe the bank doesn’t know.”
Somehow the state gets paid. There are some 50 dispensaries that remit business taxes to the Department of Revenue, though the number of dispensaries statewide may be triple that. It means either that they aren’t paying taxes or they have found other tax codes that allow them to operate under the radar. Sources in the trade tell Washington State Wire they have found ways to keep their noses clean, not that they want to explain precisely how. But in a business eternally under legal scrutiny they say they have to mind their Ps and Qs — any accusation of tax evasion could be deadly.
Now Washington is about to embark, full-tilt, into a new age of legal marijuana, with industrial-scale growing operations and stores that will invite the public trade. It is hardly something that can be dealt with by a nudge and a wink. Last year the Office of Financial Management estimated that tax revenue alone under Initiative 502 might total $2 billion over five years – an estimate that Liquor Control Board consultants say might have been overstated, but it does provide an idea of the scale. None of those businesses technically can write a check, use a debit card, or let their customers use plastic at the checkout counter. And leave aside the cash-management issue for the new industry – how on Earth does the state collect its cut? Does the cash arrive in Olympia in wheelbarrows? And does the state sock it away in a mattress?
“Going back months and months, we have been trying to explore how this can possibly work, given the federal challenges,” Jarvis says. “We don’t have the answer yet. We can collect the money at the state level but we can’t get it into the payment system.”
Heck Pushes Bill
U.S. Rep. Denny Heck, D-Wash.
Jarvis suggests that the best answer is legislation along the lines of the bill Heck has cosponsored in Congress. The Marijuana Business Access to Banking Act is prime-sponsored by Ed Perlmutter of Colorado. It would clear the way for banks, credit unions and other depository institutions to provide banking services to legitimate marijuana-related businesses – both the recreational business in Washington and Colorado and the medical-marijuana business nationwide.
Heck is among five members of Congress from Washington who have signed on to the measure – also in support are Suzan DelBene, Derek Kilmer, Jim McDermott and Adam Smith. But he is perhaps the most vocal about it — he plans a town hall meeting on the subject at Olympia City Hall, Aug. 22 at 6 p.m. He admits he had to think pretty carefully before he finally voted yes on the initiative last year – certainly he doesn’t see himself as an industry booster. Yet he says an all-cash industry is an inducement to crime. Imagine all those stores with thousands of dollars in the cash drawer. “What we will find is that these retail establishments are more subject to robbery because they are all-cash and everybody knows it. They can’t use direct deposit, they can’t make loans, they can’t use credit cards – there is a high incidence of tax avoidance. And at the end of the day, I think the failure to allow legal authorized businesses to use these banks is essentially putting the welcome mat out for organized crime. We’re talking about a business with a $500 million to $1 billion [annual sales] projection over time. Any small business is going to tell you that is a recipe for disaster.”
Heck says response in the halls of Congress so far has been good, but it takes him at least three paragraphs to explain. “When you talk to people who don’t like marijuana and are worried about the effects of it, you have to help them understand this isn’t about helping that industry exist or grow – this is about enabling them to use the banking system so that all sorts of other bad things don’t happen. I personally think this is sort of a long-term project – I think eventually other states will do what Washington and Colorado did. And as time goes by, people will begin to appreciate that this is truly an anti-crime bill.”
There is one point worth considering – given the federal silence about legal marijuana sales in Washington, a nod from the U.S. House and Senate with regard to banking might be the next best thing to a federal blessing.
Hasegawa Sees Opportunity
Bank of North Dakota headquarters in Bismarck.
Which brings things back to Hasegawa and the state bank. Since 2010 Hasegawa has been pushing a bill that would authorize creation of a state bank, modeled after the Bank of North Dakota. The 93-year-old institution, unique in the country, serves as the depository for all state taxes and fees, and it plows the money back into the state in the form of loans for public projects, commercial enterprises the state wishes to encourage, even student loans. It is what is known as a “banker’s bank,” providing liquidity for community banks statewide, ensuring capital is available in that tiny market.
It is an idea that has captured the imagination of activists nationwide – a way, perhaps, around Wall Street and the investment banks, which got something of a bad rep during the late unpleasantness. Since the mortgage meltdown of 2008 the idea has been promoted in 18 states, the main selling point being that they might be able to shave a point or so in interest when issuing bonds and save on underwriting costs. But in Washington, as elsewhere, the idea has run aground on practicalities. Part of the issue is that the Washington state constitution prohibits the lending of public credit for any private purpose. Even if the bank is limited to lending for public enterprises, this state’s population and budget is approximately 10 times the size of North Dakota and it has a cash flow that can fluctuate $600 million to $800 million in a single day. Tying up money could place the state in a pinch. So how does one provide such an institution with seed capital? State Treasurer Jim McIntire has been critical of the idea whenever it gets a serious hearing – which isn’t often.
Hasegawa sees a way, though, that the two ideas might dovetail. Suppose there was a state-operated institution that was enabled to take deposits from the marijuana industry? Something that wasn’t subject to federal banking-insurance regulations? At first he says it probably would have to be strictly limited to marijuana. And certainly that business alone wouldn’t generate the kind of money that would be needed for the kind of operation he would like to see – but over time it might grow to the point that some of the same purposes might be served. Hasegawa says he has asked legislative staff to research the possibilities and plans to introduce a bill next session.
“We can’t have a multi-billion dollar industry dealing in cash, so we have to do something,” he says. “The problem is anything we do is illegal – or at least is likely to be considered illegal by the federal government. So the question becomes how do we minimize the risk while we are waiting for the federal government to decide how it is going to interpret all of this?”
Of course there risks involved in a state bank of marijuana – like launching an institution backed by the faith and credit of the taxpayers at a time when no signals seem to be forthcoming from the feds, and a new administration is just a few years away. Jarvis says he thinks such an institution might run afoul of the same federal money-laundering rules that restrict traditional banking institutions. But the idea certainly seems to have captivated some in the trade: Several testified at a February hearing before Hobbs’ committee that it is an idea with promise. If a state-bank measure allowed merchants of marijuana to make deposits and write checks, it would solve many of the state’s problems, said Ezra Eickmeyer of the Washington Cannabis Association. “It is just a little idea we thought we would throw out there to help make some money for the state.”
The banking biz, naturally, is dubious. “Many in our industry would love to provide banking services to that industry, but we just cannot do it until the federal government signals that it is legal or acceptable to do so,” says Denny Eliason of the Washington Bankers Association. “And a state bank would have many of the same restrictions as we have.”
But it does explain why so many in the banking industry are so eager and helpful as the state ponders ways to solve the problem, says state Rep. Chris Hurst, D-Enumclaw, chairman of the House Government Accountability and Oversight Committee. At a hearing last month, he remarked, “I think that is partly what is driving the main street banks to want to get into this industry – they don’t want to see a state bank.”
Or maybe it’s just that all money is green.
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