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Banks out of reach, Md. marijuana businesses eye unique solutions

With state regulators next week revealing the recipients of the first round of licenses for growing and processing medical marijuana, one big question remains: Where does the money go?

The federal government is still at odds with the 25 states and the District of Columbia where medical marijuana is legal, leaving banks at a loss for clear regulations that would let them offer services to those businesses. The Department of Justice has offered some guidance to financial institutions, but it doesn’t provide the assurances bankers say they need to have a relationship with businesses that deal with what the federal government considers a controlled substance.

Darren H. Weiss, Attorney and Jonathan Wachs, Principal at Offit Kurman who are starting a marijuana industry practice group. (The Daily Record/Maximilian Franz).

Darren H. Weiss and Jonathan Wachs, who lead Offit Kurman’s marijuana industry practice group. (The Daily Record/Maximilian Franz).

Earlier this week, the U.S. Drug Enforcement Administration said it will continue to classify marijuana as a Schedule 1 drug, the most restrictive of the agency’s five classifications, meaning it’s considered highly addictive and without medical benefit.

Maple Lawn-based Offit Kurman, which launched a medical marijuana practice group earlier this year, is helping entrepreneurs and businesses get the assistance they need as Maryland’s cannabis industry gets ready for prime time.

“On a practical side, most banks are not comfortable getting into cannabis,” Darren H. Weiss, a member of Offit Kurman’s new practice.

But cannabis businesses still need a way to protect their money. In Colorado, Washington and other states that have had legal marijuana in some form for the past few years, law enforcement has seen an uptick in theft and robberies in dispensaries that carry large amounts of cash. Entrepreneurs in other parts of the country, particularly in Colorado and on the West Coast, are trying to find solutions, some of which may address concerns among future Maryland dispensary owners.

“It’s a really interesting opportunity for entrepreneurs and innovators in the space,” said Weiss.

While the firm wasn’t comfortable giving names of specific companies they’ve encountered, Weiss, and his colleague Jonathan R. Wachs, a principal who heads the nine-lawyer practice group, said that alternative currency is becoming an option as the banking problem is sorted out.

“There are opportunities for entrepreneurs to come out with payment processing systems,” said Weiss.

The Fourth Corner Credit Union is chartered in Colorado and does the due diligence for banks to make sure they are dealing with legitimate cannabis businesses. It’s considered the first state-chartered credit union in the country to offer banking services to cannabis and hemp businesses.

In 2015, the credit union sued the National Credit Union Administration and the Federal Reserve Bank of Kansas City after both entities denied Fourth Wall’s application for federal approval. The case was dismissed in January when a U.S. District judge said allowing federal approval “would facilitate criminal activity,” The Denver Post reported.

“These guidance documents simply suggest that prosecutors and bank regulators might ‘look the other way’ if financial institutions don’t mind violating the law,” Judge R. Brooke Jackson wrote, in reference to the Department of Justice guidelines. “A federal court cannot look the other way.”

Some entrepreneurs are going outside the system of modern currency entirely, such as PotCoin. Think Bitcoin, but for pot. The digital currency is designed to allow exchanges between legal marijuana businesses and customers, keeping cash out of stores and away from potential robbers. First launched in 2014 by developers who go by pseudonyms Hasoshi, MrJones and Smokemon 514, the currency takes banks out of the equation with no fees, no chargebacks and fast transactions, according to Potcoin’s website. The currency is accessible through an open source software.

Another payment system in the works is similar to Venmo or Paypal, what is known in the tech world as a blockchain payment system. One app launched this year, Tokken, uses a system that moves money from a customer’s bank account to a bank account run by the app. Tokken also manages subaccounts for member dispensaries, serving as the middleman between banks and dispensaries.

Tokken was founded by Lamine Zarrad, who worked for the Office of the Comptroller of the Currency, where he saw marijuana compliance issues within the financial system. Zarrad found that the OCC did not crackdown on banks working with marijuana businesses as long as the transactions were well documented, The New York Times reported.

As the middle man, Tokken is saving banks from the other big question the financial services industry has to address with pot: whether it’s worth the hassle.

“Most banks don’t want to put the time and money it putting in that infrastructure,” said Weiss from Offit Kurman. “They’re not convinced that it’s worth the time and expense.”

If banks do business with dispensaries, they don’t always have the ability to track whether the business is legal.

“They’re limited to a certain extent to the accuracy and veracity of the materials submitted,” said Wachs.

If cannabis money is intermingled with the rest of the bank’s money and the federal government freezes the dispensary’s assets, it can severely restrict the bank’s cash flow. As a result, banks have to “silo” cannabis funds.

That said, Wachs and Weiss warn their clients against keeping any secrets from their financial services provider.

“The biggest risk to those in the industry is to do things under the radar,” said Weiss. “This a completely legal industry under state law. Businesses and business owners must be completely transparent with financial institutions.”

Reporting from Bloomberg was used in this story.