That scenario is playing out in the nascent medical marijuana industry, where Pennsylvania legislators and the governor have approved licenses for marijuana growers and dispensaries.
Federal laws, however — and banking regulations in particular — still deem marijuana and proceeds from related businesses to be illegal, requiring banks to report any suspicious activity involving deposits or accounts tied to the drug.
Several observers involved in the Pennsylvania medical marijuana industry said that some businesses have found lending institutions willing to work with them but at huge costs, which will be passed along to consumers in higher prices for medicine.
Those fledgling efforts were frustrated earlier in January when U.S. Attorney General Jeff Sessions rolled back Obama-era guidelines that softened the federal stance on state marijuana laws. The guidelines, known as the “Cole memo,” essentially suggested that federal resources not be spent targeting states that had legalized marijuana in one form or another.
Sessions’ memo overruled the Cole memo.
“The federal government made it real simple: don’t do it,” said Nick DiFrancesco, president and CEO of the Pennsylvania Association of Community Bankers, based in Harrisburg. “I would tell any of our members to not even go near it. You just can’t take the risk, if you want to keep your charter.”
Before the Sessions memo, some banks across the country were finding ways to serve the new industry, said Judith D. Cassel, a Pennsylvania attorney who works with the Harrisburg-based law firm Cannabis Law PA. The Sessions memo had everyone take a closer look at what they were doing, but some institutions will continue to serve the industry.
“It’s challenging, but you can find them,” said Cassel. She declined to name the institutions, saying that publicity would be counterproductive.
State-chartered banks are more likely to consider helping the industry, she said, because the regulations for them are not as severe as they are for federally chartered banks.
Ed Novak, spokesman for the Pennsylvania Department of Banking, said he couldn’t comment on such claims. He added that the issue is squarely with Washington, D.C.
“This is entirely a federal issue,” Novak said. “This is not our issue.”
After the Sessions memo was published, Gov. Tom Wolf denounced it as misguided. Essentially, the memo reminded U.S. Attorneys that marijuana still is a Schedule 1 controlled substance under federal law and that they were free to prosecute violators as they needed.
“The Trump Administration must put patients’ rights first, and I will not stand for backwards attacks on the progress made in Pennsylvania to provide medicine to those in need,” Wolf said in a prepared statement shortly after the Sessions memo was released.
The Reuters news agency reported on Jan. 11 that the Sessions announcement created widespread confusion. Inquiries flooded the Financial Crimes Enforcement Network, or FinCEN, about how to handle banks and credit unions that had already taken steps toward offering services. The news agency said about 400 banks and credit unions, mostly small institutions, were operating in ways to help the industry. Reuters reported that FinCEN, which is part of the U.S. Treasury Department, could not answer the questions because it had no advance warning of the Sessions memo.
Meanwhile, Pennsylvania has continued to license grower/operators and dispensaries.
Ryan Smith is COO at Cure Pennsylvania, which is building a dispensary in Manheim Township, Lancaster County off Fruitville Pike, as well as in other Pennsylvania communities.
“For us, we are working with a local bank,” Smith said. “We have armored-car pickup, employees don’t have to carry cash. It’s expensive compared to other business. But we want to be as compliant as possible with local or federal regulations.”
Smith, who would not disclose the name of his bank, said the Sessions memo took nearly everyone by surprise. But support for the industry has come from both sides of the political aisle. Ironically, he added, the Sessions memo might accelerate a legislative fix.
“It might be what finally pushes federal legislation over the hump,” he said.
While some banks are willing to venture into the new industry, he said, they have to do so by charging higher fees. The Washington Post recently reported that one such bank is Maryland-based Severn Bancorp, which assesses high fees and other charges to cover the higher costs of meeting regulations.
“With any business, the more friction, the more red tape, it costs more money, and you have to charge more to your customers,” Smith said. For an industry that is designed to help sick people, that doesn’t make sense, he added. “The less expensive it is to run our business, the less expensive the medicine.”
Smith envisions a fix that could be similar to the way alcohol is regulated: state by state, where local authorities know their communities the best. The federal government would just need to get out of the way.
“Let the states handle it,” he said.
So far, Pennsylvania has done an “incredible job” in setting up the new industry, he said from Colorado, where Cure also does business. Allowing banking would help control all aspects of the operations.
“We want to be 100 percent compliant. We want to do the right thing, we want to follow the letter of the law,” he said. “Nobody wants to pay people in cash, no one wants to pay vendors in cash. We want to pay our taxes.”
Several community-based bankers in Pennsylvania said they had no interest in delving into the new industry until the federal government provides a fix. Other pharmaceutical companies routinely produce and deliver all sorts of technically illegal drugs, such as opiates, but are able to do so under tight regulations and rules from the federal government.
However, such guidelines have been absent for the new marijuana-based pharmaceutical industry. While bankers said they recognize the medical marijuana industry has potential for growth, they are not willing to risk running afoul of federal authorities.
“My experience in this area is that most of the banks do not have any interest in taking the risk,” said Eugene J. Draganosky, president and CEO of York Traditions Bank, which is based in York Township. “And it is unforeseen how the federal regulators are eventually going to handle this.”
Currently, federal rules require banks and lending institutions to report any suspicious activity or if they suspect that money is coming from illegal drug trades, he said.
“When you deal with a company that deals with cash, you have to know your clients,” Draganosky said.
If a medical-marijuana facility is depositing large amounts of cash, then the bank has the duty to produce a Suspicious Activity Report, or SAR, creating a regulatory and paperwork nightmare, he said. Another issue is whether the banks would be required to look beyond the surface. For example, would employees applying for mortgages be eligible for a loan if their paychecks are coming from a marijuana-related industry?
“How far do the tentacles go?” he said. “What about the worker who works at the growing facility? It’s a mess.”
Draganosky said he had heard of a credit union that was willing to take the chance but was doing so because it thought the rewards outweighed the risks.
“I just wish the federal government would rule on this,” he said, adding that a new pharmaceutical industry holds great promise for Pennsylvania.
Smith agreed, pointing out that medical marijuana businesses also need insurance, accountants, lawyers, office suppliers and all the other vendors that any business needs to operate.
“Just let us run our businesses the way everyone runs their businesses,” Smith said “It will be better for everyone.”