Editorial: The perils of pot’s cash economy

Medical marijuana may be a billion-dollar industry in California, but it’s a cash business.

Because marijuana remains illegal under federal law, most pot shops can’t get bank accounts or accept credit card transactions because the financial services companies fear they would be penalized or shut down by federal regulators for handling money gained from unlawful drug sales. That means marijuana products are typically sold for cash, and dispensary owners pay their employees, their landlords and others in cash as well. It’s not unusual for pot shop owners to haul bags of money — tens and sometimes hundreds of thousands of dollars — to the state tax collector’s office.

But as unwieldy as the cash-only system is now, California regulators and cannabis businesses could be swimming in even more cash if voters pass Proposition 64 in November and the state legalizes adult recreational use of marijuana. California dispensaries sold an estimated $2.7-billion worth of marijuana last year, and industry observers predict the recreational and medicinal market could increase to $6 billion by 2020.

Proponents of Proposition 64 have drafted a logical, pragmatic plan for legalization, which includes a comprehensive licensing and regulatory system, and which the gives state legislators the flexibility to change the law to address unintended consequences. That’s one reason why The Times has endorsed Proposition 64. Marijuana is already easily accessible and widely used in California; it would be better for public health and for public safety if it was regulated and highly controlled for adult use.

But even proponents must acknowledge that as long as the marijuana industry is a cash business, it will be harder for California to regulate and control. And there is little state officials can do to fix the banking problem as long as the federal government considers marijuana an illegal drug and classifies marijuana revenues as illegal proceeds.

The problems are already apparent. Board of Equalization Chairwoman Fiona Ma estimates that the state collects only about a third of the taxes owed by existing medical marijuana businesses. And because cash transactions don’t generate a reliable paper trail, tax collectors have resorted to sitting outside pot shops and counting customers to estimate sales revenue and taxes. Proposition 64 proponents say a new “seed-to-sale” regulatory system created for medical marijuana, and which would apply to recreational cannabis as well, should make it easier for the state to track tax revenues.

Then there are the safety and logistical challenges of having so much cash on hand. Pot shops have been targeted for robberies and are often staffed with armed security guards.

In theory, banks have some cover for working with marijuana customers. The Justice and Treasury departments issued guidance on how banks could serve state-sanctioned marijuana businesses, as part of President Obama’s policy of allowing states to experiment with legalizing marijuana. But that doesn’t apply to independent bank regulators like the Federal Reserve or the Federal Deposit Insurance Corp. In practice, pot shops that are able to open accounts often find them shut down after a few months when the large cash deposits raise alarms, according to the National Cannabis Industry Assn.

There have been various attempts by states to facilitate banking services for cannabis businesses. In 2014, Colorado officials approved a charter for the first-ever credit union created specifically to serve marijuana businesses, but the Federal Reserve refused to grant a master account to conduct transactions from the illegal sale of marijuana.

California officials have also tried to devise workarounds. Ma, the Board of Equalization chairwoman, proposed creating a state bank to take cash deposits and allow businesses to make electronic transfers to pay their tax bills. But that wouldn’t address the larger goal of letting customers and shops conduct transactions without cash.

Ultimately, the solution will have to come from the federal government. Congress or the next administration could reclassify marijuana from Schedule 1 of the Controlled Substances Act (a designation meaning it’s as addictive as heroin and has no medicinal value) to a less-restrictive category that would allow banking transactions. Or Congress could bar federal regulators from penalizing banks that provide services to state-legal marijuana businesses.

Lawmakers from Colorado and Oregon have introduced bipartisan bills that would allow banks to start providing services to marijuana businesses that are licensed and regulated by the state, but they’ve failed to get traction in the House and Senate. If voters in California and four other states choose to legalize marijuana in November, how much longer can federal leaders ignore a multibillion dollar industry?

For a complete list of The Times’ endorsements for the Nov. 8 ballot, go to latimes.com/endorsements.

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