Doing Business in the Age of Marijuana – Risks and Rewards – Part 1

Doing Business in the Age of Marijuana – Risks and Rewards – Part 1

Doing Business in the Age of Marijuana – Risks and Rewards

There’s a standoff escalating around us. It involves vast amounts of money, drugs, culture, illness and health. State by state, the lines of alliance are being constantly redrawn around perhaps the biggest emerging industry of this generation.

Marijuana has become sanctioned across a growing number of states, dominoing out from California, which first legalized medical use in 1996. Marijuana is now legal to some extent in 29 states, including Ohio and Pennsylvania, the most recent additions. Opposite this movement, the federal government still holds the drug as a Schedule I banned substance under the Controlled Substances Act. By the laws of supremacy, enforcing federal law could invalidate state laws and snuff out all progress virtually overnight – killing a giant of industry in the process.

Hopefully, the feds will wait until there is a critical mass of support – which we seem to be rapidly approaching – and sweep in to ratify and regulate the marijuana industry. In the meantime, businesses positioning themselves to cash in on the promising enterprise must consider a situation rife with uncertainty and a laundry list of restrictions.

The Banking Conundrum

Most of a business’s cash flow finds its way to a banking institute sooner or later. In the marijuana industry’s infancy, banks were these businesses’ only option, which was no option at all because of heavy regulation under the Federal Reserve, where the cannabis industry is illegitimate. Most banks, then and today, do not accept funds from marijuana-related ventures and refuse to allow those businesses to open accounts or deal in credit. In 2014, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidances clarifying the Bank Secrecy Act and expectations for financial institutions seeking to provide services to marijuana-related businesses. The guidance implicitly authorized providing financial services to marijuana businesses subject to certain reporting requirements. Despite this guidance, most financial institutions continue to refuse to do business with those in the marijuana industry.

You’ll hear stories of cannabis businesses hoarding duffel bags full of cash, with no way to convert it all to fiat. Many still operate this way today, although alternatives are beginning to emerge. Some private credit unions now risk violating the Bank Secrecy Act (BSA) to service marijuana businesses. And some institutions use closed-loop payment systems (in which a digital fund transaction is made on a local network without connection to public internet) to avoid exposure.

Still, these alternatives are the exception and most people transacting business with a marijuana-based company should expect to deal in cash for the time being. Interestingly, even credit card purchases remain difficult, as the purchase code for a marijuana product does not yet exist.

 

Professional Services and Guilt by Association

Any professional service handling the finances or property of a marijuana business risks running afoul of professional ethics standards, state board regulations, and a robust body of federal law. A tax accountant could be found guilty of aiding and abetting their client’s illegal sale of illicit drugs. A payment processing company could be prosecuted for money laundering. So the risk extends beyond the marijuana industry itself to all ancillary services – even those that are legitimate and necessary for operation.

Currently the risk of prosecution to these ancillary services is low, especially in Ohio, as the congressional budget as it stands prohibits the Department of Justice (“DOJ”) from prosecuting any person or entity lawfully complying with a State’s legal medical marijuana scheme. So long as businesses in Ohio continue to comply with Ohio’s medical marijuana statute, and this provision remains in the federal budget, the actual risk of prosecution is low.

 

Insurance Risks

Because of the risk, many service providers either cannot or will not do business with marijuana companies – insurance companies key among them. Insurers have an industry-standard gap in coverage for illegal activities. Catering to marijuana businesses would require a marijuana-specific carve-out, and many insurers choose not to invite the hassle or risk.

The limitation on coverage means that many marijuana businesses are underinsured or completely uninsured on top of their associated legal risk. Those providing services to the cannabis industry might also have gaps in their own professional liability insurance when dealing with such ventures, depending on their policy’s definition of “illegal activity.”

It’s no wonder many entrepreneurs choose not to get involved in the cannabis industry, either directly or indirectly. Yet, for a number of intrepid businesspeople, the rewards far outweigh the risks. In the next installment of our marijuana business blog series, we will explore considerations for those betting the odds and getting involved.

About Alex Gertsburg

At Gertsburg Law, our attorneys have a comprehensive understanding of the countless issues facing businesses on a daily basis. Most of our experienced attorneys in the Chagrin Falls and Cleveland offices are former business owners and in-house counsel, bringing a unique perspective and depth of knowledge to their skill set. We will work with you to understand your goals and to find the right solution for your organization.