Beginning about five years ago, the legal domestic (USA) cannabis industry has grown exponentially. In 2013, it was reported that the revenues from sales of Medical (MMJ) and Recreational marijuana (MJ) were approximately $2.3 billion dollars. Estimated forecasts indicate that by 2020, annual revenues could range from a low of $35 billion dollars to a high of $120 billion dollars revenues, depending on which survey, projections, or forecasts you read.
Regardless of the enormous potential of the growth of the industry, there are significant obstructions that must be addressed and removed in order to sustain the current momentum and optimize the industry’s future performance. The MMJ/MJ industry is currently forced to do their business on a cash basis. This is largely due to outdated federal drug and banking regulations. There are two principal reasons why conventional banks do not allow dispensaries and all other cannabis related business to open and utilize bank accounts:
Marijuana and cannabis related products are classified as Schedule 1 narcotics. According to the Obama administration, the classification of Marijuana should be changed soon based on the legal medical use of Marijuana. Additional pressure to change the classification comes from over 20 states that have legalized the use of marijuana and there is a groundswell for change as additional states are engaged in legalization efforts. The federal classification changes are expected soon.
The other issue originates with business banking regulations relating to the Organized Crime Control Act of 1970 better known as RICO. The difficulty for banks is their requirement to comply with FinCEN rules and regulations (see reference # 3 in the Appendix). In a nutshell, when a repetitive cash deposit is made at a bank or if such deposits exceed $10,000 per deposit, the deposit transaction must be reported to the FBI and the U.S. Department of Treasury. On February 14, 2014 FinCEN issued Guidance to Financial Institution on marijuana business Clarification.
The FinCEN guidance provides that financial institutions can provide services to marijuana-related businesses in a manner consistent with their obligations to know their customers and to report possible criminal activity. In states that have legal dispensaries those individuals of criminal inclination have two principal methods of “laundering” money:
Take in $10,000 of daily revenue and yet deposit $40,000 (or more) to the bank account. This means that the business illegally “laundered” the excess funds from illegal activities and used the dispensary account to legitimize the excess funds so deposited; and
Purchase only a part of the marijuana inventory from state licensed growers and the balance of the marijuana inventory from a non-licensed (illegal) grower. The dispensary pays a lower rate for inventory that may be an inferior* product that sells at the same price of a certified license grown marijuana. The dispensary has lower inventory and a wider profit margin including cheating the state of a portion of its tax levy. *Non-licensed – illegal growers that don’t follow regulations, pay state taxes, and often deliver lower quality or potentially dangerous products.
The foregoing are the principal reasons banks continue to decline marijuana dispensary business. That means that after nearly a year into legal dispensaries, the banks are still not capitalizing on this very profitable and growing industry. One is reminded of the age-old question “what came first the chicken or the egg?” or “Trust or ingenuity?”
Fortunately for the Cannabis industry, various companies are closing the gap in terms of compliance support systems. Today many companies deliver software and hardware that provide auditing and complete transaction records “from seeds to sales”. This allows agencies to follow marijuana seeds until they are delivered to a dispensary, through software and hardware technology. These products and services are important but do not resolve the banking requirements.
Southern ITS International, Inc. (www.sitsint.com) has created the first “payment to sales” technology for dispensaries, called Greeniosk.
Greeniosk is a combination of hardware and software that provides a complete audit trail from the cash payment of the end user (client) to the deposit at the bank. Each transaction is processed through a secure kiosk that accepts all types and denominations of bills and prints a secure encrypted bar code on a voucher that is redeemed at the dispensing counter. The operation is simple and only requires the client to answer 3 qualifying questions (legal age for the transaction, valid state issued ID or driver license, and finally, in the majority of the states, if the client has a valid state issued medical marijuana card). After properly answering the 3 questions, the client accepts the legal disclaimer and inserts money in the Greeniosk bill acceptor. When the desired amount is inserted, the client presses the “print” button and the Greeniosk prints the voucher to take to the dispensing counter.
The Greeniosk kiosk functions accomplish several important tasks. It removes the handling of cash by employees thereby reducing risk of internal theft, since the money is now safely locked in the Greeniosk and can only be removed by authorized individuals or armored car vendors. An integral function of money removal from a Greeniosk is a complete audit report printout detailing each deposit transaction. The audit records not only report the amounts collected by the Greeniosk, but also report the denomination of each bill used for payment. If required, images of each bill inserted in the Greeniosk can stored in the Greeniosk database for additional audit trail purposes.
The vouchers tendered by clients at the dispensary counter for merchandise will be retained to provide the final audit trail process. The client identification cards are then verified at the dispensary counter by the dispensary employees through the Greeniosk ID scanner and database. When the voucher is redeemed, all the information about each transaction is then merged and retained in the Greeniosk database. It can then be available for the banking deposit substantiation and an accurate and complete audit trail of deposit funds.
One of the purposes of the Guidance Clarification Expectations of Financial Instructions Serving Marijuana Business is to provide Clarity to enhance the availability of financial services for the marijuana business. Greeniosk will allow them to create that compliance, auditing and more importantly establish a trusted relationship with the marijuana business owners.