Entrepreneur Chaz Cornellier says that in his line of work, obeying the law doesn’t go unpunished. The owner of Organic Care of California, a cannabis retailer in Sacramento says he’s talked to five banks about opening up accounts. Those that haven’t turned him down flat offered onerous terms: one wanted a $25,000 retainer, would have limited his deposits to $500 a day and would charge a yearly service fee of 12 percent for the privilege.

Cornellier says he’s losing out to illegal dealers who take credit cards and PayPal, and are willing to conceal the nature of their companies from banks and payment processors.

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Eleven months after recreational marijuana use became legal in California and six years on from legalization in Colorado and Washington state, legal pot growers and dealers still can’t use banks the same way other businesses can. Since the failure of a California state legislative fix in August, the lack of a legal way to process anything but cash is an anchor dragging down businesses.

The banks have every reason to keep their distance. Cannabis products still are illegal under federal law, and federal anti-money laundering and anti-terrorism laws forbid banks from handling money generated from illegal activity. The Obama Administration did create a tortuous pathway for banks to serve cannabis businesses legally. The 2013 Cole memorandum, written by the U.S. Department of Justice, gave federal prosecutors more discretion not to pursue industry players and the financial institutions that serve them. And 2014 guidelines from the U.S. Treasury laid out rules that banks need to follow to serve canna-businesses, including a seven-part process for conducting due diligence on those customers.

None of that comforts Pat Lewis, COO at River City Bank. The Cole memorandum was scrapped by the Trump Administration in January 2018, and the Treasury guidance cross-references that now-extinct memorandum. In response to questions from Congress, a Jan. 31 letter from the Treasury clarified that the 2014 guidelines remain in place but that the department was reviewing those in light of the Cole memo’s reversal.

That puts banks on shakier legal ground given the power of individual federal prosecutors to decide which cases to pursue. “When banks process transactions associated with the business, they are laundering the proceeds of an illegal activity,” wrote Rob Rowe, vice president and associate chief counsel for regulatory compliance at the American Bankers Association in September. “Will they be prosecuted for it? That’s the great unknown.”

So the industry is a no-go for River City Bank. “Our risk tolerance level is pretty low here at the bank… it’s all about safety and soundness for our current and existing customers,” Lewis says.

In California, only a handful of banks — likely fewer than 20 — work with marijuana businesses, says Nicole Howell Neubert of Clark Neubert, a law firm that represents marijuana businesses and this year opened a Sacramento office. She declined to give the names of any that do because of the legal environment.

Those banks that do work with cannabis companies have judged that they can manage the risk, Neubert says. They do that by setting up robust compliance processes — meaning extra costs, which the financial institutions pass along to the customer. “They’re banks that are just a bit more entrepreneurial than your bigger national banks,” she says.  

The stakes in finding a banking solution are high. Cash businesses attract crime: Cannabis businesses can be targets, much like pizza deliverers who also take cash, says Chris Cox, owner of Sacramento-based BeGreenLegal, which consults with cannabis companies on business strategy, permitting and licensing.

Cox points to a recent weekend, when someone broke into a Sacramento manufacturing facility where a friend of his works and stole $100,000 of concentrate. He says it’s hard to know whether the thieves were after cash or product, he says. But stashes of bills in those businesses make them ripe targets for robbery. Off-the-books growers and dealers actually are safer since they don’t have their addresses listed on state agency websites, unlike their legal counterparts.

The state legislative analyst’s office projects tax revenues from cannabis products at $1 billion a year, an amount that could shrink if many businesses stay underground because it’s too dangerous to operate openly. In August, state legislation to get around the issue failed. State Senator Robert Hertzberg had introduced SB 930, which would have created a closed-loop banking system for the marijuana business. Special licenses would be issued to private banks designated as “cannabis depository institutions.” Marijuana companies could open accounts there to use for essential transactions, like paying vendors and state and local taxes, but couldn’t transfer balances to other banks. 

The bill sailed through the Senate on a 32-6 vote but in August was killed by the Assembly’s appropriations committee. One reason was cost — the committee calculated the bill would run $2 million a year to administer, but there was no guarantee that the limited banks wouldn’t be shut down by federal authorities. Another was that a new board and the California Department of Business Oversight would have had to enforce the bill’s provisions. Hertzberg press secretary Katie Hanzlik speculates that agencies may have been hesitant about such a large undertaking.

Hertzberg is “definitely interested in revisiting the issue” next year, Hanzlik says. Next year, they’d likely work early on with the affected agencies on the details, she adds.

The real solution is federal. Legislation has been introduced in the U.S. House and Senate that would prohibit federal regulators from shutting down banks that deal with cannabis companies. In June, amendments in both chambers that would have achieved those goals were shelved.

Meanwhile, Cornellier says the banking problem is a key reason his company isn’t realizing the returns that could be flowing from legalization. “Everyone thinks we’re rich,” he says. But since he opened in June it’s been tough going. “One day I’ll make $400. The next day I’ll lose $300. The next day I’ll make $1,200. The next day I lose $800…” But overall? “I literally have not made a dollar,” he says.