Banking on marijuana

State ‘laundering’ money from pot sales another strange aspect of legalization

Colorado’s experiment with legalizing marijuana is predicated on the Obama administration’s decision essentially to look the other way so long as the state acts responsibly and regulates pot sales and use. It is a precarious foundation on which to build an industry – or a tax base.

That is perfectly illustrated by the way money from marijuana sales is handled. And it has put the state of Colorado and its bankers in an odd and amusing position.

Regardless of what Colorado voters said, marijuana is still classified as a Schedule 1 drug under federal law – the same as heroin. So banks, which are federally regulated, cannot touch the money generated by marijuana sales or in any way get involved with the business of selling pot.

What that means is that, although legal, businesses selling marijuana cannot get loans or accept credit cards or checks. They are in every respect strictly cash businesses.

That is dangerous. The last thing a business owner needs is to have criminals convinced that the firm has a pile of cash there for the taking. There have been robberies of dispensaries in Denver and a particularly gruesome episode in California in which a store owner was tortured.

But as The Denver Post reported Sunday, there is another, stranger result. State government recognizes the voter-approved legalization of medicinal and recreational marijuana and happily collects a hefty sales tax – $15 million in the last two years – with more expected now that recreational sales are permitted. The state takes that money, in cash, shakes off the seeds and stems, and deposits it in one of the banks with contracts to handle state funds. And the banks, receiving the money from a duly constituted government, are apparently good with that.

It is unclear, however, why. As the Post reported, “There are no rules, no memos, no opinions, no laws or anything else that officials can point to that clearly says the state can bank pot-derived income.”

Except, of course, that the state has to put the money somewhere. One does not keep millions of tax dollars in a drawer.

The result is that, by federal rules, the state could be seen as laundering money – as could just about everyone else involved. After all, if income from marijuana sales or the tax on them is tainted money, why would that thinking not also apply to a pot store’s employees’ pay or the rent paid to the store’s landlord?

Trying to extend that thinking highlights the absurdity of the situation. And it is only going to get worse.

State officials hope for some kind of federal fix before too long, perhaps in the first quarter. But that should not be limited to tweaking banking regulations. Barring some unforeseen disaster in Colorado or later this year in Washington state, which also voted to legalize recreational marijuana, it is likely that more states will legalize pot. And so long as marijuana remains a Schedule 1 drug under federal law, the underlying contradictions of this situation will persist.

According to a CNN story from Saturday, besides Washington and Colorado, 18 other states and the District of Columbia already allow some form of legal marijuana use. It is hard to imagine that trend reversing any time soon. And at this point, it only makes sense to eliminate marijuana’s incongruous legal status.

The idea that the state is laundering drug money while bankers wink and nod is amusing, but the underlying situation is pointless. Moreover, by forcing businesses to rely exclusively on cash, it is dangerous. Congress should change marijuana’s status to reflect reality, and do it soon.