For decades, the business of marijuana has been managed under the table by illegal drug dealers, smugglers, and organized crime. With an increasing number of states legalizing or decriminalizing marijuana, the Fed hopes to keep those shadowy players out of the new, legalized marketplace.
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To do that, and at the same time clear the way for new, legal marijuana business, the Fed is turning to an unlikely ally: banks.
The business of marijuana
Estimates put marijuana industry revenues at $3 billion annually, and growing. At present, nearly all of that revenue is in cash. Twenty-three states and the District of Columbia have either legalized or de-criminalized marijuana; today, more than 200 million Americans have legal access to the plant.
But very few banks are willing to accept the business of the legal marijuana industry. The problem is, while many states have taken steps to legalize marijuana, the federal government still officially considers it an illegal drug. The current policy is to defer to the states; however a new administration could reverse course in the future. Without a more permanent policy from the federal government, banks don't want to take the risk of future prosecution.
For legal marijuana dispensaries and farms, storing all of that cash creates huge risks for embezzlement and robbery. With potentially hundreds of thousands of dollars sitting in the back room, these business are obvious targets for potentially violent crimes.
The Fed's newest allies
During the past year, officials from the Treasury Department's Financial Crime Enforcement Network, commonly called FinCEN, have been encouraging banks to accept business from this industry. FinCEN published instructions for banks on doing business with legal marijuana businesses and maintaining compliance with federal law more than a year ago. They've also met privately and encouraged banks to engage with the industry. Their motivation is multifaceted.
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Clearly, Treasury officials want the industry to join the traditional financial system to better track revenue -- and then tax it. At the same time, the Treasury recognizes the public safety hazards of these businesses dealing in hoards of cash instead of secure bank accounts.
But many argue there's another, critical motivation: keeping organized crime out of the legal weed business.
The best anti-money laundering systems in the world
In 1970, the Bank Secrecy Act was passed into law. Forty-five years later, that act has grown to be one of the most rigorous regulations governing the banking industry.
The Bank Secrecy Act requires banks to assist the government in rooting out and preventing money laundering. That meant something totally different in the cash and check world of 1970 than it does in today's digitized financial system. The difference is plain to see in the massive investments modern banks make to comply with the law.
Banks spend hundreds of millions of dollars to develop and deploy highly complex computer algorithms and employee protocols to prevent money laundering. For the largest banks, this means tracking trillions of dollars in commerce all over the world, every single day. Banks maintain dedicated staffs of PhDs, computer scientists, and statiticians to stay a step ahead of the criminals seeking to layer and integrate illegal money into the legit financial system.
With so much experience and expertise, the banking industry is the obvious choice to prevent organized criminal networks from infiltrating legal marijuana, and using it to launder money or expand their illegal activities. If the Treasury can convince banks to do business with the legal marijuana industry, that would essentially funnel the industry's revenues through the bank's anti-money laundering departments and stop organized crime in its tracks. The banking industry is the unlkely hero for keeping organized crime out, and legitimate businesses in.
Waiting on Washington D.C.
Across the board, though, bank executives have stated that, until marijuana is officially given the "go-ahead" by law, they won't be doing business with the industry. Citigroup, JPMorgan Chase, Wells Fargoand a whole host of others have all publicly stated as much.
Until the law is clarified one way or the other, the legal marijuana business will continue to be nearly exclusively cash-based. With elections looming a short 18 months away, it's likely that this issue won't be fully resolved until at least 2017. Until then, banks and the legal marijuana industry will just have to watch and wait.
The article How the Fed Is Using Banks to Keep Organized Crime Out of the Legal Pot Business originally appeared on Fool.com.
Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup Inc, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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