Banking on Pot: Arizona's Banks and Medical-Marijuana Dispensaries Seek an Unprosecutable Relationship

Finding banking services for his business, Encanto Green Cross, has been difficult for Nick Kriaris.
Finding banking services for his business, Encanto Green Cross, has been difficult for Nick Kriaris.
Ray Stern

On a recent Friday afternoon, Nick Kriaris, owner of Encanto Green Cross medical-marijuana dispensary in Phoenix, and his brother, Chris, tried to open an account at Bank of America for their nonprofit business with $420 in cash.

The attempt at the bank branch at 3030 North Central Avenue was, to some extent, a stunt, from the pot-culture-inspired amount of the initial deposit to the dispensary employee videotaping his bosses. They knew the odds of success were minimal, if not zero.

But if the bank agreed to take the medical-marijuana retail shop's money, it would have been something of a minor historical moment. Although dozens of dispensaries are authorized to operate in the state, no bank will deal openly with them -- yet.

At first, things went smoothly.

The young bank representative behind the desk was gracious and happy to be able to open a new business account. The hopeful businessmen tried to be as transparent as possible. The brothers, both in their late 40s, wore black T-shirts with the dispensary's logo, featuring a cross with a green marijuana leaf in the middle. Nick Kriaris presented his certificate to operate, issued by the Arizona Department of Health Services, and required business documents. The representative got a woman from the bank's credit card services office on the phone, because Kriaris wants to offer his customers the same convenience of any other retail outlet.

"They have all their paperwork -- they're doing quite a bit of transactions," the bank representative told the woman. "It's a medical-marijuana dispensary. Mm-hmm. Okay. They're licensed through the state and everything. I could fax all that to you if you need it."

Then he hung up. "She says she'll call back."

Seemingly, the bank rep was the only one who didn't realize the transaction wasn't really going anywhere.

"I haven't heard of any problems with dispensaries," he said. But then the woman called back and told him that no bank account could be opened. A message on his computer screen followed, stating that this type of business is restricted. A branch manager walked over and apologized, saying he had just gotten off the phone with the "back office," which told him the account couldn't be opened. He'd also phoned other local bank managers and heard the bank had turned away similar businesses.

Back at Nick Kriaris' dispensary, near 27th Avenue and Thomas Road, the businessman discussed previous attempts to obtain financial services. Once, he was given a large check written from a Chase bank account to the dispensary. Chase wouldn't cash it, and the teller told him the bank didn't serve his "kind" there, he says.

"I told her, 'You better rephrase that,'" he said. She apologized, but the bank wouldn't budge, forcing him to ask the issuer of the check to cut him another check to a different name.

That's one way the game works, anyway. Kriaris won't go into details, naturally. He told another story, this one about the day one of the accounts he used closed. The bank called him in, having figured out that the account was tied to the dispensary and said it had transferred all of the dispensary's money -- an amount well into six figures -- into his personal account at the bank. Then, it closed that personal account and issued him a cashier's check.

"The president came down, actually. I started complaining. I said I'm not leaving with this check -- are you kidding me?" Kriaris recalled. "That's a big check."

The next problem was finding a bank in which to deposit the funds. Kriaris found a bank by opening an account in the name of another company he owns that doesn't appear to have anything to do with marijuana.

The name of his dispensary is "red-flagged now," he said.

Yet his dispensary accepts credit and debit cards. He pays his employees by check. The company he used to get the account issues checks and makes bank deposits both in cash and by check.

It's all on the sly -- an odd position for a legal, state-authorized business to be in.

"We're under the radar. Maybe you have a different LLC that's owned by something else," he said, describing in vague terms some of the methods he must use to work with a bank. "But I'm always the type -- I like to be open, straight, and honest. Why should I have to do [business like] that?"


The interior at Encanto Green Cross, which accepts cash only. There is an ATM in the lobby.
The interior at Encanto Green Cross, which accepts cash only. There is an ATM in the lobby.
Ray Stern

The medical-marijuana industry in Arizona generates millions of dollars that no bank will openly touch.

That this is the case appears odd at first glance.

In 2010, voters approved the Arizona Medical Marijuana Act, giving qualified patients the right to possess up to 2.5 ounces of pot at a time to treat their symptoms and setting up a system of cannabis retail shops where patients can buy up to that same amount every two weeks. The state Department of Health Services oversees the program.

The state's nonprofit dispensary program had a slow start, stalled intentionally by Governor Jan Brewer and by state Attorney General Tom Horne (both of whom are preparing to leave office). But following a pair of key court decisions, the first dispensary in the state, Arizona Organix of Glendale, opened in December 2012.

Now, at least 83 dispensaries are in operation, with some ringing up hundreds of thousands of dollars in sales annually from about 53,000 patients. Industrious certification doctors may be collecting $1,000 a day or more from patients. Numerous entrepreneurs are providing ancillary services, from making concentrates or infused edible products to growing the perfect strain of cannabis sativa. All of these struggling small-business owners have one thing in common, besides their stated love of helping people with medical herb: They have no legitimate place in which to put their money.

At the same time, they all use banking services to a certain extent, limiting how much cash they handle.

It's a Catch-22 for the cannabis companies: They can't legally operate bank accounts, and they can't operate their businesses without bank accounts.

Like Encanto Green Cross, most dispensaries in the Phoenix metro area take credit and debit cards and utilize banks. It's impossible for a small business to make regular payments in cash to the IRS, utilities, municipalities, vendors, suppliers, and employees. For the patients/customers, the convenience of payment cards is nothing more than they expect at every other retail outlet.

So every dispensary does all this without any overt and open relationship with a bank. This method of banking, arguably, could be defined as money laundering.

Everyone agrees there is risk of prosecution or asset seizures -- but how much risk is uncertain. Each positive sign that the marijuana industry is about to be fully accepted by financial institutions can be countered by a potential problem.

Overall, the movement toward marijuana legalization shows no sign of slowing. Thirty-two states plus Washington, D.C., now allow the legal use of marijuana for medicinal reasons. Retail marijuana shops for adults 21 and older have opened in Colorado and Washington state. In November, Oregon, Alaska, and Washington, D.C., voters approved recreational use and cultivation of the plant.

Although certain banks and state-legal cannabis companies have worked together for a few years now, albeit unknowingly at times, neither the federal government nor banking authorities show much interest in prosecuting the financial institutions.

Just this month, a groundbreaking pro-cannabis law was approved by Congress in a spending bill and signed by President Obama. It prohibits the U.S. Justice Department from spending funds to prevent Arizona and other states from implementing their programs to use, distribute, possess, or grow medical marijuana.

It's a new day in America. Almost.

No law prevents the banks from accepting marijuana-themed clients. The problem is that marjiuana still is a Schedule One drug under the Controlled Substances Act, technically illegal under federal law despite increasing legality among states including Arizona. The Rohrabacher Amendment in the new spending law applies only to the 32 states (plus D.C.) that it names, and it says nothing specific about banking.

The Arizona U.S. Attorney's Office, which prosecutes criminal cases based on federal law, declined comment for this article. The U.S. Justice Department told New Times that the agency is "currently reviewing the legislation."

Banks may want to help marijuana companies, since they'll make money in the process. As a whole, the U.S. industry was worth about $2.5 billion this year and may triple in volume by 2018, according to one widely quoted estimate by Marijuana Business Daily, a Colorado-based online publication.

But banks are scared. If the feds change their minds, if the Rohrabacher amendment isn't renewed next year, if an anti-marijuana U.S. president gets elected in 2016, if attempts to regulate the sale and distribution of marijuana don't work out -- well, the whole industry conceivably could come crashing down. Banks, their assets, and their shareholders, could be in trouble if they openly provide services to the industry.

Last February, the feds, hoping to ease the ongoing financial challenges of these state-legal businesses, suggested guidelines for banks on how to serve the cannabis industry. The guidelines note that the banks still would be taking a legal risk.

So far, no daredevil bankers in Arizona have stepped forward to begin accepting such clients openly.

Any that do can expect an avalanche of new business -- for better or worse. Meanwhile, the state's medical-cannabis businesses must continue to do their banking in the shadows.

Exactly where voters didn't want them to be.


Will Humble, director of the state's Department of Health Services
Will Humble, director of the state's Department of Health Services
Ray Stern

The banking problem has been with Arizona's medical-pot program from the beginning; New Times mentioned it in a November 25, 2010 article about the voter-approved law.

Wells Fargo told New Times at the time it wouldn't "bank" dispensaries because they're illegal by federal law. Four years later, the bank hasn't changed its position.

As soon as marijuana businesses formed in the wake of the new Arizona law and tried to open accounts, banks shut them out.

One local doctor recalls that bankers, landlords, and other businesspeople initially refused to provide services to a new company the doctor had formed to write pot certifications.

Then, "I got smart," the doctor said. The certification company now conducts its banking using the aforementioned method: It's done through another company that has a generic, health-oriented business name that doesn't hint at anything cannabis-related.

"This is a problem. It [requires] a work-around, and it's a concern," the doctor said. "I don't feel like I'm doing anything illegal" with the work-around.

Neither do dispensary operators who practice a similar scheme for banking needs. That is, they keep who they are and what they are doing hidden from the financial institution through various means. Their methodology isn't quite right -- it's the system they've been forced into.

But law-abiding operators of state-authorized marijuana businesses have little to worry about, judging by federal authorities' lack of interest in busting them. Which is fairly amazing, considering that this activity would have resulted in federal convictions a few years ago -- and still results in federal convictions and prison time for offenders in states that don't have legalized medical marijuana.

"Let's be honest -- this is a gray area," said Greg Lambrecht, a local entrepreneur familiar with the challenges.

Lambrecht is founder and president of Singlepoint, a public company that helped launch GreenStar Payment Solutions of Denver, a firm that has received press for providing debit card services to dispensaries in Arizona, Colorado, and other states. Using GreenStar's system, patients use their debit card at the checkout counter of a dispensary, and the money, he said, "goes from the patient's debit card account to the dispensary's account."

He acknowledged, however, that banks on either end of that transaction probably don't know -- or at least claim they don't know -- that marijuana transactions are occurring.

"If the banks know or see that this cashless ATM transaction is happening and they feel like its putting them at risk, they'll shut [the transactions] down," Lambrecht said.

Similarly, "when they do see it, and they decide not to shut them down," Lambrecht knows the banks have accepted GreenStar's solution.

He doesn't know whether that's happened yet.


Paul Hickman, Arizona Bankers Association president and CEO
Paul Hickman, Arizona Bankers Association president and CEO
Courtesy of Paul Hickman

Greg Lambrecht and other industry representatives look forward to a time when legitimate pot companies receive the same banking services as, say, flower shops.

In the interim, pot businesses are encouraged by the federal government to try to cultivate relationships with banks by being as straightforward and honest as possible.

That honesty contains inherent risks, though, because in an open partnership with a bank, a marijuana-related business would provide the bank with paperwork containing evidence of acts forbidden under federal law. Every time a dispensary cash register records a transaction, an illegal sale of marijuana occurs under the letter of federal law.

In an example of one facet of the U.S. government acting contrary to the legal dictate of another, a February announcement from the U.S. Treasury Department's Financial Crimes Enforcement Network, stated that banks and pot businesses should work together.

FinCEN's "guidance" memo to the public states that its intent is to "enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses."

As long as marijuana companies follow the Obama Administration's advice from the August 2013 memorandum by Deputy Attorney General James Cole, they should be okay to bank, FinCEN said. It should be noted that the memorandum didn't change the federal statute making marijuana illegal.

The "Cole Memo" stated that as long as states with legalization or decriminalization laws prevent marijuana sales to minors and drug cartels, keep pot out of states that haven't legalized it, and take other precautionary steps, the people involved probably won't be prosecuted.

Normally, banks submit "suspicious activity reports" every time a bank employee suspects illegal activity could be associated with an account or a bank transaction.

However, this year's FinCEN rules allow a bank to file special "Marijuana Limited" SARs with the government for marijuana-related account holders.

In such reports, the fact that marijuana was sold would be acknowledged officially -- but no enforcement action would be taken unless the businesses were seen to have "red flags" mentioned in the Cole Memo.

The goal of FinCEN guidance is to reduce the likelihood that financial operations of marijuana businesses will "move underground and become more difficult to track," FinCEN director Jennifer Shasky Calvery said in an August public statement.

From February to August, Calvery said, the "marijuana limited" reports showed that 105 financial institutions were "engaged in banking relationships with marijuana-related businesses . . . So, from our perspective, the guidance is having the intended effect. It is facilitating access to financial services while ensuring that this activity is transparent."

FinCEN won't release the names of the 105 banks, however, and the banks aren't outing themselves. Cannabis businesses see banking services they manage to obtain as company secrets, fearing that banks will lose interest if their actions become public and close accounts.

Very few banks nationally have declared themselves pot-friendly. First Security Bank of Nevada is one that has. Earlier this year, it began opening accounts for dispensaries, cultivators, and other cannabis-related businesses, but so far it reportedly has dealt only with Nevada firms.

Ryan Hurley, a Valley attorney who works with marijuana-related businesses, believes the Nevada bank could accept deposits from Arizona dispensaries if it chose to. John Sullivan, president of First Security Bank of Nevada, didn't return messages.

In Colorado, the Fourth Corner Credit Union, created to serve the state's cannabis industry, obtained a state charter last month. A final hurdle remains: approval from the Federal Reserve System.

Numerica Credit Union, based in Spokane, Washington, announced in May that it would begin serving a select few cannabis clients for the state's regulated recreational industry.

Last month, Randy Williams of Fireweed Farms made headlines - and more than $600,000 - in a public auction of about 300 pounds of marijuana. New Times asked him how he handled the basic finances of the deal.

"All of it is in the Numerica Credit Union," he said. "They are one of a handful that will accept my deposits. Most of my sales were paid with checks, only [$100,000] was in cash."

Hurley said he's heard that M Bank of Portland, Oregon, soon will accept Arizona clients. An M Bank representative didn't return a call on the issue.

Companies in Arizona, California, Colorado, and other states that have decriminalized pot apparently have no current above-board options.

The financial institutions actually doing open banking with marjiuana companies are rare and could be considered experimental.

Because here's the rub: the Cole Memo states that no one can use the memo as a legal defense of any kind and that the government reserves the right to prosecute anyone for a marijuana offense if that prosecution "serves an important federal interest," which obviously could be defined as anything.

There's an interesting exception to the general rule in Arizona of no obviously pot-related bank accounts: Bank of America is the contracted "servicing bank" for the state Treasury Office, meaning it's where the accounts for the state's medical-marijuana program reside.

As Will Humble, director for the state DHS confirmed, fees for patients, caregivers, dispensary agents, registration certificates, dispensary licenses, and annual renewal of those licenses, are processed through B of A.

No fees come directly from the sale of medical marijuana, Humble said, but a dispensary license authorizes the business to distribute marijuana under state law.

The fees add up, too: More than $7 million is sitting in the state's medical-marijuana fund in B of A -- in spite of the policy preventing Encanto Green Cross from opening a small-business account.


Former RepublicBankAz president Bob Regan says dispensaries and banks are working together surreptitiously with a "wink and a nod."
Former RepublicBankAz president Bob Regan says dispensaries and banks are working together surreptitiously with a "wink and a nod."
Ray Stern

In Arizona and elsewhere, permanent solutions seem remote. For starters, no one knows how long, if ever, it will be before cannabis is legalized on a national level.

The Obama administration "can say whatever it wants" about tolerating cannabis companies using banks, but its policy "could be overturned," said Paul Hickman, executive director of the Arizona Bankers Association.

It's not that his organization's members don't sense an opportunity.

"They recognize a multi-billion-dollar industry when they see one," he said. It's inevitable that banks will take on cannabis clients, he said, but "you're not going to want to be the first guy out there."

At the least, he said, banks could have their ability to operate yanked or their insurance denied under the rules of the Federal Deposit Insurance Corporation.

Yet Hickman believes that the legalization movement is too far along to tolerate criminal prosecutions of banks for servicing state-legal marijuana businesses.

Because of the acute need for dozens of existing state-authorized canna-businesses in Arizona, plus the potential for banks to make money, experts including Hickman predict that financial services could open years before changes in federal law.

This would be a good thing, since the current arrangement between banks and Arizona dispensaries is one that nobody wants.

New Times talked to several dispensary owners who have had their accounts shut down by banks.

Despite the shell game when cannabis businesses use an affiliated non-cannabis company to hide who they really are, industry representatives say banks tend to grow suspicious over time.

Sometimes, bank employees, perhaps hungry for commissions or bonuses based on the number of new accounts opened, work with dispensaries with what Bob Regan, former president of RepublicBankAZ, called a "wink and a nod." Even such deals could get a bank in trouble, he said.

Typically, someone, perhaps higher up at a bank, might do extra research, ask questions, and -- account closed. Banking is a highly regulated industry to keep both organized crime and terrorist organizations out of the U.S. financial system. Every bank and financial institution in the country can be physically examined by agents from the Office of Controller of the Currency (a Treasury Department division) or from the FDIC, Regan noted.

"They can ask for explanations at any time," said Regan, who runs a consulting firm. "'What are you doing with this customer, who is this customer, and why are you doing business with them today?' You can be compliant with FinCEN, but that does not make you compliant with all federal regulators. It puts the bank, its capital, and its shareholders at risk by doing business with someone who deals with a controlled substance.

It would help, he said, if "our state [put] pressure on the federal government . . . to change the schedule of the drug."

As it stands, marijuana remains ranked under federal law with dangerous drugs like heroin and meth.

And yet the momentum nationally is toward greater, not lesser, acceptance of pot.

Banks could make a decision to work with authorized cannabis companies on a case-by-case basis, said Michael Hannum, co-chair of the Greater Phoenix Chapter of the Association of Certified Anti-Money Laundering Specialists.

Hannum said he believes that if a bank does that, it should practice "enhanced due diligence" on the company and "have a solid framework of ongoing monitoring to ensure the business remains aligned with any and all agreements" between it and the bank.

Although it's a hot topic with "a ton" of risk, Hannum said, "With the right controls and appetite, there is a way to move forward."


Kriaris tried unsuccessfully in December to open a Bank of America account Encanto Green Cross.
Kriaris tried unsuccessfully in December to open a Bank of America account Encanto Green Cross.
Ray Stern

All businesses are hard to run, said J.P. Holyoak, principal member of the Peoria dispensary Arizona Natural Selections. "But they've made this twice as hard because of all the bullshit regulations."

Holyoak said he "absolutely" uses banking services, but he admitted that they aren't conducted in the medical-marijuana company's name.

"There are banks in town openly doing business with dispensaries, but I'm not willing to say [which ones]," said the entrepreneur, whose secret cultivation warehouse was featured in a New Times blog post and photo slideshow in January.

"You don't have any anti-money-laundering protections," he continued. "All of the risks apply. And you have to report everything."

Arizona Natural Selections takes only cash from customers, but there's an ATM in the lobby. He scoffed at the question of how he manages all the cash: "Would I really tell a reporter that?"

The dispensary soon will offer card services through a "traditional merchant," he said. How that will work is something else he won't talk about.

Because an Arizona dispensary's staying somewhat in the dark is business as usual.

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