The marijuana industry just got a critical boost in its effort to become a massive and completely legitimate business. On Friday, two federal law-enforcement agencies released coordinated statements clearing the way for banks to take deposits from and offer financial services to marijuana producers and retailers without fear of prosecution for money laundering.
To say that this will ignite a revolution in the still upstart industry would be an egregious understatement. "It is imperative that this legal industry have access to banking the same as every other business sector," said Mike Elliot, executive director of the Medical Marijuana Industry Group. "To continue doing business on a largely cash basis creates serious safety issues for owners, employees, and customers."
An industry awash in cash
As the legal marijuana industry develops in Colorado and Washington -- click here to access our recent in-depth series on the business of legal marijuana -- entrepreneurs have run up against a major problem: Banks won't provide them financial services or, for that matter, even accept their deposits, leaving retailers and wholesalers awash in copious amounts cash.
The reason is that marijuana remains an illegal drug under federal law. As a result, banking statutes and regulations make it a crime for financial companies to handle the proceeds of any business engaged in the production, distribution, or sale of the drug. In short, it would be considered money laundering.
While the coordinated guidance issued at the end of last week by the departments of Justice and Treasury doesn't change this, it does send a strong signal to financial institutions that they won't be prosecuted for providing services to the marijuana industry so long as their customers don't run afoul of eight "enforcement priorities" laid out by the Justice Department in the middle of last year.
These include preventing the distribution of marijuana to minors, preventing revenue from the sale of marijuana from going to criminal enterprises, and preventing the interstate trafficking of marijuana, among others. Short of "significant" violations like these, the Justice Department is now instructing its law-enforcement officers to concentrate their "limited investigative and prosecutorial resources" elsewhere.
For participants in the fledgling field, this is a critical step -- assuming, of course, as I believe to be true, that banks heed the guidance. In the first case, it relieves business owners of the security and accounting issues associated with conducting business in cash. In the second case, it could very well be the first step in making additional capital -- i.e., loans -- accessible to those in the industry. The latter in particular would serve as a potent catalyst for growth and expansion.
Does this mean the nation's banks will soon become accomplices in the drug trade? Yes and no. It seems safe to assume that many community banks will jump at the opportunity to curry more business, especially if it equates to a substantial increase in demand deposits like checking accounts, which pay little to no interest.
By comparison, the risk/reward analysis will be different at the nation's largest lenders. Just last year, Bank of America (NYSE:BAC) struggled over the decision of whether it would provide banking services to the state of Washington -- that is, the government itself -- given that a portion of the state's tax revenues derives from excise and sales taxes on marijuana. The Charlotte, N.C.-based bank eventually decided to do so, but the controversy alone spoke volumes.
Meanwhile, in response to a reporter's inquiry on Friday, a spokeswoman for Wells Fargo (NYSE:WFC) said that "It is currently Wells Fargo's policy not to bank marijuana businesses, based on federal laws -- under which the sale and use of marijuana is still illegal." Though, to be fair, she did qualify the statement by noting, "We are reviewing the guidance."
It's still too early to say what the impact of these nonbinding guidelines will have on the banking industry. However, there's much less ambiguity about the significance of this to people in the marijuana business. Love it or hate it, the momentum behind this movement is clearly growing.
John Maxfield owns shares of Bank of America. The Motley Fool recommends and owns shares of Bank of America and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.