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Brian Stroh stands inside the beginning stages of his 2,000-square-foot facility, the third licensed marijuana growing operation in the state.

(Troy Wayrynen/The Columbian)

OLYMPIA -- Brian Stroh is not taking any chances.

Aware of the inherent risks associated with his line of work, Stroh pays monthly for armed security guards to assist him in guarded revenue transport and facility supervision. He’s planning to use lockboxes and a variety other methods to store his money, which he will keep away from his home and place of employment. And while he's taking major precautions, he’s even more worried about the people buying his product.

His business: marijuana production and processing, one of Washington's first to be licensed since the state legalized cannabis for recreational use.

His worry: the continued federal prohibition of marijuana, which prevents banks from offering any legal financial services to state-licensed cannabis businesses.

With marijuana retailers scheduled to open in June, prospective business owners are worried the state industry could be plagued with violent crime.

“It’s straight up dangerous,” Stroh said. “Anytime there is a known cash business, it puts everyone at risk.”

Initiative 502: A quick explainer

Initiative 502, approved by Washington voters in November 2012, legalized the recreational use of marijuana and established a state-regulated system for the drug’s production and sale. Washington residents over the age of 21 will be allowed to purchase up to one ounce of dried marijuana at state-licensed retail stores. The initiative applies a 25 percent excise tax to each level of marijuana distribution: from producer to processor, processor to retailer and retailer to consumer. State-generated revenue will be deposited into the dedicated marijuana fund, large portions of which are dedicated to the state health plan, the state general fund and the Department of Health’s substance abuse program. The state has already begun licensing producers and processors, and retail stores are set to open in June.

The banking question is the largest of several uncertainties swirling around implementation of Initiative 502, which passed in 2012 and legalized recreational marijuana in Washington state. Financial institutions are not ready to accept revenue from the sale of a federally illegal drug, meaning legal marijuana businesses in Washington could be left dealing with the difficulties and dangers of a largely cash-run system.

"We've got this entire marketplace that we're building from nothing," said Sen. Bob Hasegawa, D-Seattle. "A billion dollar marketplace out there, and it all has to deal in cash because it's totally un-bankable. That's just a magnet for armed robbery, murder and organized crime."

Stroh is working to protect his production/processing facility, but he believes retailers will face the biggest risk of violent crime because they’ll be responsible for protecting large amounts of both finished marijuana and cash.

“Young men and women taking service jobs are going to be there when the doors close at night,” Stroh said. “And there may be six figures worth of cash stored there. Everyone knows if they don’t get it solved, someone is going to die.”

New guidelines, but no clarity

The solution, Stroh and others say, lies with the federal government.

On Feb. 14 the Obama administration laid out an approved way for banks to work with marijuana businesses without federal intervention.

The administration guidelines were paired with a three-page memo from U.S. Deputy Attorney General James M. Cole stating that the Department of Justice will focus on prosecuting financial institutions which provide banking services to businesses that violate the department's "marijuana conduct priorities."

Those priorities, released last August following legalization measures in Colorado and Washington, include keeping marijuana out of the hands of children, preventing criminals from receiving revenue and keeping cannabis contained to states in which it is legal.

The memo said it “may not be appropriate” for federal prosecutors to go after financial institutions servicing pot businesses if they don’t violate any of the DOJ’s priorities.

However, federal regulators have not guaranteed banks legal protection from seizure or prosecution, leaving open the possibility financial institutions that serve marijuana-related businesses could be charged with money laundering or unlicensed money transmitting. Bank executives have said that until there is a more concrete change in federal regulatory policy, they will not touch marijuana money.

"The guidelines are strictly guidelines," said James M. Pishue, president and CEO of the Washington Bankers Association.

Pishue said federal directives put a sizable amount of responsibility on banks to track the legitimacy of their customers. Even if banks commit to that additional workload, there’s no guarantee they will be protected.

“If all those guidelines were followed to the teeth, it still remains a fact it’s against federal law,” Pishue said. “Following the guidelines will not be a defense against federal action.”

Mark MacDonald, president and executive director of the Community Bankers of Washington, said he would be pleasantly surprised if federal regulatory agencies changed their policy before June, when recreational stores open.

That reality worries law enforcement officers, who say the potential for violent crime in an all-cash industry goes against the goals of marijuana legalization.

“Any cash business is incredibly dangerous,” said King County Sheriff John Urquhart. “Unless we have the cooperation of the banking industry, which requires cooperation of the federal government, we’ll be right back where we started.”

Brian Stroh stands in one of the shipping containers he will use to grow marijuana. Stroh received a producer/processor license from the state earlier this month.

Urquhart, who testified on the topic at a U.S. Senate hearing in September, said one of the goals of Initiative 502 was to take money out of the hands of criminals. Without a viable banking industry to support licensed marijuana growers and sellers, legalization could do just the opposite, he said.

“It puts the entire industry in jeopardy,” Urquhart said.

Urquhart has another concern with an all-cash system: tax revenue collection. Estimates on the amount of state tax revenue marijuana will generate have varied, but according to the Liquor Control Board, it could be as much as $2 billion in the first five years.

“It is incredibly difficult to audit a cash-only business,” Urquhart said.

Similar problems exist in Colorado.

"Banking is the single biggest outstanding issue that we have," said Michael Elliott, the executive director for the Marijuana Industry Group, a trade association representing more than 50 Colorado businesses.

While many of Elliott's members have bank accounts, he described it as a “don’t ask, don’t tell” situation. E

ven those with private accounts have to deal in large amounts of cash. No marijuana business can deposit more than $10,000 at a time without their bank filing a suspicious activity report. That report would force a bank to drop that business, Elliott said.

“Banks want to get involved but they also want deniability,” Elliott said. “As soon as you say it out loud that you have a bank account, it is no longer true.”

Seeking other options

Meanwhile, newly-licensed producer/processors in Washington are attempting to run their businesses without the benefit of standard banking options.

Stroh, whose Vancouver-based company is called CannaMan Farms, said he utilizes the data processing firm ADP for administrative functions, including payroll.

Why banks just say no

In the eyes of federal regulators and judges, marijuana remains a an illegal Schedule I drug. Banks that provide services to legal marijuana businesses in Washington still run the potential risk of prosecution at the federal level for money laundering.

Gregory Stewart, the CEO of Nine Point Growth Industries, a producer/processor based out Bremerton, said he uses a money market fund through a non-banking national financial institution to pay his two employees. Stewart declined to name the institution.

Stewart said he researched whether the institution he’s using would be comfortable accepting funds from his business and is confident they will. However, the true federal test will come when he starts putting money from marijuana sales into the account, he said.

Stroh said the lack of banking services will force legal marijuana businesses to essentially launder their cash.

“We want to see a well-regulated industry, but we’re horrifically handicapped from the get-go,” he said.

Not everyone believes the industry is un-bankable.

Scott Jarvis, the director of Washington's Department of Financial Institutions, said he believes some banks will be willing to play ball when I-502 stores open this summer. There won't be enough to handle the entire market, he said, but he's optimistic the system will grow over time .

“It’s healthier for all concerns if that money is in the banking system, rather than wandering around the cash environment,” said Jarvis, whose agency regulates state-chartered banks.

Both Stroh and Stewart expressed confidence that a limited number of banking or credit union services would be available to marijuana businesses by summer. Brian Smith, the communications director for the Liquor Control Board, said that some of the state's larger banks are discussing the issue.

“There’s a lot of people dedicated to see (the system) succeed,” Smith said.

-- Conor King Devitt