Cash business problematic for medical pot dispensaries

Checking accounts and credit-card machines for state-licensed dispensaries have become casualties of a crossfire between state and federal laws. Although Arizona voters approved marijuana in 2010 for certain medical conditions such as chronic pain and cancer, it remains illegal under federal law.

That means banks and credit unions, which are federally insured, steer clear of Arizona's new health buzz, citing federal regulators. Medical-marijuana proponents say banks also won't lend to the marijuana industry out of fear of federal seizures.

The cash-only conundrum is a nightmare for dispensaries, which have to set up safe houses and potentially use armored transport for the cash they collect. Just like any other business, dispensaries have to pay bills and taxes and meet payroll, but that's a lot trickier without a checking account or a revolving line of credit.

It also poses a safety risk for cash-wielding customers, who may become robbery targets. And Arizona's health director said the lack of bank accounts will make annual audits of dispensaries more challenging and potential fraud easier to pull off.

"I have personally been in all of the major banks, and all of the smaller banks, and a fair amount of the credit unions, and they've been told not to do business with us," said Bill Myer, of Arizona Organix in Glendale, which opened earlier this month and is the state's first dispensary.

A second dispensary in Tucson, Southern Arizona Integrated Therapies, is also taking only cash. Rouben Beglarian, president of the dispensary, said he's managed to land a business account with Wells Fargo, but he still can't get a credit-card machine.

"We are a small operation," he said, noting the dispensary is taking patients by appointment only. "We're not going to keep much cash on hand."

Wells Fargo could neither confirm nor discuss whether it had provided a bank account to Southern Arizona Integrated Therapies. But it did issue a statement saying, "Wells Fargo has opted not to bank these businesses.

"While marijuana legalization initiatives were recently approved in Colorado and Washington, and medical marijuana dispensaries are legal in some states, the sale and use of marijuana is illegal under federal law," the statement says.

State dispensaries must be nonprofits, and independent accountants will audit them each year.

Will Humble, director of Arizona's Department of Health Services, said the dispensaries will be regulated in a number of ways to ensure inventory control and that they truly are nonprofits. He said outside auditors will examine staff and board compensation, but he also said having dispensaries operate only in cash does open the door for fraud.

"When you operate a cash business, it certainly makes it easier to shift resources around," he said.

To keep tabs on transactions, dispensaries are required to log each sale on the date it's created.

"You walk in with your card, they verify the validity of your card, discuss how much you need and they sell that to you," he said. "But before you take possession, and you pay for it, they log into our database how much they sold to you."

Dispensaries log volume, not purchase price. It's a way of tracking inventory.

Because all banks are required to have insurance, the FDIC is a primary or secondary regulator, said Paul Hickman, president and chief executive of Arizona Bankers Association. Even state-chartered banks doing business only in Arizona need insurance provided by the FDIC.

But Ryan Hurley, an attorney with Rose Law Group in Scottsdale, Ariz., said banks could provide merchant services. The hangup is really over lending, he said. Banks are wary of lending to marijuana dispensaries because of the threat of federal seizures.

"It doesn't come down to the fact that they are FDIC insured," he said. "They have potentially legitimate concerns that the federal government might come in and seize that property, in which case their loan is worthless."

Branding also plays a role, said Lance Ott, of Washington-based Guardian Data Systems, which provides merchant services, particularly to businesses that might have stigmas.

No bank wants to be identified as a lender for a dispensary that the federal government has shut down.

For dispensaries, short of changes to federal law, there is no clear way around an all-cash business.

Ott has helped create a PayPal-like system for dispensaries to avoid doing business in cash. But he said the system — known as PaySafe Solutions — has been slow to catch on with dispensaries. Many dispensary owners would prefer to wait it out and eventually link with Visa or MasterCard.

Ben Myer, of Arizona Organix and Bill Myer's son, said the dispensary has bought safes and security equipment from a now-closed bank branch. He wouldn't provide details about how the cash will be transported or where it will be stored, but he has looked at how it's been done outside Arizona.

"We have in a sense modeled after different dispensaries back in Colorado and figured out what you do and how you operate," he said. "It's created a lot of hurdles. But people are determined in this industry, and we just find ways to make it work."

However, DoD officials say the successful sale of NMDC shares last week, in which foreign institutional investors bid for half the shares on offer, was proof that issues priced attractively will do well.

The DoD set a floor price of Rs 147 a share in the NMDC auction, going against views that wanted it higher at Rs 150 per share. "Had we fixed the floor at Rs 150, the issue would have failed, but at Rs 147, the demand was twice the size of the issue and finally the government got about Rs 149 per share," one DoD official said.

"The intent behind having a lower floor price is not to sell cheap, but to discover the genuine price," the official said, adding a realistic pricing helps convince more investors to participate and greater participation helps improve the final price. "Forthcoming divestments would not be dependent on government-owned financial institutions such as Life Insurance Corporation."

Additionally, officials and bankers said, the department has also sought the views of merchant banks on fixing the incentives for them at between 0.25 per cent and 0.5 per cent of the sale proceeds to encourage them to attract foreign investors. Banks currently charge as little as Re 1 as fees, partly because of the prestige of being identified with disinvestment mandates and also on account of peculiarities in the selection rules.

In the selection of merchant bankers, some 70 per cent weightage is given to technical qualifications and the rest to financial bids. This has resulted in banks quoting Re 1 as fees because it helps them score full marks on the financial criterion. "We cannot change the selection process, but we will fix the incentives so that bankers work hard to make the process successful," said the DoD official.

For managing initial public offerings of private sector firms, banks charge 1-2 per cent of the proceeds, even though managing IPOs and disinvestments, which are primarily executed through offers of sale (OFS) of shares, may not be strictly comparable.