“I don’t think I’ll ever forget that day,” Pittsburgh attorney Catia Kossovsky said with a laugh.
The day was January 4, 2018. And then-U.S. Attorney General Jeff Sessions had announced he would let prosecutors crack down on the medical marijuana industry, undoing Obama-era guidelines that generally left states to enforce their own marijuana laws.
“And I remember specifically looking at [Sessions’ decision],” Kossovsky remembered, “and saying, ‘What’s going to happen next?’ … And nobody really knew.”
Kossovsky, who represents marijuana growers and dispensaries, said nothing ever came of Sessions’ announcement. But, it was a bitter reminder of the risks that come with doing business in a legal gray area.
While 33 states, including Pennsylvania, have legalized marijuana either for medical or recreational use, the drug remains illegal for any purpose under the federal Controlled Substances Act. Kossovsky said such legal ambiguity is problematic for cannabis businesses when it comes to banking.
“We’re talking about generating hundreds of thousands of dollars on a regular basis,” she said, “And if you don’t have [anywhere] to put it … you become a target for criminal activity.”
Most banks, however, refuse to work with the marijuana industry while the drug remains illegal at the federal level. Even in states like Pennsylvania, which has legalized the drug for medical use, banks that serve the industry could be liable for money laundering under federal law.
Nonetheless, a few banks have opened their vaults to Pennsylvania’s cannabis providers. And federal data show that nationally, more than 700 banks and credit unions serve the industry.
But Rebecca Myers, founder and CEO of the marijuana grower FarmaceuticalRX in Mercer County, said banking in this business comes with steep fees unheard of in other industries.
“We’re probably, with our different accounts, spending close to $100,000 a year,” she said.
Other medical marijuana businesses in western Pennsylvania said they similarly pay about $3,000 a month for each of their accounts. Like FarmaceuticalRX, many of the businesses are clients of the New Jersey-based ParkeBank.
“I think Parke found everybody to start that were the initial [medical marijuana] permit winners in Pennsylvania,” said Chris Kohan, co-founder and CEO of The Healing Center, which operates dispensaries in Cranberry, Monroeville, and Washington, Pa.
“They were pretty much our only option at the time,” Kohan said of Parke, “So … there wasn’t really much negotiation [of fees].”
And those costs, Myers of FarmaceuticalRX noted, often get passed onto customers.
“It’s just making medicine for folks who need medicine more expensive,” Myers said.
Compliance drives costs
Parke didn’t respond to a request for comment, but lawyer Catia Kossovsky said banks usually charge high fees due to the cost of compliance and due diligence.
“And for them to do that, they have to hire additional personnel,” she said. “They have to … do audits of the clients. And they have to file ‘suspicious activity reports’ on an ongoing, daily basis.”
Legislation in Congress could provide some relief: The U.S. House of Representatives passed the bipartisan SAFE Banking Act in September. It would shield banks that serve the cannabis industry from sanctions if their clients operate in states that have legalized marijuana.
The bill won the support of all Pennsylvania U.S. House members, with the exception the 13th District’s John Joyce, a Blair County Republican.
Democratic U.S. Rep. Mike Doyle, of Forest Hills, called the SAFE Banking Act “a very common-sense approach … Look, [marijuana] is legal in one form or another in 33 states, and it makes no sense not to allow these people to have a banking relationship.”
Doyle noted, however, that the Senate is not expected to vote on the bill anytime soon. So for now, banks avoid prosecution by filing suspicious activity reports, as required by the U.S. Treasury Department.
“We have to take a look and say, ‘Hey does the money coming in make sense?’” said Dan Moon, president and CEO of SSB Bank, a community bank based in McCandless.
SSB’s lone medical marijuana client is Keystone Integrated Care, a dispensary with locations in Lawrenceville and Greensburg. When the dispensary deposits money at the bank, it involves large quantities of hard cash: Because most banks and credit card companies bar transactions with the cannabis industry, Keystone’s patients usually pay with cash.
Moon said SSB has to account for all the deposits and withdrawals Keystone makes in reports to the Treasury Department.
“The money comes in. They pay out vendors. They pay salaries. They pay overhead or mortgages. And what’s left,” Moon said his bank must assess, “Does it match the profit?”
Moon said if something doesn’t seem right, SSB must report it as a “red flag,” which could suggest a cannabis business is operating as a front for criminal activity.
‘We’re talking about finite capital for everyone’
Unlike other banks, SSB doesn’t charge Keystone extra fees. Moon said that wouldn’t fit the model of a community bank like his. And, he added, Keystone benefits SSB by boosting the bank’s liquidity.
“So it’s a two-way street,” Moon said. “They bring in their money and their revenues, and we’re able to lend it back out to the community.”
Yet, Keystone chief operating officer John Schaffer noted that companies like his generally cannot borrow from banks: The banks don’t want to take that legal risk. So instead, Schaffer said, marijuana businesses must court numerous investors to secure funding. He said that process was one of the hardest aspects of getting Keystone off the ground.
“You’re going out and meeting with people,” Schaffer said. “You’re incurring a lot of legal cost … It’s a lot more intensive to raise the capital. With the bank you’re dealing with one person. They’re still going to want to see financials and projections, but not to the same degree that a private investor may.”
Private shareholders, moreover, typically demand returns on investment that are much higher than interest rates charged at banks. Schaffer estimates those returns typically run between 10 and 15 percent, compared to bank interest rates of about 4 to 6 percent.
As a result, Harvest Health & Recreation CEO Steve White said, “We’re still talking about finite capital available for everyone.”
And according to White, existing investors tend to favor established companies like Harvest, which runs 30 dispensaries across eight states. In Pennsylvania, Harvest has shops in Johnstown, Harrisburg, Reading, and Scranton.
White hopes the SAFE Banking Act will make bank loans more accessible, if it becomes law.
“We do absolutely think that it would help the smaller mom-and-pop operations compete with companies like ours,” he said. “But we think that’s a great thing” and would help “a healthier, more natural market [to] develop.”
From cutting off access to loans to generating high bank fees, advocates for changes to federal law say, current regulations are stifling the industry, and proposals like the SAFE Banking Act would allow a growing market to truly flourish.
Find more stories in our series, The State of Cannabis.