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Marijuana's triple whammy: Money, lawsuits and politics

Will the industry go up in smoke?

Glen Weinberg //February 17, 2016//

Marijuana's triple whammy: Money, lawsuits and politics

Will the industry go up in smoke?

Glen Weinberg //February 17, 2016//

The marijuana industry is on fire and generating not just smoke but substantial profit and tax revenue.

According to recent indications from the Colorado Department of Revenue, marijuana will provide more than $86.7 million in tax revenue (more than $100 million a month in sales for recreation and medical). Will 2016 continue these trends, or are “smoke clouds” on the horizon?

There are three major areas to watch in the coming year: banking, lawsuits and presidential politics. Each of these three areas has the potential to send the industry into a tailspin.

First, banking continues to be a major issue for businesses in the marijuana industry. The year 2015 was supposed to be the one in which marijuana banking took hold with the introduction of a marijuana credit union. As predicted, the marijuana credit union idea went up in smoke.

For a credit union to function, two critical items had to occur. First, the credit union needed depository insurance from the National Credit Union Association (NCUA). Second, an account with the Federal Reserve was needed to transfer money, cash and checks Unfortunately, neither requirement was met. NCUA declined to provide depository insurance and the Fed refused to basically answer the request for an account.  

Remember, marijuana is still illegal under federal law. Since the Federal Reserve refused to answer the marijuana credit union application request, a lawsuit was filed by Fourth Corner Credit Union to force an answer.

This did not work out so well for the marijuana credit union. The feds filed a motion to dismiss which they won and also issued a strongly worded statement that basically stated that forcing the Federal Reserve to bank a marijuana business would give approval to criminal activity.

Before this case, the Fed had basically taken a back seat position; however, with this ruling, they clarified they would not tolerate marijuana in the banking system. The credit union not only lost their bid, but this ruling also gave pause to any other banks that were looking the other way with the new industry. The marijuana credit union attempt has made banking even more difficult for the industry.

Along with banking, there have been a string of recent lawsuits aimed at the industry. Outside groups are suing both marijuana dispensaries and ancillary businesses using the RICO act (Racketeer Influence and Corrupt Organizations Act). An interesting case recently occurred in Frisco where a Holiday Inn hotel owner claimed revenue would decline as a result of a planned marijuana dispensary. The owner, backed by well-funded out of state groups, filed a lawsuit against the prospective dispensary, an accountant that assisted the dispensary and a bank that had accounts with the dispensary and others.

The proposed marijuana dispensary never opened and yet various parties settled with the owner of the Holiday Inn for $70,000. Although the case never went to trial and all the parties settled, this lawsuit will have a large impact on the industry.  This case has basically emboldened the group “Safe Streets” and “Drug Free America” to file more lawsuits, and four more have already been filed. That includes one in Pueblo where a property owner backed by the same group is claiming that they are being “damaged” by a proposed cultivation facility in a rural area of Rye.

Many drug law experts feel that although it will be difficult for any business to show that they were harmed by the location of a marijuana business, these suits are going to be incredibly problematic for the industry going forward. The folks who helped to bring this suit and sought out plaintiffs are looking for more and other lawsuits. Furthermore, the groups filing the suits are well-funded out-of-state anti-drug groups whose objective is to try to use the legal system to end the legalization of marijuana.

This leads to the third major challenge facing the industry: politics. Opinions from presidential candidates range from those who would enforce federal law (Ohio Gov. John Kasich would “lead a significant campaign down at the grassroots level to stomp these drugs out of our country”), to Democrat Bernie Sanders, who has called for an end to the federal prohibition on marijuana so that it could be state-regulated just as alcohol and tobacco are. Others haven’t been as straightforward on the issue.

Jeb Bush, for example, has said he will respect states’ rights, but ironically, he is a backer/board member of one of Drug Free America, one of the main groups behind lawsuits in Colorado. The political challenge could be a real issue depending on who wins the next election.

Will 2016 be the year marijuana goes up in smoke? Although politics seems to catch the headlines, the biggest immediate issues are banking and lawsuits. Without an operational banking system, the marijuana movement could easily get hijacked by shadier elements, such as money laundering, which has already occurred in several dispensaries that have been shut down, and will cast a cloud over the industry.

Along with banking, lawsuits could further dissuade service providers for the industry and jeopardize investments being made as well. Whichever side of the marijuana debate you are on, the banking problems and lawsuits are real issues that need to be resolved quickly, or they will likely lead to problems in 2016 for the industry and substantially decreased tax revenue for the state.