Same Problem: Recreational Use in the Future or Medical Marijuana in the Past
Here’s the problem as stated in the federal law. A person or entity cannot launder any proceeds from a federally illegal activity. Here’s the definition of laundering in federal law…”The process of taking the proceeds of criminal activity and making them appear legal.”
There has been no limit to the number of media accounts, including our own, of the troubles involved in trying to “move money” in the upcoming world of recreational-cannabis use. It is clear to all. A U.S. Senate Judiciary Committee hearing this week confirmed that federal banking regulators are aware of the problem and are working with the U.S. Department of Justice to address the conundrum. Specifically, Deputy Atty. Gen. James Cole said the federal government was “looking at ways to address the banking issue within existing laws.”
The issue was explained in our post last weekend.
The Past Is Murky
Cannabis is an illegal substance under the federal Controlled Substance Act. No one can legally have any of the stuff — the recent federal announcement that Washington and California will be allowed to proceed with legalization amounts to a federal decision to look the other way. So under federal banking laws no bank can touch proceeds from the illegal business. Yet states and the IRS have collected or at least received tax money and “moved it.”
No Workarounds or Documented Authorizations
In Washington state the Department of Revenue receives cash payment of B & O taxes and sales taxes from medical marijuana businesses and electronically transfers the money to the state treasurer. The Office of State Treasurer electronically moves it to the Bank of America. The treasurer’s office then directs B of A to move it to appropriate accounts, including investments.
We made requests to the state treasurer’s office for documentation of its authority to handle this federally-illicit money and got nothing. The office has no documentation and no internal policies addressing the transfers. Representatives of the treasurer’s office go on to say that it merely accepts funds from all agencies and does not question the legality of the payments. They further suggest that question is something for other state agencies to consider – in this case, the Department of Revenue.
Department of Revenue representatives spent two days carefully checking their legal footing and told us this: “The department consults with the Attorney General’s office about various issues, including marijuana taxes. Revenue has taken the position that we can collect and remit to the State Treasurer’s office taxes from cannabis businesses.” The department spokesperson went on to say that “the documents or discussions cannot be shared because they are private and privileged client/attorney information.”
Revenue staff further emphasized that it is “ultimately up to Revenue to decide the direction we take based on our understanding of the law.”
Hairsplitting? Gross Or Net
It might be easy to declare that license fees and even sales tax are net/net above the core proceeds of the business — an add-on that is not generated by activity illegal under federal law. But B & O tax is actually a percentage of the gross receipts of the business, legal or not. So B & O payments come directly from the money generated by the business.
Hiding Behind Client/Attorney Privilege?
Washington State Wire is not a nationally funded think tank, and we have limited resources; we can only ask for the documentation of the state’s authority to use the banking system for cannabis-related tax revenue. To date no one has produced it. We cannot find how the state, the feds or any commercial financial institution can justify the handling of fee or tax money generated by an illegal enterprise — other than a claim that that an unknown assistant AG has offered an opinion we are not allowed to see. We are hoping someone has an attorney’s opinion they would like to share, or that there exists a fancy ruling in case law that somehow clears this up. But until documentation of this “hairsplitting” is available, a promise from a deputy U.S. attorney general, a secret state attorney general’s opinion and a willingness to avoid the question does nothing to clear up this murk.
Hiliary Bricken, prominent Seattle attorney with Harris and Moure’s Canna Law Group working with numerous cannabis businesses, answers the question this way. “The Liquor Control Board and the Department of Revenue definitely face the same issues that [recreational use] licensees will face relative to banking. Plainly, this issue won’t be fixed until the feds change federal banking laws. “