A few loose ends remain as the state continues its journey toward legalized recreational cannabis.
A few very loose ends.
And if you’re looking for a precedent, don’t bother. Since the Civil War, no state has gone this far in challenging the federal government.
The propagation, transportation and use of cannabis in any form is illegal under federal law. Washington and Colorado walk a fine wire in declaring pot legal.
To please the federal government, Washington seeks to pre-emptively placate its judicial sovereign by limiting access to cannabis, keeping use within state borders, limiting advertising of the product, and demanding that strict security be imposed as the product is grown, processed and sold.
But a larger question persists: How to process the money in a retail system selling a substance still illegal under federal law.
BANKING AND THE FEDS
Growers, processors and sellers have found that no state bank or credit union will knowingly open an account for their enterprises. Such has been the fate of people who grow, process and sell medicinal marijuana, and such is the fate awaiting recreational entrepreneurs.
The problem blooms because cannabis is illegal under federal law. Transactions that relate to the production and sale of marijuana are likewise illegal under federal money-laundering statutes. Because all banks and credit unions are federally regulated, it is unlikely to expect that a financial institution would be willing to risk its charter, and future, in trade for a new customer or two.
“The reason that the banks are not giving these services — it’s not just their deposit insurance. The real issue they’re running into is their anti-money-laundering regimes,” said Robert McVay, who represents clients in the industry as a member of the Seattle Canna Law Group.
“I do know that banks have requirements that they know their customers, and they ask the right questions. If they find out, they’re not supposed to open an account. You can never lie, and you can never use complicated corporate structuring to obfuscate. We don’t condone any dishonesty.”
Angel Swanson, co-owner of a medicinal-cannabis access point in unincorporated Pierce County, said last week that she and other sellers deal in cash.
“If you went to a bank, you have to lie,” she said. “If you lie, you open yourself to all kinds of liability.”
Some sellers have tried to skirt the law by establishing holding companies or other financial fronts. Eventually, Swanson said, these are likely to be discovered for what they are.
“We do cash,” she said. “It’s virtually impossible otherwise. It’s absurd, and it’s dangerous.”
Swanson will travel to Washington, D.C., in early July to lobby the banking issue on behalf of the National Cannabis Industry Association.
Even as retailers worry about banking, a larger horse already has left the barn.
THE STATE’S MARIJUANA FUND
The state intends that all taxes and fees derived from growers, processors and sellers be placed into a “dedicated marijuana fund,” the benefits of which will be distributed to the Department of Social and Health Services and other agencies for purposes of research, education and administration. The state’s general fund also will benefit.
The marijuana fund, according to the initiative, “shall consist of all marijuana excise taxes, license fees, penalties, forfeitures, and all other monies, income, or revenue received by the state liquor control board from marijuana-related activities. The state treasurer shall be custodian of the fund.”
The state intends to levy an excise tax of 25 percent of the wholesale selling price by a producer, plus 25 percent of the selling price by a processor and a further 25 percent on the price of a sale by a retail seller. Producers, processors and retailers also will pay a license fee. Cities, if they prefer, may also charge a business and occupation tax.
Estimates of the amount of money the state could raise have varied. The state Office of Financial Management has estimated the annual total proceeds at close to $500 million. However, the retail price charged to the consumer will ultimately depend on market forces. If the retail price is set too high, consumers might continue to rely on the lower-priced black market rate. If prices are set too low, state receipts could fail to meet goals.
By contract, the state has hired Bank of America to administer this and other accounts. By administering the state’s cannabis account, the bank, it could be argued, is laundering drug money under federal statutes.
Even if the state deems such activity as legal, the federal government currently does not. The bank, it could be argued, would be involving itself in an ongoing conspiracy to violate federal law — just as any city that collects B&O tax from medical-marijuana sellers could be said to be doing likewise.
Two ideas have emerged to solve the problem. The federal government could issue waivers to states, giving them permission to stray from the law, similar to what President Bill Clinton did in granting states freedom to experiment with welfare requirements.
Or, Attorney General Eric Holder could sign cooperative agreements with the states, allowing them to condone the sale of marijuana so long as they run tightly controlled operations with federal oversight.
It is unclear what the Obama administration will do. The White House has had no comment, referring questions to the Justice Department.
Justice Department spokeswoman Allison Price recently said, “The department is continuing to review the legalization initiatives passed in Washington and Colorado.”
“A lot of us are waiting for that shoe to drop from back East,” said Scott Jarvis, head of the state’s Department of Financial Institutions, which regulates state-chartered banks and credit unions.
Asked repeatedly for comment about the legality of its relationship with the state, Bank of America spokeswoman Britney Sheehan has said only, “It’s a more complicated issue than you might think. It may be too premature to comment.”
“There’s no credible argument that they (Bank of America) are not participating in it,” said Steve Victor, city attorney for University Place.
Under his leadership, University Place has effectively banned cannabis-related businesses from the city.
Victor likens the state’s position to the legalization of fully automatic weapons, or the banning of federally required emission-control devices on cars.
“Machine guns, it’s the same thing,” he said. “What if we did not want emission-control devices? It’s all the same thing.”
He notes that other cities have allowed marijuana to be sold under state law.
“What it amounts to, those who are participating are doing so because they want to,” he said. “They are choosing to accept the risks. There’s no credible argument that any municipality has to accept this. It’s illegal under federal law.”
The closest legal precedent he can find goes back to the 1974 National Maximum Speed Law, a federal mandate that highway speed be limited to 55 miles per hour. In violating the law by issuing its own statute allowing higher speeds, at least one state faced the loss of federal highway funds.
The next precedent goes back to the Confederacy, and the Civil War.
“I can’t think of anything to compare it to but secession,” Victor said.
BALANCING ‘A LOT OF UNKNOWNS’
Said Candice Bock, government relations advocate with the Association of Washington Cities, “It illustrates the rock and a hard place that cities find themselves in on this topic, balancing federal law, state law and a lot of unknowns.”
“Obviously the state will be collecting funds,” she said. “Cities will be looking to follow the state’s lead. It would sure be good to get some direction from the federal government.”
Jon Walker, legal adviser to Tacoma police, believes the situation is ripe for conflict between local and state governments and the federal government. “It does look like trouble. You get into sovereignty issues between the state and federal government. It’s a tough situation for local governments, and we’re going to be on the front lines,” he said.
Walker also noted the problems attorneys might face advising their clients to become involved in criminal activities by drafting various business contracts. An attorney would defend a client without conflict, but would advice on establishing a business constitute a breach of the law in itself? Would it constitute a conspiracy if an attorney or a notary helped prepare a document that established a partnership, or perhaps a lease, related to the marijuana business? Would that present an ethical problem?
“I don’t know,” Walker said.
The state Treasurer’s Office, which would administer taxes and fees collected under Initiative 502, remains sanguine.
“We’re complying with the state law in a manner that we see as reasonable and rational collecting taxes on business,” said spokesman Chris McGann. “We don’t see taxes or fees collected by the Liquor Control Board as ill-gotten gains. We comply with the law voters gave us. The way that the banks interact with the industry is up to them.”
Growers, processors and sellers will be required, say rules recently issued by the Liquor Control Board, to have “commercial general liability” insurance policies that cover claims of harm that might befall a consumer.
The state Office of the Insurance Commissioner sees no conflict.
“Based on our recent review of the regulation, yes, it would be legal because it does not conflict with Washington state policy,” spokeswoman Stephanie Marquis said.
Which leaves the state Attorney General’s Office.
The agency was recently asked if it has considered its relationship with Bank of America in terms of Initiative 502. The bank will process the state’s money, and that money will derive from an activity illegal under federal law. The Attorney General’s Office was asked if it can continue that relationship, given the illegality of cannabis under federal law. These were among a handful of other specific questions, including whether the office has been in contact with the federal Office of the Comptroller of the Currency, which regulates Bank of America.
“We have been exploring all banking alternatives and are eagerly awaiting guidance form the federal government,” spokeswoman Janelle Guthrie replied. “We are working all sides of the issue and preparing accordingly.”
She did not list those preparations.
And should the state continue with its journey, it’s not just the Obama administration that will speak to the legality or illegality of marijuana legalization.
The statute of limitations on federal drug crimes continues for at least five years, so a subsequent administration could charge crimes committed before it took office.
“All of the guideposts are obscured. We’re in a sandstorm,” Steve Victor of University Place said.
C.R. Roberts: 253-597-8535
Staff writer Rob Hotakainen contributed to this report.