by Ryan McMaken, Mises Institute
Following voter referendaย in which the voters opted to legalize recreational use of marijuana, four states โ Colorado, Washington, Oregon, and Alaska โย legalized to varying degrees. Colorado and Washington were the first, back in 2012, but in all cases, federal regulators have done their best to hobble the newly legalized industry and to keep businesses in a legal gray area.
Specifically, it has been the banking industry โ which is regulated at the federal level โ which has done nothing at all to attempt to cooperate with private firms in jurisdictions where the voters have parted ways with federal prohibiting marijuana use.
Colorado in particular passed legislation allowing for the creation ofย “marijuana banks” that were designed to create new financial institutions that could be allowed to functions under federal banking regulations. The governor of Colorado passed that legislation into law in 2014, but the Federal Reserve system โ one of the federal government’s agencies that regulates the financial sector โ refused to allow these institutions to exist.
The Fed, which vehementlyย opposed any meaningful oversight for itself, nevertheless is happy to assist the federal government in shutting down peaceful, legal businesses.
Federal prohibitions on banking for cannabis-related businesses has meant that dispensaries and related businesses โ even businesses that never touch physical marijuana, such as advertising agencies โ must deal in large sacks of physical cash. This, not surprisingly, has led to more criminal activity in which violent thieves more often ambush employees of cannabis-related businesses, hoping they’ll score a large cash payout. The problem could easilyย be solved, of course, by allowing these business to put cash deposits in banks.
The result, not surprisingly, has been that businesses have moved underground to use so-called gray markets inย aย gray economy. This involves numerous workarounds, but federal regulators spend immense amounts of time trying to spy on these businesses and come up with new ways to stymie their efforts to engage in a legal business.
In a lengthy article on Monday, Bloomberg recently recounted the efforts of these legal businesses in detail and their efforts to conduct business while still paying taxes and staying in line with state-level regulations. Bloomberg even recounted how the DEA threatens businesses over which the DEA has no actual jurisdiction:
โThis strikes me as ludicrous,โ Wykowskiย said. As a prosecutor, โall of our focus was to get the underground economy above ground. The way you do that is to take the cash, because when it is deposited, you can follow its paper trail,โ he said. โIt is self-defeating for the government not to encourage people to use bank accounts and accept their cash.โ
People in the business have been forced to be โmore clever with banking, so a lot have indirect banking so they can pay with checks or wire transfers,โ the lawyer said. He doesnโt want toย give an exact definition of โindirect banking,โ however, since โthe Drug Enforcement Agency tries to foil any workarounds we come up with.โ
For a while, Wykowski said, one strategy was to hire an armored car service that would deposit the clientโs cash in its own general account, then wire it to the clientโs banks, and that the DEA found out and wrote a letter to the armored car company saying it would pull its license if it didnโt stop. The DEA said in a statement they didnโt send such a letter but did have โsome telephonic discussions with multiple armored car companies.โ These discussions, the DEA said, were to advise the companies โof things we were observing in the โstate legalizedโ marijuana business.โ The DEA does not have direct jurisdiction over licensing decisions made by state authorities.ย (The armored car company didnโt return requests for comment.)
As Bloomberg notes, it also shows how the federal government attempts to torpedo state level attempts at allowing even the smallest bit of greater freedom for citizens. Moreover, the feds couldn’t care lessย even when the state is attempting to increase its own revenues. Many businesses were happy to do emerge from the black market in response, but federal regulators want to drive them right back into the shadows.
On the other hand, by setting state regulations and taxes so high to begin with, many marijuana users have already begun moving back into black markets where the tax and regulatory burdens are often perceived to be lower.
This post was originally published at Mises.org and is reposted here under a CreativeCommons, Non-Commericial 3.0 license.