Applying for a Safe Harbor checking account is an invasive procedure. The credit union first tries to learn as much as it can about the company and its owners, beginning with an hourlong interview, followed by the document collection that Behzadzadeh found so aggravating: lists of owners, investors, vendors and customers; financial statements and tax forms; the business’s organizing documents; state licenses; leases, handbooks and more. The documents can multiply quickly, because marijuana businesses are often a web of affiliated companies with overlapping ownership. Each often gets its own bank account.
Once the accounts are opened, Safe Harbor’s bankers inspect the business and its premises as frequently as every three months, to confirm that it hews to all of Colorado’s rules. Treasury’s guidance implies that a bank can’t properly make sure that a client stays on the right side of the Cole memo without a rigorous state licensing and regulatory plan in place, according to McVay, the Seattle lawyer. This, he says, explains why California’s large medical-marijuana sector mostly lacks access to banking services: Local governments oversee the business, and with a very light touch. The state won’t implement comprehensive regulations until later this year at the earliest.
Safe Harbor bankers spend most of their time monitoring client transactions, tying every dollar the bank takes in to a legitimate sale and making sure that no dollar withdrawn disappears into the illicit economy. Each month, they reconcile the account activity to a company’s ledger and the sales it reports, as well as to all the other information they’ve gleaned about a client, such as which companies it normally trades with. The credit union has compiled reams of data about how money moves around the marijuana industry, and bankers regularly compare notes about the transactions they see. When an unusual deposit arrives — larger than typical, say, or from a new source — the banker holds the money until the client can account for it.
Seefried recalls how a banker noticed that one dispensary seemed to have customers with unusually deep pockets: its sales averaged $300 to $400 each, while medical-marijuana patients generally spend less than $100 at dispensaries. The banker interrogated the client and, from the parking lot, even staked out the dispensary and studied its customers. In the end, still mystified by how the dispensary made its money, Safe Harbor closed the account. “You cannot bank what you don’t understand,” Seefried says.
Safe Harbor has closed three other accounts after members broke various credit-union rules, indicating that they weren’t willing to be fully transparent with their bankers. Late last summer, Seefried ejected three more members after bankers, working with money-laundering experts, detected suspicious activity. And another three closed their accounts rather than comply with her increasingly strict requirements, including one that customers deposit 90 percent of their receipts. The rule, she acknowledges, was mainly intended to weed out less-committed clients: Only a business trying to hide its transactions would be put off by it.
Last June, the National Credit Union Association, Partner Colorado’s federal regulator, conducted its annual examination of the credit union’s books and practices, and for the third year in a row, had no complaints about Safe Harbor. Today the program consists of 13 people, including five responsible solely for compliance. Most are women. (Women manage more than half of all credit unions.) When Seefried hires bankers for Partner Colorado, she gravitates toward sociable people. For Safe Harbor, she says she prefers introverts or, at the very least, people who evince precision and curiosity.
This sort of meticulous banking isn’t cheap. For each $100,000 deposited at Safe Harbor, a client pays $450 in fees in the first year and $300 thereafter. (Client companies that serve the marijuana industry but don’t actually sell the drugs, like laboratories, require much less vetting and so pay much lower fees.) Seefried says the Safe Harbor program made a modest profit in its first year — less than $200,000. It became much more lucrative for the credit union in 2016, but Seefried won’t reveal specifics. According to federal data, most of the institution’s sources of income have stayed relatively steady since 2014, but fee income has grown to a projected $5 million in 2017 from nearly $3 million.
Seefried says that about three-quarters of Safe Harbor’s marijuana-selling clients pay less than $1,000 a month per account, considerably less than they would pay at banks, where monthly account fees are said to start at $1,500. Many observers assume that the opportunity to assess lucrative fees is what entices small banks to take on these risky accounts. Federal data show that at Champion Bank, in suburban Denver, which began explicitly working with marijuana businesses in 2014, annual fee revenue on deposit accounts increased by a factor of 68 from 2013 to 2016, to $752,000 from $11,000, even as its main line of business, providing loans, shrank. At Colorado Bank and Trust in La Junta, fees grew elevenfold to $2.9 million.
For marijuana businesses, engaging with the financial mainstream has kept them mostly free from legal trouble. Safe Harbor has received subpoenas for the bank records of only four of the just over 200 clients it has had. None has yet been indicted. John Walsh can recall prosecuting one case against regulated dispensaries and none against a business serving the industry. But working without a checking account makes even an otherwise law-abiding business look evasive, says Lewis Koski, who served as the first director of the state’s Marijuana Enforcement Division, which collects marijuana taxes and regulates the industry, before he joined Andrew Freedman in a consulting venture. A cash-management technique like personal deposits structured to evade notice can legally amount to money laundering. “Banking,” Koski says, “just provides a really clear picture of where money is coming in and where money is going out.”
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On the last Wednesday of last March, Kim Oliver, Partner Colorado’s executive vice president, pulled her old, mud-streaked silver Jetta into Avicenna’s parking lot. She had come from her ranch, east of Denver. She was dressed formally and seemed intently focused on the business at hand. Seefried had reviewed all of Behzadzadeh’s paperwork; now only an inspection stood between him and a bank account. Behzadzadeh gave Oliver a warm welcome, and Elsberg took her ID, signed her in and gave her a visitor badge. Oliver made a mental note: the first small compliance test, passed.
Oliver, who is 59, has worked in credit unions all her adult life. Earlier she had confided to me a lifelong hostility to marijuana and rage when she discovered that her son-in-law, a veteran suffering from PTSD and living in her house, was cultivating a small crop in her basement. But working on Safe Harbor had forced her to reconsider her views on medical marijuana. “I found out that he wasn’t blowing smoke,” she told me. (I couldn’t tell if she intended the pun.) “That was my whole thing: You’re just trying to have an excuse to smoke dope.” She now supplies her arthritic mother with topical creams that contain cannabidiol, a chemical compound in the marijuana flower that doesn’t produce a high but that medical-marijuana advocates believe reduces inflammation.
Oliver sat down with Behzadzadeh and Elsberg at a gray marble table in the kitchenette just inside the employee entrance. She began the formal inspection by going through a checklist: six pages long, scores of questions. The first series delved into Behzadzadeh’s financial practices and the second into business procedures. These were meant to assess Behzadzadeh’s compliance with state regulations. Then she read five or six questions about each of the eight Cole memo priorities. After a response, Oliver made a check — almost always “yes” — and sometimes wrote a little note beside it. “If you had an employee, and they cut a bud off,” she asked at one point, “how would you catch who did that?”
“Cut a bud off” — the phrase in Oliver’s Great Plains twang was disorienting. One of the incongruities in Colorado’s marijuana business is how professionals new to the trade adopt the Mendocino idiom without either irony or any particular reverence, the way their clothes absorb the plant’s scent after a few hours on site. The industry’s brand-builders prefer more sanitized language when talking to the public: “adult use” for “recreational” and “cannabis” for “marijuana.”
Elsberg replied, “That’s the beauty of it — we have cameras on everything.” The questions, and especially the answers, occasionally delved into minutiae, as when Behzadzadeh noted that he had hired a man to drive the perimeter of his two buildings hourly every night. Oliver raised an eyebrow. “He’s legal,” Behzadzadeh said. “I checked his sosh” — Social Security number. “I checked his driver’s license.” He deadpanned, “I sent a copy to Jeff Sessions, too.”
Next, Oliver went about documenting compliance, snapping photos of the cameras, the safes, the locks on cabinets and other equipment, the bars blocking the windows and even the eyewash station. She walked over to a bakery-bun rack and photographed the RFID tag lying next to a brittle sheet of an extract known as shatter. Then she had an employee type the tag number into the state record system to call up that batch’s history. She visited the grow next door (“I’m surprised they have as many cameras that they do,” she remarked approvingly afterward) and then followed Behzadzadeh and Elsberg up to the dispensary in Federal Heights.
The dispensary inspection got off to a rocky start when Oliver noticed the A.T.M. near the entrance. Cash-machine companies often rent them to dispensaries and stores, because so few can accept credit cards, but Behzadzadeh owned his and each week filled it with $2,000 in cash taken from the register. “That’s got to change,” Oliver said matter-of-factly. “The biggest way of laundering money is through the A.T.M.”
Behzadzadeh’s machine was tied to a personal bank account; every time a customer withdrew cash, that account received a credit. But the register money was unaccounted for; it could come from anywhere. Now, Oliver told him, he would have to withdraw money from Safe Harbor and hire an armored car to deliver the cash and fill the A.T.M.; he couldn’t even touch it himself.
A look of incredulity crossed Behzadzadeh’s face. “Wait — I’m not going to give my business to somebody else!” he said. As a start-up entrepreneur, Behzadzadeh nursed a swelling grudge against the contractors and vendors who nickeled and dimed him, he thought, at every turn — maybe even Safe Harbor. The cost of banking was one thing, but the prospect of trading the satchel for an armored car from a company like Blue Line, another niche player that charged a premium in a niche industry, especially galled him. “I have no problem doing business with you guys, and I appreciate the banking, but I’m not going to pay Blue Line to take my money,” he said, his voice rising. “There’s no way.”
Oliver kept pressing. “All they’re doing is loading the machine for you,” she said. “If I wanted to be on the black market, I would come in here and fill this machine all the time to clean the money.”
“Ah,” Behzadzadeh said. Now he understood. He thought out loud: He would bring cash from Avicenna to the dispensary and give it to a courier, who would put different cash, which he had brought with him, into the A.T.M. machine. “While you’re doing that” — Behzadzadeh addressed the imaginary courier — “I’ll make you coffee.”
Behzadzadeh’s dogs were barking ferociously when he and his wife returned home from dinner late one night in September. They didn’t think anything of it, but several hours later, the couple heard noises in their house. Behzadzadeh gathered his wife and children in a bedroom and raced downstairs with a laser-sighted pistol. But the intruders were gone, along with his cellphone — and the satchel.
The robbery could have been a financial disaster. A month earlier, the Denver Fire Department had determined that the extraction room at Avicenna was not sufficiently blastproof, shutting down the factory for two months. “If they had taken $30,000 or $40,000,” Behzadzadeh said, “it would have literally broken my back.” But the satchel held no money that night. Behzadzadeh had opened his bank accounts the morning after the inspection. It had taken him a few months to fully embrace them — Seefried had predicted as much — but now around two-thirds of his trading partners also accept or write checks. What cash remains in Behzadzadeh’s business waits in safes, secured to the floor, for the armored truck.
Yet despite Safe Harbor’s efforts and those of its competitors, bank accounts remain out of reach for many Colorado marijuana companies. The high fees put off smaller businesses at the same time as banks seem to be pulling back. Seefried didn’t want Safe Harbor deposits to swamp the credit union, so last January she reduced the number of new monthly clients from five to three and then closed the door altogether in August after deposits ballooned over the summer. As the state Marijuana Enforcement Division granted licenses to about 220 additional companies last year through November, Safe Harbor’s waiting list swelled to 96 businesses, or two-and-a-half-years’ worth of new clients, before the credit union stopped adding names to it. The five banks have become very stingy about granting new accounts, according to three C.P.A.s who have marijuana-industry clients. The parent company of one of those institutions, Colorado National Bank, declared bankruptcy in November, putting its future as a marijuana banker in doubt.
Marijuana banking has always depended entirely on forbearance from Washington, and the Trump administration seems decidedly less tolerant than its predecessor. In March, Attorney General Jeff Sessions declared before a gathering of law-enforcement officials that marijuana is “only slightly less awful” than heroin. “I reject the idea that America will be a better place if marijuana is sold in every corner store,” he said. A task force assembled in February by the Justice Department to combat violent crime didn’t recommend any changes to the Cole memo when it delivered its initial findings last summer, but the agency is very likely revising it. (The Justice Department wouldn’t comment on its deliberations.) [Update: After this article went to press, the Justice Department rescinded the Cole memo, giving U.S. attorneys more latitude to enforce federal marijuana laws in their districts.]
Seefried had hoped to begin making loans to and processing credit-card transactions for Safe Harbor’s existing clients, but for the foreseeable future, she has put those plans on hold. Until federal law catches up to public sentiment, marijuana banking is unlikely to keep pace with the industry — the vetting is too expensive. Just last month, after a client was caught up in a police investigation, Safe Harbor had to review the account to make sure bankers hadn’t missed any suspicious activity. “It cost me $30,000: $20,000 to bring in investigators for three days and $10,000 for legal fees,” Seefried told me. “That’s one client, with one problem.” She plans to raise fees in the next couple months.
Yet she still hopes to position Safe Harbor as a model for banking the marijuana industry elsewhere. In November, Safe Harbor began licensing its name and protocols to financial institutions nationwide. Six banks and credit unions in six states will begin taking on customers this month, including a credit union in Colorado to serve the customers that Safe Harbor no longer can. Three more will join each quarter. Safe Harbor is also testing a mobile-phone app for buying marijuana in Hawaii’s handful of state-licensed dispensaries.
In June, the National Credit Union Association, Partner Colorado’s regulator, advised Seefried that it would begin examining the institution quarterly rather than yearly, which she attributes to the national expansion. She has hired two full-time employees just to manage the increased compliance. “We are bringing more credit unions to the table, and they don’t want us teaching them incorrectly,” she says.
One industry investment facilitator, the Arcview Group, estimates that legal marijuana sales in the United States will more than double to roughly $21 billion by 2021 from nearly $9 billion last year. Walsh, the former prosecutor, has concluded that the tension between the federal government and liberalizing states is unsustainable. “I came in as U.S. attorney in 2010 assuming that it was my job to enforce the federal marijuana laws regardless of what state legalization efforts would look like,” he says. “The longer I worked on the issue, and we struggled with it, the more I realized that a simple shut-it-down approach was not practical. The notion that you can put this genie back in the bottle today is not realistic.”
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