Category: reason

When he was first breaking into the legal weed business in 2011, Joel Pepin did what any sensible, aspiring marijuana entrepreneur would do. He didn’t tell his bank how he was making money.

“You give them an LLC name and you’re sorta vague about the rest, you know what I mean?” Pepin recalls.

He was running a legal business, but if Pepin wanted something as simple as the ability to purchase equipment with a check instead of handing over stacks of cash, he’d have to behave like a common criminal. It’s an uncomfortable legal grey area that continues to afflict most of the businesses within America’s booming marijuana economy—thanks to federal financial rules that haven’t caught up with state-level legalization efforts.

And it’s a struggle to stay one step ahead.

“We had accounts shut down at two different banks,” Pepin tells Reason. “Once you have transactions where there are comments written on the bottom of the checks for ‘wholesale flower’ or that type of thing—they figure out that you’re working in marijuana, and they write you a letter to say you have to pull out your funds and close the account or else they will do it for you in 30 days.”

Things have changed a lot for Pepin since those early days. Today, he’s the co-owner of JAR Cannabis, which has 40 employees, two cultivation facilities, an extraction lab, and two storefronts—along with plans for four more—in Maine, where recreational marijuana was legalized last year.

He’s no longer scrambling from bank to bank, either, thanks to cPort Credit Union, a Maine-based firm that has bucked national trends and has offered banking services to the state’s nascent cannabis industry since 2014. The credit union doesn’t offer loans or financing to marijuana-related businesses, but even the stability of knowing that his checking account won’t be closed next week gives Pepin an advantage over most cannabis entrepreneurs in America.

Medical marijuana is now legal in 36 states. In early April, New York became the 15th state, in addition to Washington, D.C., to legalize marijuana for recreational use by adults over age 21. There were $17.5 billion in legal sales of marijuana last year, but nearly all of those transactions were conducted entirely in cash. Thanks to marijuana’s enduring status as a Schedule I drug, banks that are subject to federal oversight must file Suspicious Activity Reports (SARs) to the Financial Crimes Enforcement Network (FinCEN) each and every time they engage in a transaction with a marijuana-related business—even if the business is fully compliant with state law. The federal law doesn’t prohibit financial institutions from offering banking service to dispensaries and growers, but the added reporting requirements and threat of federal scrutiny keeps many banks away.

According to FinCEN data, 515 banks and 169 credit unions filed at least one SAR related to a marijuana business during the first quarter of 2021. Both numbers had been steadily growing for years as more states legalized marijuana, but have declined slightly since 2019.

The FinCEN data probably exaggerates how many banks are truly doing business with the marijuana industry, says Morgan Fox, a spokesman for the National Cannabis Industry Association, a trade group. He estimates that the real number is less than one-third of what the federal data would suggest. Because banks are required to file SARs for every transaction that might be related to marijuana, a bank that accepts a single deposit is counted the same way as a credit union that offers its full range of services to a dispensary.

It is hard to get precise figures for obvious reasons, but Marijuana Business Daily, an industry trade publication, estimates that about 70 percent of America’s cannabis industry is operating without any access to even the most basic banking services.

Beyond the fundamentals like having a checking account, processing credit cards, and paying taxes, that means cannabis businesses have a harder time getting access to capital to cover start-up costs or pay for expansions. “For smaller growers, especially, that might mean they aren’t able to keep up,” says Fox. Unless you have a deep-pocketed investor or have been around long enough to build up cash reserves, the lack of banking access means most weed businesses can’t scale up.

This lack of access can also be dangerous. Since many pot shops have to operate as cash-only businesses, they are obvious targets for actual criminals.

“We can’t keep forcing legal cannabis businesses to operate entirely in cash—a nonsensical rule that is an open invitation to robbery and money laundering,” says Sen. Jeff Merkley (D–Ore.), one of 27 senators—including five Republicans—to cosponsor the 2021 version of the Secure and Fair Enforcement (SAFE) Banking Act. The bill would change several federal statutes so banks are no longer pressured to consider state-legal marijuana businesses unlawful. An earlier version of the same bill passed the House of Representatives in 2019 with a bipartisan vote of 321-103, but was blocked by the Senate.

Now that Democrats have full control of Congress, the SAFE Banking Act’s prospects look better than ever. Of course, an even better solution to the federal government’s restrictions on how marijuana businesses can engage in banking would be for Congress to simply order the Drug Enforcement Agency (DEA) to remove marijuana from Schedule I.

Even for businesses lucky enough to have access to some banking services, like Pepin’s, there would be huge gains from passage of the SAFE Banking Act or the descheduling of pot—not just for the businesses, but for the entrepreneurs too.

“As the owner of a cannabis company,” says Pepin, “I can’t use that income from the marijuana industry to get an auto loan.”

He’s been running a successful, legal business for more than a decade. It’s time to stop treating Pepin and thousands of others like him as criminals every time they walk into a bank.

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Eighteen states containing 40 percent of Americans have now fully legalized marijuana, but the federal prohibition on cannabis still hangs over the country like a noxious, non-psychoactive cloud. However, a renewed push in Congress could finally end the government’s war on weed.

Last year, the House of Representatives voted in a historic first to end the federal prohibition on marijuana. That bill, the Marijuana Opportunity Reinvestment and Expungement (MORE) Act, failed to pass the Republican-controlled Senate, but now that Democrats hold a slim majority in both chambers of Congress, they are trying once again.

In the House, Rep. Jerry Nadler (D–N.Y.), who chairs the Judiciary Committee, plans to reintroduce the bill, which would remove cannabis from the Controlled Substances Act and eliminate federal criminal penalties for cultivation, distribution, and possession.

The legislation would also automatically expunge federal marijuana convictions and require judges to vacate the sentences of those currently incarcerated for federal marijuana offenses on request. It would also end the ban on federal public benefits to those with marijuana convictions.

Meanwhile, Sen. Chuck Schumer (D–N.Y.), along with Sens. Cory Booker (D–N.J.) and Ron Wyden (D–Ore.), announced they will pursue comprehensive marijuana reform this year.

“The War on Drugs has been a war on people—particularly people of color,” the senators said in a press release. “Ending the federal marijuana prohibition is necessary to right the wrongs of this failed war and end decades of harm inflicted on communities of color across the country.”

That bill has not been introduced yet, but in an interview with Politico this month, Schumer said Democrat leadership in Congress will move forward with legalization with or without the support of President Joe Biden.

“I am personally for legalization,” Schumer said. “And the bill that we’ll be introducing is headed in that direction.”

Biden supports decriminalization but not full legalization, a position he hasn’t budged on even as more and more states and Democratic leadership in Congress—not exactly a spry, young group—leave him behind.

“He spoke about this on the campaign,” White House press secretary Jen Psaki said in response to a question about marijuana legalization. “He believes in decriminalizing the use of marijuana, but his position has not changed.”

Maritza Perez, national affairs director for the Drug Policy Alliance, predicts the MORE Act will pass the House again, but it will be a much tougher road for legalization in the Senate.

“The Senate will present a challenge because there aren’t many vehicles where we can get this done with a simple majority,” says Perez. “We’re probably going to need 60 votes, which means we’re going to have to get all the Democrats plus 10 Republicans. I think that will be very challenging given the polarized Congress that we have.”

Perez says the bill is also expected to have provisions intended to funnel tax revenues back into communities that were ravaged by the drug war. These sort of racial justice provisions, as civil liberties groups call them, have become more and more common in legalization bills, and progressive groups consider them make-or-break for their support.

As Reason‘s Jacob Sullum summarized last year, the MORE Act would also:

Impose a 5 percent federal tax on cannabis products, rising to 6 percent after two years, 7 percent after three years, and 8 percent after four years. The revenue would be assigned to drug treatment, ‘services for individuals adversely impacted by the War on Drugs,’ loans for marijuana businesses owned by ‘socially and economically disadvantaged individuals,’ and grants aimed at reducing ‘barriers to cannabis licensing and employment for individuals adversely impacted by the War on Drugs.’

Congress is also once again considering legislation that would normalize banking for the legal marijuana industry, which almost exclusively operates in cash because of its lack of access to financial institutions. In March, Rep. Ed Perlmutter (D–Colo.) reintroduced the Secure and Fair Enforcement (SAFE) Banking Act. The legislation would stop banks from being penalized by federal regulators for servicing legal marijuana businesses.

Democrats’ razor-thin majority in the Senate means the passage of these bills is anything but assured, but the chance to end the federal criminalization of marijuana and let states decide for themselves is closer than ever.

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4/18/1775: Paul Revere’s ride.

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Not long after taking office, President Joe Biden released an executive order to fight climate change and called for evaluating the impact of environmental policies on the poor. Yet in a separate executive order, Biden affirmed his support for the 1920 Jones Act, a maritime law that harms both the environment and disadvantaged communities. It seems the residents of Hawaii, Puerto Rico, and Alaska are no match for an entrenched industry and union cronyism.

The Jones Act—technically the Merchant Marine Act of 1920—shields the American shipping industry from foreign competition by requiring that ships engaging in trade between multiple U.S. ports be made in America and owned and crewed by American citizens. Supporters say the Jones Act is necessary for national security, but research from the Cato Institute has shown the law’s biggest impact is driving up consumer prices for many Americans by forcing isolated states and territories to import necessities from other countries.

The cost of complying with the Jones Act encourages American businesses to transport goods between U.S. states on trains and trucks. In Europe, 40 percent of freight is moved by sea. Within the United States, that share is only 2 percent. Ships generally require less energy per mile and therefore produce less pollution.

The Jones Act pushes freight transportation onto highways across America, thereby increasing pollution and congestion. Ironically, the law has even led to a decline in the number of ships America builds domestically.

In other words, a small number of Americans benefit financially from the Jones Act at the expense of the rest of us. “Supporting the Jones Act is in direct contradiction of the Biden administration’s stated desire to both fight climate change and promote Puerto Rico’s economic recovery,” says Colin Grabow, a Cato policy analyst. “By dramatically raising the cost of domestic waterborne transport, the Jones Act discourages the use of this carbon-friendly means of transport while imposing a significant economic burden on an island that suffers from a painful 43 percent poverty rate.”

On the campaign trail, Biden and Pete Buttigieg, who has since become secretary of transportation, promised better representation for Puerto Rico. But because of the Jones Act, shipping a container from the continental U.S. to the island territory can cost twice as much as sending the same container to a nearby island nation, where Jones Act rules don’t apply. That’s not a recipe for lifting Puerto Rico out of poverty or helping it recover from the devastation caused by Hurricane Maria in 2017.

Biden’s embrace of this archaic law undercuts his economic, environmental, and transportation policy goals.

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The Yale Journal on Regulation  online symposium on Adam Cox and Cristina Rodriguez’s important new book, The President and Immigration Law, has now concluded with the authors’ response to the commentators and critics.

All of the contributions can be accessed here. My own essay praises the book and accepts much of the author’s analysis of the growth of executive power over immigration and its dangers. But, in assessing possible solutions for the problems they identify, I argue that the authors undervalue the importance of strengthening constitutional constraints on executive power, and making it easier for migrants to enter the United States legally.

In their thoughtful response, Cox and Rodriguez partly agree with my suggestions, but emphasize that neither the full elimination of constitutional double standards on immigration policy nor the adoption of a presumption of freedom of movement across national borders are likely to be fully realized, anytime soon, if ever.

I agree these ideals are unlikely to be fully realized anytime soon, and said as much in my initial contribution. But I also pointed out that there is a great deal of room for incremental progress on both fronts. Cox and Rodriguez’s own reform proposal of legalizing most of the current undocumented immigrant population and severely curbing detention and deportation is also unlikely to be fully implemented in the near future. For reasons noted in my contribution, strengthening judicial review and cutting back barriers to legal migration are essential components of any reform agenda, whether incremental or radical.

Indeed, failure to pursue the the former might even undercut many of the beneficial effects of the latter. If detention and deportation are more tightly constrained, White House hostile to immigration would have incentives to double down on using its discretionary authority to try to keep out migrants in the first place. If so, there may be little net reduction in executive power in this field and its undermining of the rule of law. For potential migrants, being barred to begin with can be just as bad or (in some cases) even worse than being deported after entry.

I previously also commented on Prof. Dan Farber’s outstanding contribution to the symposium, which focuses on the ways in which the current executive-dominated immigration regime undermines the rule of law.

In conclusion, I once again commend the authors on their outstanding book. The debate over these issues will surely continue.

 

 

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