TIME Marijuana

Pot’s Money Problem

Matt Nager Colorado requires pot shops like Medicine Man to grow 70% of their product.

The legal marijuana business is off to a booming start in Colorado. Now what do they do with all that cash?

At the front of Medicine Man, a retail cannabis shop on an industrial strip in north Denver, customers wait patiently to buy strains of O.G. Kush and Ghost Train Haze arrayed in glass jars or to sample the menu of pot-infused chocolates, cookies, creams, lozenges and tinctures. In the back, company president Andy Williams strolls the aisles of his cavernous marijuana gardens, pointing out the custom drainage tables and drying racks and a 20,000-sq.-ft. factory addition with crisp white wall panels designed to evoke an Apple Store. “We’re building a showcase for the world,” he says.

These are heady days in Colorado, which on Jan. 1 became the first state in the world to legalize the sale of recreational pot to anyone over 21. State officials spent more than a year building a market that regulates weed from seed to sale. So far the selling is going just fine. The state’s retail pot shops raked in more than $1 million on their first day in business, and demand has barely dwindled since.

The problem is the proceeds. Federal law classifies cannabis as a drug on a par with heroin and ecstasy, which has prevented more than half of Colorado’s legal pot merchants from using bank accounts or credit cards. That forces multimillion-dollar businesses like Williams’ to operate in cash, which is not just difficult but also dangerous.

As a result, Denver’s marijuana moguls sometimes look more like criminals than capitalists. They lease secret off-site warehouses to store their money and pay employees with cash-stuffed envelopes. Some outfit their homes with false walls and safes bolted to the floors. They tote tens of thousands of dollars around and foot five-figure tax bills with thick wads of 20s. To avert robberies, stores often stagger delivery schedules, hire decoy drivers and employ armed guards to monitor dozens of on-site surveillance cameras. Shunned by proper banks, they run their shops as makeshift substitutes. “We’re a little fortress,” Williams says.

Simple accounting becomes a dizzying logistical puzzle. At Medicine Man, the daily procedures include counting and recounting receipts, spraying the cash with Febreze to mask the scent, stuffing it into tamper-resistant clear plastic bags and shipping it in armored cars to a downtown vault.

“Just managing payroll is a nightmare, let alone paying for a $2 million construction project,” Williams says. “That’s going to be a pretty damn heavy suitcase.” He recalls feeling “like a terrorist” as he ferried $90,000 in a black knapsack to the site of one wholesale purchase in Colorado Springs. Elan Nelson, 35, who works in business development at Medicine Man, remembers spiriting a backpack crammed with $30,000 through an alley near the state capitol to buy weed-laced baked goods from a vendor. Kristi Kelly, 36, spends large chunks of her time shuttling between the two retail pot shops she owns and the windowless vaults where she stores her money, her two dogs in tow for protection.

For the state, the banking problem makes money harder to track, harder to tax and harder to regulate. For the pot industry’s pioneers, it requires enormous capital, crimps efficiency and creates the very safety hazards the state was determined to avoid by legalizing weed in the first place. “Somebody,” says Williams, “is going to get hurt.”

Don’t Ask, Don’t Tell

Some already have. In July, a medical-marijuana-dispensary owner and a security guard were shot and killed during an apparent robbery in Bakersfield, Calif. In October 2012 the industry was shaken by the grisly tale of three people who allegedly kidnapped the owner of a lucrative dispensary in Orange County. According to court documents, the assailants zip-tied the victim, tortured him and drove him to a patch of desert where they believed he had buried large sums of money. When the kidnappers couldn’t find it, they allegedly burned him with a blowtorch, cut off his penis and doused him with bleach before dumping him along the side of a road. (He survived.) “Marijuana dispensaries are full of cash,” Melinda Haag, the U.S. attorney for Northern California, said in 2012. “They are at risk of being robbed, and many of them are.”

When Colorado began assembling its retail pot market, the guiding principle was safety, says Barbara Brohl, the state’s head cannabis regulator. The plan was meant to bring marijuana out of the shadows and into the stores, where inventory is tested and tracked. After 55% of voters approved a constitutional amendment to legalize recreational cannabis in November 2012, a task force created by Democratic governor John Hickenlooper scrambled to write rules for everything from packaging to advertising.

The state took steps to block underage use, cap purchases and deter people from driving while stoned. Regulators made stores grow 70% of the product they sell, an onerous requirement designed in part to limit supply, which might in turn prevent rogue dealers from amassing product and transporting it across state lines.

But one major issue was beyond the state’s control. Federal law prevents banks from transacting with businesses connected to so-called Schedule I drugs. That means the array of companies based in the 20 states (plus the District of Columbia) that allow medical-marijuana sales cannot legally do business within the financial system.

Denied this access, dope merchants are forced to find ways around the restriction. Through “don’t ask, don’t tell” relationships with sympathetic bankers, some businesses obtain accounts under an owner’s name or those of affiliated consultancies. At one point, as the number of medical-marijuana dispensaries in Denver grew to exceed the number of Starbucks, a single bank in Colorado Springs had an estimated 300 cannabis clients. But over time, hefty cash deposits trigger the scrutiny of compliance officers, who can shut the accounts. And the spotlight has only made banks more skittish.

Long business relationships often end without warning. Kayvan Khalatbari, a co-owner of medical-marijuana dispensary Denver Relief, maintained an account for four years at the Alabama-based bank BBVA Compass as well as one with a merchant-processing company, which allowed customers to use credit cards. “They knew damn well what we were doing,” he says. In May, Khalatbari received notice that the bank was closing his accounts. After a lengthy search, he was able to find a replacement bank whose representative allowed Denver Relief to transact through a shell company. To reduce the amount of currency it carries on-site, the dispensary uses a cashless ATM system in which customers swipe their debit cards and get receipts. But employees are still forced to make daily trips to the bank in their cars, scrambling their schedules to stave off robberies. “It’s a huge issue,” Khalatbari says.

“The lack of access to banking,” says Betty Aldworth, former deputy director of the National Cannabis Industry Association, “is hands down the single most dangerous aspect of legal marijuana.”

The tales are enough to make cubicle dwellers appreciate the wonders of direct deposit. Trips to vendors to simply pay a bill become white-knuckle journeys when your vehicle is crammed with cash. Employees at one shop fan out across Denver every month, visiting Western Union offices to pay the monthly rent in money orders. Another cuts fake checks to satisfy its payroll software, then distributes salaries in cash. Christian Sederberg, a lawyer who represents marijuana companies, has a client who carries $150,000 in a Kate Spade bag, scattering sums across different banks to escape notice. “It’s an invitation to robbery,” he says. “The fault will be squarely on the federal government when that happens.”

Colorado officials are eager to find a solution. “Our perspective is these are legitimate businesses licensed by the state,” says Jack Finlaw, Hickenlooper’s chief legal adviser. “They’re being regulated, following the rules and generating economic opportunities. We think they should have access to banks the same way any small business does.”

The Department of Justice, which has said it will not interfere with states that pass more-permissive pot laws, is aware of the contradictory banking rules. “We agree that it is an issue we need to deal with,” Deputy U.S. Attorney General James Cole told a Senate panel last fall. But in Washington, inertia is a more powerful force than consensus. Financial regulators, law-enforcement officials and banking representatives met to discuss a solution in December, but Justice spokeswoman Ellen Canale declined to confirm industry speculation that one was forthcoming. Says a senior law-enforcement source in Colorado: “There’s not going to be an easy fix.”

Even a signal that they won’t be punished for transacting with pot merchants may not be enough to coax national banks into taking the risk. “I’m not terribly optimistic,” says Robert Rowe, a lawyer for the American Bankers Association. “On this one, it would take an act of Congress.”

The industry has mulled several stopgap solutions for its surfeit of cash, from the digital currency Bitcoin to state-licensed banks. “I question whether we’re being set up for failure,” says Michael Elliott, executive director of the Medical Marijuana Industry Group. “The feds have always said this industry is going to cause crime. It’s almost like they’re trying to make that come true.”

Trouble Ahead

What’s happening in Colorado may soon be repeated elsewhere. Washington State is preparing to launch its own recreational-pot market later this year, and pot reformers plan to mount legalization campaigns in a handful of other states by 2016. Within five years, legal weed will be a $10 billion industry.

Twilight was falling on the first Friday in January as a few dozen marijuana moguls and lobbyists gathered for a political fundraiser in Denver. At a Mexican restaurant in the Capitol Hill neighborhood, they sipped margaritas and mingled with state legislators, giving off the giddy vibe of a group sitting on a gold mine. “We’re on the ground floor of a movement that’s much larger,” says Brooke Gehring, a former commercial banker who is now a partner in four Denver-area dispensaries.

But if the cash conundrum isn’t fixed, many of the popular reasons for legalizing dope will evaporate. Pot purveyors have eagerly accepted high taxes and burdensome regulation as the price of political legitimacy. The state is projected to take in $67 million in marijuana taxes in 2014, which it will deposit in accounts at national banks. The first $40 million raised from an excise tax on pot sales is earmarked for school construction. “We want to be transparent, legit and recognized as an industry that pays millions of dollars in taxes a year,” says Gehring.

Gehring, 33, recently wrote her will at the behest of her mother, who feared for her daughter’s safety because of the thick stacks of bills she sometimes carries. Those fears are a reminder that marijuana’s big moment could still go up in smoke.

This appears in the January 27, 2014 issue of TIME.
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