Mises Wire

Government Regulators Drive Legal Marijuana Underground

Following voter referenda in which the voters opted to legalize recreational use of marijuana, four states — Colorado, Washington, Oregon, and Alaska — 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 — which is regulated at the federal level — 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 of ”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 — one of the federal government’s agencies that regulates the financial sector — refused to allow these institutions to exist. 

The Fed, which vehemently 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 — even businesses that never touch physical marijuana, such as advertising agencies — 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 easily 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 in a 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:

“This strikes me as ludicrous,” Wykowski said. As a prosecutor, “all 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,” he said. “It is self-defeating for the government not to encourage people to use bank accounts and accept their cash.”

People in the business have been forced to be “more clever with banking, so a lot have indirect banking so they can pay with checks or wire transfers,” the lawyer said. He doesn’t want to give an exact definition of “indirect banking,” however, since “the Drug Enforcement Agency tries to foil any workarounds we come up with.”

For a while, Wykowski said, one strategy was to hire an armored car service that would deposit the client’s cash in its own general account, then wire it to the client’s banks, and that the DEA found out and wrote a letter to the armored car company saying it would pull its license if it didn’t stop. The DEA said in a statement they didn’t send such a letter but did have “some telephonic discussions with multiple armored car companies.” These discussions, the DEA said, were to advise the companies “of things we were observing in the ‘state legalized’ marijuana business.” The DEA does not have direct jurisdiction over licensing decisions made by state authorities. (The armored car company didn’t 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 less 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

Ryan McMaken is the editor of Mises Wire and The Austrian. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. Contact: email, twitter.

Image Source: commons.wikimedia.org/wiki/Cannabis_sativa#/media/File:Hanf.jpg
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