Rocky Mountain Highs & Lows

As you no doubt know by now, as of January 1^st the State of Colorado has legalized the recreational use of marijuana.  This has created a huge industry almost overnight and equally huge problems that will probably require an act of Congress or Supreme Court Ruling to resolve.

The basic problem stems from the fact that pot is an illegal substance in the United States.  The Controlled Substances Act lists marijuana as a schedule 1 controlled substance.

Schedule I Controlled Substances

Substances in this schedule have no currently accepted medical use in the United States, a lack of accepted safety for use under medical supervision, and a high potential for abuse.

Some examples of substances listed in Schedule I are: heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), peyote, methaqualone, and 3,4-methylenedioxymethamphetamine ("Ecstasy").

The penalties are severe:

Possession of any amount of marijuana (even a single marijuana cigarette) is punishable by up to a year in jail and a fine of $1,000 on the first offense. The second offense carries a 15-day mandatory sentence, and can be extended for as long as two years in prison. Any possession after that gets a 90-day to three year prison term, and a $5,000 fine. 

The sale of anything less than 50 Kilograms of marijuana is punishable by up to 5 years in prison and a whopping $250,000 fine. Selling more than 50 Kilograms is generally something that is relegated to the criminal underworld, but the penalties get exponentially worse:

50-100 Kilos distribution/cultivation: Up to 20 years in prison, with a $1,000,000 fine

100-1000 Kilos distribution/cultivation: Mandatory 5 years, up to 40 years in prison, with a fine of $2,000,000

1000 Kilos+ distribution/cultivation: 10 years to Life in prison, with a $4,000,000 fine

What's more, distribution of anything over 5 grams to a minor (under 21 years of age, not 18), OR within 1,000 feet of a school, housing project, youth center, video arcade, public pool, or playground automatically doubles all the punishments listed above (both jail time and fines).

The federal government can even administer the death penalty for marijuana sale. This is reserved only for the heads of criminal enterprises that distribute more than 60 metric tons of marijuana OR annually make more than $20,000,000 from marijuana sales.

Since by definition, federal laws supersede all state laws, Colorado marijuana growers face a huge risk.  But this is just the beginning of their problems. 

The fact that they are, in effect, cultivating and selling illegal drugs, has made it impossible to get banking services.  Banks who accept deposits from the growers are at risking prosecution for money laundering.

The potential punishments for money laundering are extremely severe: 

·        Criminal sentence of up to 20 years in prison

·        Criminal penalty of up to $500,000 in fines

·        The government can file a Civil Penalty lawsuit for the value of funds or property involved in Money Laundering

·        The Department of Justice also has the unique power under money laundering laws to pursue civil lawsuits against financial institutions even though they may not have been charged with the crime of money laundering.

§  Suits are based on allegations that employees laundered money

§  The lawsuit seeks recovery of the amount of money laundered

So without banking services how do you operate a supply chain?

Surely most suppliers will accept cash in payment for their goods and services (money laundering laws focus on cash transactions of more than $10,000).  The biggest problem arises when they need to pay taxes.

At the state level, where sales tax revenue from marijuana is expected to exceed $100 million in 2014, growers have been paying their tax bills with wads of cash. 

Now we come to Al Capone’s problem.  Capone, if you recall, went to Alcatraz for tax evasion. Not paying taxes (regardless of the source of income) is not an option.  That leads us to the question, how will they pay the IRS? 

According to their website.  The IRS can accept Debit or Credit Cards; Electronic Funds Transfer; or Check or Money Order.  Without banking services all of these options are beyond the growers reach. 

President Obama and his Justice Department have pledged not to prosecute the banks and growers but unless the law is changed, the banks won’t participate.  I am certain that the government will come down hard on these folks if they fail to pay taxes.

I have other nagging questions as well.

·        How did the growers get started?

·        Where did the seeds to grow the plants come from?

·        How do you operate a supply chain when the risks are so great?

Some of my students are helping me to get these answers and more.  Stay Tuned!