Bank of America: Legalized Pot Revenues Are OK

Bank of America: Legalized Pot Revenues Are OK

Bank of America already has a jump-start on other institutions that may be looking to win the bid to be Washington state's bank of choice. B of A, the state's banker for the past seven years, may or may not wish to renew its contract. It has, however, indicated a willingness to do what rivals may not: handle state tax and fee revenues generated from the newly legal recreational marijuana industry.

This may seem like a no-brainer, since the business will no longer be illegal. But the fact that the state asked specifically about pot-related revenue indicates officials believe the issue could be problematic. Judging from the history of the legal medical marijuana trade, they could be right.

Legal, but not accepted
Sensibly, Bank of America noted that such monies would be little different than state revenue from medical marijuana, which it has almost certainly handled during its tenure as the state's main bank. But federal laws pertaining to drug laundering have scared many banks and credit card companies away from the budding industry.

This can be seen more clearly when it comes to medical marijuana dispensaries. Even B of A has shied away from handling accounts from those businesses, after being warned by the U.S. Drug Enforcement Administration more than five years ago. Wells Fargo served dispensaries in Colorado until 2011, and in California as recently as last year, but it has also backed away in light of federal laws that still treat cannabis as a controlled substance.

This puts dispensaries in the position of having to conduct business in cash, a dangerous proposition. In early September, Visa and MasterCard put a halt to the use of their credit cards at some California dispensaries, forcing even more transactions to be handled in cash. Though Visa stated that it had "not changed its policy," both companies may have been spooked by a threatened forfeiture action against a large dispensary in Oakland by the U.S. Attorney's Office in San Francisco.

Feds moderating their position
The government may be changing its attitude, however. The Huffington Post reported that a phone call between Attorney General Eric Holder and the governors of Colorado and Washington in late August addressed the issues of relationships between legally operating marijuana businesses and banks, including the concern about safety when entities are forced to deal solely in cash.

At minimum, the Department of Justice is not planning to interfere with the two states' legalization of marijuana and indicated that banks working with legal vendors of cannabis probably won't be charged with any federal drug crimes, including money laundering.

A profitable enterprise
Of course, doing business with a state government is much different than taking large cash deposits from pot growers, but a softening of the government's stance will go a long way toward opening up what promises to be a lucrative legalized marijuana industry. Though Colorado's revenue estimate of $60 million per year through 2017 has been criticized as being too high, the plan to institute taxes totaling 25% on pot sales should certainly help bridge any budget shortfall.

Washington state also plans a 25% tax on the production and sale of recreational marijuana, and the state plans to begin collecting licensing fees in November, and other taxes by next March. Though no one knows for certain, the state estimates receipts could total between $1.4 billion and $3.2 billion over a 10-year period.

As the concept of legalized marijuana gains traction, it will doubtless begin to spread beyond the few states that embrace it today. This means big money for state governments, as well as businesses that deal with the industry, either directly or indirectly. This includes financial institutions, which means that Bank of America may have opened itself up to a whole new profit stream.

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Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Bank of America, MasterCard, Visa, and Wells Fargo. The Motley Fool owns shares of Bank of America, MasterCard, Visa, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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