View original publication on CannaBrunch.net.
On September 19, John Vardaman of Hypur, will speak at Kahner Global’s 3rd Annual Cannabis Private Investment Summit in New York. This event gathers industry leaders and investors for a day of collaboration and networking.
John Vardaman spent 10 years working at the U.S. Department of Justice, working on everything from national security to marijuana banking. He helped draft the Cole memo, the DOJ policy that the entire state-legal cannabis industry hinges on. Now, the attorney serves as the EVP and general counsel for Hypur, a technology company that helps financial institutions serve cash-intensive businesses like marijuana companies.
“It’s exciting to be part of an industry that’s growing in the way that the cannabis industry is,” he said in a recent interview. “It continues to enjoy a very unique status in our legal system, which makes it very interesting in terms of the disconnect between state law and federal law. As a lawyer, I’m very interested in it from that perspective.”
We got his take on the current administration (“relatively optimistic”), what financial institutions make of marijuana money, and how the industry can gain the trust of banks.
This interview has been edited for length and clarity.
There are a lot of media reports about the lack of access to banks for cannabis companies. At the same time, there are reports that there are plenty of banks out there that will work with the industry. How does a cannabis company – especially a plant-touching one – go about finding those institutions when they’re constantly having their bank accounts shut down?
It’s admittedly a problem because there’s a lot more demand for banking access than there currently is supply. It’s still a difficult concept for a lot of financial institutions to get their heads around, but you can actually permissively service an industry that remains illegal under federal law.
It really is about education and explaining how this can be done, and why it’s in the interest of the institution to consider it. And also [how] they can perform a community service by enabling these businesses to operate as legitimate businesses. That way, businesses can be monitored, and it can be taxed, and you avoid all the safety and transparency problems associated with banks operating in cash-based industries.
Are the institutions you talk to generally receptive of that message?
If they’re talking to us at all, it means that there’s probably a certain level of interest. Sometimes, it can just be a curiosity. Sometimes, it can be that this is something they’ve already decided and they just want to know how best to do it. Every institution is different.
But I can tell you that without exception, every institution that we talk to [feels] better once they have the benefit of our understanding of this market from a compliance side and a legal side. Then you couple that with our technology, which is specifically designed to meet the needs and challenges of this industry. That’s not always the end of the story – you’re talking to boards of directors, and you have to clear a lot of hurdles. But invariably, when we talk one-on-one with a bank, I think we’re able to make them understand why this can be done how it can be done responsibly and profitably.
Going back to your experience at the DOJ, what is your take on this administration and Jeff Sessions? Are you optimistic or pessimistic about what they’ll do?
It’s no secret that the attorney general is no fan of this industry. Given the fact that so much of the industry is operating on federal policy which can be changed in an instant — it doesn’t require an act of Congress — I understand why there is concern as to what steps this administration might take.
I think I probably consider myself a little bit more optimistic than a lot of people. This is an industry that has gone so far down the track that to try to undo it is just not feasible, even if they’d want to do it. From a law enforcement perspective, the guidance that I worked on alludes to the fact that federal resources are limited. I just don’t think that trying to stamp out the state-legal marijuana industry is a high law enforcement priority. They can expect very little cooperation from states that historically have worked with the federal government on marijuana enforcement. I think those days are over.
It’s obvious what the attorney general would like to do. But for a lot of practical reasons, it’s unlikely that they’re just going to simply rescind the guidance that is currently in effect and try to go back to a policy of full enforcement.
Some additional guidance could be forthcoming and I’ve met with some of the people involved with making recommendations to the attorney general on this subject. One of the things that I’ve stressed to them is the absolute need for more banking access to this industry and maybe some additional guidance on that front would go a long way towards giving banks the comfort to actually get in. Any signal that current policies are going to remain more or less in place would be an incredibly affirming message.
I remain relatively optimistic. But we’re obviously still in a wait-and-see mode. There’s reason for hope that the system we have in place will be allowed to continue in some form.
One of the scary headlines recently was the story of PNC bank shutting down MPP’s bank accounts, which they have served for over 20 years. It seemed to signal some future enforcement that focuses on money laundering. Do you have any thoughts about that story or the possibility of money laundering charges being a way for them to go after the industry?
Up until a few years ago, before you had legalization at the state level, it was never an issue for them to bank a group like MPP because they are just an advocacy group. Now, banks across the country are actually servicing the industry — plant-touching businesses and all other associated businesses. That may be why they now feel like they don’t want to be associated with this at all because some people might think they’re serving marijuana businesses themselves.
A lot of the big banks like PNC have made it very clear that from a reputational standpoint, they just don’t want to be associated with the marijuana industry. They don’t really need the marijuana industry. The money that they’d get from it would be just a rounding error for them. But a community bank or a regional bank could decide that they do want to get into the industry, and the money that they could make is worthwhile.
As for the money laundering – that threat is always there. There is no getting around the fact that any marijuana proceeds that go through a financial institution are a per se violation of the money laundering laws. That’s true even in states where it’s been legalized.
I was working in the money laundering section to draft guidance as to how DOJ was going to enforce or not enforce money laundering laws when it comes to marijuana banking. If they wanted to, they could shut down every single bank that’s doing it and charge them with money laundering. They obviously made the decision not to do that because from a policy standpoint, if you’re going to have state-legalized marijuana, it’s better to have those businesses banked, where their money can be accounted for.
One of the things that states have tried to remedy this problem is to create their own banks or their own credit unions to serve the industry. There was Fourth Corner in Colorado and there’s been talk in California about creating a bank. Do you have any thoughts on whether states should be trying to do this? Is that a feasible stopgap measure right now?
I think for a lot of logistical and legal reasons, that’s an uphill climb. Fourth Corner is a perfect example: The Federal Reserve basically said that they’re not going to issue a master account so long as marijuana remains federally legal. I think any state that tries to set up their own bank is going to run into the same problem. If a state-chartered institution is a solution to this, I think it already would’ve already been done. California could potentially find that out the hard way.
Looking towards a state bank is missing the fact that you don’t need a new institution. All you need to do is enable existing institutions to do it. And that means giving them as much certainty that if they do this, they’re not going to incur any liability. Ultimately, the answer will be getting existing banks involved rather trying to start one from scratch.
What would you say to a potential investor who is concerned with the amount of cash going around or just with risk involved with investing?
I don’t know if that would necessarily concern me. It doesn’t necessarily adversely impact whether or not a business succeeds or not. From a macro standpoint, if I’m an investor looking at the marijuana industry, it starts with: What is the likelihood that this industry is still going to be around and whether it’s going to be allowed to continue to grow at the rate that it has been? And I think the answer to those two questions is yes — there’s no questioning that this is a growing market. There is considerable investment opportunity for people, it’s still very much in its early stages.
I also think that the more investment money and the more responsible actors that get involved in this industry, the more likely it will actually be around and permitted to continue. One of the longstanding concerns of state-legalized marijuana is that it would just be run by a renegade industry. The evidence is proving just the opposite. This industry does take its compliance and safety responsibilities seriously. The more serious people that get involved, the less likely it is that critics would point to this and say it’s being run irresponsibly.
In your work with Hypur, do you see any trends that stick out in terms of the intersection between the cannabis market and financial services? Things cryptocurrency are really buzzy and get a lot of press. Do you think they have a long-term staying power?
There are no shortages of new businesses and purported solutions that have sprung up in the last couple years that have tried to address the payment piece of marijuana commerce.
There’s the payments piece and there’s the banking piece. We see this as more of a banking issue rather than a payments issue. You mention something like bitcoin – for all its appeal I think it’s actually going in the exact wrong direction from the standpoint of marijuana commerce. The marijuana industry needs transparency, and having an anonymous means of transaction is the exact wrong way to go.
This industry needs to embrace transparency because people are watching, the federal government is watching. All sorts of bad things are done through bitcoin transactions because it’s anonymous. I don’t think the marijuana industry wants to be associated with something like that. The answer lies in the other direction — we’re embracing transparency, we’re not hiding anything and so we can show we’re being fully compliant with federal policy and state law. I think the best way to do that is to get these businesses a bank account.
A bank account enables a marijuana business to do payroll services, to send and receive checks, to send and receive wires, to pay taxes electronically. No bitcoin, no kiosk, and no payment application can address those basic foundational concerns.