When President Donald Trump tapped then-Sen. Jeff Sessions to be his attorney general, the cannabis community wasn’t happy. The thought of a man who had characterized legalization as a “tragic mistake”—and who infamously quipped that he thought Ku Klux Klan members were “OK until I found out they smoked pot”—leading the Justice Department fueled fears of a return to time of armed raids and jail time for cannabis businesses operating in legal states.
Industry insiders, however, suspected a subtler approach. The first casualty, some predicted, would be the industry’s access to capital. Sessions’ mere presence as America’s top cop, they warned, could scare away banks and investors.
Ask the owners of Confidence Analytics, a cannabis testing lab in Redmond, Washington, that’s now embroiled in a lawsuit with Walla Walla–based Banner Bank, and they’ll tell you that’s exactly what happened.
In early 2016, the lab’s owners were shopping around for banking services, looking to upgrade from the local credit union account they’d been using. “We went to a couple banks looking to see who would open an account for us, and Banner Bank was very willing,” Confidence co-owner Nick Mosely told Leafly.
Soon after setting up their commercial account, Mosely said, their banker at Banner’s Redmond branch, Tony Young, approached them about business loans. “Tony was very eager to start talking to us about loans,” Mosely said. “And it was timely, because we had just heard about these new testing requirements coming up.”
As part of what was then a new law merging the state’s medical and adult-use cannabis systems, testing labs would soon need to begin screening for pesticides and heavy metals in addition to the regular potency and microbial tests they’d had been performing. That meant a need for expensive new equipment. Young’s loan pitch couldn’t have come at a better time.
Confidence began the loan application process, and in May 2016—just as Trump was for the first time overtaking Hillary Clinton in some presidential polls—the bank funded a loan for $135,000. The lab purchased two pieces of testing equipment, began paying back the loan, and went on with business as usual.
Later that year, in November, Mosely checked in with Eric Scroggins, Banner’s branch manager whom Mosely said they’d been passed off to after Young retired, to see about getting another loan to fund a friendly takeover of a struggling Oregon lab.
“We were going to need to tool them up in order to be compliant with Oregon’s new rules—they needed pesticide and heavy metals, all the stuff that we already knew how to do—so we went back to Eric saying, ‘We’re looking for a loan.’ He said, ‘Sounds good, let’s start the application process and get this rolling.’”
Then, shortly after the presidential election, Confidence got a call from Scroggins, this time with a very different tone.
“I don’t have the exact dates,” Mosely said, “but it was late November—after the election, after Thanksgiving—that I received a call from Eric informing me that the underwriters or higher-ups above him had decided that we were not a business that they could do business with and that they were going to consider us in default of our loan for having violated federal marijuana laws.”
Mosely and his business partner, Bobby Hines, were shocked, they said. They had assumed that Banner was fully aware of their cannabis-related activities. After all, they weren’t exactly shy about it.
“Our logo has little pot leaves in it!” said Mosely. “Every signature on every email!”
Confidence had also discussed its business extensively and explicitly with Young, the owners said, and even hosted him for a site visit. Though Scroggins never visited the lab, they say he had requested a copy of financial documents detailing their relationships with clients.
“That included a list of all of our customers at the time, which was 400-some-odd marijuana farms, some of which have business names that are literally ‘Marijuana Farm,’” Hines said. “It’s pretty obvious.”
Regardless, in January 2017, the testing lab received an official notice of default. “Banner Bank does not do business with customers whose business is the cannabis industry,” It said. “Banner Bank, under controlling federal law, is not allowed to do business with such persons; and, as a matter of its own internal business policy, Banner Bank has determined that it will not do business with such persons.”
As a result of that notice, say Mosely and Hines, Confidence nearly went out of business.
“We laid off six valuable employees,” Hines said. “We lost a lot of money. Honestly, it hit us at a really bad time, because we had another instrument go down and we really needed capital to replace it, but we had just spent all of our capital on paying off this loan.”
Confidence is now suing Banner for damages, alleging “unfair and deceptive business practices.” In its complaint, first filed in March 2017, Confidence says that Tony Young gave them repeated assurances that Banner was comfortable working with the cannabis industry, which was allowed under a 2014 Treasury Department guidance memo, a document that remains in place today.
“They absolutely, 100% knew,” said Patrick Moberg, a lawyer for Confidence. Even if Scroggins and Young kept the nature of Confidence’s business activities hidden from their superiors, which he suspects they did, Moberg said a bank teller at Banner had independently identified Confidence as a cannabis account after receiving a deposit bag with a strong cannabis odor. (The lab uses deposit bags interchangeably for transporting samples and actual deposits, Moberg said.)
Scroggins’ call, Moberg, Hines, and Mosely now suspect, had less to do with the bank suddenly finding out that they’d accidentally lent money to a cannabis lab and more to do with recent political events. Trump’s nomination of Sessions was announced just before Thanksgiving, Mosely remembers, and the call came right after.
A representative for Banner Bank, Senior Vice President Dianne Larsen, said in an email to Leafly that the bank does not comment on “matters pertaining to client relationships or ongoing legal matters.”
“The federal government identifies cannabis as an illegal drug,” Larsen continued. “As Banner Bank is a federally regulated institution, we chose not to pursue banking relationships within the cannabis industry.”
In its response to the lawsuit, filed in King County Superior Court, Banner argues that they were never aware of the nature of Confidence’s business and would never have given them a loan if they were. In a countersuit, they alleged that Confidence purposefully failed to disclose that they were a cannabis business in order to secure the loan—a claim Mosely and Hines deny.
Asked whether Sessions’ appointment may have played a role in the bank’s decision, Russ Rosendal, the CEO of Salal Credit Union, one of Washington’s most active lenders to the cannabis industry, acknowledged that the appointment of Sessions certainly sent a chill through some financial institutions.
“We’ve heard of a number of people who had talked about trying to get into the business, both from the deposit and lending side, and they were testing and seeing how they could do it,” Rosendal said, “They just completely pulled out. If you were just dabbling in it, [Sessions’ appointment] would have scared you quite a bit.”
“I think that’s what happened,” agreed Moberg, the attorney for Confidence. “They saw other banks doing it, and they were like, ‘Why are we missing out on this money?’ And then they got scared when Trump got elected.”
Even in light of Sessions’ move last month to rescind the Cole memo, a DOJ guidance memo that encouraged prosecutors to not interfere in state-legal cannabis programs, Confidence’s case appears to be unusual. Nevertheless, it’s an indication of what many in the industry say is a tougher post-election climate for cannabis businesses seeking basic banking services or access to capital.
Even at Salal, which continues to work with the cannabis industry, Rosendal said the credit union has been much more careful about screening new accounts. The price tag for cannabis banking has also gone up. “Our rates are probably higher today than they were a year ago,” he said.
“Rather than trying to force the issue and go after somebody,” Rosendal expects Sessions’ aim has been “scaring off investors and financial institutions, and he sees that as a way to slow down the growth of the industry.”
“My impression,” he said, “is that’s what he’s trying to do.”
credit:420intel.com