Fed Examiner Turned Pot Executive Says Banks' Fears Are Overblown

Similar to the end of Prohibition, the rush is now on to build business empires in a once-illicit industry. Back then the newly legitimized companies sold alcohol, while today they're catering to marijuana users.

Seattle-based Privateer Holdings, which was founded in 2011, has emerged as one of the best-capitalized companies in the booming pot industry. Two of the firm's three co-founders are former bankers, and the company has raised $82 million in private capital to build a business with global ambitions.

Privateer is currently supplying the medical marijuana market in Canada, and operating a cannabis information website and mobile app that get more than seven million page views each month. The firm has 250 employees, including horticulturists, PhD scientists, plant biologists and experts in supply-chain management and marketing.

And soon, the company plans to launch Marley Natural, a brand of pot that it developed in partnership with the family of the reggae legend Bob Marley. The brand's use of Marley's likeness is drawing comparisons to the Marlboro Man of a bygone era.

But for all the professionalization of the booming industry, pot distributors and manufacturers still struggle to find banks willing to accept their business. Even though 23 states and the District of Columbia have legalized the drug, most U.S. banks are spooked by the fact that it remains illegal under federal law.

This week Privateer announced the hiring of Dante Tosetti, a former bank examiner at the Federal Reserve Bank of San Francisco, as its director of treasury compliance. He joined Patrick Moen, a former investigator for the U.S. Drug Enforcement Administration, who was hired in 2013 to run the company's compliance efforts.

Part of Tosetti's job is to find a solution to the pot industry's banking problem. That may sound like a tall order, since many observers believe that a thaw will not happen until Congress changes the law to provide clear protections for banks.

On the other hand, the pot industry does have momentum, as more states are legalizing the drug, Congress has shown some sympathy to the industry's plight, federal agencies have taken steps meant to offer a degree of comfort to skittish banks, and some banks have quietly started serving the sector.

In an interview Tuesday, Tosetti and Moen both said that they approached Privateer about job opportunities, figuring that their backgrounds inside the federal government would be an asset.

"I saw that my knowledge and skill set was intersecting with the cannabis industry, which was going mainstream. I wanted to be part of professionalizing and setting standards for an entirely new industry," Tosetti said.

"When I gave my notice to leave the Fed, the response was congratulatory," he added.

The two men also spoke about how the pot business is changing, and why they think banks should open their doors to the industry. The transcript has been edited and condensed for length and clarity.

As you look at the cannabis industry as a whole, how has the level of professionalism changed over the last couple of years?

PATRICK MOEN: It has definitely and noticeably increased. We're starting to see the involvement of more folks with professional backgrounds. We're also starting to see, from an investment perspective, a lot more interest from institutional investors.

That being said, you still have a ways to go. There is a certain level of risk tolerance required for this space at this point in time. And so you have certain players that still are sitting on the sidelines.

Obviously a company like yours — pretty large now, fast growing, global in scope — is going to need to have banking relationships. Has that been a problem for you?

DANTE TOSETTI: We're in good standing with various financial institutions both in the United States and in Canada. Our relationships with our banks is what I believe is one of our many competitive advantages in this space.

The banks and credit unions that are doing business with companies like yours, are they charging quite high prices?

Tosetti: I just began looking into that. I've heard where the pricing is too high from some of the proprietors in the industry. That was kind of surprising to me, considering the alternative is not having an account.

In terms of the reasonableness of pricing, it's all relative. Here we have, as of right now, a cash-intensive business. I believe the proprietors would be willing to pay a substantial fee to have access to just basic banking services. Consider the costs that they're facing without having a bank.

Obviously a lot of banks remain wary. Tell me about how the Federal Reserve Bank of San Francisco viewed the industry while you were there.

Tosetti: Of course I can't speak for the Fed. Yet I want to say this. I had the opportunity to go around the country and meet various counterparts at other districts. The Fed is operated by some of the most intelligent and socially conscious professionals that I've come across in my career.

They see the problem, and they want a solution as well. But the solution must be the right solution for the Fed, and it must be done the right way for the Fed, and nobody could blame them for that.

Do you think there are differences in terms of how different regional Fed banks and the Fed board in Washington are all viewing the risks associated with this business?

Tosetti: The way I see it is the businesses are looking to the banks for an answer, and then the banks are looking to the regulators for the answer, and the regulators are looking to Congress for the answer.

And if you ask me, the answer is going to be found within the relationships between the banks and the industry. The answer's going to be found within the private sector.

And when those answers are identified, it will roll up to regulatory oversight, and roll up to Congress. So I think maybe we should reverse the cycle a little bit. Instead of looking to Congress, we should look back to the banks and the industry to find answers.

I hear again and again, from the standpoint of bankers, that only Congress can fix this problem. Do you disagree?

Moen: The fact of the matter is the vast majority of banks operate in states where cannabis is legal in some form. And when they take this position of "We won't service the industry," their clients are just going to bank with them under false pretenses.

These banks are better off establishing policies that provide services to these companies, and enable these companies to do so in a transparent manner, so everybody involved understands the risks and the activities.

One of the other things I hear from banks is, "We don't know what's going to happen in 2017 when there's a new president." It could be someone who has a very different view of this industry, takes a more law-and-order approach. Do you think that's a significant risk for your industry as well as for banks that are serving it?

Tosetti: Everybody's political viewpoint is different, but I don't believe that the federal government is going to want to infringe on the sovereignty of its states within the union.

Clearly there is a lot of momentum, if you look at the broad scope of history, toward legalization and regulation. Do you have thoughts about how long it's likely to take for this industry to become completely uncontroversial and accepted legally?

Moen: It's obviously highly speculative. This is a mainstream product with mainstream consumers. The end of prohibition is inevitable. It's just a matter of time. The American public is overwhelmingly in favor of this. The obstacles seem to be just a few remaining holdouts. If you had to pin me down, I'd say two years. But I think one to four years is a good estimate.

And you're talking about not necessarily all 50 states enacting legalization, but the end of federal criminalization?

Moen: I'm specifically referring to federal prohibition. We're going to see an increasing number of states legalize, but there will be some holdouts.