Legalized marijuana may be a boon for Southern Oregon, but the banking industry's unwillingness to risk federal penalties by holding pot-tainted money means more cash is circulating through the local economy — a lot more.

"We're seeing much more cash," says Jeri Reno, chief operating officer at Medford-based People's Bank of Commerce. "It really is the unintended consequences of passing new state laws."

After years of moving away from cash, financial institutions have been yanked back in time by the burgeoning cannabis industry. Cash crop money spent at grocery stores and retailers and paid to builders and handymen is circulating in increasing volumes and eventually finding its way to banks.

"We don't bank directly with marijuana businesses," says Dawn DeVita, vice president and operations manager at People's Bank, Southern Oregon's only locally headquartered bank. "But we have cash-intensive clients. So indirectly, we have a cash society again. We kind of went back 10-plus years."

The real uptick came when recreational use became legal in July 2015 and growers began obtaining licenses from the state in May 2016, Reno says.

The widespread impact is best illustrated by the supply chain.

"A marijuana grower is going to need irrigation, fencing, greenhouse supplies and soil," Reno says. "So you can see how far-reaching it is in that it impacts so many businesses in the valley."

Building supply firms, for example, saw an immediate response as growers acquired fencing and other construction materials.

"We've had people come in and pay three, four or five thousand dollars in cash for the materials they needed," says Becky Hingle, office manager for Hughes Lumber Co. "We've seen a lot of cedar fencing go out of here."

Oregon Bankers Association CEO Linda Navarro says banks have two primary worries: Regulatory compliance, which often is a moving target, and federal law that classifies marijuana as a controlled substance in the same category as heroin.

"Financial institutions have to determine if they're violating federal law and complying with burdensome regulations at the same time," Navarro says.

She says 90 percent of Oregon's banking institutions have taken a hands-off approach to the cannabis industry.

"There were some who dipped their toes into the water and got back out of it just as quick," Navarro says. A couple of smaller institutions in the northern part of the state tried working with secondary businesses created specifically for the industry, such as security firms, but regulatory slip-ups or federal action proved too much of a risk, she says.

The reality, Navarro says, is many businesses derive income in one form or another from the cannabis industry.

"Whether it's cities, counties, utilities, the local fencing company, hardware stores or fertilizer sellers, who isn't going to have some overlap?" Navarro says.

Without a bank account, dispensaries must pay their employees, landlords, lawyers and electricians in cash, says Brie Malarkey of Breeze Botanicals, which operates shops in Ashland and Gold Hill, a processing plant on Vilas Road and farm in Shady Cove.

"We spend most of our life delivering cash," Malarkey says. "Our employees get paid in cash, we have to stand with them while they count, confirm and sign for the amount. It's the same with our vendors."

Because the Internal Revenue Service requires electronic fund transfers, Malarkey had to repeatedly open accounts to make tax payments last year.

"We'd open an account and pay the IRS before the bank shut it down," Malarkey says. "We never lied about it, we just didn't offer it was cannabis money."

An array of anti-terrorism and money-laundering components wrapped into the Bank Secrecy Act put banks in an economic minefield of dealing with communities awash in cash while complying with federal regulations.

The  Bank Secrecy Act requires banks to monitor customer deposits for any Anti-Money Laundering law violations and file reports of suspicious activity to the U.S. Treasury. Failure to file suspicious activity reports can result in criminal and civil penalties, including jail for involved employees. Technically, a bank itself commits money laundering by accepting money derived from the sale of marijuana.

Marijuana-related or not, cash-intensive industries demand more monitoring. That means more expense in adding backroom staff for financial institutions.

"It has evolved over the last five years," DeVita says. "We have daily reports, weekly, monthly. We look for behaviors with algorithms for things outside of normal business patterns. Based on our size, we've seen a substantial increase in those. It's nothing directly related to the marijuana industry, but to BSA regulations."

Even though marijuana activity that often operated out of sight in Jackson and Josephine counties is now sanctioned by state law, bankers still have to keep their eyes wide open. The challenges for banks are substantially no different today than they were when states began passing laws permitting medical and recreational use, dispensaries and grows.

"Our area has always been categorized by the Bank Secrecy Act as a high drug-trafficking area, just because we're on the I-5 corridor, even back 10 years," DeVita says. "We have cash-intensive clients we have to monitor, report, and do due diligence. We can track electronic transactions much easier than cash transactions. With electronic transactions, you know the originator and the beneficiary. With cash, you don't know where the originator came from, you only know the beneficiary. That's the really ironic thing."

Privacy requirements don't allow the bank to talk about how many accounts are affected, DeVita says.

"Indirectly, all of us have seen more cash, even consumers, based on friends having cash, or this or that," she says. "It's part of the whole industry in the community."

Banks don't specify how much more cash, citing security issues, goes through their counting machines and is shipped out of town by armored trucks.

"We've had to heighten our security standards and awareness," DeVita says. "We're shipping (cash) out sooner rather than later; which is also an additional expense."

Likewise, she says, businesses are more likely to unload cash more often.

"You've got the Grange, Home Depot or others using armored cars so they don't put their employees at risk," DeVita says. "Fast food places seeing a little more cash are just making more deposits — twice a day, maybe a drop in the morning and then a drop at night. Maybe they're buying a little bigger of a vault or using armored cars for transport."

Marijuana dispensaries themselves have had to devise ways to deal with the influx of cash.

"A lot of the dispensaries use a third party with a lot of their shipments to their central vaults," DeVita says. "Because they're not bankable, typically they have created their own infrastructure."

One financial institution, Salem-based Maps Credit Union, has offered services to licensed operators, but it doesn't advertise its marijuana dealings and requires clients to sign a non­disclosure agreement when the account is opened.

Maps CU has managed to walk the legal and regulatory tightrope, albeit less foreboding than banks might face. The institution runs such clients through a litany of tests and checks that are both expensive and labor intensive. To this point, however, the service hasn't been available in Southern Oregon.

One reason marijuana cash stays local longer is that unless it goes to a vault, it's recycled into other businesses, says Marc Armstrong, president of Commonomics USA, a management consulting firm.

"You're finding a significant buy-local movement in Humboldt County (on the Northern California coast)," Armstrong says. "You can't use a $20 bill to buy something on Amazon, so it ends up being a local currency, accepted and circulated. A lot of the communities (where marijuana is grown) are isolated, so it's not like they're going to travel to the big cities to buy things."

Still, there are plenty of people who would like to see cash curtailed, he says.

"There's an inconvenience issue associated with people who would rather not have cash on hand and be forced to use it," he says. "Banks don't incur that sort of problem, but they may have greater risks because of (legal and regulatory) issues associated with cash."

OBA's Navarro anticipates Congress may eventually revisit marijuana if enough states legalize medical and recreational use. But as long as marijuana remains illegal at the federal level, the problem of the cash it produces will remain.

"It's a real gray area for the businesses with that much cash circulating around the streets," Navarro says. "Trying to figure out how to get it into the banking industry is a real challenge."

— Reach reporter Greg Stiles at 541-776-4463 or business@mailtribune.com. Follow him on Twitter @GregMTBusiness.