Perils & Pitfalls: Banking In The Cannabis Industry
In this blog, we explore the obstacles cannabis businesses face in establishing and maintaining banking relationships as well as what federal regulators are considering in response.
Banks and credit unions can bank cannabis businesses as long as they comply with the Financial Crimes Enforcement Network’s guidance:
“In general, the decision to open, close, or refuse any particular account or relationship should be made by each financial institution based on a number of factors specific to that institution. These factors may include its particular business objectives, an evaluation of the risks associated with offering a particular product or service, and its capacity to manage those risks.”
However, cannabis companies frequently have their accounts closed with no notice, leaving them scrambling for other banking options.
The cannabis industry isn’t the only industry that faces these hurdles to safe banking. Other federally legal industries that pose huge banking challenges due to their high regulatory burden include the following:
Check Cashers
Tattoo Shops
Payday Loan Companies
Pawnshops
Guns and Ammo Companies
These industries also have a hard time establishing banking relationships and keeping their accounts open.
Banks are risk-averse by nature, so they may not want to bank industries that will put their portfolios at risk.
BURDENS CANNABIS COMPANIES AND BANKS
The burdens and increased work loads are shared mutually between banks and cannabis businesses. Record retention is critical for dispensaries in keeping their banking relationships healthy and their bank accounts open. Dispensaries have to keep carefully maintained records of customer details including:
Name
Age
ID
Verification that they’re a legal purchaser
Banks have to scrutinize all transactions on a quarterly basis which means they have to hire additional staff to handle the steep regulatory requirements.
Regardless of your operation’s banking status, RMCC can help implement best practices to ensure you maintain accurate records to keep you compliant.
Debit and Credit Card Transactions
While it may be true that a majority of cannabis businesses are banked, that doesn’t mean that these businesses are able to handle non-cash transactions. Branded card networks prohibit cannabis transactions on their networks.
However, plenty of businesses use workarounds to accept these transactions. Some use third-party processors that provide misleading information regarding the nature of the business. They might claim the dispensaries are flower shops or health food stores. Once a business does this, it is lying to a financial institution and can face serious consequences – the punishment could be as severe as a $1 million fine or 30 years in prison. The financial institution is also at risk of federal enforcement actions in these situations.
Businesses looking for acceptable payment methods should stick with cash or transparent electronic transfers. Cash will likely always be a payment option in the cannabis industry. Businesses that opt for transparent payment solutions can offer convenient electronic payments. Then, if the branded card networks allow cannabis transactions, the business has already been underwritten and can more easily "flip the switch" to offer card payments.
Access to the credit and debit card transactions through branded-card networks will likely depend on federal legalization.
Legacy Cash
Legacy cash is cash earned before establishing a banking relationship. Once the banking relationship is established, operators are unable to deposit those funds because the bank doesn’t know that the cash is legitimate. In the bank’s eyes, it could easily be cash obtained from money laundering or from terrorists.
legislative response
So, what are federal legislators considering in response to these issues? We’ll go over a few pieces of legislation pertaining to banking the cannabis industry:
The SAFE Banking Act “HR 1595 – Secure and Fair Enforcement Banking Act of 2019”
Purpose: The purpose of this Act is to ensure access to financial services to cannabis-related businesses and service providers and reduce the amount of cash at such businesses. The bill would enable banks to offer loans and other banking services to marijuana businesses, including contractors and vendors who never touch the plant.
Status: The Secure and Fair Enforcement (SAFE) Banking Act passed in the House of Representatives and made history as the first standalone marijuana bill to be passed by a House floor vote. The Senate received the act on September 26th, 2019 and referred it to the Committee on Banking, Housing, and Urban Affairs where progress stalled.
More recently, the House included the Secure and Fair Enforcement (SAFE) Banking Act in the COVID-19 relief legislation it approved in May; however Senate leaders have not shown a willingness to advance the bill in its current state. While the SAFE Banking Act could end up on the cutting room floor during review, it is possible that some version of the legislation might be included in the next relief package.
Some believe that this bill won’t change much. If a big bank is unwilling to bank other high-risk industries that are federally legal, the SAFE Act isn’t going to change that. However, I think the SAFE Act will help cannabis businesses achieve a level of legitimacy at the federal level. It may be more symbolic than practical but it feels like an important milestone, especially as cannabis businesses are deemed essential in states with cannabis programs. These essential businesses are forced to handle cash, posing health and safety risks for operators, employees, and customers alike.
MORE ACT – Marijuana Opportunity, Reinvestment, and Expungement Act
Purpose: The bill removes marijuana from the Controlled Substances Act and creates several grant programs to repair harm created by marijuana prohibition. This bill also seeks to foster social equity in the industry and offers tax relief related to section 280E of the Internal Revenue Code. It’s paid for by a modest excise tax on sales from cultivators and processors and would make cannabis businesses eligible for stimulus relief programs.
Status: The bill was making steady and slow progress but has a long way to go. The bill made history by being the first bill to end federal marijuana prohibition to be approved in any congressional forum. It was also the last thing the House Judiciary Committee held a vote on prior to the impeachment proceedings. Believe it or not, two republicans even voted in favor of the bill. Since the bill is so comprehensive, it was referred to several committees that need to hold their own hearings.
STATES ACT
Purpose: This act was a response to the criticism that the MORE Act is too aggressive for senate republicans to consider.
Status: Unfortunately, this bill lacks bipartisan support. It is similar to the MORE Act but does not have the social equity components or response for people harmed by marijuana prohibition. Democrats do not support it for this reason and republicans have largely ignored it.
Appropriation Amendments
These are spending restrictions to the bills that fund various federal agencies. The Rohrabacher-Farr amendment prohibits the Department of Justice from prosecuting individuals and businesses acting in compliance with state medical cannabis programs. While a version that included adult-use cannabis programs passed the house with strong bipartisan support, the adult-use portion was stripped out of the final version of the bill by Senate republicans.
For the time being, these efforts are mostly symbolic but with more states creating medical and adult-use cannabis programs, these amendments may become more meaningful moving forward. Amidst the COVID-19 pandemic, states are deeming dispensaries and supply chain cannabis businesses essential. With dispensaries forced to handle cash and encouraged to provide delivery and curbside services, the dangers of operating cash only and essential businesses are clear. Legislative action, even if short of full legalization, is critical and must come soon.