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The challenges of banking higher-risk businesses are not new to financial institutions. But the obstacles around banking the cannabis industry, which is still federally illegal, adds an entirely new element of challenges.
Obtaining an open banking relationship for cannabis businesses is not easy. And this issue doesn’t appear to be remedied anytime soon, with senators declining to take action until broader reform is advanced. Until then, legal cannabis enterprises are left with a patchwork of options that vary state to state, depending on the nature of their business and available banks or credit unions in their area.
Last year, FinCEN’s Marijuana Banking Update revealed an increase in cannabis-related business activity during the pandemic (some states deemed these businesses essential). At the same time, the number of banks filing Marijuana-Related Suspicious Activity Reports (SARs) decreased.
This decrease was primarily due to a delay in filing the marijuana-related SARs promptly. Bank employees adjusted to working from home. Marijuana-related SARs were no longer required for hemp-related businesses due to new FinCEN guidance FIN-2020-G001 after the 2018 Farm Bill removed hemp from the Controlled Substance Act.
More recently, FinCEN’s Marijuana Banking Update showed that 706 financial institutions filed Marijuana-Related SARs compared to 368 financial institutions in June of 2017. Out of the 706 institutions, 518 were banks, and 188 were credit unions. Around 5,000 banks and 7,000 credit unions in the US, totaling approximately 12,000 financial institutions.
According to this FinCEN update, it is safe to say that less than 700 financial institutions, or less than 6 percent of financial institutions in the US, have active cannabis banking programs. Some of the filings are “Termination” SARs from institutions that do not wish to bank the industry.
The cannabis industry is a net new industry and does not have established federal guidelines. Although states like California have had legal medical sales for 25 years, some states are in the infancy stage, like New Jersey. The problem is compounded by the vast amount of business types within the industry, such as cultivators, manufacturers, dispensaries, and various products like seeds, lighting, vaporizers, and edibles (not even including hemp).
Even though hemp and hemp-derived CBD is federally legal, there are still nuances that cause these businesses to be considered higher-risk by financial institutions.
From the perspective of the cannabis business owner, running a cannabis business can be extremely costly and dangerous. Not being able to access bank loans in an industry with startup costs of up to $1 million hinders the ability for diverse founders to establish their footprint because private funding can be extremely costly. Also, cannabis business owners are not allowed to deduct otherwise ordinary business expenses from gross income due to the tax implications of 280E. Add these barriers to the limited access to long-term essential banking services like checking, savings, merchant card services, investments, and lending is why many of these businesses do not survive and why M&A activity is at an all-time high.
Help on the way?
The SAFE Banking Act, which was recently passed in the US House of Representatives for the fifth time in September 2021 as part of the National Defense Authorization Act (NDAA) would provide some relief. If this bill gets its time on the Senate floor, it currently has the bipartisan support to pass, and it would create protections for financial institutions by preventing federal banking regulators from:
- Terminating or limiting a depository institution’s access to deposit insurance or share insurance
- Prohibiting, penalizing, or otherwise discouraging depository institutions from providing traditional banking services to a covered business
- Recommending, incentivizing, or encouraging a depository institution not to offer financial services to an individual or business entity because of their status as, or relationship with, a covered business
- Taking any adverse action on a loan made to a covered business
Even after federal legalization, only a percentage more of financial institutions will provide depository and lending services. Banks will always consider cannabis high risk for money laundering because no other industry has legal and compliant businesses operating alongside the illicit.
Luckily, there are solutions today that can help us carve a safe path forward. A few cannabis banking consultants have proven successful in the industry. By laying the foundation through detailed risk assessments explicitly designed for cannabis banking and putting proven policies and procedures in place, a financial institution can provide much-needed depository and lending services to this underbanked industry. A successful program then must be followed up by proper monitoring, reporting, and ongoing training. With a robust, risk-focused cannabis banking program, a financial institution can safely and confidently bank the cannabis industry.
With over 40 states that have some form of legalization or decriminalization, the cannabis industry’s growth is not slowing down, and it is high time for the two industries to openly work together to build a safe and more compliant future.