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The challenges of high-risk banking businesses are not new to financial institutions. But the hurdles of banking the cannabis industry, which is still federally illegal, add a whole new element of challenges.
Getting an open banking relationship for cannabis companies isn’t easy. And that problem doesn’t appear to be resolved anytime soon, with senators refusing to take action until broader reform is brought forward. Until then, legal cannabis companies are left with a patchwork of options that vary from state to state, depending on the nature of their business and what banks or credit unions are available in their area.
Related: Here’s What You Need To Know About Cannabis Banking Laws In 2021
Last year, FinCEN’s Marijuana Banking Update revealed an increase in cannabis-related business activity during the pandemic (some states have deemed these businesses essential). At the same time, the number of banks filing suspicious activity reports related to marijuana (SAR) has declined.
This decrease was mainly due to a delay in the rapid filing of marijuana-related SARs. Bank employees have adapted to working from home. Marijuana-related SARs were no longer required for hemp-related businesses due to the new FinCEN FIN-2020-G001 directive after the 2018 Farm Bill removed hemp from the Controlled Substance Act.
More recently, FinCEN’s Marijuana Banking Update showed that 706 financial institutions have filed marijuana-related SARs, up from 368 financial institutions in June 2017. Of the 706 institutions, 518 were banks and 188 were credit unions. About 5,000 banks and 7,000 credit unions in the United States, totaling about 12,000 financial institutions.
According to this update from FinCEN, it’s safe to say that fewer than 700 financial institutions, or less than 6% of financial institutions in the United States, have active banking programs for cannabis. Some of the deposits are “termination” SARs from institutions that do not wish to bank the industry.
The cannabis industry is a clean new industry and has no established federal guidelines. Although states like California have had legal sales of medical products for 25 years, some states are in their infancy, like New Jersey. The problem is compounded by the large amount of types of businesses within the industry, such as growers, manufacturers, dispensaries, and various products such as seeds, lighting, vaporizers, and edibles (without even include hemp).
Even though hemp and hemp-derived CBD are federally legal, there are still nuances that make these companies considered high risk by financial institutions.
From the perspective of a cannabis business owner, running a cannabis business can be extremely expensive and dangerous. Not being able to access bank loans in an industry with start-up costs as high as $ 1 million hampers the ability of various founders to establish their footprint, as private financing can be extremely expensive. Additionally, cannabis business owners are not permitted to deduct otherwise ordinary business expenses from gross income due to tax implications of 280E. Adding these barriers to limited access to essential long-term banking services like checks, savings, merchant card services, investments, and loans is the reason many of these businesses fail to survive and why mergers and acquisitions are at an all time high.
Help on the way?
The SAFE Banking Act, which was recently passed by 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 in the Senate, it currently has bipartisan support to pass, and it would create protections for financial institutions by preventing federal banking regulators from:
- Terminate or limit a deposit-taking institution’s access to deposit insurance or stock insurance
- Prohibit, penalize or otherwise discourage deposit-taking institutions from providing traditional banking services to a covered business
- Recommend, induce or encourage a deposit-taking institution not to offer financial services to a natural person or a company because of its status or its relationship with a covered company
- Take any adverse action on a loan granted to a covered business
Even after federal legalization, only an additional percentage of financial institutions will provide deposit and loan services. Banks will always view cannabis as a high money laundering risk, as no other industry has legal, compliant businesses operating alongside the illegal.
Fortunately, today there are solutions that can help us navigate our way safely. A few cannabis banking consultants have a proven track record in the industry. By laying the groundwork through detailed risk assessments explicitly designed for cannabis banks and putting in place proven policies and procedures, a financial institution can provide much-needed deposit and lending services to this underbanked industry. A successful program must then be followed by appropriate monitoring, reporting and continuing education. With a robust, risk-based cannabis banking program, a financial institution can safely and confidently bank the cannabis industry.
With more than 40 states having some form of legalization or decriminalization, the growth of the cannabis industry is not slowing down, and it is high time the two industries openly worked together to build a secure and more compliant future.