The Unique Challenges of Banking and Cannabis

For most businesses in America, banking is a straightforward affair. Not many industries can operate without banks and the banks, for their part, benefit from large corporate accounts. However, when it comes to cannabis-related businesses, banking can be a real challenge.

Whether the company is “plant-touching”– businesses that grow, manufacture or sell cannabis– or one of the many ancillary businesses serving the industry, banks often don’t want their business. Though many of these companies would provide sizable deposits, the unique challenges of cannabis banking in the U.S. have led most banks in legal cannabis states to decline the business.

This installment of the RADD LLC Compliance Blog explains some of the complexities involved and what changes are happening.

Bank Secrecy Act & Anti-Money Laundering Compliance

Most major banks in the U.S. are federally chartered. That means that their customers’ deposits are insured by the Federal Deposit Insurance Company (FDIC). It also means they must follow federal law. While the U.S. Congress has passed laws protecting state-legal enterprises, most cannabis-related businesses still violate federal law by existing.

Since the legality of cannabis businesses is disputed, the law requires stricter compliance measures.

The Bank Secrecy Act (BSA) requires FDIC-insured companies to file “suspicious activity reports” for transactions involving a person or business suspected of violating federal law. Since cannabis is still a Schedule I narcotic, banks have in the past been advised that they must file a report for every transaction from businesses in the cannabis industry. Many banks have determined this to be cost ineffective or impractical.

State Level Fixes: Pennsylvania

Pennsylvania became the first state to pass its own laws protecting financial institutions from certain dangers of dealing with cannabis-related businesses. On July 11, Gov. Tom Wolf signed HB 311, protecting financial institutions with cannabis-related businesses as clients.

The Pennsylvania law specifies that the commonwealth cannot “prohibit, penalize or otherwise discourage a financial institution or insurer from providing financial or insurance services to a legitimate cannabis-related business or the business associates of a legitimate cannabis-related business.”

Still, state legislative reform has its limits.

While banks and insurers are protected from state action, the law explicitly states that they cannot be forced to offer services to cannabis-related businesses. Moreover, the onerous conditions remain at the federal level, leaving banks unsure about risk.

How would SAFE Banking Change Cannabis Banking?

Federal legislation protecting financial institutions dealing with cannabis-related businesses has been a topic in the U.S. Congress. One of the bills to be proposed is the Secure and Fair Enforcement (SAFE) Banking Act. While the bill itself is dead, representatives of the Congressional Cannabis Caucus continue to attach its provisions to must-pass legislation.

One of the key provisions of the SAFE Banking Act is a specification that state-legal cannabis business is not considered proceeds from unlawful activity. This change would mean that banks may determine legitimate cannabis businesses a better bet among other protections for financial institutions. Though language matching the bill’s provisions has been attached as amendments to larger bills in the House of Representatives, they have been consistently removed in the Senate or during the reconciliation process.

While SAFE Banking or similar legislation would be a big step for the cannabis industry, it wouldn’t solve all problems. Cannabis activists have repeatedly criticized the change as only benefitting cannabis businesses at the expense of consumers. Until cannabis is removed as a Schedule, I controlled substance. However, the stigma is likely to remain.

Rescheduling Cannabis is the Only Permanent Fix

As long as cannabis is classed along with hard street drugs at the federal level, the conflict between banking and cannabis will continue. Legislative measures like the Marijuana Opportunity Reinvestment and Expungement (MORE) Act show promise, but the industry continues to grow in the meantime. Businesses need advisors they can rely on to grow with them.

On July 21, Senator Cory Booker introduced the Cannabis Administration and Opportunity Act, a long-awaited counterpart to the MORE Act. With only months left before the November election, bipartisan cooperation to pass it seems unlikely, but it is the first cannabis legalization bill introduced in the Senate.

Are you a cannabis business or financial institution wanting to tap into the great potential of the cannabis industry? Contact RADD LLC today for a consultation on how we can help you.