The State of Affairs: Marijuana Legalization and Banking

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In 2016, the reported revenue from states that have legalized medicinal and or recreational marijuana usage is estimated to be approximately 6.7 billion dollars (1). With more states now having passed legalization regarding marijuana sale and usage, the anticipated revenue is expected to double or triple from previously reported figures.

Without any direct Federal government intervention, it is clear that this is a growth industry that many parties could potentially benefit from in regard to income generation; industries as diverse as licensing agents, attorneys, agricultural producers, shipping, packaging, storefront leasing, and many others.

What these industries have in common are that they are all in need of depository accounts, merchant services accounts, lines of credit, loans, and other financial instruments which businesses utilize. Within Banking, these are everyday services the majority of Institutions offer small businesses, but if looking to offer these services to a cannabis-related business, the laws and regulation are complicated and tenuous. Thus, many Institutions rightfully are currently reluctant to engage these businesses.

The Cole Memorandum & A.G. Sessions

In 2013, then Deputy Attorney General James M. Cole issued a Memorandum entitled ”Guidance Regarding Marijuana Enforcement”, known as the “Cole Memo” (2). He sought to address the fact that in 2012, Colorado and Washington became the first states to legalize recreational sale and use of marijuana; yet, there was no formal guidance on if and how these businesses might be able to access a bank, process credit card transactions, pay taxes, etc. Interestingly, after the Cole Memo was released, cannabis businesses largely weren’t sure of the sincerity of these announcements, in fear that it was a tactic seeking to locate and shut down their operations.

In January 2018, Attorney General Jefferson Sessions issued a Memorandum entitled Marijuana Enforcement” (3) citing the Department of Justice Controlled Substances Act regarding activities surrounding marijuana. Sessions’ expressions of disapproval toward the cannabis industry did not coincide with an actual crackdown on cannabis businesses, but rather stated that it would be left to the discretion of the local government in the various districts to decide how and when to enforce the Federal laws, reiterating what the Cole Memo also stated but without issuing additional guidance.

According to White House press secretary Sarah Huckabee Sanders (4), Sessions’ memorandum “… simply gives prosecutors the tools to take on large-scale distributors and enforce Federal law. The president’s position hasn’t changed, but he does strongly believe that we have to enforce Federal law.” Many see this as being unclear because Sessions simply reiterated a known fact, but did not express a course of action.

Banks and Marijuana-Related Businesses (MRBs)

Currently, the state of banking Institutions and cannabis-related businesses is tenuous and complicated. Leaders of the cannabis industry have reported that it is very difficult for them to find Institutions who will do business with them. Reportedly, the cannabis industry operates predominantly in cash due to sporadic banking access (5). Banking Institutions that serve cannabis related businesses, according to those in the industry, tend to be State banks with total assets less than $100MM as well as Credit Unions of similar size. Though large multinational banks deny any involvement in marijuana-related businesses, a recent report (6) shows that Bank of America, Citi, Wells Fargo, and JP Morgan all had connections to marijuana-related businesses.

Although banking institutions exercise caution in involving themselves in the cannabis industry (publicly or privately), the definition of Marijuana Related Businesses” (7) (or MRBs) as defined by the Dept. of the Treasury Financial Crimes Enforcement Network (known as FinCEN), is very loose. Bank and Credit Union personnel who observe activity by MRBs must file a Suspicious Activity Report (or SAR), using the following definitions to describe activity observed:

  • “Marijuana Limited”, meaning the Institution’s due diligence indicates that the MRB is compliant with state regulations, and no red flags were raised;
  • “Marijuana Priority”, meaning the MRB may raise one or more red flags as defined by the Cole Memo, or may not be fully compliant with state regulations;
  • “Marijuana Termination”, meaning the Institution has decided to terminate its relationship with the MRB; this may be because red flags were raised relating to adherence to the Cole Memo guidelines, or simply that the bank does not wish to have marijuana related customers for business reasons.

In 3Q 2017, FinCEN reported (8) that of the 40,842 total SARs submitted related to Marijuana Businesses, roughly 70% (28,689) were defined as “Marijuana Limited”, meaning the business was fully complying with Federal guidance as per the Cole Memo. Likewise, ~23% (9,409) of SARs served to terminate the relationship with marijuana related businesses; it is unclear how many of these were due to a lack of adherence to guidelines or that the Institution simply wished to discontinue the relationship because of risk involved. This leaves only ~6% (2,744) of SARs reporting concerns regarding adherence to the Cole Memo guidelines, but chose to continue the relationship with these businesses.

Pending Legislation

In May 2017, a bipartisan group of Senators sought to legislate the conflict between State vs. Federal law regarding commercial cannabis businesses. The “Secure And Fair Enforcement Banking Act of 2017’’ (9) (known as the SAFE Act) would solve a key problem for individuals within the banking service industry who wish to benefit from the gains that could be made within commercial marijuana manufacturing.

The act proposes that a Federal banking regulator may not:

  • Terminate or limit the deposit insurance or share insurance of a depository institution under the Federal Deposit Insurance Act or the Federal Credit Union Act solely because the depository institution provides or has provided financial services to a cannabis-related legitimate business;
  • Prohibit, penalize, or discourage Institutions from providing financial services to legitimate cannabis-related businesses;
  • Recommend, incentivize, or encourage a depository institution not to offer financial services to an account holder, or to downgrade or cancel services offered to an account holder solely because they partake in cannabis-related businesses;
  • Take any adverse action on a loan made to an owner or operator of a cannabis-related legitimate business solely because of their affiliations with the cannabis-related business.

Cannabis-related businesses understand the risk involved for banking Institutions to do business with them, and are willing to pay exorbitant fees to use even basic banking services. For lack of Banks and Credit Unions to do business with MRBs, some states are resorting to using “cashless” systems (10) such as PayPal and CanPay to avoid the troubles that come with cash only businesses: robbery risk, security guards, armored vehicle cash transport, security camera monitoring, and so on.

There is certainly a need that is not currently being fulfilled. In fact, in 2015 the FDIC had even released a report (11) stating that banks should consider clients on a case-by-case basis. If banks are to take on marijuana related businesses responsibly, these businesses would require some specialized monitoring – but this holds true for any industry with a certain degree of risk involved.