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The Banking Industry's Love/Hate Relationship With Cannabis

By Jacqueline Havelka
May 30, 2018

Cannabis companies can secure land, build a facility, develop a marketing plan—all the things that a successful business needs. The one area that still remains difficult is obtaining a business bank account or loan. Why? Because cannabis is still illegal at the federal level, and banks are federally insured. Therefore cannabis businesses typically don’t have access to the same capital and banking services that other businesses enjoy.

The result is that cannabis businesses are usually greatly hindered because of it. They’re not able to finance construction or have cash flow. They might be able to grow a cannabis crop, but it’s not easy to grow their businesses. Many are forced to raise private capital, but the agreements are typically at double-digit interest rates rather than the typical 4.5 percent going rate for a traditional commercial loan. Many owners are forced to give up equity in exchange for financing.

These businesses have been forced into being cash-only businesses. They store large amounts of money in their safes and deal in cash for all payments and transactions. Banks cite a risk to the public if they loan money to cannabis businesses, but is it fair to ask these owners to take on great personal risk to life and limb that comes with dealing in large sums of cash?

Cannabis businesses face a huge dilemma. If things go awry, they risk losing everything. But what is the risk to the banking industry? Some businesses have created new LLC entities just to allow them to open a checking account, make deposits, use credit cards and have a normal payroll operation. Some bankers let them, turning a blind eye to what’s really going on, taking a risk of attracting the attention of bank regulators and potentially breaking federal law.

A very large majority of federally regulated commercial banks downright refuse to accept deposits from any business involved in cannabis in any form, citing the federal Controlled Substances Act (CSA) law. In fact, the U.S. Treasury reported in March 2017 that fewer than 400 commercial banks nationwide had provided banking services to cannabis-related businesses. Banks are even obligated to file a suspicious activity report (SAR) if they suspect cannabis-related transactions are taking place. Banks are definitely skittish, and since the beginning of 2018, the number of SARs filed has steadily increased.

Under the Obama administration, his Deputy Attorney General James Cole issued a memorandum, now famously referred to as the "Cole memo." In it, Cole directed U.S. Attorneys in states that had legalized some form of cannabis to not focus on legal activities of businesses, but instead focus attention and resources on true crimes like drug cartels and selling to minors.

The "Cole memo" basically stated that since each state had already put its own state criminal and civil penalties in place pertaining to state marijuana law, the federal government should defer to the states and focus federal enforcement on true criminal activity.

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) was beginning to align itself with the Cole Ruling and was beginning to ease restrictions on financial institutions by allowing them to provide banking services to cannabis businesses who were complying with the Cole Memo. But that window soon closed as the Trump administration took over, and Attorney General Jeff Sessions made it clear that he was rescinding the "Cole memo." Although Sessions has stated that he was simply returning to the rule of law, many suspect that Sessions’ move was a thinly veiled attempt to stifle the industry. Now, U.S. Attorneys can take action against state-licensed cannabis businesses.

Bankers were once again skittish—even moreso since Sessions’ memo directly mentioned cracking down on financial institutions. FinCEN also did a 180-degree turn, reminding bankers about the CSA and prosecution of crimes to that effect. All of this created industry confusion about whether banks really did have safe harbor, so most are erring on the side of caution by not providing financial services to any cannabis-related business.

The overall result has inhibited industry growth. Cannabis businesses are restrained in a way that other businesses in other industries are not. Services that most businesses take for granted are simply unavailable to cannabis businesses. Experts say that unless bank services are extended to the legal cannabis industry, it will be difficult or impossible to keep many businesses going.

Forcing cannabis businesses into cash-only transactions actually prevents transparency and encourages crimes like money laundering. Most industry experts agree that a legislative decision and solution to the banking crisis is long overdue. It is just not logical to continue as is, particularly in an industry expected to surpass $10 billion in sales this year.

But how does America get a solution? Congress is the logical answer. Why? Because the U.S. Congress actually has the authority to grant banking access to cannabis businesses.

Many were encouraged by President Donald Trump in April when he stated support for states’ rights regarding cannabis legalization. Senators like Cory Gardner (R-Colorado), Elizabeth Warren (D-Massachusetts) and Chuck Schumer (D-New York) have all introduced similar cannabis legislation, which many in the industry are hoping will lead to eventual descheduling of cannabis from the CSA.

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