The discrepancy between the legal status of marijuana at the federal and state levels has made it difficult for cannabis businesses to obtain financial services. 

State-approved marijuana-related businesses struggle to get essential banking services as banks are subject to federal oversight, making it difficult to enter into prohibited relationships. In addition, the clash and disparity between federal and state law force the cannabis industry to primarily transact in cash, exposing the business owner to potential robbery and fraud issues. 

Moreover, the accumulation of cash subjects the business to increased government agency scrutiny concerning money laundering and other potentially illegal activities. Small to mid-sized cannabis companies struggle to track and handle vast amounts of cash and release payments to employees and vendors. Also, payroll responsibilities increase when salaries are paid in cash. Moreover, the businesses must also pay taxes and other business, operations, and maintenance-related charges, all expenses not generally paid in cash. Ultimately, the business owners suffer as they put their finances at risk by operating with excessive cash.

Federal  Marijuana Banking  Laws

The Financial Crimes Enforcement Network (FinCEN) reported in  2019 that approximately 563 banks and over 160 credit unions provided banking services to Marijuana Related Businesses (MRBs). Though the numbers may appear high,  it does not guarantee that MRBs receive requisite banking services. The above data may also include transactions from a cannabis business to an individual, not a company. 

None of the major banks across the United States actively pursue or knowingly entertain MRBs as customers. This is because the banks do not want to stain their reputation with potential money laundering cases that might violate federal laws.

The Bank Secrecy Act of 1970 (BSA) is one of the primary laws that affect the provision of rendering banking services to the MRBs. The BSA instructs all financial institutions to report suspicious activities, potential money laundering cases, and other possible illegal or criminal activities. In addition, the act requires banks to help federal government agencies to detect criminal actions. Therefore, banks must submit “suspicious activity reports” (SARs) to the concerned government agencies.

According to federal money laundering law, any monetary transaction involving the sale of a prohibited substance such as marijuana is considered a crime.   Cannabis business transactions fall under this interpretation,  impeding banks from accepting MRBs as customers. Moreover, even if the banks offer their services to MRBs, their transactions should be noted on the banks’ suspicious activity report, placing the cannabis businesses under federal agency scrutiny. 

However, FinCEN has previously issued guidance to banks advising them on how to bank MRBs. The FinCEN guideline was issued to reconcile the  Cole Memorandum, and the Department of Justice (DOJ) concerns during the Obama presidency to balance federal resources, state laws, and the federal  BSA requirements. Though Attorney General Sessions later revoked the Cole Memorandum, the FinCEN guideline remains in effect.

The 2014 FinCEN guidelines proposed a solution to banks regarding how they might offer banking services to MRBs without triggering the BSA. It stated that banks should do in-depth research and monitoring of the MRBs they wish to provide banking services to avoid the scrutiny of filing SARs. In addition, the guidelines were designed to help banks understand if a cannabis business seeking financial assistance complies with federal and state laws, the Cole Memorandum, and SARs requirements.  

The FinCEN guideline requires banks to file reports or SARs regularly in case marijuana-related transactions are ongoing. It has categorized three types of SARs for the MRBs.

(1) Marijuana-specific SARs for MRB transactions that the bank reasonably thinks, based on its review, do not violate state law or the Cole Memorandum priorities.

(2) Marijuana priority SARs for transactions involving an MRB that the bank logically assumes, in light of its investigation, impact the Cole Memorandum priorities or contravene state law.

(3) Account termination SARs, which the bank may use if it decides to sever ties with an MRB to keep its anti-money laundering compliance program operating effectively.

The guidance also outlines some red flags distinguishing illegal or money laundering cases from cannabis-related business transactions. However, the red flags are tough to access as the banks need more visibility into the customer’s banking activities, markets on which the customer is operating, and other details that are not easy to access and analyze. 

The FinCEN guidance obligates banks to monitor the nature and purpose of MRBs and their transactions. However, giving banks the role to monitor the MRBs and ensure that their transaction complies with government laws and continuous reporting discourages banks from engaging with MRBs. Banks do not want to be police officers or be burdened with excessive oversight responsibilities on behalf of governmental agencies. 

The complex federal laws and guidelines put banks in a challenging position. Though banks might make meaningful profits from cannabis businesses, the discrepancy between state and federal law, plus the reputation risk of not following national guidelines, makes banks reluctant to bank MRBs.

US Cannabis Cash Problem: A Recipe For Disaster

At the time of writing, marijuana is legal in 37 US states and the District of Columbia in some fashion. For recreational purposes, marijuana is permitted in twenty-one 21 states and DC, while it is legal for medical use in sixteen states.

However, marijuana or cannabis remains a prohibited controlled substance in Schedule 1 per Federal laws. The federal government also considers monetary transactions related to marijuana a crime under its money laundering laws. Moreover, the FinCEN guidelines require banks to monitor MRBs and their transactions which burdens the banks, discouraging them from doing business with MRBS. 

All these add up to banks not approving cannabis businesses to access their financial services, leaving firms with vast amounts of cash. 

Now there are several issues when running a business entirely on cash. Firstly, you need to store your cash securely. Cannabis business whales can afford security guards and storage requirements to secure profits. However,  small businesses are at risk of robbery or fraud and are even being scrutinized by the authorities. 

The second problem is paying employees, vendors, and suppliers. As you cannot make digital transactions, payments become hectic. Some even have to travel long hours with large amounts of cash to pay vendors. 

Thirdly, accounting becomes a nightmare. Over time business owners lose count of their profits and other finances. Some marijuana producers even store their cash in places like trees, fields, and sheds, which are unsafe.

The legal cannabis business had a 30% growth last year. Experts predict that it will grow by 20% this year when the company is expanding daily, yet cash poses a serious potential threat to business owners and society.

Cannabis Friendly Banking

 

Factors to consider while choosing your bank

Though there are few cannabis-friendly banks, you should consider entertaining more than one in case one provider is forced to exit the market abruptly.   There are a few factors that you should consider:

Price

Cannabis accounts typically cost more than standard business accounts since they operate in a riskier sector and require more regulation and documentation.

Membership eligibility

Only authorized marijuana-related enterprises may conduct business with banks and credit unions. Additionally, to keep your account open, you must submit proper paperwork throughout the application process and adhere to rules unique to cannabis.

Customer support

As with any financial service, think about how simple it will be to contact someone with questions about your account.

Cannabis Business Banking Tips

Also, look at some banking tips that will help you convince banks to do business with you. 

Comprehensive documentation

Be prepared for the bank to ask you about your due diligence. To ensure you comply with banking standards, you may be required to present copies of your marijuana business license, sales records, and inventory logs.

Transparent communication

Keep an open line of communication with your bank if your company goes through any changes after you become a client. This will prevent your bank from flagging these modifications as transactions or suspicious behavior that could endanger your account.

Avoid illegal workarounds

The Financial Crimes Enforcement Network’s (FinCEN) regulations require banks to abide by them, which include trying to hide or mask marijuana-related company activities by utilizing an intermediary to deposit cash.

Cannabis Friendly Banks

Though the FinCEN report states many banks provide banking facilities to cannabis businesses, only 515 banks out of some 5,000  registered banks and one out of 30 credit unions worked with cannabis businesses in 2020.

Concluding Thoughts

As a cannabis business owner, finding a bank that comfortably accepts you as a client is challenging. However, it is not impossible. It’s never wise to store all your cash in unsecured places, even in your office safe. Hence, developing a banking relationship is essential to assist your business 

With the Secure and Fair Enforcement Act of 2019, known as the SAFE Banking Act, passing the  House of Representatives on eight separate occasions, there is guarded optimization developing compliant banking relationships that may be near. 

Unfortunately, the SAFE Banking Act has not passed the Senate. If the bill safely passes both chambers, The SAFE Banking Act will allow banks and credit unions to offer banking services to cannabis businesses with minimal federal issues in states where cannabis is legal at the state level. However, concerned people are worried that it would legalize the cannabis industry, giving it a free pass to strive and go against the federal drug law.