Banking Challenges for the Cannabis Industry

In our piece about Section 280E of the tax code, we discussed the high cost of starting a cannabis business in MA which must be done without access to financial institutions or other normal channels for business startups. Entrepreneurs must be prepared to cover legal fees, city/town and state fees, property leases, employee salaries and benefits, architecture and build-out costs through the extremely long wait times leading up to final licensing. These ongoing expenses have to be covered for as much as 2 ½ years before opening the doors of an adult-use facility. A medicinal facility can cost twice as much due to the regulations stating that vertical integration must be in place during licensing of a medical facility. This means that an operator must also have the capital to build a cultivation facility in addition to all the other expenses.  To repeat, all of this must be done without having access to a lending institution.

The American Banking Association (ABA) developed the following position statement to address the continuing classification of cannabis as a Schedule 1 substance. “Currently, thirty-three states, the District of Columbia, Guam and Puerto Rico have all legalized the use of marijuana to some degree. Yet the possession, distribution or sale of marijuana remains illegal under federal law, which means any contact with money that can be traced back to state marijuana operations could be considered money laundering and expose a bank to significant legal, operational and regulatory risk.” The ABA statement goes on to say “While ABA takes no position on the moral issues raised by legalizing marijuana, the growing number of states that allow its sale and use raises practical issues that must be addressed. ABA believes the time has come for Congress and the regulatory agencies to provide greater legal clarity to banks operating in states where marijuana has been legalized for medical or adult use. Those banks, including institutions that have no interest in directly banking marijuana-related businesses, face rising legal and regulatory risks as the marijuana industry grows.”

Https://www.aba.com/advocacy/our-issues/cannabis

It is of interest that the 2018 Farm Bill removed hemp from the Controlled Substances Act, allowing farmers, investors, and commercial companies to apply to lending institutions for help in financing their operations.

In an article published by Forbes in Jan 2020, Tyler Beuerlein, Chief Revenue Officer at Hypur and Chairman of NCIA Banking and Financial Services Committee, wrote, “The overwhelming majority of licensees across the country that I’ve worked with are banked. From coast to coast, MRB’s are banking with reputable institutions.” He continues, “The issues with banking cannabis are similar to issues banks face in other highly regulated industries. Federal versus state legalization is not necessarily the issue here. Industries like check cashers, payday loans, pawnshops and guns and ammo have reportedly lost their bank accounts despite being federally legal. These sectors all pose massive banking challenges regardless of their legal status because of their high regulatory compliance burden.”

In September 2019, H.R.1595 was received in the U.S. Senate after being passed by the House of Representatives; it was referred to the Senate Committee on Banking, Housing, and Urban Affairs. Known as the Secure And Fair Enforcement Banking Act (SAFE Act), its purpose is “to increase public safety by ensuring access to financial services to cannabis-related legitimate businesses and service providers and reducing the amount of cash at such businesses.” There has been one roll call vote, but it has not yet been passed by the Senate. Under the SAFE Act, a bank could not be penalized solely for banking cannabis. Removing the Schedule 1 classification would accomplish that and more. Most cannabis advocates would prefer to be out of the crosshairs of the federal government. Having been in dispensaries across the country, I have found that most accept debit cards. Third party vendors create an ATM-like transaction at the point of service. Others will lie about the nature of the business, calling it a flower shop or a health food store. Lying to a financial institution can bring serous consequences. Punishment could reportedly be as severe as a $1 million fine or 30 years in prison, as reported by the Cornell Law School Legal Information Institute.  https://www.law.cornell.edu/uscode/text/18/1344

The road seems to repeatedly bring us back to the need for the removal of the Schedule 1 classification. That would remove many barriers to entry for business startups and would reduce much of the stress for an industry built around alleviating stress.