The commercial cannabis industry has faced many challenges over the past decade. From legal wrangling and ever-shifting regulations to fierce competition and uncertainty in the market, cannabis businesses have had to remain flexible as profits soar. One of the biggest challenges influencing the legal cannabis industry has been that of banking, or rather the difficulty in finding banking services that will serve cannabis-based businesses.
In April 2018, the Bank of Springfield, servicing most of the state of Illinois’ medical cannabis companies, announced that it would close the accounts of those businesses by May 21, 2018, leaving them with an uncertain banking future. This is just one of many examples where banks are pulling back or eliminating service to the growing cannabis industry. This is in stark contrast to industry analysts suggesting that more banks are willing to extend services to cannabis-based business operations. Which is correct? In this article, we will explore the state of banking and the cannabis industry, providing information and thought to this complex subject.
Illinois Medical Cannabis and the Bank of Springfield
Why the sudden shift in banking status for the medical marijuana businesses serviced by the Bank of Springfield? This turnaround is the direct result of the U.S. Department of Justice and Attorney General Jeff Sessions announcing that the DOJ was revoking the so-called “Cole Memo”. The Cole Memorandum was issued by the DOJ’s Deputy Attorney General James Cole in 2013. In the memo, the Justice Department set a policy of not enforcing federal marijuana laws in states where medical and/or cannabis legalization legislation had been passed unless such enforcement was deemed critical to federal safety priorities. In other words, prosecution of marijuana-related crimes in legal states was to be left to those states unless flagrant federal violations also occurred. In January 2018, newly-appointed Attorney General Jeff Sessions moved to rescind the Memo, potentially paving the way for increased federal enforcement of marijuana crimes.
As soon as this revocation was announced, it had a chilling effect on legal cannabis businesses. Already operating in a legal gray area, this shift in legal status immediately encouraged allied companies to rethink their outreach to cannabis businesses. The Bank of Springfield stated that customer protection was of the highest priority for the banking firm, and by continuing to serve businesses operating in uncertain legal status, this represented an undesirable level of danger for other customers. Banks in other states followed suit. Luckily for a few of the medical marijuana businesses in Illinois, other banks were available to serve a handful of dispensary customers, but for the most part, cannabis operations in the state are operating on a cash-only basis.
Banking and the Cannabis Industry
Since legal marijuana legislation first began to be passed in the United States, cannabis companies have had a difficult time with securing banking services. Services used by the industry include merchant accounts, payment processing, and even savings accounts. Many business owners would open accounts with local banks or even large regional/national banking chains, only to have their accounts closed when the banks discovered a connection to the cannabis industry. This was particularly prevalent among the large banks like Wells Fargo and Chase, which have valid concerns about extending services to marijuana producers and retailers, fearing that their actions would be seen as money laundering by the federal government.
Because of the lack of availability in banking services, the legal cannabis industry is cash-heavy. When thinking about cash, it is important to remember that the industry generates tens of billions of dollars in revenue – large retail operations and dispensaries had so much cash on hand that storing and transporting it became difficult. It is not uncommon for marijuana businesses to pay their taxes and licensing fees in cash, sometimes to the tune of $100,000 or more. Large operations may require the services of an armored courier to move money. Of course, having to rely on cash also means that legal cannabis operations must have security systems in place to prevent robberies, thefts, and violent crimes.
To create a workaround to the lack of suitable banking services, several cannabis businesses have established shell companies or holding firms, then routing all transactions through these companies, which the banks see as legitimate. Still others may use personal bank accounts, depositing cash and then using their own accounts to pay employees and vendors with wire transfers. Both of these methods are shady at best and deeply unethical at worst.
Hope on the Horizon?
The legal cannabis industry has pushed for several reforms in recent years, including a nationwide referendum on establishing legality, pushing for rescheduling of cannabis under DEA guidelines, and calling for banking reform.
Canada’s experiences may pave the way for U.S. based businesses to gain legitimacy. Canada passed a sweeping nationwide law allowing for medical marijuana in 2017; in 2018, the country is expected to complete passage of legalization for recreational marijuana. In that country, legal cannabis businesses enjoy a wide slate of banking services. Canada’s legislation and experience could serve as a model for U.S. lawmakers hoping to create similar federal reforms.
In the meantime, industry analysts suggest that more banks are extending services to legal cannabis businesses, particularly in the medical sector. A report in early January 2017 produced by the Financial Crimes Enforcement Network showed that 340 banks were providing services to marijuana operations; by September of the same year, that number rose to 400, split fairly evenly between banks and credit unions.
Bipartisan support for clarity in banking regulations regarding doing business with legal cannabis operations has spurred the creation of bills. So far, none of the proposed bills have been scheduled for hearings, but many people within the industry applaud lawmakers’ efforts to finally pave the way for secure and widely-available banking services for the ever-expanding legal cannabis industry.