Jane Dotson
Despite the legalization of medical cannabis in almost all states, it remains illegal under federal law to manufacture, distribute, or dispense cannabis. This discrepancy between federal and state legalization has created a complex situation for the cannabis industry, with many banks and credit unions reluctant to provide financial services to cannabis-related businesses due to the risk of criminal prosecution and money laundering charges. The result is a predominantly cash-based industry, which brings its own set of challenges, including security concerns and limited access to investment capital and funding opportunities. So, what options are available for cannabis businesses seeking to insure their funds, and what steps can be taken to navigate the complex banking landscape?
| Characteristics | Values |
|---|---|
| Banking solutions for the cannabis industry | Banks are hesitant to provide services to the cannabis industry due to federal intervention in state marijuana laws and the risk of criminal prosecution for "aiding and abetting" a federal crime. |
| Legalization | While most states have legalized medical cannabis, it remains illegal under federal law, classified as a Schedule I drug. |
| Banking relationship | Some cannabis businesses have established banking relationships, but banks may not be aware of the source of funds, leading to potential concerns about legitimacy. |
| Regulatory compliance | Banks and credit unions can bank the cannabis industry if they comply with the 2014 FinCEN guidance and develop a robust regulatory compliance program. |
| Cash transactions | The lack of banking solutions has resulted in a predominantly cash-based industry, leading to security concerns and challenges in scaling businesses. |
| Industry growth | The cannabis industry is expected to grow to $50 billion, employing around 160,000 people, making it one of the strongest growth areas of the US economy. |
| Banking challenges | Banks face challenges in offering services to state-authorized cannabis businesses, including filing suspicious activity reports and complying with federal laws. |
| Credit unions | Credit unions face decisions about banking the cannabis industry, considering regulatory bodies and insurance implications. |
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What You'll Learn
- Cannabis is a Schedule I drug, making it illegal to produce, sell and consume at the federal level
- Banks that provide services to legal marijuana businesses may face criminal prosecution for aiding and abetting
- Banks must file suspicious activity reports when providing financial services to marijuana-related businesses
- Federal intervention in state marijuana laws means banks have little incentive to provide services to the cannabis industry
- Banks and credit unions can bank the cannabis industry as long as they comply with the 2014 FinCEN guidance
Cannabis is a Schedule I drug, making it illegal to produce, sell and consume at the federal level
Cannabis is a Schedule I drug, which means it is illegal to produce, sell and consume at the federal level. Despite almost all states having now legalised medical cannabis in some form, federal law prohibits the manufacture, distribution, or dispensation of cannabis. This has made it difficult for cannabis businesses to secure banking services. Banks are wary of federal intervention in state marijuana laws and face challenges in offering services to state-authorised cannabis businesses. They are required to file suspicious activity reports when dealing with marijuana-related businesses, which further complicates the process.
The classification of cannabis as a Schedule I drug is due to its high potential for abuse and the absence of accepted medical use in the United States. This categorisation is under the Controlled Substances Act (CSA), which came into effect in 1970. Cannabis contains biologically active chemical compounds, the most well-known being delta-9-tetrahydrocannabinol (THC) and cannabidiol (CBD). THC is responsible for the psychoactive effects of cannabis, which contribute to its potential for abuse.
The federal government's stance on cannabis has created a complicated situation for the industry. While some states have legalised cannabis, the fear of federal intervention deters banks from providing services to cannabis businesses. This has resulted in a predominantly cash-based industry, with businesses transacting outside the regulated financial system. The lack of access to banking services has been a significant challenge for the industry, with operators struggling to find safe ways to manage large amounts of cash.
There have been efforts to address this issue. In 2014, the FinCEN guidance was introduced, allowing banks and credit unions to work with the cannabis industry as long as they complied with specific guidelines. Additionally, industry leaders have advocated for the education of federal legislators and regulators about the evolving nature of the cannabis industry. Despite these efforts, the Schedule I classification of cannabis remains a significant hurdle, impacting the industry's ability to access banking services and investment capital.
While cannabis remains a Schedule I drug, the situation may change in the future. In 2023, the HHS recommended re-classifying marijuana as a Schedule III Controlled Substance, recognising its legitimate medical uses and lower potential for dependence compared to Schedule I drugs. This potential re-classification could have significant implications for the industry, potentially easing the challenges faced in accessing banking services and investment capital.
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Banks that provide services to legal marijuana businesses may face criminal prosecution for aiding and abetting
Banks that offer services to legal marijuana businesses may face criminal prosecution for aiding and abetting. This is because, despite almost all states having legalized medical cannabis in some form, it remains illegal under federal law to manufacture, distribute, or dispense cannabis. As a result, banks are required to file suspicious activity reports when providing financial services to a "marijuana-related business". Consequently, many state-licensed cannabis-related businesses transact in cash, outside the regulated financial system.
The conflict between federal and state laws has created a complex situation for banks. While some banks, credit unions, and other financial services providers do serve the cannabis industry, the majority of state-legal medicinal or recreational cannabis businesses do not participate in traditional and secure banking systems and financial services. This is due to the risk of prosecution given federal restrictions on cannabis.
To address these issues, the SAFER Banking Act provides protections against criminal, civil, or administrative forfeiture of relevant "legal interests" for providing financial services to a state-sanctioned marijuana business. The Act also protects further investment of any income derived from such financial services. However, it is important to note that marijuana will remain illegal under the SAFER Banking Act, and the law aims to resolve the tension between federal and state laws regarding banking, lending to, and insuring a state-legal cannabis business.
Despite the passage of the SAFER Banking Act, there are still concerns about the potential exposure of financial institutions to civil or criminal liability. Senators Grassley and Feinstein have questioned the authority of FinCEN's guidance and its impact on federal criminal law. They have also raised the issue of protecting financial institutions from criminal prosecution if they follow FinCEN's guidance and provide services to illegal drug traffickers.
In conclusion, while the SAFER Banking Act aims to provide protections for banks serving the cannabis industry, there are still legal complexities and risks of prosecution that need to be addressed. The advancement of the Act by the Senate Banking Committee may signal that significant changes are on the horizon, making marijuana a more accessible product nationwide. However, until federal law is changed, banks must navigate the challenging landscape of conflicting federal and state regulations.
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Banks must file suspicious activity reports when providing financial services to marijuana-related businesses
Despite the legalization of medical cannabis in almost all states, it remains illegal under federal law to manufacture, distribute, or dispense cannabis. Banks are therefore faced with a challenge when offering banking services to state-authorized cannabis-related businesses. This is because banks must abide by both state and federal laws, and offering banking services to state-authorized cannabis businesses violates federal law.
The Financial Crimes Enforcement Network (FinCEN) has issued guidance to clarify Bank Secrecy Act (BSA) expectations for financial institutions seeking to provide services to marijuana-related businesses. FinCEN's guidance aims to enhance the availability of financial services and the financial transparency of marijuana-related businesses. It clarifies how financial institutions can provide services consistent with their BSA obligations and aligns the information provided in BSA reports with federal and state law enforcement priorities.
According to BSA Expectations, financial institutions are required to file Suspicious Activity Reports (SARs) on activity involving a marijuana-related business. This is because the proceeds of cannabis-related transactions are considered by the federal government to be generated by illegal activity. The obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity. The SAR facilitates law enforcement's access to information pertinent to a priority.
Due to the challenges and risks associated with providing banking services to the cannabis industry, many banks are reluctant to do so. This has resulted in many state-licensed cannabis-related businesses transacting in cash, outside the regulated financial system. The SAFER Banking Act aims to resolve the tension between federal and state law in this regard, and while marijuana will remain illegal under the act, it will provide guidelines and restrictions for banks to follow when offering services to state-legal cannabis businesses.
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Federal intervention in state marijuana laws means banks have little incentive to provide services to the cannabis industry
Despite near-total legalization of medical cannabis across US states, it remains illegal under federal law to manufacture, distribute, or dispense cannabis. This has made it difficult for cannabis businesses to access banking services.
In addition, larger investors are often bound by 'vice clauses' in their partnership agreements, which prohibit even indirect investments in the cannabis industry. This has made it difficult for the cannabis industry to access investment capital.
The fear of federal enforcement has been a substantial barrier to marijuana-related businesses obtaining financing and banking products. However, some financial institutions have chosen to serve marijuana-related businesses in recent years. The SAFER Banking Act, which has passed the Senate Banking Committee with bipartisan support, could change the landscape completely. It aims to allow state-legal cannabis businesses access to traditional financial services, reducing the risk for financial institutions. It provides "safe harbor" protections to ensure they are not penalized for offering services to cannabis businesses, which will likely increase the accessibility of banking, lending, and insurance services for the marijuana industry.
To address the current issues, it has been suggested that a consortium of bankers, regulators, and cannabis industry stakeholders should come together to lobby and educate federal legislators and regulators about the evolving nature of the industry.
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Banks and credit unions can bank the cannabis industry as long as they comply with the 2014 FinCEN guidance
The 2014 FinCEN guidance clarifies how financial institutions can provide services to marijuana-related businesses consistent with their BSA obligations. It aligns the information provided by financial institutions in BSA reports with federal and state law enforcement priorities. This guidance should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses. It is important to note that despite the legalization of medical cannabis in almost all states, it remains illegal under federal law to manufacture, distribute, or dispense cannabis. This creates a challenge for banks when offering banking services to state-authorized cannabis-related businesses.
To comply with the 2014 FinCEN guidance, financial institutions are required to file a SAR (Suspicious Activity Report) on activity involving a marijuana-related business, including those duly licensed under state law. This is because federal law prohibits the distribution and sale of marijuana, and financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. The 2014 Guidance established three categories of SARs: Marijuana Limited SARs, Marijuana Priority SARs, and Marijuana Termination SARs. Financial institutions are also expected to comply with other due diligence obligations and submit currency transaction reports.
In addition to the 2014 FinCEN guidance, the 2019 Joint Statement and the 2020 Guidance provide further clarification and detail on how banks can service hemp-related businesses. The 2019 Joint Statement specified that banks are not required to file a SAR solely because a customer is engaged in a hemp-related business. The 2020 Guidance focuses on BSA/AML Program Expectations, Suspicious Activity Reporting (SARs), and Currency Transaction Reports and FinCEN Form 8300. It expands upon financial institutions' obligations related to collecting customer due diligence (CDD) for hemp-related businesses.
While banks and credit unions can bank the cannabis industry by complying with the 2014 FinCEN guidance, there are still challenges and risks involved due to the federal illegality of cannabis. Banks may be hesitant to provide services due to the fear of federal government intervention in state marijuana laws. Additionally, there are concerns about the legitimacy of funds and the risk of money laundering. As a result, many state-licensed cannabis-related businesses transact in cash, outside the regulated financial system.
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Frequently asked questions
Banks face challenges when offering services to state-authorized cannabis-related businesses. Although almost all states have now legalized medical cannabis in some form, it remains illegal under federal law to manufacture, distribute, or dispense cannabis. Banks are also required to file suspicious activity reports when providing financial services to a "marijuana-related business". As a consequence, many state-licensed cannabis-related businesses transact in cash, outside the regulated financial system.
The issues with banking cannabis are similar to issues banks face in other highly regulated industries. Federal versus state legalization isn’t 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. Because of the fear of federal government intervention in state marijuana laws, there is little incentive for banks to provide services in the cannabis industry.
Any bank that provides services to a legal marijuana business faces possible criminal prosecution for “aiding and abetting” a federal crime and money laundering.
Hardworking commercial operators are struggling to find banks that will work with them, forcing these entrepreneurs to conduct most of the business in cash. Serious security concerns and a lack of funding to scale these businesses are some unfortunate outcomes.
