Lack of access to the banking system remains one of the biggest problems for the cannabis industry. Despite tremendous growth in the past few years and even more aggressive growth expected in the near future, it is still difficult for cannabis businesses, what bankers like to call marijuana related businesses (MRB), to establish a banking relationship. As more and more states legalize the use of marijuana, has there been any progress?
First, a little history. Banks are prohibited from banking MRBs under federal law and risk prosecution for money laundering and aiding drug trafficking. In February 2014, following the issuance of the Cole Memorandum by the Justice Department, the Department of the Treasury Financial Crimes Enforcement Network (FinCEN) and the Department of Justice issued concurrent guidance to clarify how financial institutions could serve MRBs consistent with their obligations under the Bank Secrecy Act. The FinCEN guidelines state that in determining whether to serve an MRB, a financial institution should conduct due diligence including: determining whether the MRB is properly licensed, reviewing the license application, requesting from state authorities available information about the business, understanding the products and customers of the business, monitoring the business activities, remaining alert for suspicious business activities, and conducting periodic reviews of the business. A financial institution also should consider whether an MRB implicates one of the priorities of the Cole Memorandum. Finally, if a financial institution does decide to service an MRB, it would be required to file a Suspicious Activity Report.
The banking industry was not impressed. Banks were concerned that the FinCEN guidelines did not have the force of law and were too indefinite and therefore MRBs remained risky business. In fairness, the due diligence requirements of the FinCEN guidelines did make it very expensive for financial institutions to bank MRBs, with insufficient upside to compensate for the risk. One bank in the Washington, D.C. region reportedly wanted to charge one MRB $15,000 a month to continue to maintain its accounts. The clear message–take your business elsewhere.
Fast forward over two years. Is the banking situation any better for the cannabis industry? Yes, and well, no. In order to relieve the banking stress faced by the industry, a number of states tried to charter state financial institutions to serve MRBs. These efforts have failed because the Federal Reserve will not allow these institutions to have master accounts. Perhaps the most notable example is Fourth Corner Credit Union which obtained a state charter from Colorado, but was unable to obtain a master account from the Federal Reserve Bank. Fourth Corner sued the Fed in US District Court, but the case was dismissed earlier this year. The large national banks and regional banks still won’t touch MRBs, but the situation is somewhat different for local banks, as well as credit unions. According to Marijuana Business Daily, there are over 300 financial institutions currently working with MRBs. In most cases, these financial institutions are little more than vaults for the MRBs they serve. Even though 300 seems like a large number of financial institutions, it can be very difficult for an MRB to find a financial institution that will provide services to the MRB, since the banks will not publicize the fact that they serve the industry, and MRB customers are required to sign strict confidentiality agreements preventing them from disclosing the identity of their banks. While researching this article, I was able to speak to the Chief Risk Officer of a bank that has MRB customers on the condition that I would not reveal the name of the bank.
Will the situation improve? It must. An executive of Fourth Corner Bank was quoted by the L.A. Times as saying “In 2016, $1.2 billion in cash will be transacted by the cannabis industry in Colorado. That’s all in $20 bills. At some point somebody will die. Then we will be allowed to bank.” While this statement is dramatic, it is illustrative of the fact that there are billions of dollars in cash generated by the cannabis industry, an obvious temptation to those up to no good. Another problem with all that cash is the difficulty in collecting taxes. How do you track an MRB’s financial performance to determine if it is paying the right amount in taxes? One interesting development is that both authorities and the cannabis industry are looking to casinos to learn best practices in managing and taxing huge cash businesses.
How will the situation improve? Technology and voting. On the technology front, there are a number of start ups such as Hypur and PayQwick, which could have a big impact on the industry. Hypur is one of a number of companies developing software to make bank compliance easier and cheaper, and PayQwick provides a cashless payment solution for the cannabis industry. Last week, the New York Times reported that Microsoft is developing software to enable states to keep track of marijuana sales and commerce.
At the ballot box later this year, California and several other states will be voting on whether or not to legalize recreational marijuana. If California votes “yes,” that will dramatically increase the amount of cash circulating, which, in turn, should dramatically increase the pressure on legislators and regulators to modify various laws and regulations in a way that opens up the banking system to MRBs. Finally, with a new President coming in to office, and a new Congress beginning in January, albeit with most of the same players, it is possible that the laws may change. Really.