The Banking Problems Facing Cannabis Businesses
In the early stages of state legalization, accessing and maintaining bank accounts emerged as the most pressing challenge for marijuana-related businesses. While regulatory frameworks have evolved and businesses have matured, banking obstacles remain prevalent. The stringent due diligence and reporting requirements imposed by banks on marijuana transactions continue to make maintaining bank accounts for such businesses a costly endeavor.
1. Account Access
Initially, banks shied away from the marijuana industry due to several factors. Firstly, the federal illegality of marijuana categorized any funds derived from it as part of money laundering—an activity banks sought to avoid. Consequently, major banks outright refused to engage with the industry based solely on its federal illegality. Secondly, banks grappled with the regulatory complexities associated with serving the marijuana sector. Federal regulators such as the FDIC (Federal Deposit Insurance Corporation), OCC (Office of the Comptroller of the Currency), Federal Reserve, and NCUA (National Credit Union Administration) kept banks under close scrutiny, with fears of regulatory backlash, including enforcement actions, loss of deposit insurance, and restrictions on accessing Federal Reserve-operated payment systems. Thirdly, banks were uncertain about the viability of this emerging industry and its players, questioning whether these ventures would yield profits or be plagued by liabilities, crop failures, or market saturation. Finally, some banks deemed marijuana banking too risky for their reputations.
Significant transformations have swept through the state-legal marijuana industry since 2014. By the end of 2020, fifteen states and the District of Columbia had legalized recreational marijuana, with thirty-five states legalizing it for medicinal purposes. In 2020 alone, the number of licensed marijuana entities skyrocketed by 367% in less than four years, marking a substantial increase in industry value, now worth billions of dollars, regardless of political affiliations.
Bank regulators have gradually permitted banks with stringent compliance frameworks to engage with the marijuana industry. In 2014, the Financial Crimes
Enforcement Network (FinCEN), the federal agency tasked with combating money laundering, issued guidance detailing the preparation and filing of suspicious activity reports for marijuana-related transactions. Under this guidance, banks are required to file suspicious activity reports for most such transactions. Routine transactions trigger “Marijuana Limited” reports, identifying the involved parties and clarifying the institution’s sole filing due to the subject’s involvement in a marijuana-related business. For continued marijuana-related activity, banks must periodically update these reports. Moreover, banks are expected to conduct due diligence to assess whether these transactions contravene federal enforcement priorities or state laws. Instances of suspected violations prompt the filing of “Marijuana Priority” reports. Ultimately, banks must submit a “Marijuana Termination” report should they deem it necessary to terminate a business relationship to uphold effective anti-money laundering compliance.
Although federal bank supervisors have refrained from openly endorsing marijuana banking, they appear satisfied with banks adhering strictly to FinCEN guidance. FDIC Chairman Jelena McWilliams emphasized that while marijuana remains federally illegal, banks can maintain compliance by conducting due diligence according to state requirements, filing suspicious activity reports, and adhering to federal directives. Notably, there have been no reported cases of banks losing federal deposit insurance or Federal Reserve account privileges due to marijuana banking.
2. Account Cost
Despite the availability of bank accounts for marijuana-related businesses, they come at a steep price. Many businesses find themselves shelling out thousands of dollars monthly merely for the privilege of maintaining a bank account, with some deeming these fees prohibitively expensive.
The exorbitant fees are largely driven by the compliance costs shouldered by banks offering these accounts. The paperwork involved in suspicious activity reporting alone can be staggering. In 2017, Partner Colorado Credit Union’s subsidiary, which serves 220 cannabis-related companies, filed over 7,000 suspicious activity reports, dwarfing the 226 reports filed for its 33,000 non-cannabis related customers. Similarly, Maps Credit Union, serving approximately 500 cannabis businesses in Oregon, filed about 3,000 suspicious activity reports over a two-year period. To manage this workload, Maps maintains a ratio of one full-time compliance employee for every 40 cannabis business accounts. Another Oregon financial institution has allocated four full-time employees solely to compliance reporting for fifty cannabis-related businesses. Meanwhile, at Community First Credit Union in Santa Rosa, California, one employee handles 24 cannabis businesses, compared to 400 other commercial accounts managed by the same staffer.
Banks serving the marijuana industry face heightened scrutiny from regulators. For instance, Partner Colorado underwent nine joint examinations by federal and state regulators within a three-and-a-half-year period, significantly surpassing the industry standard of three. Should a bank’s compliance efforts fall short, regulators are quick to initiate enforcement actions, often requiring costly remedial measures.
3. Legacy Cash
Additionally, some marijuana-related businesses still grapple with cash acquired during periods when banking access was unavailable. While a bank may be open to establishing an account for a marijuana-related business moving forward, they may hesitate to accept this “legacy cash.” Anti-money laundering laws mandate that banks verify the legitimacy of funds they accept. However, verifying the source of money earned by marijuana-related businesses in the past poses a significant challenge. Banks may demand a “detailed forensic audit” before agreeing to accept such cash.
4. Card Processing
Moreover, marijuana-related businesses continue to face barriers in accessing major credit and debit card processing networks. Leading networks like MasterCard, Visa, American Express, and Discover prohibit marijuana-related transactions within the United States. Even emerging fintech platforms like Venmo, PayPal, and Cash App routinely suspend services for marijuana-related businesses upon detection. Some businesses attempt to bypass payment company regulations by disguising marijuana purchases as seemingly innocuous transactions. However, manipulating merchant category codes in this manner constitutes a serious violation of card industry rules. Notably, federal authorities prosecuted two executives of a state-legal marijuana sales website for bank fraud due to their attempt to disguise the nature of their business transactions to process credit and debit card sales.
Although new payment companies have emerged with electronic or card-based solutions for marijuana-related transactions, these methods often lack the convenience of mainstream cards already in consumers’ wallets. Consequently, cash transactions remain prevalent. However, reliance on cash poses security risks, attracting potential thieves, and complicating regulatory and taxation efforts for marijuana-related businesses.
5. Loans
Furthermore, despite some banks providing account services, they refrain from extending loans to marijuana-related businesses. Additionally, these businesses are ineligible for Small Business Administration loans, leaving them excluded from a primary source of financing available to other small enterprises.
Observers attribute the absence of bank lending to the marijuana industry to several factors. Firstly, the illegal status of marijuana raises concerns among banks regarding potential criminal or regulatory repercussions. However, for banks already servicing marijuana-related businesses, the risk of criminal prosecution or regulatory action resulting from lending to such businesses is less evident. Secondly, since loans for illegal activities may not be enforceable, banks may hesitate to extend credit to marijuana-related businesses. Moreover, banks may be reluctant to repossess marijuana inventory, particularly if they lack state licensing to possess it legally. Additionally, concerns about potential criminal or civil forfeiture of money or collateral associated with marijuana further dissuade banks from lending to these businesses. Furthermore, the unavailability of federal bankruptcy protection for marijuana-related businesses and their creditors adds uncertainty for banks in the event of insolvency. Some banks may also lack confidence in their ability to assess and underwrite loans for marijuana-related businesses, viewing the industry as inherently risky. Lastly, moral opposition to marijuana among bank executives and board members may also influence lending decisions.
Consequently, marijuana businesses must seek alternative financing options. Many rely on personal funds from owners or investments from family and friends, contributing to a concentration of wealth within the industry and a lack of racial diversity. Some businesses secure loans from angel investors, hedge funds, or nonbank capital firms, albeit with high interest rates and unfavorable terms. Alternatively, a few marijuana-related businesses turn to venture capital or private equity firms willing to invest in the industry, albeit at the cost of relinquishing partial ownership and control of the company.