The Cannabis Industry: The Future of a Cash Only Business

Types : Alerts

With a new Democratic majority in the United States House of Representatives, it is likely that we will see increased activity related to the cannabis industry.  On February 13, 2019, the House Financial Services Committee is scheduled to take on the issue of access to banking services for cannabis-related businesses.  Specifically, the Committee is expected to hear the Secure and Fair Enforcement Banking Act of 2017 or the SAFE Act.  Essentially, passage of the SAFE Act would allow banks and credit unions that are federally regulated to do business with state-legal marijuana related businesses despite marijuana still being classified as a Schedule I substance under the Controlled Substances Act.  Specifically, the SAFE Act would prohibit a federal banking regulator from: (1) terminating or limiting the deposit insurance of a bank or credit union solely because the institution provides financial services to a legitimate marijuana-related business; (2) penalizing or discouraging a bank or credit union from providing financial services to a legitimate marijuana-related business; (3) recommending or encouraging a bank or credit union not to offer financial services to an account holder solely because the account holder is involved in a legitimate marijuana-related business; or (4) taking any adverse action on a loan made to an owner or operator of a legitimate marijuana-related business.

Last year, the cannabis industry was a $10.4 billion industry in the United States and it is currently a “cash only” business.  Businesses are not able to accept credit cards. It is difficult for businesses to figure out how to store and keep track of industry money and employees are finding it difficult to cash their paychecks at a bank.  Under current law, banks that provide services to marijuana-related businesses risk violating federal laws that impose criminal liability for engaging in certain financial and monetary transactions with proceeds of an unlawful activity.  In February 2014, the Financial Crimes Enforcement Network (FinCEN) issued guidance clarifying due diligence expectations and reporting requirements for banks that provide financial services to marijuana-related businesses.  According to the guidelines, due diligence requires that the bank not only ensure proper licensure of a marijuana-related business, but also develop an understanding of the customer’s business activity such as products sold and type of customers to be served (e.g., medical or recreational), monitor publicly available sources for adverse information about the business as well as related parties, and monitor for suspicious activity by the customer.  A financial institution that decides to provide financial services to a marijuana-related business would also be required to file suspicious activity reports (“SARs”) for transactions that may violate the Bank Secrecy Act.  These guidelines do not have the force of law and are subject to change at any time.  Therefore, the risks and costs associated with providing financial services to marijuana-related business are high.

As the cannabis industry continues to grow and more states move toward medical marijuana and legalizing the recreational use of marijuana, a change in federal law will be necessary in order to increase transparency and deter bad actors.  In the interim, states are trying to find creative ways to deal with this issue.  For example, California and New Jersey are now considering a state bank for marijuana-related businesses.  However, a state bank also presents its own challenges.  For now, marijuana-related businesses will have to await further legislative action, whether at the state or federal level.