Should Your Financial Institution Partner with Cannabis Businesses?
The cannabis industry is booming. Marijuana was first legalized for medical purposes in 1996 in California and became recreationally legal in Washington and Colorado in 2012. After that, the majority of states have followed suit, and, as of 2024, cannabis is legal for either medical or recreational use in all but 13 states.
The rapid legalization has led to a boom in the industry. In the US, cannabis is a 40-billion-dollar industry as of 2024, up from 12 billion in 2016.
It’s clear cannabis is big business, and it’s projected to continue to grow in the next decade. But while it’s a big industry, the money side is rife with complications owing to cannabis’s federal classification as a Schedule I drug.
The contested federal status of cannabis means there is an opportunity for state-chartered financial institutions to step in to support local cannabis businesses. However, it’s essential to know that the cannabis industry is a thorny legal situation currently in flux.
The State of Banking and Cannabis
The state legalization of cannabis in defiance of federal prohibition has created an unprecedented situation in the banking world. While there are over 10 thousand dispensaries in the US alone, there is a great deal of risk in becoming their bank. This is because, federally, the possession, distribution, and sale of products containing THC is still illegal.
This federal prohibition means that, technically, any money connected to marijuana-related businesses (MRBs) can be considered money laundering, leaving financial institutions vulnerable under BSA/AML. However, since cannabis’s status differs from state to state, the laws around finance vary as well. For example, California passed a bill allowing banks and credit unions to accept cash deposits from cannabis retailers.
According to the National Association of Federally-Insured Credit Unions (NAFCU), banking is a high-risk activity that can pose threats to federally insured credit unions. If they’re found in violation of federal anti-money laundering and racketeering laws, they could potentially lose their status as a federally insured depository institution and have their assets seized. Ultimately, federally chartered banks and credit unions are under the most scrutiny and have the most to lose if the government decides to crack down.
State-Chartered Depository Institutions and MRBs
However, NAFCU states that the situation is different for uninsured state-chartered depository institutions. There are currently nearly 800 depository institutions presently working with MRBs.
In April 2022, Rodney Hood, from the board of the National Credit Union Administration, gave an address on the current state of the cannabis industry, clarifying that “credit unions, in particular state-chartered credit unions in states where marijuana is legal, are welcome to serve cannabis- and marijuana-related businesses provided that they do their due diligence, observe all relevant “Know Your Customer” and Bank Secrecy Act requirements, and adhere to the FinCEN guidance.”
Currently, the only completely legal way for credit unions to work with MRBs is to follow the Financial Crimes Enforcement Network’s 2014 guidelines.
“In assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that includes:
- verifying with the appropriate state authorities whether the business is duly licensed and registered;
- reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
- requesting from state licensing and enforcement authorities available information about the business and related parties;
- developing an understanding of the normal and expected activity for the business, including the types of 3 products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
- ongoing monitoring of publicly available sources for adverse information about the business and related parties;
- ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance;
- refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.
With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.”
With due diligence, community banks and state-chartered institutions not insured by the federal government can safely bank with MRBs.
Change on the Horizon: The SAFER Banking Act
While that’s the current state of affairs, legislation is in the works that would significantly alter things.
For one thing, marijuana may not be a Schedule I drug for much longer. On April 30th, 2024, it was reported that the DEA plans to move marijuana from Schedule I to Schedule III under the Controlled Substances Act after the recommendation from the Department of Health and Human Services. This would mean it would be defined as drugs with moderate to low potential for dependence, joining many other pharmaceuticals.
However, the American Bankers Association has issued a statement calling for further legislation, even if marijuana is reclassified: “The solution is the bipartisan SAFER Banking Act, which would allow banks to provide services to the cannabis industry in those states where it’s now legal. Passing that legislation in Congress would address the ongoing legal limbo around cannabis banking, while enhancing public safety, tax collection and transparency.”
The Secure And Fair Enforcement Regulation Banking Act (SAFER) is intended to create a “safe harbor” for financial institutions that provide services to MRBs. This would protect them from penalties that might otherwise affect them.
It would protect:
- Insurers
- Mortgage Loans
- Assets
The SAFER Banking Act has been passed in the House seven times, but passed in the Senate for the first time on September 27th, 2023. Its status is still up in the air, and it’s not known when or if it will be ratified.
A Time To Act
The cannabis industry has experienced cataclysmic changes in the last couple of decades, and federal regulation has struggled to keep pace. This has left financial institutions adrift in many ways.
This rift between federal and state laws has created an opportunity for non-federally insured financial institutions looking to tap into the booming cannabis market. Current legislation may change things, however, and open up the playing field to larger banks.
Smaller, state-chartered credit unions and non-federally insured community banks should seize the day and establish relationships with high-value MRBs before the competition grows.
The key to finding partners is data. CRUX Analytics gives your financial institution the up-to-date information on small businesses you’d traditionally only find for big companies. Contact us today to learn more.