Banking and Financial Services

Legislative Action Could Allow Banks to Handle Cannabis Accounts

Going for the Green

One of the more challenging aspects of running a cannabis business is the inability to access banking services because banks are federally regulated, and cannabis is illegal on the federal level. However, change could be coming after the U.S. House of Representatives voted to pass legislation that would legalize cannabis banking. If the Senate agrees, proponents of the effort say, cannabis operations will become easier, less costly, more transparent, and accessible to a wider range of investors.

Want to start a cannabis business? You’d better have a lot of cash on hand.

However, that equation could be changing after the U.S. House of Representatives voted to pass legislation that would allow the cannabis industry to access banking and financial services, even as the substance remains illegal under federal law.

The Secure and Fair Enforcement (SAFE) Banking Act passed the House by a vote of 321 to 103, with nearly half of Republicans joining all Democrats but one in voting in favor of the bill.

Now the bill will move to the U.S. Senate and, eventually, to the president’s desk. Proponents are confident in their chances of passage.

“It would be great for the cannabis industry and great for the banking industry,” said Peter Gallagher, chief financial officer at INSA, a cannabis dispensary in Easthampton. “A lot of banks we’ve talked to are very interested in getting into it, but don’t want the risks associated with it, so they’ve steered clear of it.”

Banks providing services to state-approved cannabis businesses could, in theory, face criminal and civil liability under federal statutes. In fact, only two financial institutions in Massachusetts have taken on the risk, both of them located in the eastern part of the state. So most cannabis companies operate as cash-only businesses.

“The implications of having to handle a lot of cash are pretty profound,” Gallagher told BusinessWest. “A lot of effort goes into counting and transporting it. To the extent that we can move some of this to credit, it would make our operations a lot easier.”

Momentum to legalize cannabis has made the banking issue impossible to ignore at the federal level. Currently, 33 states, the District of Columbia, Guam, and Puerto Rico have all legalized the use of marijuana to some degree. Yet the possession, distribution, or sale of marijuana remains illegal under federal law, which means any contact with money that can be traced back to state marijuana operations could be considered money laundering and expose a bank to significant legal, operational, and regulatory risk, notes the American Banking Assoc. (ABA).

“The rift between federal and state law has left banks trapped between their mission to serve the financial needs of their local communities and the threat of federal enforcement action,” the association wrote recently. “ABA believes the time has come for Congress and the regulatory agencies to provide greater legal clarity to banks operating in states where marijuana has been legalized for medical or adult use. Those banks, including institutions that have no interest in directly banking marijuana-related businesses, face rising legal and regulatory risks as the marijuana industry grows.”

Gallagher said legalizing cannabis banking across the board makes sense on many levels.

“From a business perspective, it would make banking more accessible and less costly, and it would eliminate the risk of enforcement and regulatory action that banks are worried about, which is what’s leading them to abandon the market.”

Most think they would gladly jump in — making the cannabis industry more accessible to a wider range of entrepreneurs, while bringing down costs — if the SAFE Banking Act becomes law. And that’s what the Senate will have to consider as it begins its review.

Dollars and Sense

Scott Foster, a partner with the law firm Bulkley Richardson who helped establish its cannabis practice, said the law, if passed, would open up the ability of cannabis businesses to use local branches of local banks essentially overnight — if the banks decide to get involved, which seems likely, given the ABA’s advocacy on the issue.

“This is driven not by the cannabis industry, but by the banking industry,” Foster said. “We need clarity in this issue, considering all the non-cannabis businesses affected by this.”

“A lot of banks we’ve talked to are very interested in getting into it, but don’t want the risks associated with it, so they’ve steered clear of it.”

Indeed, in addition to growers and retailers, there are plenty of vendors and suppliers, landlords, and employees indirectly tied to the cannabis industry, thus posing legal risks for banks serving those individuals.

Rob Nichols, ABA president, recently wrote about two such examples: a bank in Ohio was forced to turn down a loan to a fencing company hired to build a fence around a marijuana growing facility, and a bank in Washington had to close an account when a law firm took on a marijuana business as a client.

“If either of these banks looked the other way, they risked violating federal law and facing criminal prosecution,” Nichols said, noting that these examples are far from isolated. An ABA survey found that 75% of banks have had to close an account, terminate a client relationship, or turn away a customer because there was some connection to cannabis.

“What we’re seeing is employees of cannabis companies being turned down for mortgages, and checking accounts closed down because they’re being paid by cannabis companies. That’s the biggest impact that’s actually driving the law,” Foster told BusinessWest. “Senators in states where it’s legal are saying, ‘time out.’ This isn’t about cannabis companies, it’s about the people selling stuff to them, landlords, even W.B. Mason delivering supplies. They’re getting caught up because they’re being paid by cannabis companies, and banks are saying they can’t accept the money. It’s an unintended ripple effect that’s causing a shift in thinking in Congress.”

Furthermore, reconciling the legal divide between state and federal laws would bring benefits to the communities banks serve, Nichols argues.

“The estimated $24 billion in cannabis sales by 2025 in states where marijuana has been legalized could be deposited safely with federally regulated financial institutions, enhancing transparency, public safety, and tax revenue,” he said.

And it’s not just banks asking for lawmakers to take action, he noted. A bipartisan group of 19 state attorneys general last year wrote a letter to lawmakers, arguing that bringing cannabis businesses into the banking system would improve accountability and increase public safety.

“This isn’t about cannabis companies, it’s about the people selling stuff to them, landlords, even W.B. Mason delivering supplies. They’re getting caught up because they’re being paid by cannabis companies, and banks are saying they can’t accept the money. It’s an unintended ripple effect that’s causing a shift in thinking in Congress.”

“Without relief from Congress, even banks that have decided not to serve cannabis businesses will find themselves caught in the financial web created by this booming industry,” Nichols said. “The money from cannabis businesses often goes to vendors, landlords, and employees, while the federal criminal association follows that cash.”

Gallagher agreed, and said it shouldn’t be difficult to build consensus around the need to bring clarity to cannabis finances through the well-regulated banking system.

“If, at the end of the day, what we’re worried about is diversion, or being able to track all that money, it’s easier to do that with electronic payments rather than having people carry large cash balances,” he said. “It’s easier for regulators and everyone else to make sure the industry is healthy and operating compliantly.”

Indeed, that very argument became part of the House debate. Colorado state Rep. Ed Perlmutter argued that keeping cannabis banking illegal is “an invitation to theft, it’s an invitation to money-laundering, it’s an invitation to tax evasion, and it stifles the opportunities of this business.”

Joint Resolutions

Foster said the immediate impact of the SAFE Banking Act would be significant on current cannabis businesses, which would now be able to access local branches of local banks, instead of running a ponderous all-cash operation — and requiring the security that entails — or seeking services from an institution across the state.

“We can’t apply for loans — working capital, construction loans, any lending right now,” Gallagher noted, adding that the handful of banks nationwide that are currently risking the cannabis business are passing on exorbitant costs to customers to do so.

“You’ve had some companies that have been willing to shoulder the risk associated with servicing an operation that’s federally illegal,” he told BusinessWest. “They’ve been able to charge excessive rates for that. As [legalization] happens in this industry, the fees will come down and start to normalize.”

Nichols expects that competition to emerge quickly, saying banks typically respect the decisions made by voters in the states where they operate. “Those voters had weighed the societal and cultural issues that come with legalization, and they made their decision. Instead, the industry is focused on the impact of the gap between state and federal laws on banks and their ability to serve those in their communities.”

The other major impact of a change in the law, Foster said, has to do with the concept of social equity. Massachusetts’ Cannabis Control Commission launched what it calls its Social Equity Program to expedite business applications and provide technical assistance, mentoring, and other resources for individuals from communities that have been disproportionately harmed by marijuana prohibition — typically poverty-stricken areas.

“Even though Massachusetts law has a social-equity component to it, giving expedited processing to social-equity candidates, the practical reality is, most of the investors are still wealthy, white gentlemen who have disposable income invested in cannabis,” he noted.

By allowing entrepreneurs to finance these operations instead of needing all the money up front, Foster explained, “you’ll have more players at the table, and be able to leverage smaller sums into larger companies. I haven’t heard a lot of talk about the social-equity piece, but to me, that’s a big piece, to help more people be able to engage in this business and apply for a loan if they qualify. That, to me, is a potential game changer.”

A companion bill in the U.S. Senate has yet to be voted on by the Senate Banking Committee, which held a hearing in late July on the issue. While that debate is coming, some lawmakers believe it’s only the start. For instance, House Majority Leader Steny Hoyer said he doesn’t believe the SAFE Banking Act goes far enough.

“This must be a first step toward the decriminalization of marijuana, which has led to the prosecution and incarceration of far too many of our fellow Americans for possession,” he argued.

For now, people like Gallagher are happy the banking issue may finally be resolved.

“We’ve been following this, so it’s not a surprise,” he said. “It’s something that makes a lot of sense from an operations and compliance perspective. We weren’t sure of the timing of it in terms of the evolution of the industry, but it’s something we expected to happen.”

Joseph Bednar can be reached at [email protected]

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