Ancillary Businesses and Cannabis Banking: Issues and Solutions

Despite its legal status in many states, the cannabis industry still contends with rules and perceptions that get in the way of important business needs, like obtaining basic banking services. While plant-touching businesses generally feel the brunt of those issues, the industry’s ancillary businesses – those that provide support services to plant-touching companies – also face significant obstacles when it comes to cannabis banking. By having a better understanding of what an ancillary business is and how it relates to cannabis banking, you can find the right banking partner for your cannabis business.

What is an ancillary cannabis business?

At its very base level, cannabis businesses are categorized into two main groups: plant-touching and ancillary. Businesses that provide support to the rest of the cannabis industry are considered ancillary companies. These businesses do not handle any of the cannabis products, but instead provide goods and services to businesses that do. Strictly speaking, an ancillary cannabis business does not violate any laws when obtaining banking services, nor do financial institutions violate any protocol by servicing these business types. However, there are compliance implications and requirements when depositing plant-touching customers’ payments to ancillaries for products and services.

Types of ancillary cannabis businesses

From the banking partner’s point of view, ancillary businesses are broken down into two categories:

• Tier Two: Where a substantial portion the of company’s trade is with THC licensees and/or for high monthly amounts,
• Tier Three: where the company’s trade with THC licensees is incidental and/or for low monthly amounts. 

Within these tiers, ancillaries are sub-categorized as B2B ancillary professional and service providers, B2B ancillary equipment manufacturers and vendors, and B2C ancillary products and services. Each face limitations in operations and marketing just for working with plant-touching cannabis businesses.

B2B ancillary professional and service providers

Just like any other business may need an accountant, a security company, or a plumber, cannabis businesses need to utilize the services of B2B ancillary professionals as well. Some of these professionals may dedicate the entirety of their business to specializing in the cannabis, hemp, and CBD industries, while others may have a more diverse client base. Either way, some of these professionals may be apprehensive about disclosing their cannabis industry affiliations out of fear that the bank will no longer want to work with them. Some may even be (erroneously) advised to obscure their professional ties to the cannabis industry so they can obtain banking.

B2B ancillary equipment manufacturers and vendors

These businesses are very obviously conducting business with the cannabis industry, but they are not directly involved with the cultivation, processing, or dispensing of cannabis. A common example is a cultivation equipment manufacturer who may service both the cannabis and greater agricultural industry. Their products may be great for cannabis, but they may find themselves unable to market their product to the industry for fear of being “uncovered” by their bank. Similarly, some banks willing to work with ancillary businesses are willing to work with those who service the cannabis industry if plant-touching entities only make up a portion of their client base.

B2C ancillary products and services

These types of ancillary businesses are tangentially involved with the cannabis industry without touching the plant, while offering a product or service that a consumer may use. Examples of these business include:

• Cannabis-friendly tourism: Public support for adult-use cannabis is growing and as a result, tourism companies within legal states are including cannabis-related trips in their plans. This B2C business provides tourists with experiences that are only available in those states, either by way of cannabis-friendly lodging or tours through select cities to visit various dispensaries and cultivation facilities. While these businesses are fully lawful, their marketing and messaging are reliant on targeting this consumer base. This level of openness could put a potential banking relationship in jeopardy.
  
• Smoke shops: While they clearly do not touch the plant, smoke shops that sell consumption accessories are quite clearly catering to the cannabis consumer, which is not illegal whatsoever. However, it does come with some stigma attached. To avoid scrutiny from their current banking institutions, those who sell products for use with “legal herbs” may choose to shy away from disclosing their affiliation with cannabis, no matter how tangential it may be to actual cannabis sales — or how obvious it may be that their products are for use with cannabis. Lack of disclosure, however, is precisely the issue that may get a smoke shop ejected from their bank.

• Trade shows: Every industry has multiple trade shows that bring together professionals from all around the world. The cannabis industry is no different. Even though distribution of product or open consumption are not allowed at most of these venues, trade show operators may find difficulty securing banking because they accept funds from dispensaries, products, and other plant-touching cannabis brands.

How cannabis banking issues affect ancillary businesses

Ancillary cannabis businesses tend to have a different banking experience from their plant-touching counterparts. Unlike THC licensees, ancillary businesses are less likely to trigger AML red flags, especially if their cannabis clientele have compliant, transparent banking. Although this generally makes banks more comfortable when working with ancillary businesses, actual experience has shown that few banks not already supporting THC licensees will accept industry ancillaries. For this reason — and also generally speaking — ancillary cannabis businesses have a harder time than mainstream businesses when it comes to securing banking.

The oft-cited reason for this is the ongoing federal prohibition on cannabis, which remains a Schedule I drug under the U.S. Controlled Substances Act (CSA). Banks often claim they could lose their FDIC status or face other legal repercussions for banking the industry. However, the reality is no bank has ever faced legal consequences or lost their charter due to banking state-compliant legal cannabis businesses of any kind. 

As a result of that attention and the perceived legal volatility associated with cannabis businesses, financial institutions generally shy away from providing their services to such companies. Much of this is rooted in false perception, though: Many in the banking industry assume that cannabis is an off-limits industry due to decades of Prohibition-era propaganda casting it in such a light. 

Another issue, which we touched on earlier in this blog, involves the makeup of an ancillary business’s client base. In a bid to keep risk low, some banking institutions may require that a company limit the percentage of business tied to the cannabis industry. Though this sort of limitation is generally commonplace in major national banking institutions, smaller banks or local credit unions may be more willing to enter into a working relationship.

Why do some ancillary businesses hide their relationship with the cannabis industry?

In years past, the aforementioned challenges were so significant that many ancillary businesses opted not to disclose their connection to the cannabis industry. While this option has generally been used by companies whose operations aren’t immediately apparent to be cannabis related in any way, such actions come with major risks. Do not lie to the bank, under any circumstances.

If you are caught lying to your banking partner, the consequences can be severe. Banks are already under incredible pressure from state and federal regulators; once a financial institution begins working with cannabis businesses, the scrutiny from regulators only increases. There is no tolerance for fudging the truth.

If an ancillary cannabis business is found to have been lying about their operations, they can unceremoniously lose their accounts and be forced to start the process over again. This is a common headache for many in the cannabis industry, ancillary businesses included. In the most extreme cases, the business owner and their enablers could be charged with fraud and money laundering that risk suffocating fines and long terms of imprisonment.

If there’s no legal issue, why do ancillary businesses struggle to obtain banking?

The issues ancillary businesses face in obtaining banking essential boils down to perception. There is an assumption that there will be significant legal ramifications if their banking partner knows that they service the cannabis industry. Similarly, the bank is wary of their reputation: Many are nervous that they will be stigmatized for servicing these businesses. This means that many of the banks openly working with ancillary cannabis businesses will not advertise that they are accepting these types of accounts. Naturally, a lack of advertising means that fewer customers come. The question of which banks are willing to work with cannabis businesses remains shrouded in mystery, relying on word-of-mouth, guesswork, and applying and hoping for a positive result.

According to findings from the U.S. Treasury’s Financial Crimes Enforcement Network, it would appear that 695 banks and credit unions were actively working with cannabis-related businesses by the end of the third quarter of 2020, marking a decrease from 715 such institutions in the second quarter of 2019. 

The fact is, though, that only around 190 banks actively work with the cannabis industry and less than 100 work with THC licensees. The FinCEN number is based on suspicious activity reports (SARs) filed by banks and does not necessarily reflect the true number of cannabis-friendly banks in the industry. In reality, only about 1% of the banks in the country work with legal cannabis businesses of any kind. To help find amicable banking partners, Fincann has compiled a list of cannabis-friendly banking partners which tracks the number of banks servicing cannabis businesses and in what capacity.

Contrary to popular knowledge, cannabis banking is widely available for ancillary businesses

Despite the banking challenges that ancillary cannabis businesses face, there are banks willing to work with all sectors of the industry in all 50 states – though it may not be immediately apparent. Most banks involved with ancillary cannabis businesses don’t advertise that they offer accounts for those companies.

Banking networks like Fincann have already done the research in locating ancillary cannabis business-friendly accounts and services. Fincann has already done the work for you, so there remains little reason for an ancillary business to lie to their financial institution of choice.

Finding the right banking solution for any business can be challenging at times. Ancillary cannabis businesses may have their fair share of hardship when it comes to banking, but options like Fincann exist to find the right institution.