The legal cannabis industry is still relatively young and evolving, but many U.S. institutions – financial ones included – have yet to catch up with this new reality. Due to cannabis’s status as an illegal Schedule I substance under the U.S. Controlled Substances Act (CSA), the industry has had to contend with some harsh realities. Oft cited as one of these challenges is the lack of banking and financial services available to cannabis businesses, a vacuum which has led to many cannabis businesses holding on to cash for years.
However, there is much the mainstream conversation around cannabis banking leaves out or gets wrong. Several myths have cropped up to explain the hesitance with which bankers approach the cannabis industry. Dispelling those myths is the first step toward improving cannabis businesses’ access to the banking system and financial services that every company needs to grow and succeed. Here are the five most common cannabis banking myths, and what financial institutions need to know to dispel those myths.
While it is true that cannabis businesses often have a hard time finding banking partners, the reasons you may have heard for this might not be entirely accurate. These five cannabis banking myths are pervasive and widespread, but they don’t tell the true story.
The biggest myth you are likely to hear is that banks are unwilling or unable to serve cannabis businesses due to the ongoing federal prohibition of cannabis. Today, only about 3% of the local and national banks in the U.S. serve the cannabis industry, including more than 125 institutions in Fincann’s Cannabis Banking Financial Network, but it is not federal prohibition which prevents the remaining 97% from taking on cannabis clients.
The hesitance on part of bankers to work with cannabis businesses is rooted more in prejudice and fear than any legal considerations. Bankers generally see cannabis businesses as “high risk,” which means they require an added layer of due diligence and expense. However, many industries are considered high risk and yet have no difficulty securing banking; alcohol, gambling, check cashing, and firearms businesses all work closely with their banking partners every day. It is simply a business decision on the part of the banks: is the additional labor and expense worth the revenue these clients generate? The answer is often “yes.”
So, what is it about cannabis that leads bankers to shy away from the industry? In large part, it is simply an emotional response to the drumbeat of propaganda surrounding cannabis that has persisted for nearly a century. For many bankers, cannabis is seen as “shady” or “disreputable” and therefore they are unwilling to bank cannabis industry clients – the justification that it is due to the federal prohibition is merely a rationalization.
The truth is no bank working with cannabis clients in the past decade has suffered any of the legal consequences they claim to fear. No bank has lost their FDIC insurance; no bank has been shut down by the federal government. In fact, the very same federal government that maintains cannabis’s status as an illegal Schedule I drug under the CSA has created a regulatory roadmap to banking cannabis in a compliant and sustainable manner. All that is left is for banks to decide they want to follow that roadmap.
This number has been thrown around baselessly, suggesting there are several hundred banks willing to partner with cannabis businesses here and now. Unfortunately, that is simply untrue.
This number comes from Suspicious Activity Reports (SARs), which banks are required to file with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) under the Bank Secrecy Act (BSA). Some industry analysts have interpreted SAR filings as evidence that between 600 and 700 banks are currently serving the cannabis industry; however, SARs are often filed with FinCEN regarding businesses that fall outside the scope of the agency’s guidelines. This means that, in many cases, a bank might file a SAR without ever having served a client operating in the cannabis industry.
For example, a bank working with a cannabis lifestyle magazine might file a SAR with FinCEN to err on the side of extreme caution, although such a magazine would not be considered a cannabis industry business by any reasonable metric. That bank might not have a single cannabis industry client, and yet some suggest the SAR they’ve filed is evidence to support the notion they are indeed banking the cannabis industry – they are not, and this approach inflates the number of cannabis-friendly banks. The true number is much lower.
The reality is of the 5,300 local and national banks operating in the U.S., only approximately 155 banks serve cannabis industry clients (as of November 2020). Of those 153 banks, only about 57 are friendly to THC licensees – others serve CBD businesses, hemp businesses, and ancillary businesses in the cannabis industry, but won’t work with licensed cultivators and dispensaries dealing with high-THC products.
Many claim that without Congressional action, there is no regulatory framework for bankers to follow which offers them security and peace of mind when banking cannabis clients. This is patently false. Although cannabis remains federally illegal, there is clear regulatory guidance on how to bank state-legal cannabis businesses.
The FDIC maintains a 400-page standard bank examination manual called the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money Laundering (BSA/AML) Examination Manual. This manual does not address cannabis specifically but applies to all industries. The FDIC has repeatedly reaffirmed that this is the manual by which bank examiners are required to follow when monitoring banking operations, including for cannabis industry clients. This approach has been further reinforced by the other two major examiners in the country – the Office of the Comptroller of the Currency (OCC) and the National Credit Union Association.
As a result of the myth above, many have hailed the Secure and Fair Enforcement (SAFE) Banking Act in the U.S. Congress as a gamechanger for cannabis banking. While the legislation is crafted to assuage the concerns of bankers regarding cannabis’s status as a federally illegal substance, in reality, it does very little in terms of changing the law, for one simple reason:
It is not the government standing in the way of cannabis banking, it’s the bankers.
The SAFE Banking Act would enact a few important items if it becomes law, including:
Another oft cited reason for passing the SAFE Banking Act is that it would open the way for credit card transactions on major networks like MasterCard, Visa, American Express, and Discover. However, each of these payment processors have made clear they will not open the way for cannabis-related transactions until the industry is federally legal.
While the SAFE Banking Act is a positive bellwether for changing attitudes on Capitol Hill, it does very little to fundamentally change the existing rules that are already in place. What would be more effective than passage of the SAFE Banking Act would be individual banks’ willingness to take on cannabis industry clients under the regulatory guidelines that already exist.
Banks have not suffered from the choice of banking cannabis businesses. None have faced the draconian legal consequences often articulated in mainstream discussion around the challenges of banking cannabis businesses. Not one banker has gone to jail over banking cannabis industry clients, and not one bank has lost their license.
In one case, Century Bank in Massachusetts was sued in a RICO action brought by property owners situated adjacent to a cannabis cultivation facility. The plaintiffs argued the cultivation facility created a public nuisance and cited Century Bank, the facility’s banking provider, as a defendant in the case. In federal district court, the judge ruled that the plaintiffs failed to prove their case and that Century Bank specifically had limited involvement related simply to the provision of financial services in compliance with existing regulatory guidance. Century Bank was stripped out of the lawsuit and exonerated completely – they were not found in violation of RICO or any federal laws. This case established precedent that protects banks working with plant-touching, THC licensees.
Some banks that have decided to service the cannabis industry chose to distance themselves from it after some time, but not truly for fear of legal reprisal. Instead, some may have found the workload too heavy or that cannabis clients weren’t profitable given their own processes. However, none of these banks withdrew from the cannabis industry due to legal penalties.
The argument that banks run a great risk of potentially losing their charter or incurring criminal liability for working with cannabis businesses is false and disingenuous.
While there are certainly legal constraints facing the cannabis industry, many imposed by the ongoing federal prohibition, in the realm of banking there is generally clear guidance on how to bank cannabis businesses in a compliant manner. The notion that banks must wait, with their hands tied, until cannabis is legalized federally or some supporting legislation is passed to offer additional protections, is largely a cannabis banking myth. If we look to the guidance offered by federal agencies and the precedents they’ve established in terms of monitoring and enforcement, it becomes clear that the key driver of banking access for cannabis businesses is not the government, it is the banks themselves.
If you’re a financial institution (FI) interested in servicing the cannabis industry, our experts can help you decide how you can serve this growing sector. Contact Fincann for education and training on the general risks and opportunities for banking THC licensees, plant-touching businesses, ancillary, and related industries.