What is Legacy Cash and Why Is It Important to Cannabis Banking?

Operating in the cannabis industry has traditionally meant dealing largely in cash, especially for plant-touching businesses like dispensaries and cultivation operations. Traditionally, it has been difficult for cannabis businesses to access the banking system due to hesitation on the part of banks. As the industry has grown, many banks remain hesitant to work with cannabis businesses, leading to a growing amount of cash reserves, called legacy cash, for many in the industry.

These reserves, known as legacy cash, present significant challenges to cannabis business owners; unbanked cash not only creates security concerns on site but it cannot be used effectively as capital in the banking system. Plus, moving large sums of cash into a bank account is not as simple as showing up and asking to deposit it without special considerations. Luckily, there are more banks willing to solve legacy cash problems for cannabis businesses than ever before – you just need to know where to look.

What is legacy cash?

The term “legacy cash” refers to unbanked money accumulated by a business. In the cannabis industry, many businesses have a large sum of legacy cash on hand – we’re talking hundreds and thousands of dollars – due to banking restrictions that left them without checking accounts, savings accounts, and other basic business banking products.

Historically, state-legal cannabis licensees have a difficult time accessing basic banking services. Oftentimes, these businesses were unable to find a banking partner despite remaining compliant with all state and local laws – instead, they were forced to accumulate profits in cash.

Does legacy cash pose difficulties for cannabis businesses?

Keeping large amounts of cash on hand is not a long-term viable solution, of course. First and foremost, it comes with significant safety concerns. If someone knows a dispensary is home to untold thousands in cash money, the location becomes a ripe target for robbery.

In Oakland, a string of armed robberies targeting cannabis dispensaries occurred on election night 2020, no doubt searching for the vast troves of cash many have come to expect dispensaries to keep on hand due to barriers to banking for the cannabis industry. This is by no means a new phenomenon: in October 2020, three suspects were arrested in a series of robberies targeting cannabis dispensaries in California. Portland, Oregon is similarly dealing with an outbreak of cannabis-focused robberies. It is no secret that dispensaries have been forced to hoard cash, so would-be thieves consider them prime targets for robbery, hoping to score a safe full of cash through force of arms.

It’s not just a security threat that legacy cash poses, however. The inability to bank profits also causes business headaches. Cash is only suitable for certain purchases, such as acquiring cannabis flower from a cultivator or equipment from a supplier. To purchase real estate or invest capital, the money must be put into the banking system so it can be placed in escrow. Inability to bank legacy cash prevents cannabis businesses from using their capital freely to support the growth of their businesses.

Moreover, when a business is forced to hold past profits in cash, it can be difficult to establish the documentation needed to secure a loan. If a cannabis business is able to find a bank or alternative lender willing to extend a loan in the first place (a big “if”), many are unable to demonstrate they have the reserve funds needed to support repayment. Unbanked cash, although real and useful for repaying loans, is much harder to show to a would-be lender. Without bank statements, many lenders are unwilling to extend a loan to these businesses, making it more difficult to secure funding in an industry already locked out of many conventional funding avenues.

Furthermore, legacy cash provides an opportunity for criminal elements to launder money. When illegal operators are aware that there are large sums of unbanked cash associated with the cannabis industry, they can pressure licensees to comingle their illicit profits alongside legitimate legacy cash. Not only does this offer an access point to those who would launder money earned from illegal activities, it also turns legitimate legacy cash rotten, making it “unbankable” and implicating an otherwise legitimate operator in a crime.

How is legacy cash banked?

Luckily, while they are few and far between, there are banks working with cannabis businesses to turn legacy cash into banked capital. Legacy cash is subjected to a forensic accounting review to ensure there are no clear red flags that suggest illegal activity like money laundering, making it an arduous process that some banks have shied away from. Although cannabis-friendly banks with legacy cash programs can be difficult to find, the right partner with a vast network of banks, like Fincann’s Cannabis Banking Financial Network, can streamline the process.

In recent years, some banks have dipped their toe in the waters of a rapidly growing cannabis industry. For THC licensees in states with legal cannabis programs, cannabis banking is largely focused on anti-money laundering (AML) protections – banks need to make sure that profits are legitimately derived from the legally compliant scope of the business and not comingled with profits derived from illegal activity. Banks have often (erroneously) assumed that banking the cannabis industry would open them up to larger issues, such as losing their federal licensing.

But what does this mean for legacy cash?

Unlike current and ongoing profits, legacy cash is much harder to account for. In some cases, cannabis businesses have more than a decade of cash profits on hand, all of which need to be banked. Unlike incoming revenue, which can be tracked down to the penny, legacy cash is subject to a forensic accounting review to determine there is no reason to assume the funds came from any source other than the licensed operation. In short, not every penny needs to be tracked, but banks must do their due diligence to ensure legacy cash appears legitimate based on the size and scope of the licensed business operations. Before banking legacy cash, banks must ensure there aren’t any red flags associated with the funds that will trigger audits by regulatory authorities; depositors should be prepared with whatever documentation is available to confirm the authenticity of their money.

Legacy cash applicant considerations

When considering an applicant for a legacy cash program, banks will often ask the following questions:

  • How many years has the business been in operation?
  • How large is the business?
  • What is the scope of the business’s operations?
  • Where did the money come from?
  • Does it appear reasonable this money was generated from the licensed operation of the business?
  • Does it appear as if the money has been comingled with money derived from other sources?

When looking to bank legacy cash, accountants must be able to see there is enough documentation (such as receipts, invoices, and historical sales transactions) to answer these questions and reasonably assume the legacy cash is legitimate. If there are no red flags, cannabis businesses should be eligible for legacy cash banking programs. For this reason, licensed cannabis businesses should maintain detailed records of their operations that can be used to substantiate any legacy cash they might have accumulated.

Fincann legacy cash programs

Fincann offers an expansive banking network that includes cannabis-friendly banks willing to verify and bank legacy cash. We have assembled three legacy cash program tiers that give you a choice of how to bank your legacy cash and control costs: a bronze tier, a silver tier, and a gold tier. For pricing and more detailed information about each of Fincann’s legacy cash programs, as well as the minimum requirements for legacy cash banking for a THC licensee or similar licensed operator, request more information on our legacy cash page, or you can fill out the Fincann qualification form.

Turning legacy cash into banked funds

Legacy cash is a major issue facing cannabis businesses. However, the tide is slowly turning as more banks enter the cannabis industry and recognize the need to extend banking services to state-compliant cannabis businesses. This includes legacy cash, which presents its own unique problems from businesses simply looking to bank their institutions transparently and securely. And while it might be hard to find these banking partners on your own, Fincann has established a robust network of reputable financial institutions through our Cannabis Banking Financial Network™. As of Q4 2020, more than 155 institutions in our network are ready to work with your business. With Fincann’s network of banking partners, the challenges presented by legacy cash can be a thing of the past. If you’re in need of a banking partner for your cannabis business, contact Fincann today or request to receive our legacy cash banking requirements.