By Paula Durham, CFE, Manager
Weed, pot, reefer, Mary Jane, ganja – cannabis has as many slang names as it does methods of ingestion. No matter which name you prefer, cannabis is federally illegal and is included on Schedule 1 of the Controlled Substances Act (“CSA”), along with such other substances as heroin, fentanyl, and methamphetamines. 1 It is a federal crime to grow, possess or sell cannabis.
Despite being federally illegal, 33 U.S. states and the District of Columbia have legalized the sale and use of cannabis for medical and/or recreational purposes, 2 and cannabis-related businesses (“CRBs”) are growing at a rapid rate. Revenue from U.S. cannabis sales is projected to be between $11.2 and $13.7B in 2019, and is on track to rise significantly in the coming years. 3 According to some sources, CRB revenue could reach $30B by 2025, which represents expansion at a compound annual growth rate of approximately
Because the sale of cannabis is federally illegal, financial institutions face a dilemma when deciding to provide services to CRBs. Should they take a significant legal risk, or stay out of the market and miss out on a significant revenue opportunity? So far, most, but not all, financial institutions have been unwilling to take the risk, resulting in a dearth of financial institutions willing to work with CRBs. Until recently, canna-business operators had few options for financial services. But as the song says, the times they are a- changin’.
Feds vs States
Money laundering is the process used to conceal the existence, illegal source, or illegal application of funds. 5 In 1986 Congress enacted the Money Laundering Control Act (“MLCA”), which makes it a federal crime to engage in certain financial and monetary transactions with the proceeds of “specified unlawful activity.6 Therefore, CRB transactions are technically illegal transactions under the MLCA.
Financial institutions therefore face a risk of violating the MLCA if they choose to do business with CRBs, even in states where cannabis operations are permitted. In addition, financial institutions could also face criminal liability under the Bank Secrecy Act (“BSA”) for failing to identify or report financial transactions that involve the proceeds of cannabis businesses operating legally under state law.7
In short, because cannabis is illegal at the federal level, processing funds derived from CRBs could be considered aiding and abetting criminal activity or money laundering. Because of the conflict between federal and state laws, federal prosecutors were unsure how to enforce federal law against activity that was legal on the state level. In an attempt to provide clarity in this murky environment, the Department of Justice (“DOJ”) issued three memos designed to guide federal prosecutors in this area. However, none of the guidance documents issued from 2009 through 2013 addressed potential financial crime related to the legal sale or distribution of cannabis in states allowing the use of medicinal or recreational cannabis. To assist financial institutions in navigating this channel, the Financial Crimes Enforcement Network (“FinCen”) issued guidance in 2014 that clarified how financial institutions could conduct business with CRBs and maintain compliance with their Bank Secrecy Act requirements (“2014 Guidance”).8 According to the 2014 Guidance, financial institutions may choose to interact with CRBs based on factors specific to each institution, including the institution’s business objectives, the evaluated risks associated with offering such services, and its ability to manage those risks effectively.
Those who choose to provide services to CRBs are required to design and implement a thorough customer due diligence review that includes, in part, analyzing the licensing of the entity, developing an understanding of the business operations of the entity, and ongoing monitoring of the entity.9 In addition, financial institutions are required to file a Suspicious Activity Report (“SAR”) for every transaction they process for a CRB, should they choose to accept the business.
Although the 2014 Guidance does outline a path for financial institutions to engage with CRBs, it does not change federal law and therefore does not eliminate the legal risk to financial institutions.10 By its very nature, the 2014 Guidance is a temporary fix, subject to changing views of different administrations. For example, all three of the DOJ guidance documents noted above were rescinded by then Attorney General Jeff Sessions on January 4, 2018, throwing prosecutors back into the abyss with respect to enforcing laws against CRBs.11
Because of the uncertainty and high risk, most banks remain unwilling to serve CRBs. Those that do serve CRBs charge exorbitant fees (fees of $750-$1,000 per account per month are not uncommon), pricing many smaller operators out of the financial services market.
Cash is King or Is It?
Cannabis operators have discovered the old adage “cash is king” is not necessarily true when it comes to the cannabis space. Bank-less CRBs are forced to utilize cash to pay business expenses, which can be particularly difficult. Utility companies, payroll companies, and taxing authorities are just some of the providers that are difficult, if not impossible, to pay in cash. For example, cannabis operators have been turned away from IRS offices when attempting to pay large federal tax obligations in cash. Likewise, cannabis operators have been unable to utilize payroll processing companies to administer payroll and benefits for their businesses because the processors won’t take cash. CRBs can’t use Amazon or other online retailers because online providers cannot accept cash.
Because dealing in cash is so difficult, CRB operators look for work-arounds such as using personal credit/debit cards. However, the cash problem doesn’t go away, because the credit card holder will have to accept cash as reimbursement, which will trigger IRS reporting requirements if more than $10,000 is deposited at a bank in a single transaction. Further, such transactions could be considered an attempt to hide the source of the cash, which is, by definition, money laundering.
Some bank-less CRBs try to skirt the system by obtaining bank accounts in the name of management companies or other entities one step removed from the actual business. While this effort is often undertaken in an effort to streamline business and operate out of the shadows, it again runs afoul of banking laws. Transferring cannabis related financial transactions to another entity is actually the very definition of money laundering – which, as noted above, is defined as the process used to conceal the existence or illegal source of funds.
In addition to the difficulties in making payments or purchasing business supplies, operating in a cash- heavy environment poses significant safety risks for cannabis operators. CRBs often have large sums of money onsite and also transport large sums of cash when purchasing product or paying bills, making them a target for robbery. In 2017, there was a spate of dispensary robberies across the Phoenix Metro area, including one at Bloom Dispensary that took place during operating hours. 12
Managing all of that cash increases the cost of doing business as well, in the form of increased labor, insurance, and security costs. All of that cash must be counted and double counted, which can be time consuming for staff, not to mention the time it takes to deliver physical cash payments to hither and yon. Ironically, lack of banking significantly decreases transparency and clouds the waters of compliance, as operating strictly in cash makes it easier to manipulate reported financial results.
Will Congress Fix This Mess?
Congress has recently undertaken several efforts to pass legislation that will forge a clearer path for financial institutions to provide services to CRBs. H.R. 1595 – Secure and Fair Enforcement Banking Act of 2019 (“SAFE Act”) was introduced into the House of Representatives in March 2019. The proposed act prohibits federal banking regulators from penalizing depository institutions for providing banking services to legitimate cannabis related businesses.
This initiative is supported by the American Banking Association (“ABA”) and the Credit Union National Association (“CUNA”), among others. H.R. 1595 passed the House on September 25, 2019 and is currently being considered in the Senate. While this bill appears to have more momentum than prior initiatives, its future remains uncertain. Govtrack.us gives the bill a 3% chance of passing the Senate.13
In addition to the SAFE Act there are several other pieces of legislation being considered that, if passed, could clear a path for financial institutions to provide services to CRBs by de-scheduling marijuana or changing the regulatory scheme. Legislation includes, but is not limited to H.R. 420 – Regulate Marijuana Like Alcohol Act; S. 1028 & H.R. 2093 – Strengthening the Tenth Amendment Through Entrusting States Act (“STATES Act”); H.R. 2012-–-Ending Federal Marijuana Prohibition Act; and S. 2227 – Marijuana Opportunity Reinvestment and Expungement Act of 2019 (“MORE Act”), to name a few.
Despite the increased legislative activity surrounding cannabis, GovTrack.us does not give any of these bills more than a 2% chance of being enacted. Legislative relief, therefore, does not seem likely in the near future.
The Changing Banking Landscape
Despite the fact that there is little in the way of formal protections for financial institutions, and with no legislative fix likely to happen anytime soon, an increasing number of banks are working with cannabis operators.
According to FinCen statistics, there were approximately 633 financial institutions actively involved with CRBs as of March 31, 2019. It is important to note that these statistics are based on SAR filings, which banks are required to file when an account or transaction is suspected of being affiliated with a cannabis business. However, some of these SARs may have been generated on genuine suspicious activity rather than on a transaction with a known cannabis customer. 14
There are arguably more banking institutions offering services to CRBs than ever before. The challenges for CRBs are (1) finding an institution that is willing to offer services; (2) building/maintaining a compliance regime that will be acceptable to that institution; and (3) cost, given the high fees associated with these types of accounts.
Problem Solved? How to Get a Bank to Accept Your CRB
The gap between CRBs’ need for banking and the financial services providers’ sparse and expensive offerings to the sector has created an opportunity for third-party firms to intervene and provide a compliance structure that will satisfy the needs of the financial institutions making it easier for the CRB to find a bank.
These third-party firms perform extensive BSA-compliant due diligence on applicants to ensure potential customers are following FinCen guidance required to receive banking services. After the completion of due diligence, they connect the CRBs with financial institutions that are willing to do business with CRBs and provide checking/savings accounts, check writing capability, and merchant processor accounts. These firms often provide additional services such as armored car and cash vaulting services. Some of these firms also offer vendor screening, pre-approving vendors before any payments can be made.
One such firm, Safe Harbor Private Banking, started as a project implemented by the CEO of Partners Credit Union in Denver, Colorado, who set out to design a cannabis banking program that would allow Partners to do business with Colorado CRBs.15 The program was successful and has since expanded into other states who have legalized cannabis. Other operators include Dama Financial and NaturePay. While these services offer hope for many CRBs, the downside is cost. These services perform the operations necessary to find, open and maintain a compliant bank account; however, the costs of compliance are still high, pricing some small operators out of the market.
Is Digital Currency an Answer?
Digital currency is also making its way into the cannabis world. Digital currency, or cryptocurrency, is a medium of exchange that utilizes a decentralized ledger to record transactions, otherwise known as a blockchain. One of the largest benefits of blockchain is that it is a secure, incorruptible digital ledger used for, among other things, financial transactions.16 Blockchain technology therefore offers CRBs a transparent and immutable audit trail for business and financial transactions.
In July 2019, Arizona approved cryptocurrency startup ALTA to offer services to the state’s medical cannabis operators.17 ALTA describes itself as a “digital payment club where cash-intensive businesses pay each other using digital tokens instead of cash.”18 ALTA members purchase digital tokens, which are then used to pay other members using a proprietary blockchain based system. The tokens are redeemable for US dollars at a stable rate of 1:1, and CRBs do not need a bank account to participate in the ALTA program.
ALTA proposes to pick up members’ cash and exchanges it for tokens, which are then used to pay other members for goods and services. Tokens may be redeemed for cash at any time.19 The company has been approved by the Arizona State Attorney General, and one of the first members they hope to enlist is the Arizona Department of Revenue (“ADOR”). Enlisting ADOR into the program would allow dispensary members to pay state taxes digitally rather than hauling large amounts of cash to ADOR offices.
Similarly, Nevada is moving toward the creation of its own banking system for the cannabis industry. Like ALTA, Nevada’s proposed system will deal in digital tokens; however, consumers in Nevada would also have the option of utilizing the tokens in dispensaries.20
While both of these proposals are promising for Arizona and Nevada CRBs, the timeline as to when, or if, these offerings will come online is unknown.
Although states are legalizing cannabis in one form or another in growing numbers, the fact that cannabis is still federally illegal poses a significant barrier to accessing the financial services market for CRBs. While a majority of banks are still reluctant to offer services to this rapidly growing industry, there are more banks than ever before willing to participate in the cannabis industry.
As the “green rush” continues to envelop the country, financial services options available to CRBs are slowly growing. Many new options are now available to help CRBs find a bank, develop compliance programs, and manage the cash related problems encountered by most CRBs. However, these solutions may be out of reach for the budget-conscious small operator. Also there are a number of crypto-currency solutions being designed specifically for CRBs; however, when, or if, these solutions will come online is still unknown.
Paula Durham, CFE is a Manager at Simon Consulting, LLC with over 15 years’ experience as an investigation, operations and compliance specialist in industries such as defense, oil and gas services, manufacturing, and medical marijuana.
- Controlled Substances Act, 21 U.S.C., Subchapter I, Part B, §812.
- Controlled Substances Act, 21 U.S.C., Subchapter I, Part B, §812. 2 “State Marijuana Laws in 2019 Map”; https://www.governing.com/gov-data/safety-justice/state-marijuana-
- McVey, Eli. “Exclusive: US Retail Marijuana Sales On Pace to Rise 35% in 2019 and near $30 Billion by
2023.” Marijuana Business Daily, May 30, 2019.
- Hudock, Chris. “U.S. Legal Cannabis Market Growth.” NewFrontierData.com, September 8, 2019.
- Kaufman, Irving. “The Cash Connection: Organized Crime, Financial Institutions, and Money Laundering”.
Interim Report to the President, October 1984.
- U.S. Code § 1956 – Laundering of Monetary Instruments.
- Rowe, Robert. “Compliance and the Cannabis Conundrum.” ABA Banking Journal, September 11, 2016.
- FIN-2014-G001, BSA Expectations Regarding Marijuana-Related Businesses.
- Cannabis Banking Coalition Statement.
- Sessions, Jefferson B. “Memorandum for All United States Attorneys”. January 4, 2018.
- Stern, Ray. “Robbers Hitting Phoenix Medical Marijuana Dispensaries: Is Bank Reform Needed?” The
Phoenix New Times, April 11, 2017.
- Cowee, Maggie. “Chart: Ranks of US Banks Serving Cannabis Firms Growing, But Data May Overstate True
Number”. Marijuana Business Daily, June 25, 2019.
- Mandelbaum, Robb. “Where Pot Entrepreneurs Go When the Banks Just Say No.” The New York Times, January 4, 2018.
- Rosic, Ameer. “What is Blockchain Technology? A Step-by-Step Guide for Beginners.” Blockgeeks.com,
- Emem, Mark. “Marijuana Stablecoin Asked to Play in Arizona Fintech Sandbox.” CCN.com, October 25,
- Farmer, Liz. “How Nevada Plans to Solve the Marijuana Banking Problem.” Governing – The States and
Localities, July 12, 2019. https://www.governing.com/week-in-finance/ gov-nevada-marijuana-banking.html