Making Cannabis Banking SAFE
The federal government’s continued prohibition on cannabis has left most of the industry without a traditional source of banking.
The most dangerous player in the legal cannabis industry is not some shady character on a street corner or a kingpin pulling the strings from the shadows. It’s not even a rogue high school chemistry teacher. No, it’s the federal government.
While many states have welcomed the cannabis industry with open arms, there is still a federal prohibition. This dichotomy puts both producers and consumers in a precarious position. In the eyes of local police, the cannabis industry (where legal) is just another business. However, for the DEA and other federal enforcement agencies, cannabis is still very much illegal.
Where the story becomes even more peculiar lies in the question of how one banks an industry that is simultaneously legal and illegal.
That question is where the federal government has created a danger far greater than anything caused by a bad harvest. The federal government’s continued prohibition on cannabis has left most of the industry without a traditional source of banking. In effect, the cannabis industry runs almost entirely on cash—so much so that some have even resorted to carrying duffle bags of cash to the IRS to pay their taxes.
An Industry Overflowing with Cash
Cash flow is a problem for most young industries. However, for those working with cannabis, the problem is just that there is too much of it and nowhere to put it. Legal cannabis sales in the United States were over $17 billion in 2020, up from $12 billion the year before. Most of that money comes in the form of cash because banks have been pressured by federal regulators to deny service and payment networks (i.e., Mastercard) avoid the industry entirely due to the legal risks.
The combination of ever-increasing revenue and nowhere to properly store the money has been why so many dispensaries feature armed guards, heightened security protocols, and on-site vaults. Yet, even with such precautions, robberies are all too common.
Banking Cannabis (Kind of)
To be clear, some banks have stepped up to serve the industry. Out of the 4,375 commercial banks in the United States, as many as 515 of them worked with the cannabis industry in 2020. However, even with those banks stepping up, it is estimated that 70% of the cannabis industry has no relationship with a bank. And worse yet, the 30% that does have a relationship is not doing much better: most pay astronomical fees just to maintain a basic business account—something banks won’t hesitate to shut down.
Those costs bring us back to the federal government. The banks that step up to serve the cannabis industry must file cannabis-specific reports, use anti-money laundering software, hire legal counsel, and contract external auditors. As explained by Aaron Klein and John Hudak of the Brookings Institution,
While there is no law that says banks can or cannot do business with cannabis companies, banks are required to file reports to Uncle Sam detailing a customer’s suspicious or illegal activities. That can prove costly. A bank can be subject to large fines if it incorrectly reports on its transactions, or if a future bank regulator accuses it of not following the reporting guidance properly. The reporting can be extensive, often covering every single action a customer takes, as it is based on the premise that the illegal activity is happening underground… One small credit union in Oregon that serves marijuana businesses filed 13,500 reports over the past two years for approximately 500 cannabis clients.
While Klein and Hudak are correct that there is no law that explicitly says banks can or cannot do business with the cannabis industry, it’s worth noting that FinCEN’s guidance on the matter opens with a reminder that it is “illegal under federal law to manufacture, distribute, or dispense marijuana." The guidance then follows by noting “Congress’s determination that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels.”
The banking industry is rife with jargon and exceedingly complex practices, but it does not take an expert to read between the lines. It is not explicitly illegal to bank the cannabis industry, but it is certainly frowned upon by federal regulators. And that means one is exposed to increased regulatory scrutiny.
The SAFE Banking Act
Enter the SAFE Banking Act: Last Tuesday evening, the U.S. House of Representatives agreed by voice vote to adopt an amendment that would prevent federal regulators from taking action against banks that serve the cannabis industry in states that have made the move to legalize it. In addition to other measures, the SAFE (or, Safe and Fair Enforcement) Banking Act states the following,
A Federal banking regulator may not terminate or limit deposit insurance because an institution provides financial services to a cannabis-related business.
A Federal banking regulator may not prohibit, penalize, or otherwise discourage a depository institution from providing financial services to a cannabis-related business.
A Federal banking regulator may not recommend, incentivize, or encourage a depository institution to refuse financial services to a cannabis-related business.
A Federal banking regulator may not take any adverse or corrective supervisory action on a loan made to a cannabis-related business.
It might not be perfect, but the SAFE Banking Act would be a huge step forward for the cannabis industry. By seeking to protect both the banking and cannabis industries without addressing the fundamental question of federal legalization, the SAFE Banking Act offers a solution that is both effective and politically possible.
An Uncertain Future
Unfortunately, while Tuesday’s vote was indeed a step forward, it is unclear how the amendment will fare in the Senate. Senator Brian Schatz (D-HI) told RollCall, “We’ve had increasing bipartisan support year-over-year, but [Senate Minority Leader] Mitch McConnell doesn’t like it. So he’s going to have to consult with the Republicans in his conference who are in favor of this reform, but so far he’s been blocking it.” Luckily though, most Senators are familiar with the proposal at this point.
For better or worse, Tuesday actually marked the fifth time that the House passed legislation to protect banks serving the cannabis industry. And Rep. Ed Perlmutter (D-CO), author of the SAFE Banking Act, said he thinks “the fifth time is the charm.” However, because it was not in the Senate text that came out on Wednesday, the amendment will also need to survive conference, or the process in which the House and Senate reconcile differences in legislation. Whether or not it makes it to the other side is still to be seen. Furthermore, there’s also the question of whether or not President Biden, who opposes legalization, would sign it.
So the future is still very much uncertain. However, as Senators consider whether or not to include the amendment and move it forward, they would be wise to remember that this legislation is not about overturning the federal prohibition. Instead, it is about protecting small businesses and the communities around them. More so, it is about establishing an equal rule of law so that a legitimate industry can be welcomed onto a level playing field.
If the cannabis industry has come this far without so much as a small business loan, just imagine what the future holds when it has equal access to America’s financial system.