October 30, 2019

The State of Cannabis Banking

For financial services companies and their customers, the conflict between state and federal marijuana laws has presented a number of challenges. Banks face an array of federal regulators, rely on federally backed deposit insurance and have to comply with federal anti-money laundering rules that require them to police customers for illicit activity. Although cannabis is legal in many states, banks are frequently regulated at the federal level. As a result, lenders of all sizes have distanced themselves from taking in “cannabis-tainted” deposits or making loans to the industry because of potential federal penalties.

The Secure and Fair Enforcement Banking Act (the SAFE Banking Act or SAFE) passed by the U.S. House of Representatives in September seeks to resolve these conflicts. The bill provides protections to financial institutions that work with state-licensed cannabis-related businesses (CRBs) and ancillary businesses, stipulating that a depository institution “shall not, under federal law, be liable or subject to forfeiture for providing a loan or other financial services to a legitimate marijuana-related business.” In addition to freeing banks to provide normal business banking services, the law could free up capital access for CRBs and may even allow for trading in cannabis stocks on major U.S. exchanges.

Even without reform, banks are increasingly serving the marijuana industry.

That’s because the Financial Crimes Enforcement Network (FinCEN) offers substantial protection against any possible prosecution of financial institutions working with the marijuana industry. FinCEN’s “Cannabis Guidance” requires Suspicious Activity Reports (a “Marijuana Limited SAR”) be filed confirming the cannabis activity was lawful under the laws of a particular state. Following due diligence by a financial institution, a bank account could be opened for a cannabis-related entity.

The number of banks and credit unions actively serving the marijuana industry totaled 715 in the U.S. government’s fiscal third quarter, which ended June 30, federal data shows. The data reflects a healthy increase in the number of financial institutions serving the cannabis industry, even when accounting for the roughly 35% growth in legal medical and recreational cannabis sales during that period. Still, the numbers represent just a fraction of the banks and credit unions in the U.S.

With the rather burdensome regulations of the FinCEN protections providing the only “cover,” most financial institutions are watching in the wings. Should the SAFE bill become law, smaller banks and credit unions could find themselves better positioned to offer services than larger ones, as CRBs have tended to be local enterprises. Bigger banks are more cautious, yet it seems likely they will reconsider offering investment to marijuana companies and access to capital via debt markets to large multistate operators if SAFE becomes law. And speaking about investment . . .

A venture-backed platform anticipates explosive growth.

With dispensaries expanding across the U.S. to fulfill the growing need for medicinal and adult-use cannabis, the legal cannabis market is expected to reach over $66 billion by 2025. To maintain a successful, legal and compliant operation, these companies need a strategic partner to help them continue to scale operations to keep up with consumer demands, as well as evolving state regulations. Enter venture-backed FlowHub.

The Denver-based leading cannabis retail management platform for modern dispensaries announced it has raised an oversubscribed $23 million Series A financing round led by e.ventures, Evolv Ventures — the venture fund backed by Kraft Heinz — and Poseidon, with contributions from investors 9Yards Capital, former NBA commissioner David Stern and Iqram Magdon-Ismail, the co-founder and former CEO of Venmo, among others. As one of the largest Series A rounds in the cannabis tech industry, this investment is set to position the company as the SaaS solution of choice for today’s complex cannabis retail challenges.

Community banks are positioned for opportunity.

Another beneficiary of expanded opportunities resulting from SAFE’s passage are minority-depository institutions (MDIs) — financial institutions recognized by the Federal Deposit Insurance Corp. as playing a critical role in promoting the economic viability of underserved communities. MDIs remain important sources of capital and banking access for minority communities. They are generally community-oriented banks, far smaller than large regional or national banks. Community banks have an important comparative economic advantage, understanding local communities, having relationships with local businesses and providing services for people and industries that larger financial institutions do not serve.

Many cannabis businesses end up “unbanked” and operating largely in cash, and that makes them targets for robberies and other crimes. What is likely to happen from SAFE’s passage is more community banks and credit unions deciding to serve marijuana businesses. This should lower costs, increase security, make the cannabis black market even less appealing and create new customers for community banks, credit unions and MDIs.

The politics seem to be moving right along.

The group of banking provisions that became the SAFE Banking Act originally were contained in a larger piece of legislation, the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, a bipartisan bill to prevent Federal interference with states that legalized marijuana. Introduced in the 115th U.S. Congress by Cory Gardner and Elizabeth Warren, it was blocked by a procedural maneuver by Senate Majority Leader Mitch McConnell.

The struggles of ancillary businesses that don’t “touch the plant” but provide services that CRBs need have focused significant attention on the issues of a growing cannabis-related economy. If Congress does ease marijuana banking laws, many will acknowledge the lobbying contribution of ancillary businesses like Scotts Miracle-Gro. The 151-year-old Scotts Miracle-Gro Co. doesn't sell cannabis products. It sells plant food and other gardening products, including its flagship Miracle-Gro brand fertilizer. Scotts has begun to tap into the growing demand for cultivating cannabis, which 33 states have legalized in some form. The hydroponics division it has built as part of that effort has become big business for Scotts despite the federal ban on marijuana sales.

Scotts (headquartered in Ohio where cannabis is not legal) and its allies have illustrated that even in states that haven’t legalized recreational marijuana, it’s growing increasingly difficult to wall off cannabis from other parts of the economy. Whether they like it or not, lawmakers are gradually becoming aware that federal limits on CRBs and ancillary businesses are stifling local companies in their own districts as the cannabis industry grows and becomes more enmeshed in the rest of the economy.

Scotts has plenty of company in their lobbying efforts. The American Bankers Association has made cannabis banking legislation a top lobbying priority. The International Council of Shopping Centers has also urged lawmakers to pass the House bill, which it said would protect commercial landlords and brokers that lease space to cannabis retailers. The National Association of Realtors likewise lobbied Congress to enact the bill, citing the state-legal cannabis industry’s growing use of real estate such as farmland, warehouses and storefronts.

While it remains unclear how the SAFE Act might fare in the Senate and if President Trump would sign it into law, the bill’s eventual passage would, at a minimum, allow banks to work with state-legal CRBs without fear of federal reprisal. The next step for SAFE appears to be a likely Senate committee vote this fall. Senate Banking Chair Mike Crapo of Idaho, one of the most intolerant states when it comes to marijuana policy, indicated he is increasingly positive about getting the bill up for a vote in the full chamber in 2020.

Do you have thoughts on this topic?

We will be keeping track of the activity involving cannabis banking regulation and cannabis-related businesses. We invite you to send you comments or cases that we can share with our Banking & Financial Services audience in future newsletter issues. Contact our Bank Program Director Kris St. Martin. He can be reached directly at KStmartin@cbiz.com or (763) 549-2267.


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