Banking Cannabis: Risky Business
The Cannabis Industry is nearing a banking crisis...
It's 2017: legal marijuana sales topped $7 billion last year and there are over 11,000 legal plant-touching cannabis businesses operating in the US.
Yet most of these businesses have little or no access to banking and financial services. Why? Nearly all federally-chartered banks and credit unions refuse to work with plant-touching (and even some ancillary) cannabis businesses because of marijuana's Schedule I status.
As I discussed in my last post, the Cole Memo set forth eight priorities for the federal government’s enforcement of marijuana-related crimes. FinCEN subsequently issued Guidance clarifying how financial institutions can provide services to Marijuana-Related Businesses (MRBs) consistent with their Bank Secrecy Act (BSA) obligations.
Where the Cole Memo suggested that marijuana enforcement would be lower priority outside of eight specific priorities, the FinCEN guidance also seemed to give financial institutions a yellow light to work with cannabis businesses.
But as most banks will tell you, neither the Cole Memo and nor the FinCEN guidance hold the weight of statutory authority, so it doesn’t lower the BSA risks associated with cannabis businesses. As far as banks are concerned, this guidance is only a yellow light, and they need a green light.
As long as cannabis remains on Schedule I, they won’t touch it.
When it comes to cannabis, banks and financial institutions patiently await guidance from the Trump administration, which likely won’t come until after AG nominee Jeff Sessions is confirmed by the Senate.
So far Sessions hasn’t made any clear statements about marijuana enforcement, but hinted he’d leave it to Congress to decide whether to reschedule marijuana.
As it stands now, MRBs have no reliable access to banking or financial services. Without access, the burdens on marijuana-related businesses are huge.
Last month, California Treasurer John Chiang convened the first meeting of the Cannabis Banking Working Group. The group is made up of 16 organizations including state agencies, cannabis business representatives and state banking industry representatives. CBWG, tasked with addressing barriers to banking access, uncovered many troubling issues in its first meeting.
Most, if not all, unbanked marijuana businesses operate primarily in cash. That means that these businesses are doing everything — payroll, paying taxes, paying bills and suppliers, etc. — completely in cash.
Processing payroll in cash is not only time-consuming, but very costly. A cannabis business attorney speaking at CBWG said his dispensary client employs a team of four accountants, which is virtually unheard of for a business that size. It takes the dispensary's corporate controller and bookkeeper four hours each pay period to process payroll in cash. The dispensary loses an estimated $1M each year due to the costs of cash handling and resulting lost productivity.
Unbanked MRBs have to pay their taxes in cash, which means it must be physically delivered to the state's Board of Equalization office. But once armored car services realize that a business is marijuana-related, they refuse to work with them.
This means that someone, usually an employee, has to literally drive to BOE with large bags full of cash to pay their tax bills. Some businesses are paying over $1M in taxes each year. This is extremely unsafe for the person transporting and risky for the business. And while cash is accepted, BOEs aren’t exactly designed to be handling that amount of cash either.
Cash-intensive businesses have always been a target for criminals, and MRBs are no exception. As one CBWG participant put it: “cash is the mother’s milk of crime.” Representatives from Humboldt County discussed the increase in violent crime the county has seen in recent years as the medical cannabis community has grown. Dispensary employees have been attacked and robbed while in stores and while transporting cash. Growers have seen trespassing, robbery and other violent crime as well.
Being unbanked can be difficult on cannabis industry professionals personally. One business owner at the CBWG meeting spoke about her inability buy a home because she was denied a home loan from her bank. After learning of her professional association with a dispensary, her bank closed her account and notified other banks, who now refuse to work with her as a client.
Many MRBs have little choice but to pay their vendors, suppliers and other services providers — including accountants and lawyers — in cash or money orders. Some ancillary businesses report being kicked out of their banks and lose access to all banking services because they have MRBs as clients. Business owners and employees have even seen their personal accounts unbanked too.
Unbanked = Growth Killer
Banks and financial institutions offer a wide range of extremely valuable financial services for growing businesses. Normally, companies looking to invest in their own growth can take out business loans. Not so for most MRBs.
A representative from the California Growers Association spoke about the difficulties cannabis farmers face in growing their businesses while also remaining compliant with regulatory authorities. He says the financial burden of compliance is a tremendous issue.
Businesses in other industries can easily get a loan to invest in the implementation of a robust compliance program. But because banks won’t work with MRBs, farmers and other business owners can’t get traditional loans to help the grow their businesses. The CGA representative testified that the cost of compliance can be prohibitive, sometimes at the cost of putting food on the table. But in order to grow, businesses need to invest in their compliance.
Another concern for cannabis businesses, particularly those that sell or distribute cannabis, is the potential “opportunity loss” of being restricted to cash payment from consumers. Research shows that retail customers will spend more if they can pay with a card as opposed to only with cash.
Without bank accounts, these businesses can’t accept traditional credit or debit payments. And while there are a few alternative cash-less payment systems, they are not comprehensive solutions and are often expensive and cumbersome for business owners.
California leads the way to a solution
The cannabis community is hoping for solutions to their banking issues as soon as possible. Proposed solutions will be discussed at the next CBWG meetings on February 10 and March 23, 2017.
Treasurer Chiang has stepped up and declared California's willingness to be a leader in solving cannabis banking issues. It remains to be seen whether any comprehensive or sustainable solutions exist outside of removing cannabis from Schedule I.