The Emergence of Cannabis Banking

In the fast-growing legalized cannabis industry, one of the major obstacles for businesses has been—and continues to be—access to banking services. Because cannabis remains a Schedule I drug and unlawful at the federal level under the Controlled Substances Act, the majority of federally regulated commercial banks will not accept customers that derive funds from cannabis-related activities, whether medical or recreational. While some businesses may attempt to disguise the nature of their funds, risking the potential closure or freezing of their accounts if discovered, many choose to deal primarily in unbanked cash, leading to an entirely different set of potential risks.

Cannabis banking advocates argue that forcing businesses to operate solely in cash can lead to undesirable consequences, including heightened risk in the community and stress on the business’s record-keeping and tax-reporting obligations. In an effort to further legitimize these businesses and reduce the potential risks associated with unbanked cash, some regional credit unions and state-chartered banks—particularly in states where cannabis has been legalized the longest (e.g., Colorado, Washington)—have quietly begun accepting cannabis-related clients, subject, of course, to increased diligence, disclosure, and compliance requirements.

These credit unions and banks work closely with the cannabis-related companies to ensure that all local licensing and compliance requirements are being met and that no account funds are being derived from suspicious or illegal activity. This often these institutions to perform heightened diligence, including detailed background checks, periodic facility checks, and verification of proper licenses.

Additionally, under the reporting requirements of the Bank Secrecy Act (BSA), banks are also obligated to file specialized reports with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) where there may be suspicious activity related to money laundering or fraud. In recent years, FinCEN has issued guidance clarifying how banks could provide services to marijuana-related businesses consistent with their BSA obligations, which has made some banks comfortable to take on cannabis deposits. In order to further comply with the BSA, which also requires safeguards against money laundering and tax evasion, banks and credit unions generally track the reported sales of the cannabis-related business (usually from the operator’s seed-to-sale software) against the actual cash deposited in the customer’s bank account.

In Massachusetts alone, cannabis sales are estimated to hit $450 million in 2018. Despite the fact that both medical and recreational cannabis are now legal in the state, the lack of banking availability remains a challenge for many legitimate companies. Many lenders are taking a wait-and-see approach, rather than leading the charge for change. Still, progress is being made, slowly but surely. At present, most, if not all, of Massachusetts’ operating medicinal dispensaries have some form of bank account, although the future for recreational proceeds remains up in the air.