Considering Safe Banking for the Cannabis Industry

Nicholas Anthony and Jeffrey A. Singer

America has increasingly moved in favor of legalizing cannabis consumption (Figure 1), but the shadow of prohibition still hangs over even the freest of states. One need only look to the financial system to see how heavy that shadow truly is. Despite states welcoming the cannabis industry with open arms, federally regulated financial institutions must stay an arm’s distance away.

This clash between federal and state laws has forced many businesses to operate on the fringe of the financial system, suffer an increased risk of robberies, and lose out on potential investments. Ultimately, these costs—costs created by the clash of federal and state laws—end up negatively affecting not only those who work in this industry but also their customers.

Banking Cannabis Will Get You High Compliance Costs

To be clear, existing laws do not ban financial institutions from servicing the cannabis industry. However, requirements under the Bank Secrecy Act regime do make it exceedingly costly to serve them. For example, financial institutions are required to file reports any time a customer’s activity is considered suspicious. Given cannabis remains illegal at the federal level, a bank could quickly see every activity as suspicious. One credit union reported filing 13,500 reports on 500 cannabis businesses over a two‐​year period.

These reports also involve far more than just highlighting a transaction for later review. The Financial Crimes Enforcement Network told financial institutions that their review process should include verifying business licenses, monitoring what goes on at the stores, and more. In short, under current law, banks and other financial institutions are largely required to act as drug enforcement investigators if they wish to work with the cannabis industry. And for many financial institutions, the cost of doing business here is simply too high.

A Real Problem for Employers, Employees, and Customers

Without access to banking services, many retail cannabis businesses must rely on doing all business in cash, including paying their employees. For employers, that means the already stressful process of filing payroll, paying out wages in a timely manner, and properly furnishing information to the Internal Revenue Service (IRS) involves additional accounting burdens. In fact, were dealing with the IRS not enough of a struggle normally, paying taxes in cash can seem nearly impossible. 

For employees, the process is even worse. Getting paid and working in a lucrative, cash‐​only business means employees incur a greater risk of getting robbed when working and while commuting. Unfortunately, these robberies have happened time and time again.

However, the problems created by the clash of federal and state laws do not end there. The current state of affairs also makes it difficult for cannabis businesses to access capital. For something as simple as a small business loan, cannabis businesses must often rely on private lending sources that demand high interest rates and challenging payment and repayment terms.

Finally, whether it be the time spent accounting for payroll, the preventive measures taken to prevent theft, or the roundabout methods to gain funding, all of these inefficiencies result in costs that get passed on to consumers in the form of higher prices. These factors combine to sustain and, in some cases, help fuel the cannabis black market. Consumers can often purchase cheaper and more readily available cannabis from underground dealers since those dealers do not take on the costs incurred by legal operations.

Yet, there may be a brighter future just over the horizon.

The SAFE Banking Act

When looking at the options on the table, Congress really has three solutions to choose from: revise the Bank Secrecy Act so that financial institutions are not deputized as law enforcement investigators in the first place, create an exemption for financial institutions working with the cannabis industry in legalized states so that they are no longer required to report cannabis‐​related activities, or legalize cannabis entirely so that the activities are no longer considered unlawful in any context.

The SAFE Banking Act takes the middle path. By creating an exemption for the cannabis industry in states that have chosen legalization, the SAFE Banking Act would provide a safe harbor for financial institutions to serve the industry without the risk of drowning in compliance costs that result from the clash between federal and state cannabis laws. This approach would provide a dramatic improvement for the countless businesses trying to get their start, the employees entering this field, and the financial institutions trying to help them along the way.

It would also eliminate the advantage that underground cannabis dealers have over those in the legal market.