The Future Of Cannabis Banking

by Gregory Frye

Banking and payment services are two of the greatest pain points for many cannabis operators in the U.S. While there has been some progress here, depending on the state, a lot of cannabis businesses are still forced to operate on a cash-only basis.

The challenges around cannabis banking are inherently tied to the plant’s continued status as a Schedule I controlled substance, lack of knowledge about the plant and industry, as well as lingering stigma.

To get a better sense of where we are at with the banking issue now – as well as informed speculation on the future of cannabis banking – Green Flower recently talked to a few insiders who have been paying close attention on the front lines.

An Industry Half-Banked

“The joke is that the industry is half-banked instead of half-baked,” says Mark Goldfogel, who has been following the issue for more than 10 years as a cannabis entrepreneur and consultant. He was also one of the original architects of the Fourth Corner Credit Union, which spent 40 months battling the Federal Reserve for the right to open a master account – a right they were ultimately granted.

“The reality is that cannabis banking has become significantly more available and really opened up in the past four to five years,” Goldfogel notes. “Although that is not because of any changes in the law but because the banks and regulators in certain states have realized that the health and human safety requirements of keeping this money under control trumps the short-term reactionary political dogma.” 

The fact that cannabis businesses are faced with tremendous government oversight, taxes and regulations, yet have little to no access to banking services is not lost on policymakers. “The banking issue and IRS code 280-E – which prevents cannabis businesses from deducting expenses except for cost of goods sold – go hand in hand as the two biggest things that hamper any plant-touching business from being profitable and running normally,” Goldfogel says.

The banking issue also creates a lot of headaches for state-level regulators trying to figure this out on their own. One of the most recent examples of progress here came on September 30, 2020, when California Governor Gavin Newsom signed a bill that would allow banks to work with California cannabis businesses without risk of penalty.

“Many regulators in states like Colorado that have had to face this problem now for over 10 years have issued some guidelines to let existing financial institutions handle a percentage of the businesses, those that are the most reputable, reliable, and the most professional,” Goldfogel says. 

“The operations that don’t meet those standards or are on a tight budget simply can’t afford all the additional banking oversight and regulatory fees, which in some cases can be as high as their rent. And so they just continue to do business on a cash basis.”

Banks Tiptoeing Into Cannabis

Also on the front lines of cannabis banking is Ralf Kaiser, CEO of Integrated Compliance Solutions (ICS), which works with banks and cannabis operators to provide compliance software and innovative merchant payment solutions.

“There are many cannabis entities today that have banking, but they are still under banked. They may not have the full corporate suite that other businesses would have,” he says, adding that FinCEN (Financial Crimes Enforcement Network) Guidelines have been the only federal resource for regulatory frameworks.

In fact, FinCEN released new guidelines for hemp-related businesses in June 2020 – which like all FinCEN Guidelines –– are centered around how banks can remain compliant with the Banking Secrecy Act of 1970 (BSA).

“But really there has been very little guidance or regulatory framework for the financial institutions to work in amidst this dichotomy between the federal and state laws,” Kaiser explains. “So, a lot of these financial institutions are tiptoeing their way into accepting cannabis-related businesses as clients.”

And while the legal framework, or lack thereof, presents a terse set of challenges for financial institutions and regulators, Kaiser believes that there is a much greater, underlying issue. “A big part of this is the stigma of cannabis as a whole. And banks are particularly risk-averse by nature, which is why we spend time educating boards about the plant and about cannabis as a whole – that stigma can certainly hold them back from embracing the sector.” 

The Irony Of Cannabis Banking Versus Hemp & CBD Banking

Since the passing of the 2018 Farm Bill, financial institutions have become increasingly comfortable banking CBD and hemp businesses, Kaiser says.

The irony here is that these businesses may actually require even more due diligence than their cannabis-related counterparts. “Because of the cannabis requirements for state licensing and seed-to-sale tracking, it’s much easier to track the transactional data of a cannabis business than it is for a CBD or hemp entity, which don’t have such strict requirements,” Kaiser notes.

In other words, this actually opens banks up to additional risk, adds Angela Lucas, Chief Risk Officer for ICS, because there is this perception that CBD and hemp entities are lower risk, which is especially an issue on the CBD side where there is much less federal oversight.

“Sometimes banks have lower standards whenever it comes to the due diligence to understand their CBD customers. And that’s where we can have co-mingling of funds between the cannabis industry and the CBD industry as well – when companies have related entities that the bank didn’t know about,” she says. “Where they get into trouble is that they are banking [cannabis companies] and don’t know it, or they take on too much without putting the right controls into place.”

Because of this confusion, educating banks on the particular issue has become an important goal. “We have put forth an educational initiative in the industry to increase understanding of the CBD and hemp side – and to segregate those out from the direct and indirect marijuana side so they look at them as separate categories and place their controls accordingly,” Lucas says.

Flying Blind While Mitigating Risks

Because state-level regulators have an important role in all of this, Lucas brings valuable perspective to the table in the dialogue between banks, cannabis entities, and policymakers. One of her earliest career highlights includes conducting regulatory examinations of nationally-chartered community banks. 

“It’s interesting to have the perspective to help the regulators go in and really view the risk and control structure for any complex area, and cannabis is one of those complex areas,” Lucas notes. 

“It’s not just the banks that don’t have the guidance, it’s the regulators as well. They are flying blind aside from having those FinCEN Guidelines. A lot of financial institutions are looking to these regulators for guidance, and they can’t really issue anything from a U.S. Treasury perspective because there’s nothing to issue yet.”

When financial institutions don’t even understand what would constitute a violation for cannabis banking, they are naturally going to be hesitant around such a risk-based decision.

“So when we talk about the future of cannabis banking, right now it is taboo and it is a risk-based decision, but we have an increasing number of financial institutions now taking the lead on this,” Lucas notes. “Some want to own the market while others are just taking care of their internal infrastructure, managing risks, and focusing on existing customers.”

As for the future, she continues, legalization at some point is inevitable, whether it’s through legislation like the SAFE Banking Act (a.k.a. the Secure And Fair Enforcement Banking Act of 2019), which would make it easier for banks, or whether we see a complete descheduling or rescheduling of cannabis entirely.

What’s Happening With The SAFE Banking Act? 

Many cannabis stakeholders were hopeful that the SAFE Banking Act would make it through the Senate after passing the House of Representatives on September 25, 2019. This piece of legislation would essentially give the financial institutions a legal right to work with cannabis operators while the plant remains a Schedule I controlled substance.

Now, however, the general thinking is the SAFE Banking Act – even though it was included in the HEROES Act COVID-19 relief bill passed by the House in May 2020 and again in late-September 2020 – most likely won’t make it through until after the November elections. Although there is really zero certainty on the timeline.

For Lucas, the best path is a wise, methodical approach – taking the time to get any cannabis banking-related legislation as perfectly shaped as possible – is the way to go. “We have the ability right now to set the standard, and that’s really important whenever it comes to establishing infrastructure for these financial institutions,” she says, adding that she has been participating in high-level discussions with regulators and other stakeholders on this issue. “We’ve been very vocal on why we need smart and effective legislation, because we have one go at this, one chance to write the narrative and really set those standards going forward.”

Lucas maintains that some parts of the SAFE Banking Act are good while other parts need some work. “And having to consider a lot of amendments after passing it would cloud the vision of what we want the standard to be,” she says.

Yet, even if something like the SAFE Banking Act were to pass, banks would still be concerned about the black market side of cannabis, according to Kaiser. “In really all legal states, we still have a vibrant black market,” he notes. “Back in 2019, California estimated almost 80% of its total sales came from the black market. Massachusetts 75%, Oregon 40%, Washington state 35%, etc. … financial institutions always have to be mindful of having that black market money come into their institutions.”

Meanwhile, Goldfogel contends that even black market operations or any illegal activity should have access to banking – what better way to encourage transparency and stay on top of criminal behavior?

The Future Of Cannabis Banking

Even if something like the SAFE Banking Act were passed tomorrow, or federal prohibition were to be completely lifted, financial institutions would still have the right to avoid or discriminate against cannabis operators if they choose.

As Goldfogel points out, coming up with piecemeal Band-Aid solutions to address these important hurdles in the cannabis industry – eliminating tax liabilities and banking restrictions, is one way to do it – but ultimately, it’s not the best path forward.

Goldfogel sees cannabis’s federal status as the root of all dysfunction in the industry in that it encourages stakeholders to sometimes hide what they’re doing, to break the law, or act like criminals.

“As far as the federal government is concerned, everything relating to cannabis is a felony. Everything. Our merely talking about this is aiding and abetting a conspiracy for money laundering. It’s a big deal,” Goldfogel says.

Making matters worse, as Kaiser points out, a lot of cannabis operators are unknowingly being duped into quasi-money laundering schemes through shady payment network alternatives in lieu of access to legitimate services like Mastercard and Visa.

And what about the future of cannabis banking? Because of the economic damage reaped by COVID-19, Goldfogel predicts the feds will clear the way for the cannabis industry sooner than later. “It is completely incongruous of them to continue to prohibit the visibility of financial transactions in the industry while they are desperate for the tax revenue,” he says. 

“And that will be the weak link that leads to safe access. It won’t be because of health and human safety, it won’t be because the government has finally realized that cannabis is a benign substance – at least compared to its government regulations – and it won’t be because millions of innocent people have been put in jail. It will be because the federal government needs that federal visibility for more tax revenue.”

It is more financially expedient, Goldfogel continues, for the government to drop prohibition rather than try to enforce it worthlessly. 

And perhaps one of the saddest things in all this, he adds, is that the most important benefits of cannabis have gotten lost in the conversation. 

“Unfortunately, there is virtually zero focus from our government on whether or not the substance is a viable medicine for any given ailment. And that is where we are all dropping the ball. In the states that we’ve legalized it recreationally, we’ve legalized it because of the harm it brings is insignificant compared to the value of the tax revenue,” he says.

“What I would really love to see is a government that cares enough about its people to wonder what this substance does to help heal those who are ill.” 

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