Legal marijuana sellers want bank accounts just like any other business. Over the last two years, more than $500 million worth of cash deposits from the legitimate cannabis business has flowed into Maps Credit Union in Salem, Oregon.
But that’s the exception.
Despite 47 states having some form of legalized marijuana for sale, the legal cannabis industry exists in a state of potentially dangerous uncertainty when it comes to financial services. Collectively, those 47 states are home to nearly 319 million people, or 98 percent of the U.S. population.
At a U.S. House hearing on Wednesday (Feb. 13), banking and credit union executives, along with representatives from law enforcement and the cannabis industry, went before lawmakers to argue in favor of change.
The hearing itself was a small victory for proponents who wish to open up the banking system to legal pot operators. That’s because it marked the first hearing dedicated to a proposed bill in Congress that would offer financial institutions protections against federal regulators when dealing with legal cannabis operations.
But banks, credit unions and card networks shy away from that industry, despite its revenue potential, due to concerns about federal regulatory punishment. In 2018, consumers in Colorado bought some $1.55 billion worth of legal cannabis products. In California, the industry will be worth at least $5.1 billion by 2020, according to State Treasurer Fiona Ma, who spoke at the hearing.
Cannabis Tension
The story is pretty well-known by now, but the situation seems to become more tense as time passes without resolution of the barriers that prevent most legal suppliers of medicinal and recreational cannabis from accessing the country’s legitimate financial system.
More and more states legalize sales, possession and use of pot to varying degrees. But federal law still classifies pot as a harmful drug and still views it as an illegal substance, which in turn makes most banks and credit unions reluctant to accept deposits from or offer other banking services to legal cannabis operations. The risks of running afoul of anti-money laundering laws and other provisions are simply too great for most FIs to take on.
During the Obama administration, the Department of Justice’s Cole Memorandum said that federal attorneys would prosecute violations of federal marijuana law in the states that had legalized the drug. Just more than a year ago, the Trump administration rescinded that directive. That action, combined with no federal “safe harbor” law regarding financial institutions that do business with legal cannabis operations, has led to fresh uncertainty and ongoing FI reluctance to serve the growing U.S. market for legal weed.
SAFE Banking Act
The Wednesday hearing, conducted before the House Subcommittee on Consumer Protection and Financial Institutions, focused on access to banking services for those businesses. Two of the speakers at the hearing — Colorado Rep. Ed Perlmutter and Washington Rep. Denny Heck, both Democratic members of Congress from states with legal marijuana — back the Secure and Fair Enforcement of Banking Act of 2019, or the SAFE Banking Act, as it is more commonly known.
The hearing on Wednesday served as the first one for that proposed bill, according to lawmakers and reports. The bill would prevent federal regulators from targeting banks that accept deposits from legal cannabis operators. Such prohibition could involve limiting FDIC protections for those deposits, for example, or trying to prevent loans to those businesses.
Speakers in favor of the Act — the banking executives took pains to point out they were expressing no views on the legalization of pot, only the concept of providing “safe harbor” to FIs that work with cannabis businesses — discussed the danger of forcing those operations to run via cash.
Cash Dangers
The speakers told stories of violent armed robberies, money laundering and tax evasion, among other negative impacts of a cash-based industry. Neill Franklin, a former Maryland law enforcement officer who now works as executive director of the Law Enforcement Action Partnership, said criminals have little problem scoping out businesses that rely on cash and targeting owners or employers (who get paid in cash).
“Opportunities for cash robberies will increase as more” cannabis operations start work, assuming banking access does not open up, he told lawmakers.
At Maps Credit Union in Oregon, which has some 64,000 members, “we have experienced firsthand the many challenges of facing financial institutions and state-sanctioned cannabis businesses,” said Rachel Pross, the credit union’s chief risk officer who was speaking as a representative of the Credit Union National Association.
The credit union monitors cannabis accounts closely, does criminal background checks on all account holders and commissions an annual external compliance audit for all cannabis-related business it conducts, she said. “The cash is removed from the (streets), where it is carried around in backpacks and shoeboxes,” providing opportunity to criminals, Pross added.
Maps Credit Union also has what she described as a favorable workforce balance to handle such work. “We average one employee for every 40 cannabis business accounts,” she told lawmakers at the hearing. But though Oregon has some 500 state-sanctioned cannabis operations, Maps stands as the only FI in the state to do business with that industry, Pross said. Without access to legitimate banking services, the people who run those cannabis shops are forced into “connections” with unsavory people from the black market.
Fear of Punishment
Another view came from Gregory Deckard, president and CEO of Spokane-based State Bank Northwest, who is a representative of the Independent Community Bankers of America (ICBA). While he said he also supports a safe harbor for FIs, he told the committee that “the current conflict between state and federal law has created a cloud of uncertainty for community and regional banks.” State Bank Northwest has “chosen to not service (cannabis-related businesses) because the compliance and regulatory risks are too great for our bank,” Deckard said.
In fact, those risks can be widespread, as Deckard pointed out. Offering legitimate banking services to even vendors who serve legal cannabis operations — plumbers, for instance, or landlords, or even utility providers — could put a bank at risk of violating federal regulations. “My bank cannot serve the regional utility provider because” it sells power to legal cannabis operations, he said.
“It’s a regulatory quagmire,” Deckard said.
Other speakers spoke against the safe harbor concept, and generally did so from a position of intense skepticism about marijuana legalization in general. But the main idea they put forth in the committee hearing — intended not as a debate on legalization but a discussion about FIs — was that before tackling the banking aspects of legal pot, the cannabis and allied financial institutions should first work to get marijuana downgraded on the federal schedule of controlled substances. Doing that, they said, would go toward resolving the underlying tension between state and federal laws, and would eliminate the uncertainty when it comes to offering those banking services.
That idea, of course, didn’t seem to go far with the other speakers, including Corey Barnette, owner of District Growers Cultivation and Metropolitan Wellness Center, a legal cannabis business in Washington, D.C. Speaking of the cash-based operations of the industry, he said that “no one benefits from this system, with the exception of private security firms and the super-wealthy owners out there.”
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