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| 5 minutes read

No, We Are Not Just Blowing Smoke. You CAN Bank Marijuana-Related Businesses

Since California first passed legislation legalizing medical marijuana in 1996, the legal landscape involving medicinal and recreational marijuana has grown significantly. According to the American Bankers Association, “thirty-seven states, the District of Columbia, Guam, and Puerto Rico” have all enacted some sort of marijuana legalization regulation as of the end of 2023. i However, despite this, the federal government still classifies the sale or distribution of marijuana as illegal, making it very difficult for financial institutions to provide services to entities engaging in legal (at the state level) marijuana operations. 

Those engaged in marijuana operations are not just those with direct connections to the industry (such as growers and retailers) but include those with indirect connections, such as employees of dispensaries, the landlords of the brick-and-mortar operations, and vendors providing supplies to the companies (among others). Because marijuana is still considered illegal at the federal level, financial institutions are often hesitant to accept customers with direct or indirect connections to the industry. This causes many marijuana-related businesses (MRBs) to rely heavily on cash, as FinTech (financial technology) companies that provide payment services such as credit/debit card processing and digital payment options are often backed by financial institutions supervised by a federal banking regulator. Any businesses, but especially MRBs, operating on an all-cash basis are very attractive to criminals and money launderers and susceptible to theft, tax evasion, and organized crime. In addition, the use of cash makes it very difficult to track incoming and outgoing funds in these businesses as those transactions fall outside of the traditional financial system.

The Senate Banking Committee passed the Secure and Fair Enforcement Regulation Banking Act (SAFER Banking Act) in September 2023, but it did not make it to the Senate floor, was delayed, and was not passed by the conclusion of the legislative session. However, the Democratic-led Senate has indicated that passing marijuana banking reform will be a top priority in 2024. If the SAFER Banking Act were to pass in 2024, this would assist in the effort to curb some of these issues and make it easier for financial institutions to provide services to MRBs. The bill prevents a federal banking regulator from penalizing a depository institution for banking such entities, as well as prohibits them from requesting that they terminate the relationship without specific parameters (such as if the institution is “engaging in an unsafe or unsound practice or is violating a law or regulation”). Most importantly, the regulation declares that proceeds from transactions involving MRBs are no longer considered “proceeds from unlawful activity.” ii The SAFER Banking Act is setting a path to allow more financial institutions and FinTech companies to open the door to MRBs and onboard them without the threat of repercussions from federal regulators. 

If 2024 is the year that the SAFER Banking Act is passed, it would behoove financial institutions and FinTechs to be proactive and update their compliance programs to onboard MRBs so that when the bill is passed, they are ready to operate in this space with the proper controls in place to do so compliantly. With that being said, in order to begin this process, there are many aspects a financial institution or FinTech must consider and actions that will need to be taken to ensure the appropriate level of compliance. These include: 

  • Establishing and conducting enhanced diligence on the MRB. Make sure that all beneficial owners are known, identified, and verified. Review all licenses and paperwork submitted to the state for red flags or items that may have been overlooked.
  • Including adverse media research into the enhanced due diligence (for owners AND employees). MRBs are a controversial industry in many states, with strong arguments on both sides of legalization. The reputation of these businesses must stay above reproach, so any negative news or criminal history related to those involved in the business, as well as the business itself should be thoroughly investigated and documented. 
  • Enacting an effective transaction monitoring program. MRBs will still likely continue to be a cash-intensive business, and as referenced above, still very attractive to those with criminal intentions (as with any cash-based business). Financial institutions should be prepared to thoroughly examine all transactions related to the business, identify any red flags, and implement rules and alerts to specifically identify activity related to MRBs. Be sure to look for larger than normal revenues (in cash or other forms of payment), especially if they have grown significantly since joining the financial institution.
  • Making sure that proper controls are in place within the company. Is the MRB also taking steps to ensure compliance with anti-money laundering (AML) regulations as a customer of the financial institution? Do they share the bank’s commitment to compliance? Are they able to provide and maintain adequate policies and procedures? 
  • And most importantly: Preparing to vehemently defend your decision to provide services to an MRB. Even with the provisions provided under the SAFER Banking Act, at the end of the day, marijuana will still be illegal on the federal level. Financial institutions providing services to MRBs are often federally insured. If they want to continue to receive that insurance and provide financial services to an MRB, they must be able to effectively justify their decision to bank an MRB. This includes the actions they are taking to ensure this business is not engaged in illegal activities, is adopting and actively engaging in a compliance program, and adhering to any stipulations outlined in their agreement with the financial institution.

The actions detailed above are not all-inclusive. It is vital that any financial institution or FinTech considering engaging with an MRB take the decision very seriously to avoid significant consequences. However, it can be done, as the SAFER Banking Act states that “all depository institutions should take a risk-based approach in assessing individual customer relationships rather than decline to provide banking services to categories of customers without regard to the risks presented by an individual customer or the ability of the depository institution to manage the risk.” iii This provides hope for the future for the financial industry, as well as MRBs in general, as companies (including MRBs) that “prioritize AML compliance demonstrate their commitment to ethical and responsible business practices, which can enhance their reputation and credibility in the marketplace.” iv This will be essential in paving the future of relationships between financial institutions and MRBs. MRBs, like any business, need access to financial systems to help pay employees, taxes, access loans, and process electronic payments. Without access to these opportunities, MRBs’ exponential growth will continue to be outside of the financial system which will only increase its potential use for illicit activities by illicit actors and organizations that benefit from this industry operating outside of the financial system. Financial institutions have the chance to make a difference in this evolving industry in preparation for a future that is not far off. 

It is time that those in the financial industry take a hard look at what the future holds and consider this rising field of banking MRBs. If you find that you are ready to take the leap, let Ankura help you. We have many experts who can help guide you down the right path and prepare for this exciting journey. Reach out to Patricia today at patricia.lewis@ankura.com to find out more. 

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i Cannabis Banking: Bridging the Gap between State and Federal Law. (2023). Retrieved January 23, 2024, from American Bankers Association: https://www.aba.com/advocacy/our-issues/cannabis

ii H.R.2891 - SAFE Banking Act of 2023. (2023, April 26). Retrieved January 31, 2024, from Congress.Gov: https://www.congress.gov/bill/118th-congress/house-bill/2891#:~:text=This%20bill%20provides%20protections%20for,a%20Schedule%20I%20controlled%20substance

iii Merkley, M. (2023). S. 2860 Introduced in Senate. U.S. Government Publishing Office. Retrieved January 20, 2024, from https://www.govinfo.gov/content/pkg/BILLS-118s2860is/html/BILLS-118s2860is.htm

iv AML Compliance for Legal Cannabis. (2023). Retrieved January 26, 2024, from Sanction Scanner: https://sanctionscanner.com/blog/aml-compliance-for-legal-cannabis-632

© Copyright 2024. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.

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afc, article, f-strategy, risk & compliance, financial services

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