Financial institutions are in a tricky spot within the growing cannabis industry, where conflicting regulation, information, and business advice are the norm. Under federal law, marijuana remains completely illegal, but individual U.S. states have opened up the doors for its medical and recreational use. Beyond marijuana, confusion remains about the exact legal status of hemp and CBD products.
Misinformation is making it difficult for banks and compliance teams to fully understand their exposure and to set policies that align with regulatory guidance. Whether your institution is considering banking cannabis-related businesses (CRBs) or planning to steer clear, the decision should be based in fact. We address several myths about the risks and opportunities in the industry.
Clearing Up Cannabis Industry Myths
1. CRBs cannot open bank accounts.
The myth that CRBs are cash-only and locked out of the US banking system couldn’t be further from the truth. According to their June 2019 Marijuana Banking Update, the Financial Crimes Enforcement Network (FinCen) reported that over 600 banks and credit unions had worked with marijuana businesses to date. FinCen’s findings are based on Suspicious Activity Report (SAR) filings, which have steadily increased year-over-year. The rise indicates that more financial institutions are actively banking cannabis customers. Some CRBs, however, have found another way in by hiding behind shell companies to open accounts at banks that would otherwise turn them away. Compliance teams will need to look closely at hidden ties that new and existing customers have to CRBs as part of their due diligence process.
2. Hemp and CBD are fully legal under the 2018 Farm Bill.
Under the 2018 Farm Bill, hemp is no longer a federally controlled substance, but that doesn’t mean it’s completely legal. In turn, neither is CBD. Because it’s derived from hemp, CBD is cannabis. To determine whether hemp-derived CBD is legal, banks need to understand how and where the hemp was grown, FDA regulation, and state-specific laws on the issue. Blanket statements about the legality of CBD persist, but they fail to address the many factors that could cause compliance issues. If you’re interested in learning more about assessing the risks, download our CBD Consideration Tree.
3. Legislation will resolve all risks.
Banks have serious concerns about Bank Secrecy Act compliance and potential anti-money laundering violations when working with cannabis customers. Regulatory guidance is needed to help bring clarity on what is expected of financial institutions that offer services, directly or indirectly, to CRBs. The Safe Banking Act is one indicator of progress toward this goal. However, no amount of regulation can eliminate all risk. As with any high-risk customer or industry, it’s up to banks to determine their risk appetite and put in place policies and procedures to reduce their exposure and make the most of new opportunities.
4. CRBs are instant money makers.
Regulatory concerns consume most of our attention, but the financial risks associated with the cannabis industry are something banks and investors can’t overlook. The market is full of potential: Sales of medical and recreational cannabis in the United States could reach $30 billion by 2023. However, the market’s short lifespan means there’s still much to learn and assess when determining which CRBs will have longevity.
In recent examples, Canadian-based company Aurora Cannabis Inc. will likely be unable to meet debt covenants on a $360-million loan coming due in August 2021 and analysts are warning that other companies are also in worrying financial positions. When underwriting a CRB, it’s important to understand that a lack of market history heightens the potential for losses as businesses find their footing.
5. Banks with “no marijuana” policies are immune.
Some financial institutions maintain a "no marijuana" policy, but lack the controls to actually enforce it. Blanket “zero tolerance” statements without a policy in place lack teeth and won’t satisfy regulators. As the cannabis market grows, it’s more likely that banks will find themselves working with seemingly unrelated businesses that could be a major source of risk.
Interested in learning more about the realities of banking and the cannabis industry? Reach out to our experts to talk more about how you can make fully-informed decisions based on data, not fiction.