September 11, 2019

Erin Thorburn

Will federal marijuana banking law weed out industry obstacles?

Could new legislation or a federal marijuana banking law cause current banking and cannabis business restrictions to go up in smoke? While pending legislation may hint at the possibility, Arizona leaders say it might be slightly premature to bank on anything just yet.

Presently, any cannabis-related business remains illegal under federal law. This means that although medical marijuana dispensaries can legally own and operate a licensed facility, when it comes to banking, they face significant roadblocks because of the federal law.

As long as cannabis remains illegal under federal law, federally governed banks and credit unions will not risk getting into the cannabis business.

According to research, only 30 banks or credit unions in the entire United States will currently conduct business with cannabis-related businesses. Now, scale that down to one state: Arizona. The margins of cannabis-business banking relationships are practically nil.

“There are only two banks I know of in Arizona willing to bank with medical marijuana dispensaries,” says Marie Paredes Saloum, owner and CEO of GreenPharms Dispensary. “When we opened our first dispensary and tried to open an account, we ran into problems. Since then, our only hope has been that the bank doesn’t realize that we are a dispensary. You hope they don’t ask. And, sometimes they don’t ask at first. But even a month later, the bank’s back office looks us up and sends a letter saying we have a limited time before our account is closed.”

Cash flow

While the banks are obviously seeking to protect themselves from exorbitant fines and sanctions, Arizona dispensaries are faced with a barrage of their own problems.

“I can’t do payroll or cash receivables,” Saloum says. “It becomes a safety issue with my staff to have large amounts of cash on hand.”

And, while it’s logical to assume that the banks willing to do business with marijuana dispensaries offer cannabis businesses a lucky lifeline, there’s a catch.

“The problem is that because the banks are willing to work with us, they’re going to charge us exponentially — because they can,” Saloum says. “I can’t think of any other business that gets charged the way I do.”

Why the seemingly inflated charges?

“Banks have to charge fees,” explains Paul Hickman, president and CEO of the Arizona Bankers Association. “A bank’s profit is based on risk. The fees they charge are high, but they’re not taking advantage (of the cannabis business). What they are doing is filing suspicious activity reports under every transaction which incurs fees.”

“Banks can charge the fees, but expectations need to be communicated and established correctly,” says Laura Bianchi, partner and director of the cannabis practice group for Rose Law Group. “The problem is that the requirements within the context of fees aren’t properly conveyed. This leads to ramifications for both banks and cannabis businesses.”

Bianchi goes on to explain that charter banks and local banks are more likely to do business with cannabis-related businesses, but it’s still tricky at best.

“I’ve met with a number of banks in the U.S. who want to bank with cannabis businesses, but often don’t simply because they don’t fully understand the rules and regulations,” she says.

Impact of restrictions

Additionally, what people may neglect to realize is that medical marijuana dispensaries aren’t the only cannabis-related businesses banks are turning away.

Hickman says that contractors and third-party vendors also feel the impact of cannabis banking restrictions.

California-based Green Bits serves as a prime example. Green Bits, a marijuana dispensary point-of-sale software company is classified as an “ancillary cannabis company.” Even though nothing the company produces has any physical contact or involvement with an actual cannabis plant, a financial partner terminated their relationship with Green Bits, simply because of the nature of the business.

Plumbers working at a dispensary or lighting and packaging third-party vendors who do work with cannabis-related businesses are liable to face the same fate.

No matter where one stands on the moral issue of the Arizona cannabis industry, it’s worth considering the economic impact yielded.

“In June alone, we saw 13,000 pounds of medical marijuana sold,” Bianchi says. “That’s a general revenue of $400 million. With a 5.6 percent sales tax that’s $22 million. And, that doesn’t include city and county taxes that funnel to municipalities.”

What can be done?

Despite the taxable revenue, both banks and dispensaries remain in a land-lock.

“The banking industry is not monolithic on the subject,” Hickman says, “but it’s a fairly high consensus that if cannabis is legal in a state where they are doing business, the banks should be able to do business with that industry.”

Hickman goes on to explain that the banking industry’s argument has no moral component.

“All we’re saying is that if it’s a legal and lucrative industry, it should be banked,” he says. “This comes from a place of a parochial and good public policy.”

The best hope for change will be the passing of the SAFE and/or STATES acts.

If passed, the Secure and Fair Enforcement Banking Act — or SAFE Act — will allow federally regulated banks to serve cannabis-related businesses. Basically, provided that the cannabis businesses they work with comply with state laws, financial institutions will be protected from federal prosecution.

The Strengthening the Tenth Amendment Through Entrusting States, or STATES Act, if approved, allows each individual state to determine the best legal approach to marijuana within its borders. The STATES Act also amends the Controlled Substances Act of 1970. This would ultimately protect state-compliant cannabis-related businesses from federal enforcement.

“We’re watching the SAFE Act locally,” Bianchi says. “It still has to go to the House and then the Senate. In my opinion, the STATES Act comes up short in comparison; I don’t think it’s specific enough. The SAFE Act provides guidance and greater transparency for banking and provides safety for the states.”

“The SAFE act addresses not the legality of marijuana, but how financial services can deal with cannabis businesses,” Hickman says. “It’s the best-case scenario. Ideally, I’d like to see one or both of the SAFE and STATES acts signed and put into law.”

For now, in addition to hope, Hickman offers this: “My advice for both dispensaries and banks is to hang in there.”