Arizona private banks and credit unions are not offering lending or line of credit services to cannabis industry players and those that do, require significant red tape to offer any type of credit. As such, operators cannot borrow against inventory or set up short term lines of credit to manage cash flow. In addition, the major credit card processors and online payment processors refuse to allow cannabis transactions until cannabis sales are made legal on the federal level. These banking challenges make it difficult for cannabis businesses to grow or expand operations.
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The legalization of cannabis sales in Arizona, both medical and recreational, has been a boon to local and regional Arizona banks and credit unions, but not without restrictions and exorbitant costs. Unlike many nationally chartered banks, the local and regional banks have taken some risk in helping to bankroll Arizona’s growing cannabis industry, without which would run almost entirely on a cash basis.
There is meaningful reform moving through the federal government in the form of the SAFE Banking Act, which has passed the House and is stalled in the Senate. The SAFE Banking Act will prohibit federal regulators from punishing financial institutions for their decision to transact business with companies legally operating in the cannabis space at the state level. If the industry is to truly blossom, it desperately needs a lift from Congress in the form of some sort of law, like the SAFE Banking Act, that will recognize the reality that cannabis is a big and legitimate industry. Until then, the local and regional Cannabis Related Banks (or CRBs as they are known) will continue to offer a limited menu of much-needed services at extraordinary prices.
Right now, Arizona is one of the more progressive states when it comes to cannabis banking. It is a restrictive and expensive environment. Once a bank notifies regulators that it is working with cannabis related businesses, the bank is designated as a CRB. The CRB banks are subject to more oversight by the FDIC. CRB banks are required to have additional compliance requirements and retain a designated risk manager. To meet the FDIC oversight requirements, CRBs require cannabis related businesses to provide quarterly financial statements, provide monthly inventory reports, and are subject to periodic onsite inspections from the CRB risk manager.
To compensate for the additional oversight required, the CRBs can charge significant fees to cannabis businesses for the privilege of having banking services. It is not uncommon for CRBs to charge anywhere from 25 to 100 basis points per deposit of any cannabis business money. While this is a significant cost to the business, without a banking option, cannabis businesses would lose access to ACH and wire transfer capabilities, which would make operating the business cumbersome and dangerous if all transactions were in cash.
However, these conveniences offered by the CRBs are merely an accommodation and a work-around for an industry hamstrung by our federal government that still classifies marijuana as a controlled dangerous substance. This, despite Arizona and 38 other states having passed medical and 21 states having passed recreational marijuana laws legalizing the substance.
Full passage of the SAFE Banking Act by Congress and President Biden enacting the law would be a significant step forward. But there may be another option. In Arizona, the entire industry is overseen by the Arizona Department of Health Services (ADHS), which is responsible for licensing, and oversight and the Arizona Department of Revenue (ADOR), which is tasked with collecting the excise tax (imposed by the state) and transaction privilege taxes (imposed by the state and local governments). In 2021, Arizona collected close to $200 million in taxes from cannabis sales.
These two entities or some new hybrid governmental entity could, in theory, step in to provide a full-service banking solution for cannabis businesses. ADHS is already providing the oversight that CRBs are duplicating through their risk managers. ADOR is already overseeing the financial operations of the businesses and collecting tax revenue. Between the two entities, the creation of a state-owned cannabis bank could enable operators to have access to full-service banking, including lending and credit lines. Not only would this provide a service to the businesses, but it would also be another potential source of revenue for the state from the cannabis industry. Another benefit to the creation of a state-owned cannabis bank would be the ability to reduce, if not eliminate, large cash transactions, which have the potential to hide money laundering schemes. A state-owned cannabis bank would provide another level of policing oversight to ensure businesses are free from any type of criminal activity.
Arizona lawmakers and regulators should investigate whether and how they can help cure the banking void to further legitimize and mainstream the cannabis business until the Federal Government acts.
Author: J. Christopher Gooch is a business litigation attorney with Fennemore and heads the firm’s real estate litigation practice. He has significant experience representing clients in the medical and recreational marijuana industry including investors and operators. His clients include a broad spectrum of entities, ranging from Fortune 500 corporations to entrepreneurs. Reach him at cgooch@fennemorelaw.com.
