The Cannabis Cash Conundrum

Federal, Financial Laws Limit Legal Banking For Cannabis Companies

By David Heldreth

     Cannabis may have been legalized in Washington, but the industry still has problems with all the green … green bills, that is.
     Washington adopted the I-502 system in 2012, and finally folded the medical providers into that network last July. The system has proven to be successful and has reduced out-of-state trafficking and extraction accidents, according to Governor Jay Inslee in a correction to a letter from US Attorney General Jeff Sessions. Sessions had claimed that Washington had a rash of butane hash oil explosions in the legal industry. According to Inslee, Sessions failed “to clearly acknowledge that none of these explosions were at labs operating legally under state license.... In the history of our licensing system, no legal extraction lab has ever had an explosion.”
     Despite these advancements, the industry is still in its infancy when it comes to dealing with banks, credit unions and other financial institutions. Currently, only 12 banks or credit unions in the state handle the load of the I-502 system in Washington. In 2016 alone, the I-502 system brought in $1,109,000,000 in total sales between producers, processors and retailers, with $256,000,000 going to the state in the form of taxes. Mind you, all of these sales made using cash or money order because the cannabis industry is still blocked from access to many networks.
     “The public may not know that cannabis businesses are shut out from the credit card networks such as Visa and MasterCard for the purchase of cannabis, so the vast majority of sales are cash transactions,” Carmella Houston, VP of Business Services for Salal Credit Union, said in an e-mail. “This cash creates significant public safety issues unless it is taken off the streets.”
     Houston further explained that Salal, one of the 12 financial institutions working with I-502 businesses, had difficulty finding an armored car service that would accept their business.
     “We interviewed every armored car service in Washington state and found only one company [that] would deliver and pick up cash directly from the cannabis businesses,” Houston said. “In 2016, our armored car vendor processed over $250 million in cash alone.  They now process over $30 million a month on behalf of our business members, and we are thankful for this partnership.  We also note that none of our business owners, employees or their customers have suffered a violent injury in nearly three years.”
     The banking problems are caused by the contradiction of state and federal laws regarding cannabis. Due to cannabis still being a schedule I drug, the banking industry is legally barred from participating with the industry. However, with the increase in state-legal cannabis activity across the country, the Treasury moved to create some guidance from the Financial Crimes Enforcement Network (FinCEN) in 2014. FinCEN declared that federal enforcement would end as long as the banks made sure the cannabis business followed state law and the Cole Memo—a Department of Justice (DOJ) document that outlined priorities in federal cannabis enforcement to reduce raids and other actions in states with cannabis laws. These rules didn’t actually do anything to change the law; they simply stated that the government would, for now, not enforce the law.
     In order to ensure that the I-502 businesses are in compliance with state law, FinCEN guidance and the Cole Memo, the banks and credit unions are forced to take steps they don’t have to with other accounts. For example, Numerica Credit Union has five full-time employees to check on the legality of all cannabis businesses and charges higher fees to cover these additional costs.
     The FinCEN guidance and Cole Memo have become the de facto law of the land, but now with President Trump’s administration coming into power many bank staff are becoming nervous. The first signs of this have already become visible. PNC Bank recently closed accounts of Marijuana Policy Project (MPP) and National Organization for Reform of Marijuana Laws (NORML) in Ohio this year. PNC cited the fact that both groups had deposited checks from known cannabis businesses or producers as the reason the accounts were closed.
     These fears have now stretched to the Washington I-502 system as Numerica stopped giving loans to I-502 employees and businesses. Lynn Ciani, EVP General Counsel for Numerica credit union, said the decision would affect only new loans going forward, and Numerica would continue to support and honor loans that had already been approved.
     “We did provide consumer lending products to canna employees, however, due to concerns regarding the new Administration, we have concluded that that risk is too great,” Ciani said in an e-mail. “Federal seizure laws would allow collateral owned by a canna employee securing our loan to be seized. The collateral would be taken and our lien extinguished. We are looking forward to actions by Congress or the current administration to quell our concerns.”
     A couple of bills in the works could help banks at both federal and state levels. The Washington state legislature is considering the Cannabis Banking Protection Act, HB 2098, which would help reduce risk of money-laundering charges for financial institutions. Meanwhile, in May Senator Jeff Merkley (D-OR) and others introduced the SAFE Banking Act, S. 1152, which would provide protections for credit unions and banks that legal cannabis markets.
     “It would be helpful if states followed a similar platform when setting up the framework for the cannabis industry in their states,” Salal’s Houston said. “However, as long as cannabis remains classified as a Schedule I drug there will always be a risk of federal seizure, potential fines and even imprisonment.  It’s about understanding and weighing the risks, mitigating them as much as possible and having a supportive Board that is willing to serve the industry in a prudent manner.”