Securing traditional banking services is a major hurdle for U.S. cannabis businesses. As the drug remains illegal under federal law, most financial institutions choose to avoid the industry altogether rather than take on the legal and reputational risks associated with it.
“You’ve got a very disjointed framework that is currently in place,” said Michael Makofsky, principal with Cleveland law firm McCarthy, Lebit, Crystal & Liffman, which counsels clients seeking advice on selling cannabis or related products. “There are 38 states that allow medical marijuana, and a subset of those who allow recreational. But then at the federal level, it’s illegal under the Controlled Substances Act. There’s a complete disconnect where banks don’t know how to maneuver in this environment, so the default response is that they won’t.”
Cannabis is a Schedule I drug under federal law, putting it under the same strict controls as heroin. Even if marijuana is reclassified as a less dangerous intoxicant – a discussion now taking place at the U.S. Justice Department – it would still be a controlled substance subject to federal rules and regulations.
Currently, the Federal Bank Secrecy Act prohibits financial institutions with federally approved charters from accepting money generated from the sale of illegal narcotics, including cannabis. In addition, anti-money laundering laws require national banks and credit unions to file reports if they suspect clients of illegal activity.
In this stringent environment, the risk of violating the Bank Secrecy Act leaves most potential cannabis clients on the outs, noted Eric Grischow, regional director of HBK Cannabis Solutions, a team of industry experts within accounting firm HBK CPAs and Consultants.
Without access to banking or credit card processing, cannabis is almost completely reliant on cash – a restriction that itself is problematic, said Grischow, whose firm has locations in Youngstown and Columbus.
“This leads to strict internal controls over the handling of cash, and also limits how many banks will do business with cannabis companies,” Grischow said.
Due to the limited availability of banking services, cannabis businesses may be inclined to utilize credit unions, which have less exacting regulations for depositing funds, added Grischow.
Finding other options
HBK’s cannabis clients sometimes partner with out-of-state institutions, meaning their cash may travel hundreds of miles before deposit. Entrepreneurs can turn to outside investors as well, although they run the risk of losing control of management decisions.
Considering this overall unfriendly financing atmosphere, marijuana businesses may find options with credit unions or smaller state-chartered banks. However, it’s vital for entrepreneurs to approach these outlets with caution along with a list of questions, said Grischow.
What are the institution’s compliance standards? What types of reporting are required? Does the bank have other cannabis clients? Businesses should be further prepared to answer thorough queries about their structure and operating history, Grishchow added.
For example, some cannabis companies have agreements with holding companies that never touch the plant, he said.
“The best way is to maintain a strong balance sheet, and be aggressive as possible with your marketing strategy,” said Grischow.
“You need to be honest, and give a sense of what business purpose all the entities have. You should also give clarity on what kind of money will be going into the bank. Is it from direct marijuana sales, or another means of cash inflow?”
Banks will require prospective clients to pay for a due-diligence inquiry, a costly endeavor considering the extra monitoring and reporting the process necessitates, said Grischow.
Dollars and sense
Legislation pending in Congress could reshape the financial landscape for marijuana businesses. The Secure and Fair Enforcement (SAFER) Banking Act, which has passed the U.S. House of Representatives multiple times since 2013, would offer protection to federal banks working with legal cannabis businesses. The act gained momentum in September 2023 after a 14-9 vote in the Senate Banking Committee. A Senate floor vote is now pending.
Among the bipartisan legislation’s supporters is Democratic Senator Sherrod Brown of Ohio, who said the current system only harms legitimate marijuana establishments.
“Regardless of how you feel about states’ efforts to legalize marijuana, this bipartisan bill is necessary – it will make it safer for legal cannabis businesses and service providers to operate in their communities and protect their workers,” Brown said last year.
Cleveland attorney Michael Makofsky said the pending law also creates a necessary conversation about marijuana policy.
“The legislation would try to resolve the tension between federal and state laws regarding banking, because it essentially offers safe harbors to banks, and allows them to handle money for legal marijuana businesses,” Makofsky said. “That would be needed for banks to feel comfortable that they can transact business.”
Similar to any industry, partnering with a bank would give cannabis much-needed legitimacy. What’s more, the collaboration would simply make it safer for these entrepreneurs to operate, said Makofsky.
“Something needs to be done, because there’s too much uncertainty between the federal and state level,” he said. “Hopefully, there will be a more consistent approach (to banking), which makes more sense for everyone, rather than the way it is right now.”
