As more and more states legalize the use and sale of marijuana, more and more banks are finding themselves caught between the pincer of local needs and federal law. The conflict between state and federal laws is creating a ripple of lost growth opportunities and public safety problems.
And because of the intersection of federal drug laws and the Bank Secrecy Act, the ripple effect of the cannabis conflict extends to a wide range of “marijuana-related businesses”—an expansive category that stretches from grow operations and dispensaries to their vendors, landlords, suppliers and even utilities.
The gray area of MRBs makes it a difficult judgment call for banks operating in the nine states with legal recreational cannabis and the 29 states with legal medicinal marijuana—regardless of their policies on cannabis customers. Moreover, the expansion of MRBs as a distinct category from marijuana growers and shops raises critical compliance questions for bankers, who may unwittingly find themselves banking a cannabis business even if they have policies not to.
“There’s no easy answer,” says Gordon Zimmerman, president and CEO of Citizens Bank in Corvallis, Ore., where recreational marijuana has been legal since 2015. “Everyone thinks you just stop banking the producer…but where does it stop? How about the attorney that provides them advice? How about the CPA that provides their tax returns? The power company?” And when it comes to an entity that has accepted over $100 million in cannabis-related tax payments, he says to chuckles at ABA’s Mutual Community Bank Forum, “Oregon’s Department of Revenue is the largest money launderer in the state of Oregon!”
Linda Navarro, president and CEO of the Oregon Bankers Association, says the fact that all federal guidance on cannabis banking reiterates that it remains illegal “makes it easy to want to sit back and say…and we’re not going to have anything to do with it as long as that’s the case.” However, she adds, “that’s nearly impossible as a bank to do, especially when cannabis becomes so pervasive in your state.” Oregon has about 1,000 recreational dispensaries and 18,000 registered growers of medicinal cannabis, Navarro adds. “With that much marijuana activity all over the state in every county, every bank is going to be touched by it.”
Zimmerman highlights two examples. In one case, one of his best loan customers leased space to a grow warehouse. “We bifurcated the loan, carved off that portion of it, released the collateral and helped the borrower find a loan somewhere else,” he says. In another case, he says regretfully, a candy shop with deposits at Citizens Bank “had a cannabis group that wanted to use his equipment on Sundays to make hard candies when his shop was closed. Now, there’s no way to bifurcate that, so we closed his account because of that Sunday activity.”
Because of the conflict of federal law and the need to rely on guidance from the Financial Crimes Enforcement Network or informal comments from regulators, few banks have been willing to bank marijuana businesses. As a result, cannabis firms deal in enormous amounts of cash and are attractive robbery targets. The average cannabis shop robbery brings in three to six times the loot of the average bank robbery, Zimmerman says.
Between 2009 and 2013, as states continued changing their laws, Justice Department officials issued a series of memos that outlined priorities in cannabis law enforcement. For example, prosecutors would focus on cross-border activities, drug trafficking or distribution to children, among others. The existing FinCEN guidance, which directs financial institutions that serve MRBs to file special marijuana-related suspicious activity reports, was keyed to these prosecutorial priorities. After Attorney General Jeff Sessions revoked the prosecutorial guidance earlier this year, observers are wondering whether changes will come to the FinCEN guidance as well.
Banking challenges aside, the marijuana industry is growing. In California, which permitted recreational pot use effective this year, it is projected to be a $7 billion industry and grow into the state’s third-largest. “The fact that it needs to be banked is paramount,” says Jeffrey Ball, president and CEO of Friendly Hills Bank in Whittier, Calif., and chairman of ABA’s Government Relations Council.
To date, advocacy on cannabis banking has been complicated by legitimate concerns about the morality or wisdom of expanding drug use. But cannabis activity is expanding so rapidly that bankers do not need to “address the moral issue,” Ball says. “The issue we need to address is the practical issue, which is the effect on public safety. Ultimately, we’d like to have banks removed from being trapped between federal and state law.”
Navarro and other industry leaders have organized a coalition to find policy solutions. “We do not advocate for legalization, nor do I encourage a bank to bank marijuana-related businesses,” she says. “But if it passes in your state and it’s your reality, we all benefit from clarity on this issue. Clear laws will help banks comply—whatever their choices.”