Cannabis Banking Insights
Bridge West CPAs – CannaBlog Written by Cory Parnell, CPA, Chief Operating Officer
Bridge West CPAs & Advisors to the Cannabis Industry
Access to safe and affordable banking has been a consistent challenge for cannabis companies since the outset of legal cannabis businesses. The most significant hurdle to cannabis business banking is cannabis’ place on the Schedule I list of the Controlled Substances Act (CSA). Under this designation, the production and sale of cannabis, whether state legal or not, is still federally illegal and subject to IRS section 280E. The SAFE Banking Act of 2021 was written to combat these two major problems. The issue with cannabis banking is not simply a matter of the inconvenience to deal only in cash; however, the safety concerns that come with it. Finally, limited access to banking is prohibitively expensive, which creates an undue burden for minority and women business owners entering the legal cannabis market.
Issues Born Out of Limited Access to Banking
Safety is an essential concern for employees, owners, and consumers alike when operating in the cannabis industry. The all-cash nature of cannabis transactions makes dispensaries and other cannabis facilities targets for would-be thieves. There have been numerous robbery attempts at cannabis dispensaries because of their cash-only nature. During a period of unrest following the murder of George Floyd in 2020, many California dispensaries were robbed and faced severe losses due to high amounts of on-hand cash and product. If these businesses had better access to banking, they might not have experienced such severe losses.
According to a recent Reuters article, in 2020, only 515 of the 8,200 or more federally registered banks and one out of every 30 credit unions were willing to work with cannabis businesses. One business with access to banking, SLANG Worldwide Inc., disclosed that their bank account cost $40,000. This amount is significantly higher than traditional bank accounts, which cost less than $100 to open. Banks like MAPS Credit Union cite the requirement of costly anti-money laundering software, external auditors, and legal counsel as the reason behind the higher cost of working with cannabis businesses. This specific credit union has filed tens of thousands of reports required by FinCEN regarding its cannabis business clients per their guidance.
Consequences for breaking the rules: Example of a businessperson impacted by current banking regulations
In Oklahoma, Victor Ngo, a cannabis businessman, faces up to 30 years in prison and a $1,000,000 fine because he represented his business as a “wellness and fitness” firm to process his earnings through a bank account. Many cannabis businesses have taken such risks to have some form of available banking services. Under current law, this is illegal and seen as an attempt at money laundering. There is tremendous risk in lying about your business structure to open a bank account. Therefore, some business owners keep their funds in personal vaults and use armed guards for transport. These services are also expensive, making them an option that smaller firms cannot afford.
Timeline of Notable Events Impacting Cannabis Business Banking
- 1971 – The Controlled Substances Act becomes law, and marijuana is placed on Schedule I
- 1982 – Section 280 E is added to the IRS tax code to address monies made in, among others, marijuana sales and production
- 1996 – California’s Proposition 215 passes, making California the first state to legalize medical marijuana
- 2012 – Washington and Colorado become the first states to legalize cannabis for adult-use
- 2013 – The Cole Memo directs the Department of Justice (DOJ) not to prioritize prosecuting cannabis companies in states that have legalized
- 2014 – FinCEN publishes guidelines for financial institutions to address legal cannabis companies by requiring suspicious activity reports regardless of cannabis’ legality in a state
- 2021 – The SAFE Banking Act
How the SAFE Banking Act Would Help the Cannabis Industry
There are two significant areas where the SAFE Banking Act would be a boon to the cannabis industry. The first is that The SAFE Banking Act would prevent banking regulators from penalizing financial institutions that provide services to the cannabis industry simply because they are in the cannabis industry. These protections would extend to cannabis business owners, service providers, and employees. The SAFE Banking Act would also exempt state-legal cannabis companies from the provisions of section 280E of the IRS code. If these two major areas were covered, cannabis companies could operate more safely and more competitively than they are currently operating. However, it is important to note that the SAFE Banking Act does not require financial institutions to provide services to the cannabis industry.