Despite progress over the past decade, the cannabis industry still struggles to access a fundamental piece of the U.S. economy: the financial system. Congress should either legalize cannabis or stop deputizing banks as drug enforcement investigators.
Although 18 states have fully legalized, cannabis is still a sticky issue for banks and other financial institutions because it remains illegal at the federal level. The cannabis industry might look like just another business for local police, where legal, but the DEA and other federal agencies have a different outlook. As a result, most of the industry is locked out of the financial system. For instance, Visa and Mastercard bar their networks from being used in the cannabis industry so long as federal laws remain unchanged.
The State of Banking
To be clear, the existing policy does not ban financial services for the cannabis industry. Rather there are just too many legal risks and compliance costs, so most financial institutions stay away. In fact, only 518 of the nearly 5,000 commercial banks in the United States reported having served the cannabis industry in 2021. As Aaron Klein and John Hudak have explained in the past, financial institutions
are required to file reports to Uncle Sam detailing a customer’s suspicious or illegal activities. That can prove costly. A bank can be subject to large fines if it incorrectly reports on its transactions, or if a future bank regulator accuses it of not following the reporting guidance properly. The reporting can be extensive, often covering every single action a customer takes, as it is based on the premise that the illegal activity is happening underground… One small credit union in Oregon that serves marijuana businesses filed 13,500 reports over the past two years for approximately 500 cannabis clients.
In fact, the Financial Crimes Enforcement Network (FinCEN) told financial institutions that their review process should include:
- Verifying with the appropriate state authorities whether the business is duly licensed and registered;
- Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business;
- Requesting from state licensing and enforcement authorities available information about the business and related parties;
- Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);
- Ongoing monitoring of publicly available sources for adverse information about the business and related parties;
- Ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and
- Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available.
In effect, banks and other financial institutions are largely required to act as drug enforcement investigators if they wish to work with the cannabis industry. While some of these investigations may be desirable for a financial institution assessing the risk of a client, financial institutions should not be investigators for the federal government––especially since the public is largely unaware that this financial surveillance is taking place.
Three Solutions
Congress has options when it comes to fixing this problem: revising the Bank Secrecy Act so that banks are not deputized as law enforcement investigators, creating an exemption for financial institutions working with the cannabis industry where it is legal (e.g., what is proposed in the SAFE Banking Act), or enacting full legalization. All are steps that could remove this unnecessary barrier between the cannabis industry and the financial system. Whether it is a small fix or a sweeping reform, the legal cannabis industry should have access to financial institutions like any other business, and financial institutions should be able to work with the industry as they see fit.
