The State of Cannabanking
There’s a lot of money to be made in cannabis these days. Annual sales of the Ohio Medical Marijuana Control Program are forecasted at $225 million in 2021. By then, total economic output from the legal cannabis U.S. market will have risen to $40 billion and sport 414,000 jobs, encompassing not only growing, harvesting, processing and testing, but also ancillary services like packaging, accounting, security, HVAC and lawn mowing.
One would think that financial institutions would salivate over such numbers. More customers, more transactions, more fees! One would be wrong. Almost daily, the news covers yet another bank slamming its monetary door on cannapeople and cannabusinesses. Wells Fargo closed a Florida candidate’s campaign account during her primary election. In Ohio, Grow Ohio Pharmaceuticals (Level I cultivator), Apeks Supercritical (maker of extraction machines) and the Ohio Rights Group (advocacy organization) had their accounts shut down. An estimated 70% of marijuana businesses are unable to bank, even though active cannabis licensees in the U.S. number almost 10,000.
This makes no sense until a tangled web of federal banking laws and unintended consequences unravels.
Banks are corporations with a federal ( “National” or “N.A.” by their name) or state charter. In Ohio, state banks are regulated by the Ohio Department of Commerce. Insured deposits held by these entities usually involve the federal government.
The U.S. Department of the Treasury regulates banking institutions under Federal Reserve system (“Fed”). The Fed serves as the U.S. central bank. It oversees federal- and state-chartered banks, helps maintain the stability of the financial system and supervises payment systems that insure deposits and clear checks. The Fed is charged with enforcing anti-money laundering laws that prohibit the use of criminal proceeds in financial transactions.
The fundamental problem with cannabis banking begins with the 1970 Controlled Substances Act (CSA) where marijuana resides in highly restricted Schedule I. The CSA prohibits cannabis’ manufacturing, possession and distribution and defines all transactions as money laundering.
Thus, a bank’s decision to work with marijuana-related businesses imposes a heavy regulatory burden. For one, banks adhere to the “Know Your Customer” doctrine and must assess any “illegal intentions for the business relationship.” The U.S. Patriot Act of 2001 mandated “due diligence” in developing those relationships.
Currency Transaction Reports (CTRs), which banks routinely file for currency transactions over $10,000, represent one reporting mechanism that disproportionately targets the cannabis industry. The absence of bank accounts begets large cash transactions that beget CTRs.
U.S. Justice Department memos issued under the Obama administration shielded cannabusinesses from the full force of the feds. They directed U.S. Attorneys to honor state laws provided eight priorities were met. The well-known Cole Memo served as a stop gap until former Attorney General Jeff Sessions rescinded it in January 2018. Reverting enforcement to the whim of disparate U.S. Attorneys induced more risk into the highly risk adverse banking industry. Banks and even credit card processors became increasingly wary of marijuana.
Under federal law, banks must assist government agencies in detecting and preventing money laundering. To comply, these institutions must obtain and review a myriad of information about “at risk” businesses, including “suspicious activity” and specified “red flags” (violations). Each flag must be reported to the Treasury Department’s Financial Crimes Enforcement Division (FinCEN) as a separate “Suspicious Activity Report” (SAR). For cannacustomers, this could mean a report for every single check or deposit, even where marijuana is legal at the state level: medical, recreational or hemp. Neither government agencies, candidates, professionals, advocacy groups, nor even individual citizens are immune.
There are three kinds of SARs:
Marijuana Limited Filing. Due diligence finds no red flags/violations.
Marijuana Priority Filing. Due diligence finds one or more red flags. Financial services continue.
Marijuana Termination Filing. Due diligence finds one or more red flags. Financial services terminated because of violations or a corporate decision to can all cannabusinesses.
SARs must be retained five years from the filing date.
Worse, SARs aren’t just veiled in secrecy, they hide behind impenetrable walls. “No bank, and no director, officer, employee, or agent of a bank that reports a suspicious transaction may notify any person involved in the transaction that the transaction has been reported,” so says FinCEN’s training manual. Incredibly, SARs can’t even be subpoenaed! No ability to correct the incorrect or challenge a falsehood. In truth, every day, zealous banks dig deep into private finances, red flag unsuspecting customers, close accounts on mere suspicion, dislocate affected families and share this information among themselves and no one else, all while generating a mountain of government-mandated paperwork.
The tentacles of federal banking laws enwrap everyone in the cannabis industry: licensees, employees, contractors, patients, advocates, accountants and even the gal mowing the lawn. Remember, banks follow social media. Their “due diligence” permits them to peer into private spaces and terminate financial relationships with neither warning nor recourse. It may sound unfair. It may sound cruel. It may sound unamerican. Sadly, it sounds like state of cannabanking is not a legal industry.
Forced closure: What you can do about it
So, you received a forced closure notice from your federally chartered bank. What should you do? First, calm down. You’re not alone. But you do have time-sensitive steps to take, so it pays to be both proactive and prepared.
Call the bank’s customer service number and find out what’s going on. Remember, while needlessly hostile toward marijuana businesses, banks do enforce basic rules concerning overdrafts, cash deposits and fees. If your account is imperfect, resolve those issues first. If your account is perfect, don’t automatically assume you’re at fault. Even the accounts of “indirect marijuana businesses” (accountants, attorneys, HVAC installers and lawn mowers) could be closed.
Don’t expect a warning. As a preventive measure, maintain two bank separate accounts and two debit cards in case one goes down.
Force the bank to close your account. Withdraw all but a small amount. Providing there’s no negative balance, a check for residual funds should be mailed you. This gives you standing in court, if it comes to that.
Redeposit your funds at another institution. Credit Unions have spoken favorably toward cannabanking. They are non-profit and pay dividends on deposits.
Make sure your corporate documentation is up-to-date. For business accounts, you’ll need copies of the company’s EIN letter from the IRS, tax returns, operating agreements, meeting minutes and resolutions concerning the new account. The banker will probably review the filings of your organizing documents online.
Exercise free speech. You should be able to freely protest the bank’s actions with letters-to-the-editor, social media posts and, yes, Free Press articles.
Advocate to change federal law. “Banking Marijuana Requires ‘Act of Congress” Wise words from the Boulder Weekly. The Controlled Substances Act, the Patriot Act and the Bank Secrecy Act weave together to create this banking crisis. Only Congress can fix it. This means removing marijuana from the CSA. Once gone, no basis will exist for money laundering, SARs or account closures. Contact your federal officials and ask them to support this legislation:
Safe and Fair Enforcement (SAFE) Banking Act. Introduced into the US Senate by Senator Jeff Merkley (D-OR) in April 2017. Would provide a “safe harbor” for banks that offer financial services to cannabusinesses.
Marijuana Freedom and Opportunity Act. Introduced into the US Senate by Senator Minority Leader Chuck Schumer (D-NY) in June 2018. Would remove cannabis from the CSA.
Strengthening the Tenth Amendment Through Entrusting States (STATES) Act. Introduced into US Senate in by Senators Cory Gardner (R-CO) and Elizabeth Warren (D-MA) in June 2018. Would amend the CSA to not apply to those acting in compliance with state law.
Support state legislation and other means of change. Because banking edicts come from on high – the federal government – there’s only a few things that states can do other than complain, as many states have.
Lobby the Ohio General Assembly adopt a resolution similar to New Jersey’s State Resolution No. 104 that urged passage of the SAFE Banking Act.
Lobby the General Assembly to pass enabling legislation for the 2018 Farm Bill which became law in December 2018. This bill legalized hemp nationally, making it an ordinary agricultural commodity and opening the national banking system to farmers and producers. Even though some states already have hemp pilot programs, Ohio does not. A USDA approved program in the state will enable Ohioans to take full advantage of this new market.
Close loop payment systems. Under Ohio HB 523, the Department of Commerce can create a payment system similar to prepaid debit or gift cards. Patients deposit money into their accounts and then draw on those balances when buying from dispensaries. HB 494 and SB 254 were introduced but gained little traction.
Payment transactors. CanPay, a Seattle-based company, lets marijuana patients provide a bank account number and routing number and then pay for cannabis as ACH transactions.
Join together. Banks and the feds need to hear about the hardships imposed by their outdated policies. If a bank forced the closure of your account or cannabusinesses (direct and indirect), the Ohio Rights Group would like to hear from you. Please email email@example.com. Describe your situation and how these policies have affected you. Please include your name and contact information.
All direct and indirect marijuana businesses, as well as their customers, vendors and supporters, have the right to be treated like every other business. It’s time to unleash the full potential of this new industry. Fairness in banking is key to making this happen.
These articles appeared as an expose into cannabis banking in the January 2019 edition of the Columbus Free Press. You can read it here.