Banking on Financial Reform for the Cannabis Industry in 2020

For an industry that topped $10 billion in sales in 2018, it’s hard to believe cannabis companies still rely on bags of cash to conduct their daily business: cash for payroll, cash for vendors, cash for contractors, cash for tax bills… The list goes on.

That dispensaries and other retailers accept only cash for purchases complicates the situation for consumers, too. For a variety of reasons, some potential customers are unwilling or unable to conduct transactions in cash, depriving them of products they want or need and costing retailers potential sales. The situation is more complicated than necessary for everyone involved.


The primary reason lies with banks and other financial institutions that remain in the same precarious position they’ve occupied for decades: While cannabis is illegal on the federal level, every deposit or payment made by a cannabis company may be construed as money laundering for a criminal organization. In order to work with legal businesses and meet regulatory compliance requirements, banks must follow the letter of the law as interpreted by the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Even the most scrupulous adherence doesn’t protect them from criminal liability, though.

Until banks open their doors to the industry, more than 250,000 cannabis workers across the country are exposed to the public-safety risks that come from transporting bags of money between labs, distributors, retail outlets, and tax collectors, whether the destination is a shop down the street or a farm hundreds of miles away.

Despite the challenges, an increasing number of financial institutions across the U.S. are setting up accounts with licensed cannabis, CBD, and hemp companies that are willing to pay fees associated with complex compliance procedures. If 2020 is the year cannabis banking finally breaks through, it’s up to Republican Senate Majority Leader Mitch McConnell and his colleagues to act.

SAFE banking to the rescue?

Several bills addressing cannabis banking have been introduced over the years, but the Secure and Fair Enforcement (SAFE) Banking Act (H.R. 1595) has gained the most support from politicians and industry lobbyists. Sponsored by Colorado Representative Ed Perlmutter (D) and introduced in March 2019, the bill passed the House of Representatives in late September. The SAFE Banking Act would protect financial institutions from federal prosecution as long as state-legal cannabis businesses comply with state laws and regulations. Lobbyists from the financial services industry—including the American Bankers Association (ABA), the Independent Community Bankers of America, and the Credit Union National Association—support the bill, as do most cannabis industry trade organizations.

Gavin Kogan, co-founder and general counsel for Grupo Flor in Salinas, California, flew to Washington, D.C., in September to discuss the banking situation with lobbyists and politicians. He was in a taxi to Capitol Hill when he heard the SAFE Banking Act had passed the House.

“This just massively changes our whole dynamic here,” said Kogan. “Now it’s about how to get this through the Senate, and the general feeling is [the bill] will make it, but [the Senate version] will have some changes.”

The Senate Banking Committee and its chairman, Sen. Mike Crapo (R-Idaho), have pledged to act on the bill this year, so expectations are high. Among possible changes, said Kogan, is the “reputational challenge,” meaning financial institutions may deny banking to any potential client if the client’s business might cause reputational harm to the financial institution. “Democrats are trying to take that reputational harm back, but Republicans are trying to populate a lot of bills with that concept,” he said. “It’s very weird and a bit of a complicated storyline. But with thirty-three states that now have some form of cannabis activity where banking is inhibited, [H.R. 1595] could provide a lot of relief.”

Terry M. Neeley is managing director for West Coast AML Services, a Sausalito, California-based consulting firm that helps banks handle high-risk clients while complying with federal guidelines. Formerly a regional coordinator for the Department of Homeland Security Organized Crime Drug Enforcement Task Force Program, he possesses more than twenty-five years of experience investigating complex drug-money-laundering organizations. He said passage of the SAFE Banking Act will reinforce what the Department of Justice has, in effect, done since the Cole memo was released: “So long as you have a really robust compliance program, we won’t go after you” has been the unspoken message. Of course, setting up the required compliance procedures is a complicated and labor-intensive endeavor.

“We always talk about what’s responsible, and the degree by which a financial institution has to do its AML [anti-money-laundering] compliance to manage a high-risk portfolio is a much higher degree of enhanced due diligence if you’re a money services business,” Neely explained. “And when that portfolio is federally illegal, they have to do an even higher degree.”

Both anti- and pro-cannabis groups have expressed concern about the SAFE Banking Act. Advocates argue the legislation doesn’t go far enough to protect banks and cannabis companies, while cannabis opponents don’t want to confer further legitimacy on the industry. The wildcard that may have tipped the scales last year is passage of the Farm Bill and the subsequent nationwide rise of the hemp industry.

“It’s possible that banking reform could have yields and a positive utility to small business owners in the cannabis space, but it may just be a byproduct of legislation designed to help the big players,” said Brandon Dorsky, a Los Angeles-based attorney who advises the cannabis industry and has a stake in small edibles company, Fruit Slabs. “Like a lot of banking reform, it’s more likely to provide clarity for CBD operators than create a clear path for the THC space.”

A revolving door of accounts

Platinum, founded by Chief Executive Officer George Sadler and his son Cody in 2013, is a San Diego-based company specializing in extraction. Even though Platinum is among the top ten cartridge manufacturers in California, with sales north of $10 million annually and an established track record in two states, the company still struggles with banking.

“We’ve gone through fourteen banks over the years,” said Sadler. “Two weeks ago, we opened a bank account, and before I got home it was closed. We opened one last week, and that got closed the next day. We just opened another account yesterday, but we don’t have too high hopes [it will stay open].”

Like many other cannabis entrepreneurs, Sadler opened the accounts under a holding company that manages real estate and other assets associated with his business, but “unfortunately, it doesn’t take them too long to Google your name,” he said. Several years ago, Platinum branched out to Michigan, where he said business is booming and he has been able to maintain an account with a credit union.

Even for companies that trade in hemp and CBD, banking is a challenge, especially considering many of them are launching international operations and need to comply with regulations in every country where they do business.

Santeer is an international CBD brand with labs in Colorado and Ireland. Chief Commercial Officer John Hogan said the company maintains a bank account in Ireland and uses an offshore payment processor but has been unable to open an account in the U.S. He said cannabis banking is “a complex jigsaw we are constantly trying to put together and, no matter what we land on, we never end up with the perfect jigsaw. There’s always some sort of trade-off.”

Even if a cannabis or CBD company qualifies for an account, banks charge a variety of fees for the compliance services they provide. “Some of what I’ve been quoted is fairly significant, and we would have been paying $10,000 per year for banking in the U.S.,” said Hogan. “When you’re in startup mode, you feel like you’re getting gouged. We need to find banking in the U.S., because otherwise dealing with the international dimension can be troublesome.”

Beyond fees and compliance requirements, most banks that deal with cannabis businesses are cautious and selective about the companies they take on as clients. Hardcar is a California-based company that offers clients armored cash and product transportation in twelve states and facilitates banking relationships with six banks in California, all of which have complex vetting procedures. “You need to be making a certain amount of money to afford the banks’ service fees,” said Mariko Augustis, who oversees banking and cash compliance at Hardcar. She added most cannabis companies with bank accounts have revenues exceeding $500,000 per month. “There are several credit unions in California that work with cannabis clients, but most of them are closed to new customers and have long wait lists, so they are reluctant to discuss these accounts,” said Augustis.

Staying on the right side of regulations

Because financial institutions serving cannabis businesses do so very privately, most client relationships are formed via word of mouth or through intermediary companies that act as partners in the complicated web of compliance procedures. “I don’t think there’s any other industry I’ve ever heard of where who you bank with is a trade secret,” said Kogan. “People don’t talk about it and are all ‘I’m keeping that quiet and locked down.’”

Even though it’s one of the biggest operations in California, with twenty-five local and state licenses and a real estate footprint of 1.5 million square feet, Grupo Flor has endured the turmoil with banking relationships. “We’ve lost a lot of bank accounts but now use an intermediary to manage the due diligence and FinCEN compliance,” remarked Kogan, who said managing cash is an expensive proposition, costing as much as thirty cents on the dollar.

For anyone who has worked on financials in the cannabis industry, FinCEN is a familiar acronym. According to the agency’s Frequently Requested FOIA-Processed Records report, FinCEN reported 493 banks and 140 credit unions handled cannabis businesses in the U.S. in March 2019. By comparison, 438 banks and 113 credit unions were engaged with such businesses in December 2018. The report also notes FinCEN received 81,725 Suspicious Activity Reports (SARs) about marijuana-related businesses. Financial institutions with cannabis-related clients must file SARs to prevent illegal activity such as fraud and money laundering. Most overreport to protect themselves.

Jason Dunn, United States Attorney for the District of Colorado, recently told The Colorado Sun, “As federal prosecutors, we will never tell [financial institutions] what they are doing is lawful under federal law. There’s always a risk, just like a retail marijuana business in Colorado, that they face federal prosecution. There is no carve-out from federal prosecutions.” Dunn and his office have never prosecuted a financial institution whose clients include cannabis companies or a retail marijuana establishment operating legally under state law.

Banks that play ball

Santa Rosa, California, is a major cannabis hub because it is the gateway to the storied Emerald Triangle and one of the most progressive cities on the West Coast when it comes to cannabis policies, taxes, and regulations. So, it’s no great surprise one of the very few banks in the state that has been open and public about doing business with the cannabis industry is located there.

Local farmers founded North Bay Credit Union (NBCU) seventy years ago. In 2018, the institution opened commercial accounts for cannabis businesses. According to Chief Executive Officer Chris Call, NBCU members voted to serve the cannabis community because large cash-only transactions composed a public safety issue. Unfortunately, Call and his associates understand the problem all too well: Intruders from out of state who were looking for marijuana and cash shot and killed Jose Luis Torres in his Santa Rosa home in March 2018. Torres and his wife ran an appliance repair business in town and maintained business and personal accounts with the credit union.

Call said NBCU receives about a dozen inquires every week from inside and outside California. “We only work with the most experienced, professionally run operators that have paid their dues and have compliance nailed down,” he said. NBCU currently services about sixty cannabis accounts, with another twenty to thirty in the pipeline. According to Call, the credit union processes $20 million to $40 million in transactions each month.

NBCU’s thorough vetting process involves management background checks, a financial analysis of the company and its tax returns, and constant access to the company’s point-of-sale (POS) system. In order to fulfill all state and federal requirements—verifying money exchanged between companies and vendors, customers, and distributors, in addition to other strict compliance measures—the credit union added more than a dozen staff members. When it needs to pick up money from its cannabis clients, NBCU charters armored trucks that transport the cash to the Federal Reserve Bank of San Francisco.

The banking situation in California is very similar to what has played out in other cannabis-legal states on the West Coast and in Colorado, where the Colorado Bankers Association estimates thirty-five financial institutions serve the industry. Sundie Seefried, chief executive officer and president at Partner Colorado Credit Union, recently told The Colorado Sun the credit union has about 400 clients in the industry, including companies that grow and sell cannabis as well as ancillary service providers. In Oregon and Washington, only a few credit unions have stepped up to serve the industry. Maps Credit Union in Salem, Oregon, has provided services since 2014, citing public safety as its primary motive. In 2017 and 2018, its 500 state-registered, cannabis-related customers deposited at least $529 million in cash, according to Chief Risk Officer Rachel Pross, who spoke to members of the House Financial Services Committee earlier this year.

A new wave of payment processors

As traditional banks and credit unions continue to take a cautious approach with cannabis companies, technology companies are trying to get a foothold in the industry, providing payment services and staking claims at key points along the supply chain. Platforms built specifically for the cannabis industry mimic, and sometimes piggyback on, increasingly popular digital payment services PayPal, Square, and Venmo.

Alt Thirty Six, currently operating in Arizona, California, and Oregon, is one such platform. It is scheduled to add Nevada, Washington, and Colorado by the end of 2019. Chief Executive Officer Ken Ramirez said the company hired a law firm with expertise in digital currencies and blockchain, and the firm spent a year developing Alt Thirty Six’s compliance policies and components. The processor utilizes blockchain on the back end to put a permanent timestamp on each transaction, which ensures information can’t be tampered with and allows state regulatory bodies to review each transaction.

Ramirez asserted many of the “closed-loop” digital payment providers targeting the cannabis industry use questionable systems that don’t meet regulatory or reporting requirements and employ “gift-card schemes behind the scenes that violate all Visa/Mastercard rules…but they are being shut down quickly these days.”

While customers handing over a debit or credit card at a legal dispensary might think everything is on the up and up, the reality is far more complicated. With each of these transactions, there are multiple banks and processors involved, each with unique regulatory requirements and responsibilities. Currently, dispensaries that allow credit card charges are flouting the rules Visa and Mastercard set out in their contracts, Ramirez said, because there is no Merchant Category Code (MCC) for cannabis purchases.

Ramirez recently visited a large San Francisco dispensary and was surprised when the budtender accepted his American Express card. When he looked at his statement later, he learned the purchase had been categorized under the MCC code for florists. “[The dispensary] could be fined and put on the blacklist forever,” he said. “The second we know Visa and Mastercard are cool with [processing cannabis transactions], we’ll enable it. Until then, it’s not worth putting your merchant processing at risk. You’ll never get a merchant account again.”

Alt Thirty Six is in the process of partnering with Square to offer credit card payments via its platform, and Ramirez said the company also will open the system to business-to-business (B2B) operators by the end of the year. “We have a lot of partners that are looking for B2B functionality, and it’s basically an invoicing system for vendors and suppliers where they can make payments just like consumers would,” he said. “We will probably charge about 1 percent to 2 percent on those transactions, whereas [business-to-consumer] is coming in between 3 percent and 5 percent.”

As more technology companies jump into the fray, transactions up and down the cannabis supply chain will become more streamlined and compliant with state and federal regulatory requirements. Nevertheless, no matter how many state and federal laws address cannabis banking, it’s doubtful large, multinational banks and credit card companies will ever be comfortable working with an industry that deals in a federally illegal substance.

“The number one thing for these big card networks is reputational risk,” said Ramirez. “You have a Mastercard, Visa, or Chase that are processing payments for State Farm or Allstate, family companies. And then they find out that they are also facilitating payments for cannabis-related products. They don’t want to align from a [public relations] perspective with someone that does that, so they will go to another company. But Visa and Mastercard have created a program in Canada, so once [cannabis is] de-regulated in the U.S., there will be a similar program here. But until then, they won’t touch it.”

Until banks do come on board, many operators in the industry are content to do things the old-fashioned way, face-to-face and cash on delivery.

“I still see a lot of companies paying in cash for some transactions,” said Hardcar’s Augustis. “We have a lot of cultivators who are old school and prefer not to have a bank account. The manufacturers need to have cash on hand and don’t want to pay the banking fee and set it aside for cash payments. It’s funny. Even though they have a bank account, they’re still dealing in cash.”