With state and federal laws regarding cannabis changing rapidly, an emerging legal cannabis industry holds great opportunity for financial institutions to profit by serving a new customer base. Producers, processors, retailers and other players in this sector require access to all the benefits of a banking relationship – everything from basic checking and savings accounts to business loans – but providing those services is far from straightforward. A patchwork of dramatically differing state laws and a complex maze of federal regulatory requirements makes it challenging for banking institutions to deliver what the young industry needs.
The cannabis plant (Cannabis sativa) has long played a significant role in American society. Early settlers were required to grow it, and both the Declaration of Independence and the original US flag were crafted of hemp (the subspecies Cannabis sativa L., which is preferred for industrial purposes). Centuries later, the federal government banned hemp along with its THC-rich sibling marijuana, relegating cannabis to the black market.
That began changing ever so slightly in the 1970s as a few states gingerly approached decriminalization and two (New Mexico and Virginia) even took baby steps toward recognizing the plant for its medicinal value. The 1990s and 2000s saw more meaningful shifts, with several states legalizing medical use of marijuana.
But even in those jurisdictions, federal law stifled the marijuana trade except as an illicit drug, albeit one with a well-established network of growers and dealers who formed an effective global supply chain. Whether state and local law enforcement chose to prosecute or not, possession and sale was a crime under the U.S. Controlled Substances Act, which classified all cannabis as a Schedule 1 drug.
In 2012, Colorado and Washington took the bold step of legalizing marijuana for recreational use; two years later the Rohrabacher-Farr amendment prohibited the federal Department of Justice from prosecuting citizens who are compliant with their state’s medical cannabis laws. Also in 2014, Utah passed a law that allowed residents to use cannabis oil with low THC but high levels of cannabidiol (CBD) upon a doctor’s recommendation.
The floodgates had opened for legalization of medical and recreational marijuana as well as CBD (a hemp derivative with much potential for treating myriad medical conditions and no ability to get users high). The 2018 Farm Act removed Schedule 1 restrictions on hemp and made CBD legal nationwide, so long as it comes from low-THC hemp grown in compliance with the Act (although marketing that claims medical benefit for CBD violates FDA regulations). The Act also delegates to states, territories, and Indian tribes, the regulatory authority over the production and sales of hemp and hemp products.
As of 2020 there are more states that allow medical marijuana (33 plus the District of Columbia, with others considering the issue) than ones that do not. Eleven states specifically permit recreational use while numerous others have fully decriminalized possession.
Yet despite the clear trend toward acceptance of the cannabis plant in all its incarnations, it remains a legal minefield that’s prohibited at the federal level in some forms and illegal in some states in some or all forms. This confusing landscape poses a formidable barrier for cannabis entrepreneurs, investors and financial institutions that provide financial services the fledgling industry so desperately requires.
To minimize risk while capitalizing on the vast profit potential of an expanding cannabis industry, financial institutions must exercise extreme care in a number of key areas that include:
- Understanding the legal and regulatory risks of banking Marijuana Related Businesses (MRBs)
- Differentiating between marijuana, CBD, hemp, THC and the regulatory framework surrounding each one
- Maintaining effective anti-money laundering (AML) programs appropriate for MRBs
- Navigating the confusing MRB regulatory landscape
- Understanding the 2018 Farm Bill and how it impacts MRBs
- Establishing and monitoring an effective MRB compliance program
- Classifying MRB customers
- Determining which types of MRB SARs to file
- Evaluating MRB due diligence requirements
As state and federal laws continue to evolve, the burgeoning cannabis sector offers financial institutions a valuable opportunity to grow their balance sheet and income statement, but this opportunity carries significant risk. Before diving in, banking institutions should seek expert advice from highly qualified professionals with a deep understanding of this tantalizing and complex industry. Contact the business advisors at Mauldin & Jenkins for help.