I’ve recently been reading articles on the impact of cannabis legalization if the House, Senate and Presidency are Democratically controlled after the 2020 election. Not surprisingly, they all anticipate that cannabis will become federally legal in 2021. What’s missing is how cannabis legalization will impact the banking industry.

Currently, if you are a cannabis related business, you know that it’s difficult to find a bank that is willing to open an account, and if you do find that bank, the account will be expensive. The big question is, will that change if cannabis becomes legal?

I’ve spent the last 7 years working with financial institutions developing and managing cannabis banking programs, so I have an insider’s perspective on the issue. The key to being a bank that serves the cannabis businesses is identifying risks, determining if you can mitigate those risks to acceptable levels, and the ongoing monitoring of those risks.

The first risk to consider is the legal risk of banking cannabis businesses. Under the Controlled Substances Act, it is illegal to manufacture, distribute or dispense a schedule 1 drug, which includes marihuana, marijuana or cannabis as its commonly known. While a bank doesn’t directly engage in any of those activities, they may be unwillingly aiding and abetting its customer who may be engaging in one of these activities. Also, by accepting funds from an illegal transaction, the bank may be engaging in money laundering. This risk is too great for most banks, and they will stop right there. With legalization, this risk will be minimized, so the cannabis banking flood gates should open, right?

Aside from the legal risk, compliance risk is the next highest concern. Banking cannabis businesses is a masterclass for Bank Secrecy Act (“BSA”) compliance. A bank that fails BSA compliance is subject to significant fines and potential criminal liability. When I say significant fines, they can be in the hundreds of millions of dollars. The Department of Treasury Financial Crimes Network (“FinCEN”) is responsible for BSA compliance. In 2014 FinCEN issues memo: FIN-2014-G001, that addressed how to comply with BSA requirements if a bank choses to serve marijuana-related business customers. This memo is divided into three sections. The first section is identifying illegal marijuana business activities under federal laws and when those laws may be enforced. The second is related to the customer due diligence requirements specific to marijuana related businesses, and the final section is related to filing of Suspicious Activity Reports (“SAR”). Each of these sections provide significant details on how the bank needs to accomplish each of these steps.

To pare the FinCEN guidance into one sentence: If a bank is required to understand what activities are illegal, they need to conduct ongoing monitoring to ensure they know their customers, and ensure they don’t engage in a suspicious or illegal activity — and report the activity if they are. For those people familiar with the Bank Secrecy Act (“BSA”), they will recognize that I basically pared down all BSA requirements into one sentence as well. While obviously over simplified, the FinCEN guidance didn’t create new BSA requirements for banking cannabis businesses. Instead, they just took the existing BSA requirements and identified how they applied to cannabis businesses. If cannabis becomes legal, BSA requirements don’t go away, they just revert to traditional BSA requirements. Does that mean a bank can treat them like any other business? I don’t think so. The FinCEN memo identified that the Department of Justice wants to ensure that cannabis businesses don’t sell to minors, fund illegal activities/organizations, or use the marijuana business as a cover for other illicit activities — along with other priorities. Even with cannabis legalization, cannabis businesses will be considered high-risk and the bank will need to develop a compliance program that addresses those specific risks.

A good example of this is hemp. In 2018 the US Farm Bill removed hemp from the definition of marihuana, making hemp legal in all 50 states. With legalization, hemp banking should have been normalized. In July 2020, FinCEN issued specific guidance for hemp accounts. It removed the requirement to file marijuana specific SAR’s, but was concerned that hemp may be a cover for illegal cannabis activities. It requires banks develop a compliance program to specifically ensure that the bank’s hemp customers comply with the USDA or state regulatory regulations. As a result, there are still few banks that will accept hemp customers.

Ultimately, cannabis legalization will remove the legal risk of banking cannabis. The compliance risk may be reduced, but it will remain a burden for banks. This will keep many banks from serving the industry and those who do enter will require high fees.