The Complicated Relationship Between Cannabis Dispensaries and the Banking Industry
Law Office of Jin KimFree Consultation
Since cannabis use began to be legalized in several states across the United States, it has straddled the uneasy fence between legality and illegality. Yes, cannabis might have been legalized in some states, but there is a whole legal history of laws, rules, and regulations where cannabis was considered illegal; and you don’t just wipe out all those laws by yet another law – and state law, at that – that permitted cannabis use. It is where those various laws smackheads together that create challenges to the cannabis industry. And one of those legal vs. illegal points of impact is the treatment of cannabis businesses by the banking industry.
Most cannabis businesses nowadays are cash-based. The majority of banks are wary of issuing accounts to cannabis businesses and dispensaries, and the reason for this is two-fold:
Schedule 1 Drug
- First, marijuana is still classified as a Schedule 1 substance under the Controlled Substances Act.
There are five categories of substances under the Controlled Substances Act, and Schedule 1 substances are deemed to have “no accepted medical value and a high potential for abuse.” Schedule 1 substances are, among the five categories of substances, treated as the most dangerous, and marijuana is ranked right alongside other illicit drugs such as heroin, LSD, ecstasy, and peyote.
In effect, Schedule 1 substances are, at least under federal law, not approved for medical use, and prescriptions for their use are not allowed to be written. So, what does that have to do with the banking industry? Well, by engaging in transactions involving the proceeds of what is deemed “illegal activity,” (and cannabis is still technically considered an “illegal substance” under the Controlled Substances Act) opening the doors to the marijuana industry puts the banks that do so right in the line of fire of possible federal charges of money laundering.
- Second, banks can be penalized by the Federal Deposit Insurance Corporation (FDIC)
The FDIC law has caused banks to be wary of opening accounts for cannabis businesses for several reasons. First of all, the FDIC requires member banks to implement an anti-money laundering program that includes identifying and reporting suspicious transactions, where “suspicious transactions” include funds or assets derived from “illegal activities.” This reporting requirement is pretty stringent, and requires, among other things, ongoing monitoring and updating of customer information, including the implementation of internal controls and risk-based procedures to ensure compliance. Again, under federal law, marijuana is still classified as an illegal substance, and therefore proceeds from a cannabis-based business could technically be considered “suspicious transactions.”
Secondly, the FDIC Law penalizes financial transactions involving the proceeds of unlawful activity, as well as engaging in “unsafe and unsound practices.” The penalty could include hefty fines, criminal charges against individuals, and perhaps even the withdrawal of the bank’s FDIC membership. Straddling that line by granting bank accounts to cannabis businesses which, while legal at the state level is still considered illegal at the federal level, might just be deemed “too risky” by many banking institutions, given the possible repercussions.
That said, there are a few banks that have offered services to cannabis businesses, but such banks are in the minority. Hence, a lot of cannabis businesses have had no choice but to operate as a cash-based business. And it seems as though things will remain this way – at least until some clarity is achieved regarding the legal or illegal status of marijuana – enough to inspire some confidence in the banking industry that they can lawfully offer their services to the cannabis industry without suffering any backlash, or until guidelines for a serviceable compliance program is issued that would allow banks to minimize their risks through compliance.
This will likely take some time, which means that, at least in the current state of affairs, cannabis businesses will have to operate as cash-based businesses. But doing so also carries its own risks and complications – not the least of which is compliance with federal tax laws.
–Jin Kim. Attorney Jin Kim practices cannabis tax law in Sacramento, CA. She helps cannabis businesses resolve federal, state, and local tax debt.