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Banks still scared of cannabis businesses


Bills heading for Congress could make the budding North American sector bankable for the first time, but it might not be enough to get the biggest lenders comfortable with the risks

The majority of US banks remain incredibly wary of providing services to cannabis or related businesses in the US, despite advancements in federal law that are further legitimising the sector.

The House Financial Services Committee has voted to advance theSecure and Fair Enforcement Banking Act, or the SAFE Act, which could help the financial services sector provide banking services to cannabis-related businesses in the US.

Although cannabis is currently legal in 10 states in the US for recreational use, and 33 for medical use, federally it remains a controlled substance as designated by the Controlled Substances Act (CSA). If passed by Congress and the Senate, the SAFE Act would offer a level of protection for national financial institutions looking to make investments into 'cannabis-related legitimate businesses'.

Estimates suggest that the legal cannabis industry could be worth as much as $30 billion globally within the next four years. One regulatory compliance vice president at a major US bank told IFLR: "With several US states already earning more than $200 million in tax revenue, and New York and New Jersey racing to legalise recreational usage first, attitudes have changes drastically over the past 10 years."

"Attitudes have changes drastically over the past 10 years"

As it stands, US banks are reluctant to engage in any activity with cannabis companies that are operating legally in a given state because of this federal prohibition, due to regulatory concerns. "As a result most large banks in the US are essentially refusing to bank state cannabis companies," said Peter Aziz, senior counsel at Canadian law firm Torys

"This leads to the use of cash. The individuals advancing this are trying to achieve a sense of security, by creating a safe harbour for US banks to be able to bank the cannabis industry without having to worry about refractions by US banking regulators," he added.


  • The House Financial Services Committee has voted to advance the SAFE Act, which could potentially solve issues hindering the financial services sector from banking cannabis-related business;

  • Federally cannabis remains a controlled substance as designated by the CSA). If passed the act would offer a level of protection for federal financial institutions looking to make investments;

  • There are currently a lot of reasons for banks to be wary and avoid the sector, it could have much larger ramifications on the ability to run their businesses;

  • Similarly in Canada there are legally ramifications, despite cannabis being legalised north of the border.

Currently banks are concerned that providing any services to such companies would violate the Bank Secrecy Act, which stipulates that any cash over $10,000 must have a legitimate source. Banks are also required to fill out a suspicious activity report (SAR) for smaller amounts if they believe the funds originate from an illegitimate source.

"The concern for a bank, or any financial institution right now, is that with all the press and fines around money laundering, with banks being fined and investigated even for funds that a client bank has desposited to it, the costs outweigh the gains," said the vice president.

"Even businesses that are not cannabis-related but service them in any way can get into trouble, and present due diligence red flags for banks determining whether to accept products or provide services," he added.

Knowing what businesses are serving cannabis or related businesses is incredibly difficult.

In the US it remains legal to provide such services to these businesses at state level, but not federal, so most banks or credit unions will operate at the state level from a bank cannabis business. As a result many cannabis businesses operate in cash in the US, which is both impractical, and can increase the likelihood of potentially violent crimes.

As part of the liberalisation of cannabis as a whole there appears to be high levels of support in Congress for the SAFE Act, which can be seen as a reflection of how both the House and Senate feel about the legalisation of cannabis.

"In this way Congress can say that it does not fully agree with cannabis being legal at the federal level, but is happy to pass this act because it understands that legally banking cannabis is important for public safety," said Aziz.

"It is an interim step for the public good, without necessarily having to take a political step."

The Cole Memo

During the Obama administration the US Department of Justice issued a memorandum which offered similar protections from the federal laws governing the cannabis industry. The Cole Memo stated that prosecutors should only focus on those parts of cannabis operations that would have damaging effects on the public or incite violent crime.

This was seen as a first step in making the US cannabis sector bankable, until former attorney general and Trump appointee Jeff Sessions rescinded it in January 2018.

However the memo did not fix the issues of bankability. One prominent US banking partner told IFLR that during this period many in the sector remained very concerned about the process of banking cannabis. Statutes of limitations on the federal felony list last for six years, and what may be clear from prosecution one day may not the next.

"When Jeff Sessions revoked the Cole Memo and confirmed that the government was going to prosecute marijuana as it would all other controlled substances under the CSA as a federal felony, it stopped a lot of bankers from getting further into this," he said.

Clearly the trend is heading towards more liberalisation, yet US banks remain suspicious about how to bank cannabis. "They go to regulators to be comforted, but there is not a lot of comfort that they can give," he added. "There is political consensus that it would be better if they amended the CSA and decriminalised cannabis."

"There is political consensus that it would be better if they amended the CSA and decriminalised cannabis"

This is a rare topic that President Trump and Senator of Massachusetts Elizabeth Warren tend to align on, which means the SAFE Act could potentially pass through Congress during this term. Similar sectors like the alcohol industry are making clear strides into the cannabis arena, and it is gaining in credibility and in size. The banking industry remains nervous about making investments because of larger regulatory impacts. In order to be truly comfortable, it is likely going to require some form of legislative protection.

Banks can be written up for anti-money laundering (AML) violations in these instances, which can put them in very hot water. If a bank has orders like this, it cannot be termed 'well managed', which means it cannot engage in certain M&A transactions or branching transactions.

There are a lot of reasons for banks to be wary and avoid the sector. It could have much larger ramifications on the ability to run the business if things go wrong, in what is a very perilous area.

Oh, Canada

Unlike the US, Canada has a fully legal system – which creates further issues. Where one act in the US that was lawful in a US state and under federal law could be illegal in Canada, there are also certain cannabis-related acts in Canada that are legal under Canadian law but unlawful under US law. Even though Canadian law may be generally thought of as more permissive than most foreign laws, there are areas, particularly as regards production and distribution, where Canadian law remains quite restrictive.

“As a result difficult money laundering issues can arise," said Peter Hamilton, partner atStikeman Elliott. “This is because the money laundering offence is based on receiving or dealing in the proceeds of conduct which constitutes an indictable offence in Canada, including most Cannabis related offences, or conduct, which would be an indictable offence in Canada even if that conduct is lawful where it actually took place."

That means that even lawful foreign conduct in relation to Cannabis can give rise to money laundering issues in Canada, if that conduct is unlawful there.

Similarly, if a Canadian lender is lending to a Canadian borrower with a US subsidiary in a cannabis-related business, the Canadian business is required to ringfence the Canadian aspect of the security to ensure that it doesn't take any liability on anything that crosses the border – including shares of subsidiaries outside Canada.

The funds are then segregated into a Canadian account that can only be used for Canadian proceeds of Canadian business, which whitewashes that money.

For Canadian banks looking to invest in US companies, things are even more complex.

"You could have a strange situation where Canadian law is more permissive and liberalised than US law, but in other respects less so," said Elizabeth Breen, also a partner at Stikeman. "If I am lending to a US production and distribution company, which is largely prohibited under Canadian law but in the US is a carry-on activity, the issue goes both ways."

“Some issues are potentially affected in Canada but permitted in the US, and vice versa. Canadian banks can be liable either way for lending to a business which offends US law or Canadian law," she said, adding: "That is not a terribly efficient or practical way to run financings. It is an issue.”

Whether it be the US government issuing legislation such as the SAFE Act that removes the threat of federal prosecution, or cannabis being federally legalised for recreational use nationwide, it is clear that there is appetite for banks and investors to enter the industry in the near future – but that change is needed first.

See also: The green economy