Since the legalization, banking has been a major headache for many people in the cannabis industry. Whether you own a dispensary, or have an ancillary business, it seems as though many hit the roadblock of not being able to open a bank account for their business because just the act of mentioning that the business is in the cannabis industry becomes troublesome. Even if cannabis is not their main business, the fact that they support cannabis can place them in the category of being a “cannabis” business.
The fact that the states and the federal government have opposing laws has plagued cannabis operators and supporters, making their business difficult and costly, often requiring them to fully operate in cash. Many banks make it hard to deposit cash into accounts as a way to combat money laundering, and other illegal activities, but that also makes it harder for legal cannabis operators as well, placing them in the middle of the fight between the local and federal government. It is legal cannabis operators and supports that are paying the price.
As more states join the rush to the legalize cannabis the federal government is, unfortunately, not in a rush to legalize cannabis, and has yet to remove it as a Schedule 1 Drug. As a result, there are numerous restrictions placed on legal cannabis operators, as they still have the difficult task of finding a banking option.
Banks have cashed in by increasing fees on depositing cash, profited off individuals in the industry, and many industry businesses have been forced to find alternatives to traditional banking methods, which sometimes border on money laundering.
To fully understand this, we must take a deep dive into the true definition of money laundering. The term “money laundering” refers to a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly obtained money.
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The money laundering process can be broken down into three stages: (1) placement, (2) layering and (3) integration. Since federally chartered FDIC banks are governed by federal law it makes it difficult to be able to bank in cannabis, even if the business is in a green state (states that have legalized cannabis).
Due to the way the banks define money laundering, if anyone opens a simple business account and during the “KYC” (know your customer) process and does not disclose the legal nature of their business they can be convicted of money laundering. Ultimately their banking relationship can be terminated, and they can be reported to the federal government by what is called a “SAR” (suspicion activity report). This report can travel the chain of government watch firms like the OCC, OFAC and FinCEN and can sometimes end up on the list that the government created under Operation Choke Point. Once added to this list it can be virtually impossible for that person to open any bank account, personal or business!
Over the years, more and more states have been working with banks and devise procedures to allow cannabis business owners to find banking solutions, however most are not affordable and have a lot of restrictions, forcing many business owners to fully operate in cash.
However, operating in cash has its challenges as well. They are high targets for theft and robbery, and paying basic bills can be challenging, as it is hard to take in cash and disburse payments to cover basic expenses such as payroll, bills and even taxes. This has become dangerous, as many cannabis operators must physically take money to the treasurer’s office and make their payments in cash!
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The headaches for many cannabis business owners don’t stop there. Many report difficulties finding credit card processing solutions, or even viable insurance products or loans to start or scale their business, as vendors either aren’t allowed to do business with them or, if they do, they take advantage with high costs and complicated application requirements.
Many founders and operators have had to resort to creative solutions to operate their businesses, oftentimes breaking the rules of banking to find affordable solutions. Even so, they are often short lived, as banks eventually find out and shut their bank accounts down.
As a result of the growing nature of the cannabis businesses in green states, many banks and financial institutions have gotten smarter at recognizing people in cannabis businesses and often exiting the relationships and holding their monies for up to six months, causing major financial problems for operators.
How can legal cannabis operators protect themselves? That is the burning question in this challenging time, as the states and the federal government work together to find a solution to allow cannabis operators operate legally while still placing provisions to protect themselves.
Our advice: If you are an ancillary business (a business that supports cannabis, but doesn’t touch the product, such as an accounting firm or a marketing firm) make sure your business classification is accurate when you open an account. Make sure that the bank has your proper NIAC code entered, and make sure your banking is in line with your business.
Also know that banks will always do a second check after you open an account and, if your activity level changes significantly, banks will submit a SAR’s report and their compliance team will take a closer look at your business. This could include your website, social media or any other online mentions or names. If anything has any ties to cannabis–this could include mentions of cannabis, or even pictures or reviews–your accounts could get flagged. That is why reputation management for your business is crucial!
For a new account holder, a bank will typically monitor the account for the first sixty to ninety days. Ensure that your activity in those times is that of what your businesses NIAC code is so that your accounts don’t get flagged. Remember, banks want your money, but they will not risk their charter, their license and FDIC status just to keep your business.
Once your account is more seasoned, make sure your activities are in line with your business. Try to avoid large cash deposits, as this could cause currency transaction reports and, if a bank sees that you are depositing cash which is not typical for the type of business that you are doing, it could cause the banks compliance team to take a deeper look and ultimately could have you exited, leaving you without a bank account.
It’s also best practice to have multiple bank accounts. I have always believed that sticking to one bank is a mistake, as your entire business is at the mercy of one bank, which can be dangerous if your accounts get flagged. If your accounts get flagged, your bank accounts can be frozen, leaving you with no access to your money.
If your business is purely CBD, then there are more solutions available as more banks and credit card processors are allowing for CBD businesses to do bank with them. Square has a program for CBD businesses and will allow CBD brands selling e- commerce products to take in credit cards and integrate with websites to launch CBD businesses.
Slowly things are turning around, and even dispensaries can find banking solutions. There are now several credit unions which allow dispensaries to bank with them, although they have limits on the number of cannabis customers they can take in because of the reporting requirements that must be done to keep them compliant.
Banks can face hefty fines for not properly reporting your activities, which is why they are always cautions when bringing in new customers.
Even if the federal government legalizes cannabis on a federal limit banks won’t be rushing to change the rules for cannabis operators, as the reporting restrictions will make it costly for them to be compliant and avoid fines. What will ultimately happen is more and more smaller banks will voluntarily take the risk and ultimately create a robust system for reporting and monitoring money movement to ensure they don’t get fined or, worse, have their banking charters suspended or revoked.
Neema Mahdavian is an experienced entrepreneur with ventures in cannabis marketing, tech, crypto NFT Marketplace and several other ventures in the educational and chemical manufacturing space. He started his career in finance, with a background in banking and corporate finance. He has also dabbled in politics and currently resides in Los Angeles and San Francisco, Neema has a passion for doing what is right and being a part of the solution.
