Compliance Blues are Preventing U.S. Banks from Getting the Green
By Mike Sanchez, theBluntness Finance Writer
The lack of clarity around the Federal Government’s policy toward recreational and medical cannabis remains a source of confusion for companies in this dynamic and rapidly-growing space. The challenges this ambiguity creates for entrepreneurs have been well-documented, but let’s take a look at how it affects financial institutions like banks.
Proceed with caution
The federal government has provided some high-level guidance on banking requirements such as the recently rescinded Cole Memorandum and the Treasury Department’s FinCEN Guidance on banking marijuana, state that banks are allowed to work with cannabis businesses, so long as they file the necessary reports, like SARs (suspicious activity reports) and comply with a dense set of regulations.
But the reporting requirements are riddled with ambiguities, making it hard for financial institutions like banks to understand how to stay on the right side of the law.
For example, banks must file SARs for any customer depositing funds they believe to be “derived from illegal activity.” While this is obvious for businesses such as cultivators and dispensaries that “touch” the cannabis plant, deciding whether a SAR is required gets very tricky the further down the rabbit hole you go.
If a large real estate management company with more than 500 units of office space rents to just one dispensary, should the bank flag the real estate company with a SAR, even though less than 1% of its income comes from cannabis sales? Or how about agencies and legislative offices in states like Colorado, that deposit funds derived from cannabis taxes -- does the bank flag them with SAR?
As a result of this confusion around what’s legal, what’s not and what they may be liable for, many banks have chosen to avoid this high-growth industry -- avoiding risks -- but cutting themselves off from a potential new source of revenue which New Frontier Data predicts will grow to $25B nationwide by 2025 with a compound annual growth rate of 14.7%.
Braving the risks for new rewards
Banks brave enough to navigate this complex web of requirements often must increase their manpower to handle compliance paperwork and documentation for cannabis businesses, so as to not drop the ball on identifying other potential suspicious activities such as traditional bank fraud.
Bank tellers, for example, in the sake of “knowing your customer” now need to be educated about how to spot marijuana-related businesses that may be masking themselves as something else - ie is this “essential oils” company secretly selling or using CBD?
Due to the limited legal banking options available, cannabis businesses have adapted by either hiding the true nature of their businesses or resorting to cryptocurrencies such as PotCoin. The problem with both approaches is that they don’t solve the banking problem, preventing them from transacting with payment platforms and others in a traditional manner.
The limited number of legal banking options for MRBs have lead some to pursue a “gray market” for financial services, including cryptocurrencies, as well as finding creative ways to conceal the nature of their businesses.
But technology is actually driving an increase in legal financial options. Hypur, a Scottsdale-based fintech startup, is one such example. By providing technology that allows banks to collect and verify point-of-sale data from dispensaries, Hypur is able to help banks alleviate any concerns of money laundering.
A winding path forward
The ultimate reprieve will need to come from Washington in the form of clear, concise guidance and/or Federal legalization, as differences between compliance from state-to-state are still creating confusion.
Once the banking issues are sorted, there are significant benefits to be realized for all parties -- increased tax revenue for states and the federal government, growth for banks able to tap a new industry, and cannabis businesses finally gaining access to the same financial services as others.
Most industry experts conclude that we’re relatively far away from a Federal consensus or blanket legalization, though this does not mean all hope is lost for cannabis businesses who are presently hoping to bank. As it stands now, cannabis banking is possible -- it’s just daunting.