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Banking and Cannabis: Is it Legal

Client Alert

The following is an excerpt from remarks made at the Arizona/Colorado Bankers Association 2021 Convention: 

Is it legal?  Borrowing an infamous quote from a famous person: “That depends on what the meaning of the word ‘is’ is.”

Marijuana is still a Schedule 1 drug and is illegal under federal law.

However, I am not aware of any federal banking law or regulation, or any other federal law or regulation, which explicitly makes it illegal for banks and other financial institutions to provide their traditional services to state legal cannabis businesses. 

Apparently, neither are any federal bank regulatory agencies. Every bank that I know that is doing business with the industry has done so with total transparency to its federal regulators, often working with their regional offices of their federal regulators in formulating and refining their policies. 

A number of senior federal bank regulators have publicly signaled their recognition. In June 2020, Jelena McWilliams, Chairwoman of the FDIC said:

“We know that banks are banking marijuana businesses, and you know, we can’t bless them and say “go ahead and do it.” But to the extent that you’re doing it because it’s legal in your state, follow the FinCEN Guidance.” 

Rodney Hood, former NCUA Chair and still a member of the NCUA board, is an outspoken proponent of the federal regulators acting, even if Congress doesn’t. In an article published on October 7th, he wrote:

Many people are surprised to learn that credit union and bank financial services providers can do business with the marijuana industry, so long as they observe anti-money laundering laws under the Bank Secrecy Act, practice due diligence and meet other basic requirements.” 

In a September 9, 2021, address, Mr. Hood said:

“Here’s a basic reality: as a rule, regulators really don’t like to get out too far ahead of the policy process.  We always seek to respect the existing statutes and to defer to Congress as the policy-making arm of the government.  However, there are times when an independent regulator in the executive branch needs to step forward to provide leadership, or at least nudge things along.  I believe that’s the case today with marijuana and the financial services industry.”

FinCEN Guidance 

Banks that are providing services to the cannabis industry are doing so in accordance with guidance was issued in 2014 by the Financial Crimes Enforcement Network (“FinCEN”), the arm of the US Treasury Department charged with enforcing the anti-money laundering laws. It is intended to be permissive,” and enabling, articulating key objectives of clarifying “how financial institutions can provide services to marijuana-related businesses” and enhancing “the availability of services for, and the financial transparency of, marijuana related businesses.” 

Unfortunately, it lacks a clear definition of what a marijuana related business (“MRB”) is, although in a footnote it indicated that even a landlord might be so categorized. Although the SBA subsequently tried to elaborate, it’s still less than clear. As a result of the lack of clarity, most banks doing cannabis business apply a very broad brush. 

The Guidance uses the priorities established in a 2013 memorandum by Assistant Attorney General. Notwithstanding the purported rescission of the Cole Memorandum by Attorney General Sessions, its principles were memorialized by the FinCEN Guidance, which remains in effect today, and the Secure and Fair Enforcement Banking Act (the “SAFE Act”) contemplates policy updates by FinCEN.

The Department of Justice and asset forfeiture 

In recent years, the DOJ has shown little interest in prosecuting state-legal marijuana activities or asset seizures. U.S. budget amendments have, for some time, precluded the DOJ from using appropriated funds to act against anyone engaged in state-legal medical marijuana activities.  While the preclusive language of the budget amendment has not been expanded yet to state-legal recreational marijuana activities, there’s no indication that the DOJ is taking a difference approach to those activities. 

I’m neither a litigator nor a criminal lawyer but, since FinCEN is the federal law enforcement agency responsible for the anti-money laundering laws, the prosecution of a financial institution following the FinCEN Guidance seems a pretty long stretch. 

Why should you care? 

First, this is a huge business opportunity. At a time when banks are relatively flush with liquidity, with constrained deployment opportunities, there are tremendous current and growing credit demands from cannabis businesses that are rapidly becoming bankable from a financial perspective. 

Best guesses, based upon limited public information, are that cannabis industry borrowing in 2021 will likely have exceeded $6 billion, and it could be much more. This doesn’t reflect even larger refinance opportunities for the $10s of billions of existing debt, most priced in the mid-teens. 

The demand for borrowing is certain to increase as a cannabis industry continues its explosive growth and more and more U.S. cannabis companies will become bankable. 

Over the next 5-10 years, many, if not most, of states that haven’t done so yet are likely to legalize at least medical, and many, if not most, of the states that have legalized medical, or will legalize it, are likely to legalize recreational markets. The international scene is tracking the U.S. 

Your competition is moving aggressively forward with lending, and this trend will continue whether or not there is any change in the federal law. State chartered commercial banks, Federal mutuals and savings associations, and credit unions are lending, and some of those loans are large 

You can run, but you can’t hide, at least not for long 

As the industry grows, so too will the number of good existing and potential customers who develop businesses and financial relationships that will cause them to become categorized as MRBs, bringing their banks under the ambit of the FinCEN Guidance and its due diligence requirements. 


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