Wed Apr 21, 2021 | | Banking Relationships, Cannabis, CFO Services

What You Need to Know About Cannabis Banking


cannabis banking

If you own a cannabis or hemp-related business or are looking to start one soon, you should learn about the ins and outs of cannabis banking.

Because marijuana use and distribution are illegal at the federal level, cannabis businesses often have trouble partnering with banks and other financial institutions. Currently, only a little over 700 out of the 12,000+ banks in the U.S. serve marijuana businesses, and the ones that do tend to have strict approval processes and hefty fees.

Read on to learn everything you need to know about banking in the cannabis industry.

Significant Challenges to Cannabis Banking

The Controlled Substances Act (CSA) bans the manufacturing, distribution, and dispersion of marijuana under federal law. However, 36 states as of April 2021 have legalized cannabis for medical use, and 15 of those (plus Washington, D.C.) also permit recreational cannabis use.

This federal ban and these conflicting state policies provoke confusion and hesitation among banks across the United States. Many banks avoid conducting business with cannabis companies as the risk to them outweighs the benefits. Some banks have even lost their master accounts with the Federal Reserve after taking on marijuana-related clients.

What’s worse, any funds that banks collect from cannabis businesses could be considered laundered, giving the federal government the right to seize them. As a result, banks and cannabis businesses often hesitate to do business with each other, giving marijuana businesses no choice but to conduct business using cash, putting them at greater risk of theft.

Regulations for Banks and Credit Unions Serving the Cannabis Industry

In recent years, federal and state policies have slowly advanced the ways financial institutions can service cannabis-related businesses.

FinCEN Guidance

In 2014, the Financial Crimes Enforcement Network (FinCEN) issued guidance to financial institutions and law enforcement officials about how to interact with cannabis companies. This policy clarified that each bank has the right to decide whether to open or close an account or provide other financial services to a cannabis business.

The banks that do provide banking services to the cannabis industry must determine the objectives, associated risk, state licenses, and financial activity of each business before approving an account.

Most legal cannabis businesses that land an account with an accredited financial institution go through time-consuming approval processes and must maintain precise, rigid financial reports. Hiring a CFO to track your business’s financial and accounting processes along with internal controls could give you a better chance of securing bank accounts with institutions down the line.

Currently, no banks that have complied with the above FinCEN guidance have received penalties for their marijuana-related partnerships. However, many banks are still hesitant to provide their financial services to these related businesses, making it challenging for hemp companies and cannabis companies to achieve financial security.

Suspicious Activity Reports

If a financial institution decides to provide services to a dispensary, cultivator, or related company, it must agree to file a suspicious activity report (SAR). SARs provide more information about a client and allow banks to report any suspicions that a transaction involves illegally obtained funds, evades Bank Secrecy Act regulations, or lacks an apparent lawful purpose.

The SAFE Banking Act

The Secure and Fair Enforcement (SAFE) Act first came on the scene in 2019. This legislation has since gained approval from the House and may be on the road to Senate approval. If passed, the SAFE Act would allow financial establishments to provide their services to hemp and cannabis businesses that have legalized the plant for medicinal or recreational use without fear of penalty from federal enforcement.

It is unlikely that this legislation would move forward should Congress not approve the MORE Act. This law would remove cannabis from the list of prohibited substances in the Controlled Substances Act. However, many people suspect upcoming reform for federal hemp and cannabis legalization policies.

Colorado House Bill 1217

Colorado is a leading state for the cannabis industry. In September 2020, the state published a bill that allows any state-chartered bank or credit union to loan money to licensed retail or medical marijuana companies. This bill is paramount for the cannabis industry and hemp industry to transition from a cash only business to a secured payment method. 

Banking with Credit Unions

Many hemp & cannabis companies choose to conduct their banking with credit unions instead of banks. While the number of banks that service hemp and cannabis companies has declined in recent years, credit unions across the country have steadily increased their marijuana- and hemp-related clients.

The National Credit Union Administration (NCUA) recently released an article with guidance and FAQs about providing financial services to legal hemp companies. The NCUA sought to improve confidence about servicing hemp-related clients and clarify the risks involved in these activities.

Final Thoughts for Hemp Companies

If you own a cannabis or hemp distribution or manufacturing company, or if you are a cannabis cultivator, grower, or producer you may struggle to gain access to financial support from banks. Even though legal reform and promising bills have made news headlines recently, many cannabis companies still utilize cash-only transactions and fear theft due to their lack of financial security,  support, and internal controls.

Currently, the best way to open a bank account as a cultivator, distributor or manufacturer of cannabis and hemp is to be able to provide ample evidence of your licenses, legal sales practices, and financial activities to those banks that are currently working with the cannabis industry. Having this documentary evidence will be key in finding a banking relationship, just be sure to expect to pay hefty banking fees until more pro cannabis legislation is passed. 

Contact CFO Strategies Today

Another way to prove your legitimacy to a bank is to provide detailed financial records and reports of all of your transactions. Hiring a CFO accounting team to manage your finances is the best way to ensure your records are up to date and to show credibility with banks and financial institutions. 

Our CFO team has the cannabis industry and hemp industry knowledge and experience necessary to provide the best financial solutions for you and your business. Contact CFO Strategies today at 732-236-4454 to schedule a consultation and free business review with our team.