Five Factors Affecting Cannabis Banking

Arkansas voters passed the Medical Marijuana Amendment in November of 2016. Since then, entrepreneurs in the state’s newest industry have been working feverishly on business plans for cultivation facilities, dispensaries, testing facilities and other marijuana-related businesses (or “MRBs”).  The sale of marijuana – either medically, recreationally, or both – is currently legal according to the laws of 29 U.S. states and the District of Columbia. In 2017, legal cannabis sales in those states topped NINE BILLION DOLLARS.  And yet, many of these state-legal MRBs do not have access to bank accounts or traditional financial services.  So what’s going on here and why? And how will this impact Arkansans wishing to purchase medical marijuana?

1. Marijuana is still considered a Schedule I controlled substance under the Federal Controlled Substances Act.  Banks are also federally regulated, which presents an obvious legal conflict, resulting in only a handful of banks across the country that accept deposits from the cannabis industry thus far. This has caused most state-legal markets to transact largely in cash, even giving rise to the cottage industries of cash transportation and security, which have become a significant part of most dispensaries’ operating budgets.
2. Under federal law, banks are required to follow strict regulatory compliance regimes. Under the Bank Secrecy Act and other anti-money laundering laws (“BSA/AML”), banks are required to report all suspicious illegal activity to FinCEN, a division of the U.S. Treasury. Failing to comply with regulations can result in hefty fines for an institution. This compliance burden is a big part of why the vast majority of banks have opted not to bank MRBs.
3. In 2014, shortly after the Justice Department released what became known as the Cole Memos (setting forth law enforcement priorities with respect to state-legal MRBs), FinCEN issued guidance for banks on how to report their dealings with state-legal cannabis enterprises without running afoul of their obligations under BSA/AML.  This guidance doesn’t address the myriad other legal issues that surround the conflict between state and federal law, but it did provide a framework under which a few banks have begun to serve the industry.
4. Before the FinCEN guidance, it was not uncommon to hear of MRBs disguising the true nature of their businesses in order to open bank accounts, or even for them to bank offshore.  Though generally well-intentioned, these strategies could easily implicate business owners in money laundering or fraud.  Even today, many business owners still believe they have no other option, especially if they want to be able to accept payments electronically, which is exactly how the vast majority of consumers now prefer to pay.
5. Attorney General Jefferson Sessions recently rescinded the Cole Memos, further muddying these already-murky waters.  However, the FinCEN guidance for banking MRBs remains in place as of today.  This policy dissonance continues to keep major financial players from serving the industry, including Mastercard and Visa.  The banks and payment companies that choose to work with MRBs are generally smaller, regional organizations.  By utilizing technology to assist with their compliance and regulatory filings, these smaller entities have stepped up to fill the void.  Finally, financial services are becoming available to this high-growth industry, and cannabis cash is slowly being removed from the streets and placed into the banking system where it belongs.
6. Given the current political climate and disjointed nature of state and federal law, Arkansas’ newest industry will need to operate either in cash or through an alternative payment method.  Because Arkansas has a long history of leading the way in financial innovation for the country, it should perhaps come as no surprise that local entrepreneurs are developing new ways of navigating banking challenges for MRBs.
7. MediPays is one such alternative available to MRBs in Arkansas. Much like a health savings account, patients can load money into their MediPays mobile wallet to be spent at participating dispensaries. MediPays has partnered with an established and reputable Arkansas bank to launch its closed-loop payment system where patients and MRBs can transact electronically without the costs and risks of cash. MRBs can use MediPays and its partner to bank their money in an FDIC insured account, pay bills, manage payroll, and create financial reporting.