Cannabis and banking: An ongoing impasse for U.S. pot businesses

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One of the biggest dilemmas facing America’s legal cannabis industry is the reluctance by most financial institutions to work with pot businesses.

That avoidance is due to the U.S. federal government’s prohibitions on cannabis. And the federal illegality of cannabis has made banks, credit unions and other financial firms shy away from cannabis companies, out of concerns they could open themselves up to federal prosecution.

As a result, most cannabis companies transact business on a cash-only basis; a situation that makes these businesses vulnerable to robbery, money laundering and other criminal acts.

“Whether you’re for or against legalization, everyone agrees it’s terrible to have this multi-billion-dollar, cash-only business,” said Sam Kamin. He’s the Vicente Sederberg Professor of Marijuana Law and Policy at the University of Denver’s Sturm College of Law.

“You want to be able to see the money, know where the money goes, have a paper trail,” he told 420 Intel. “Everyone agrees on that: the businesses, the regulators, law enforcement. But we’re years and years into this (cannabis legalization) experiment and we’re not there yet.”

Progress…and obstacles

Meanwhile there are only mixed signals about whether the U.S. cannabis industry’s banking predicament might be resolved in the near future.

A report released this summer by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) said nearly 450 banks and credit unions in the United States were “actively banking” marijuana businesses – up from 340 at the start of the Trump Administration.

Earlier this month the Massachusetts-based GFA Federal Credit Union, established 80 years ago in to serve French-Canadian immigrants, said it plans to start serving the state’s recreational cannabis businesses starting in October.

“We’re looking at a cannabis business as a legitimate business that wants to be recognized as such and that, without banking services, presents a tremendous public safety issue in our communities,” Tina Sbrega, GFA’s President and CEO, told the Boston Globe. “Otherwise, you’re talking millions and millions of dollars of cash on the street.”

But state and federal legislators remain an obstacle.

This past August, lawmakers in California set aside a proposal to create state-chartered banks for California’s newly-legalized recreational cannabis sector.

State legislative analysis, quoted by the Los Angeles Times, said the proposal would not guarantee such state-chartered banks any protection from federal law enforcement – being that the measure would concentrate “cannabis business assets into one or several easily identifiable institutions.”

California state senator Bob Hertzberg, who proposed the bill, also pointed towards the public safety and law enforcement crisis created by having an all-cash cannabis business sector.

“We’ve got barrels of cash buried all over the state, businesses being ransacked,” he told the Times, “and it’s clear that the federal government won’t act. It’s a shock to me that the state government may not act this year either.”

This past June, both the House and Senate Appropriations Committees rejected measures that would have protected financial institutions that offered services to pot businesses in cannabis-legal states.

Fourth Corner Credit Union: A Hard-Earned Lesson

Mark Goldfogel, who helped to launch the Fourth Corner Credit Union in Colorado several years ago, knows the obstacles that government can impose.

Fourth Corner was established in 2014, with the mission of becoming the first financial institution to support the hemp and cannabis movement. It received a state charter from Colorado and appeared to be on its way.

But the Kansas City Federal Reserve Bank, which has jurisdiction over Colorado, would not approve a master account for Fourth Corner.

Fourth Corner sued the Kansas City Fed. The lawsuit said that without access to a master account, the device that allows credit unions and banks to interact with each other, “A depository institution is nothing more than a vault.”

Earlier this year, after much legal wrangling, the Kansas City Federal Reserve Bank conditionally granted Fourth Corner a master account – but on the understanding that the credit union could serve only ancillary cannabis businesses, and not those cultivators, manufacturers and others companies who “touch the plant.”

Because of all that, Fourth Corner is back at square one, and still has yet to open.

Goldfogel told 420 Intel that legal obstacles, along with the threat of federal prosecution, are more than enough to discourage most financial institutions from entering into the legal cannabis sector.

“The federal government is very effective with a letter,” he said. “They don’t need to go to court. One letter to a financial institution saying, hey, we don’t like what you’re doing, is more than enough for a financial institution to weigh the risks against the rewards and to pull out of the industry.”

A lost opportunity for US cannabis?

The University of Denver’s Sam Kamin also has his doubts about whether the credit union in Massachusetts will be successful with its plans to serve the local cannabis industry.

“It’s possible these folks have the secret sauce that will make that work, but I’d be surprised,” he said. “The person that figures it out can make a lot of money. I’ve been pitched scores of ideas, everything from bitcoin to state charters to savings and loans. Nothing so far has broken this logjam.”

For decades cannabis has been classified as a Schedule One drug on the federal Controlled Substances Act. That means cannabis is considered as having “no currently accepted medical use and a high potential for abuse.” Other Schedule One drugs are heroin, LSD, ecstasy and peyote.

Goldfogel said that until Congress reschedules cannabis and allows pot businesses access to banking, the U.S. will continue to lose its share of the international cannabis market.

“Not only Canada but all the other countries that are coming forward and stepping up to solve this problem responsibly, (they are) in commercially advantageous positions over the United States,” he said. “The U.S. needs to take an adult approach to solve this problem.”

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