One thing Maine’s legal pot industry can’t bank on: Support of financial institutions

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The inability of Maine’s cannabis-related businesses to access traditional banking services is a huge drag on the industry, but that may be about to change.

Supporters of a congressional push to protect banks and credit unions that do business with legal cannabis growers, sellers, processors and product makers say it would transform the industry in Maine, especially with recreational sales right around the corner.

Under existing law, most financial institutions fear that providing services to cannabis-related businesses could lead to a host of problems ranging from having their federal deposit insurance revoked to being charged with money laundering. Such fears led one of the only two Maine credit unions known to work with cannabis businesses to stop accepting new cannabis-related customers last year.

Maine’s upcoming recreational cannabis industry – expected to dwarf its medicinal counterpart – will have trouble getting off the ground without access to the traditional financing only offered by banks and credit unions, said Corey LaPlante, co-owner and CEO of Portland-based cannabis processing business Governor’s Island Co.

“A lot of the companies need capital to get started, and it isn’t really available,” he said.

The Secure And Fair Enforcement Banking Act of 2019, or SAFE Banking Act, would prohibit federal regulators from terminating deposit insurance or otherwise penalizing financial institutions for taking on legitimate cannabis-related businesses as customers. On Wednesday, the attorneys general of 38 states and territories, including Maine, sent a letter to congressional leaders urging them to pass the bill.

Proponents say encouraging financial institutions to work with cannabis businesses would make the legal cannabis industry less prone to theft, more accountable to taxation and better able to grow and expand. The industry could finally advance from an antiquated cash-based model to modern business practices that include credit card processing and e-commerce, they said.

The House bill recently made it through committee and is expected to get a full vote, while a Senate version has yet to be finalized. The effort appears to have broad bipartisan support, with no major groups speaking out against it. In Maine, U.S. Reps. Chellie Pingree and Jared Golden, both Democrats, have signed on as co-sponsors of the bill, while Sens. Angus King, an independent, and Susan Collins, a Republican, have expressed their support.

AVOIDING RISK

Supporters of the measure in Maine say it is especially important to enable financial institutions to work with cannabis companies before the state launches recreational sales, which is expected to happen by the end of this year. They said forcing the new cannabis storefronts to operate on cash-only sales will promote robberies and break-ins in an industry that some estimates say will produce sales of over $430 million in Maine by 2025.

The bill would not actually legalize cannabis at the federal level, which means banks and credit unions providing services to cannabis sellers could remain exposed to certain regulatory and legal risks. For example, if a cannabis business was found to be operating illegally, it could create repercussions for the bank. Still, the bill would establish protections for depository institutions that provide financial services to legitimate cannabis-related businesses in states where cannabis is legal.

Because cannabis and its main psychoactive ingredient, tetrahydrocannabinol, or THC, are illegal under federal law, most financial institutions have been extremely wary of taking money from companies – even individuals – involved with cannabis and other products containing THC.

“There’s some banks that if they even get a whiff of anything related to a cannabis account, they’ll err on the safer side and close that account out,” said medical cannabis industry consultant Thomas Mourmouras, managing partner at Portland-based Fiscal Therapy Financial. “They’ve made the decision to not take any risk in relation to this industry.”

There is no law explicitly prohibiting financial institutions from doing business with cannabis providers, but there is a catch: They are required to file reports on any “suspicious activity” exhibited by customers, which means banks and credit unions that take on cannabis-related customers must file a report on every financial move those businesses make in order to protect themselves.

Failure to follow those strict guidelines could implicate the bank in any customer activity deemed illegal by regulators or law enforcement. The SAFE Banking Act would eliminate that additional regulatory burden and require regulators to treat the banking relationship with cannabis providers more like it does with any other type of business.

For that reason, an estimated 29 out of 30 financial institutions in states with some form of legal cannabis have decided it’s not worth the trouble, according to Washington, D.C.-based nonprofit public policy group the Brookings Institution. It said one small credit union in Oregon that serves cannabis businesses had to file 13,500 such reports from 2015 to 2017 on roughly 500 customers.

In Maine, only one financial institution – Portland-based cPort Credit Union – openly touts its willingness to work with cannabis companies, although there may be others that do so more discreetly. Bath-based Five County Credit Union used to market to cannabis businesses but stopped taking on new customers from that industry in early 2018 after former U.S. Attorney General Jeff Sessions signaled his intention to reverse an Obama-era policy of ignoring the legal cannabis industry.

Even banks and credit unions that do accept cannabis businesses and their employees as customers generally limit those accounts to basic banking services such as checking and savings accounts, said LaPlante, the Governor’s Island Co. co-owner. One of the biggest problems his business faces is that it’s difficult to hire skilled employees after explaining to them that they likely wouldn’t be able to obtain a home mortgage or other bank loans.

“If you try to even start up an account with (certain financial institutions), they want to know what your sources of income are,” LaPlante said. “Because they are (Federal Deposit Insurance Corp.)-insured, if it has anything to do with cannabis they basically stop the conversation right there.”

THWARTING CRIME

Crime is another problem that the SAFE Banking Act could help alleviate, he said. Cannabis businesses currently have to stockpile two things criminals really like: cannabis and cash.

There already have been incidences of robbery and theft even in Maine’s relatively small medical cannabis marketplace, LaPlante said, and many business owners are afraid to call the police because of cannabis’ ambiguous legal status. He said if cannabis sellers could work with credit and debit card processors, as the proposed law would allow, the risk of crime would be reduced.

“We had our front door kicked in and they stole some product from us over the summertime,” LaPlante said. “We have a couple of other clients of ours that have had their door breached with a couple of guys with guns coming in.”

Maine Bankers Association CEO Christopher Pinkham said many banks in Maine would like to do business with licensed cannabis providers and their affiliates, but that most have determined the existing law does not provide adequate legal cover to do so.

Still, there are plenty of situations in which it is less clear whether the financial institution is putting itself at risk, Pinkham said. One example he cited is accepting deposits from the landlord of a multi-tenant property that has one cannabis business as a tenant.

“We’ve also heard stories of vendors – you know, electricians, plumbers, people in the construction business – who’ve had a contract to put in grow lights, or install water monitoring systems … for indoor greenhouses,” he said. “Well, suppose they have a regular business relationship with a bank or credit union – what does that mean (for the financial institution)?”

Pinkham said allowing cannabis businesses to access banking services also would benefit state efforts to tax those businesses. It is much easier for the state to track sales activity for taxation purposes if the funds are flowing electronically through the banking system rather than being collected and deposited strictly in cash, he said.

“When that’s done electronically, it’s a much more comprehensive audit,” Pinkham said.

NETWORK OF REGULATIONS

Todd Mason, president and CEO of the Maine Credit Union League, said the U.S. Treasury Department issued guidance to banks and credit unions in 2014 that set forth certain due diligence, monitoring and filing expectations for cannabis-related accounts.

The guidance provided an opening for financial institutions to provide services to cannabis businesses, Mason said, but with “significant risks and compliance burdens.”

“Because the guidance is not law or regulation, it could be rescinded at any time, and cannabis remains a schedule 1 drug under the federal Controlled Substances (Act),” he said.

Under the current rules, any financial institution that decides to do business with cannabis providers must be committed to devoting the time and resources necessary to comply with the additional rules, Mason said. Most Maine credit unions are not willing or able to make that commitment, he said.

Mason and Pinkham said most Maine banks and credit unions would only work with the cannabis industry if there were a law on the books that explicitly protected them from future federal policy changes. That’s what the SAFE Banking Act would do, they said.

There is at least one financial institution in Maine that continues to take on cannabis-related customers despite the risks. Gene Ardito, the CEO of cPort Credit Union, said he decided five years ago, with the support of the credit union’s board, to open accounts for cannabis businesses that undergo a lengthy vetting process. He said factors in the decision included the value of medical cannabis to patients and the public safety issues raised by cannabis buyers and sellers carrying large amounts of cash.

Ardito acknowledged that the additional compliance requires significant resources, but he said the cPort staff has become adept and efficient at filing all the requisite paperwork.

“You’ve got to have a significant infrastructure to handle this,” Ardito said.

Mourmouras, the cannabis industry consultant, said institutions such as cPort charge cannabis providers additional fees to cover the cost of compliance. He said another benefit of the SAFE Banking Act is that it would make banking more affordable to his clients.

It also would allow cannabis-related businesses to apply for traditional bank financing, which would help the industry grow, he said. No bank or credit union in Maine currently offers business loans to cannabis providers, leaving them in the hands of private lenders that may charge up to 30 or 35 percent interest.

“Allowing the banks into this would remove the need to go through private equity financing, where those are sometimes predatory interest rates,” Mourmouras said. “At least for the smaller guys, I think it would definitely help having access to fair loans.”

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