Community banks are still in limbo on cannabis

Cannabis has been legalized in some form in 47 states despite being a controlled substance at the federal level.

For financial institutions, banking cannabis-related businesses remains in legal purgatory due to conflicting state and federal laws. But some banks are making the business case for banking these customers before federal protections are put in place.

By Judith Sears


Conflicting federal and state laws are keeping the banking of cannabis-related businesses (CRBs) in limbo. As of this writing, 47 states and Washington, D.C., have legalized cannabis use in some form, but banks that handle accounts for these businesses have no legal safe harbor on the federal level, where cannabis is still illegal.

In February 2019, Greg Deckard, president and CEO of $145 million-asset State Bank Northwest in Spokane, Wash., testified before the House of Representatives Committee on Financial Services and Subcommittee on Consumer Protection and Financial Institutions about the risks that financial institutions face when banking cannabis-related businesses.

Deckard notes that State Bank Northwest does not bank cannabis-related businesses, either directly or indirectly. However, refusing to do business indirectly with these businesses can still lead to risk, he says. “If an employee of a marijuana processor comes in and wants a car loan, we aren’t going to be able to provide that,” he explains. “Such an individual also can’t get federally insured mortgage loans.”

Quick stat

$28 billion

The estimated value of the current U.S. cannabis market if it were legalized

Source: Barclays

In his testimony to lawmakers, Deckard emphasized the problems created by the ambiguity of what counts as a cannabis-related business. “How many levels down must banks go to determine if an electrical company provides power to a retail cannabis shop?” he asks. “That’s what I tried to hammer home in my testimony.”

Nevertheless, some banks do provide banking services to cannabis-related businesses. “They’re looking at this issue from a local perspective, and no one is better able to do that than a community banker,” says Aaron Stetter, ICBA’s executive vice president of policy and political operations. “Sure, they have some discomfort, but they are making the determination that these businesses should be allowed access to the banking system based on what’s best for the bank, its community and its customer base.”

Stetter adds that community banks that service cannabis-related businesses follow Financial Crimes Enforcement Network (FinCEN) guidance and seek additional input from their state banking regulators.

Cannabis-related compliance

Banks that choose to bank CRBs will have to add to compliance staff to cope with the regulatory uncertainty. “The average of the banks that I’ve talked to in my state and throughout the country is probably about six accounts per one full-time equivalent employee,” Deckard says.

Twin City Bank, a $55 million-asset community bank in Longview, Wash., began handling cannabis-related accounts in 2014, shortly after cannabis was legalized in Washington. Neil Zick, Twin City Bank’s president and CEO, reports that his community bank started with 10 cannabis-related business accounts but now handles nearly 50.

Zick says he’s comfortable with the approach of FDIC regulators, who have gradually asked for more documentation and more due diligence. “Right now, they are monitoring this as a high-risk BSA [Bank Secrecy Act] situation,” he says. “In my opinion, they’re not unreasonable in what they’re asking for.”

Despite the legal uncertainty, a 2018 FinCEN report concluded that more banks are handling cannabis-related businesses. However, some industry observers point out that the report’s conclusion was based on an increase in filings of Suspicious Activity Reports (SARs), which, they argue, may reflect more filings by banks already servicing cannabis-related businesses, rather than an increase in banks handling accounts for such businesses.

“It’s hard to say, because banks don’t advertise that they’re engaging with cannabis-related businesses,” Deckard says. “It may well be that they are filing more SARs and CTRs [currency transaction reports] as a defensive measure.”

According to Stetter, most community banks seem to have a “wait and see” attitude. “Cannabis is still a Schedule I drug,” he says. “Until that is addressed or an effective safe harbor is recognized by statute, the risk for the overwhelming majority of community banks will be too great to bank this industry.”

The state of the SAFE Banking Act

Introduced in March 2019, H.R. 1595, the Secure and Fair Enforcement (SAFE) Banking Act, aims to provide safe harbor to depository institutions dealing with legal cannabis-related businesses (CRBs).

If it were signed into law, the SAFE Banking Act would prohibit federal banking regulators from taking actions against banks that provide financial services to CRBs and protect them from liability under federal law.

Most importantly, the act stipulates that banks are under no obligation to provide financial services to CRBs. “That’s huge,” says Greg Deckard, president and CEO of State Bank Northwest in Spokane, Wash. “There are other risks associated with CRBs, such as compliance and reputation risk. If it doesn’t make a business case for an institution, we don’t want to be told we have to do it.”

ICBA was the first banking trade organization to support the SAFE Banking Act. However, Stetter emphasizes that ICBA does not advocate and has not taken a position on the legalization of cannabis. ICBA advocates for a safe harbor for banks in states where cannabis is legal. The SAFE Banking Act passed out of the House Financial Services Committee on a bipartisan vote. Stetter expects it to pass through the House on a strong bipartisan basis, too. The picture in the Senate is less clear.

But support for the act is growing, with several trade associations backing the legislation. In addition, top financial regulators from 25 states have written to Congress expressing their support. Pressure is building for a legal resolution of the current stalemate.


Judith Sears is a writer in Colorado.

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