In-Depth: Marijuana Businesses Face Up To Payments Problem

By Chris Sieroty

Despite the perception that U.S. legalized marijuana has a payments problem, industry executives and analysts believe an increasing number of financial institutions are quietly opening their doors to the industry.

“I would say instead of unbanked, it’s underbanked,” said Dustin Eide, chief executive of CanPay, a debit-based, digital payments network for the cannabis industry. In total, 33 U.S. states now have some sort of legalization of marijuana.

Eide told attendees at this month’s Power of Prepaid 2019 conference in Washington, D.C. that his company now has approximately 40 financial institutions in its network that are banking cannabis businesses under the federal guidelines.

“If you look at the SARs (suspicious activity reports) filings, the number of institutions banking the business has increased in recent years,” Eide said. “It is growing, but there are markets that are unserved or underserved … and there are markets that are almost entirely banked.”

Adam Crabtree, chief executive of data analytics firm NCS Analytics, agreed, saying that in older markets, including Washington and Colorado, “almost everyone who wants an account can get it.”

Crabtree added, however, that in newer markets — California and Nevada — banking services for medical and recreational cannabis businesses remain much tougher to access.

Cannabis’s status as a schedule-one narcotic means federally-chartered banks, the card networks and the traditional payments ecosystem have stayed away for the most part from an industry expected to be worth between $20bn and $50bn by 2021.

Eide and Crabtree were joined for the 40-minute discussion on navigating the challenges surrounding payments in the cannabis industry by Brian Tate, president and chief executive of the Innovative Payments Association.

A significant challenge comes from the federal level, where cannabis is still illegal, said Eide, adding that it “creates a lot of confusion and challenges when it comes to what is required to bank these businesses.”

To complicate the issue even further, the business of legal cannabis became even more fraught with uncertainty when former U.S. Attorney General Jeff Session ended an Obama administration policy that gave the marijuana business a degree of safety from federal prosecutions.

Sessions’ decision struck down 2013 Cole Memorandum, a policy memo written by Deputy Attorney General James Cole that mostly protected marijuana legal states from federal scrutiny.

The Cole Memorandum instructed U.S. attorneys to focus on drug cartels and cross-border trafficking, not marijuana businesses complying with state regulations.

The memo also established a safe harbor for financial institutions that provide, or intend to provide, deposit and lending services to persons or businesses involved in the marijuana industry.

“One of the things that comes up quite frequently is that there isn’t one bank that doesn’t have one of these businesses as a client, whether they know it or not,” said Adam Crabtree of NCS Analytics. 

That was followed by guidance from the Financial Crimes Enforcement Network (FinCEN) that supported the safe harbor provision for financial institutions, but that due to federal criminal laws required banks providing services to file several special-purpose SARs.

However, Attorney General William Barr has said he will not use federal resources to “go after” companies if they are complying with state law.

During a Senate committee hearing this month, Barr reiterated that he would prefer the U.S. Congress enacts legislation allowing states to legalize marijuana instead of continuing the current approach, under which a number of states have ended cannabis prohibition in conflict with federal law.

Barr added that the Department of Justice (DOJ) is actively reviewing legislation that would provide safety for states that legalize marijuana.

According to FinCEN, a bureau of the U.S. Department of the Treasury, there are 511 financial institutions “knowingly” servicing cannabis businesses.

“One of the things that comes up quite frequently is that there isn’t one bank that doesn’t have one of these businesses as a client, whether they know it or not,” Crabtree said.

Crabtree said the number of financial institutions servicing these companies is constantly growing, but a relatively small number are public about it.

“There is a difference between filing the required SARS and putting a sign on the front of the branch,” Crabtree said.

But there could be legislative relief on the way, including two bills in Congress that would decriminalize marijuana on the federal level, and protect financial institutions that service the cannabis industry.

“Every day, we wake up and with the stroke of a pen our whole business could go away,” said Dustin Eide of CanPay. 

The bill, the Secure and Fair Enforcement (SAFE) Banking Act, was drafted to create protections for depository institutions that provide financial services to cannabis-related legitimate businesses and service provides for those businesses.

Last month, the House Committee on Financial Services voted 45 to 15 to pass the SAFE Act (H.R. 1595), sending the measure to the House floor for a vote.

The other proposal, known as the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, would exempt state-legal marijuana businesses from the federal Controlled Substances Act, and establishes that money obtained from the sale of legal marijuana does not constitute proceeds of unlawful activity.

Barr recently told members of the Senate Commerce, Justice, Science and Related Agencies Subcommittee that he has not specifically looked at the STATES Act yet, but the bill is currently being circulated internally through the DOJ “for comment.”

“Once we get those comments, we’ll be able to work with you on any concerns about the STATES law, but I would much rather that approach — the approach taken by the STATES Act — than where we currently are,” Barr said.

But even if both bills are passed and signed into law, banks and credit unions are expected to remain cautious about servicing the cannabis industry.

“Every day, we wake up and with the stroke of a pen our whole business could go away,” Eide said.

This post originally appeared on PaymentsCompliance.