Weighing the risks and rewards of cannabis banking

Legal marijuana sales are estimated to reach $92 billion in the U.S. in 2021, a 30% increase from last year, and to climb to $160 billion by 2025. As the cannabis industry becomes more lucrative, marijuana-related businesses (MRBs) have an increased need for traditional banking products. However, current federal laws make capitalizing on this emerging client base an extremely risky endeavor for financial institutions.

Recent developments—including guidance from Congress and regulatory agencies—indicate that banking institutions may soon be able to accept MRB customers. But before proceeding, banks must take an honest look at their appetite for risk. From there, they can begin to chart a strategy that helps build compliance and other processes needed to successfully navigate the legal landscape.

Risks of cannabis banking

While the passage of the SAFE Banking Act would alleviate many of the risks previously associated with cannabis banking, there are ways to engage with an MRB under current guidelines. However, banks should understand the challenges before getting involved in the business.

• Increase in regulatory compliance efforts: The FinCEN guidance requires banks to conduct due diligence on MRBs, including verifying licenses and registration with appropriate state authorities, and requesting information about the business from state licensing and enforcement authorities. Banks with MRBs as customers must stay informed on regulatory requirements in states in which they do business.
• Additional staff and technology: More Suspicious Activity Reports (SAR) will need to be filed. The FinCEN guidance specifically states that, “The obligation to file a SAR is unaffected by any state law that legalizes marijuana-related activity.” Because marijuana is considered a Schedule I drug by the federal government, banking activities related to marijuana must be reported. FinCEN outlines three distinct marijuana-related SARs to address conflict between state and federal laws. Banks can automate much of the BSA/AML process with watchlist screening and software that flags suspicious activities. However, banks will still need someone responsible for filing SARs and responding to the screening flags.
• Separate depository methods: Due to the pungency of marijuana, financial institutions that move forward with cannabis banking should consider a separate depository method to separate MRB-related from that of non-MRB customers. This ensures that customers who are not MRBs do not receive cash that smells like cannabis.
• Reputational risk: Many people have perceptions about marijuana—both positive and negative—that could affect a bank’s perceived image or reputation. In certain regions of the country, it could damage a bank to be known as the “weed bank.” While more federal legislation and more states legalizing MRBs will decrease legal constraints, reputation is a subjective measure that may lead many banks to steer clear of cannabis.

Rewards of cannabis banking

The influx of cash to state economies—and the demand for institutions to handle the large and growing number of MRB transactions—means that for some banks, the benefits will outweigh the potential risks.

For those organizations willing to build a strong MRB risk mitigation strategy, the benefits could include:

• Increased revenue: As the marijuana industry continues to grow, so does the demand for banking services. In fact, MRBs need access to financial services to survive. Financial institutions that get involved in cannabis banking could increase their revenue by attracting MRBs as customers.
• New business partners: Financial institutions that accept MRBs as clients could form and expand business partnerships. This strategy could ultimately assist banks in growing their business and expanding their customer base.
• Competitor differentiation: The cannabis industry provides financial institutions with an opportunity to differentiate themselves from competitors in states where cannabis is legal. This has proven to be especially true in states where there is a large presence of marijuana businesses, such as Oregon, Colorado and California. However, this competitive differentiation can cut both ways. In some communities, it would not be a competitive advantage to be associated with MRBs, and banks need to consider their existing customer base and service area when deciding whether to pursue this business case.

The recent passage of the SAFE Banking Act by the U.S. House of Representatives offers significant promise and opportunity for cannabis banking. However, this sector will always have high-risk factors that make working with MRBs tricky. Financial institutions striving to get involved in cannabis banking must exercise due diligence to effectively mitigate risks.

Guy Cope leads AML and machine learning for CSI’s Regulatory Compliance Group.