By Jana Weltzin
Due to the lack of traditional banking services, cannabis business owners are faced with a cash management and security disaster. Cannabis appears to be the only state-sanctioned business whose financing ability is restricted to private individual loans that are usually unsecured and subject to extremely high interest rates. What other market faces this type of service discrimination?
The consequences of such discrimination are a lose-lose for all. The state loses out on potential tax revenue as cash is more difficult to track; states will have to spend more money on police services to deter robberies; cannabis businesses are unable to utilize banking services to track money in and out; they have to expend more money on security and onsite vaults; large stockpiles of cash at the businesses puts employees at risk of being a target for criminals; and banks lose out on a substantial amount of business. Also, because the opportunities for traditional lending services are nonexistent or very limited, private individuals who do loan funds to cannabis-related companies could easily have connections to crime groups or motives that implicate the Cole Memo priorities. Therefore, the federal government is undermining its own priorities by restricting the ability of cannabis companies to do business with regulated financial institutions.
Is there a solution? Not yet, but hopefully soon.
Under the dual federal and state banking system, a credit union can generally choose a federal charter or a state charter from a state credit union regulator. Theoretically speaking, a credit union that chooses a federal charter must follow federal law and a state-chartered credit union must follow state law. Now, given this distinction the answer would be simple, right? Cannabis businesses should only do business with state chartered credit unions. Unfortunately, it’s not that simple. In a perfect, truly dichotomous world this would solve the banking issue, but in reality, state and federal financial institution regulators do not operate completely separately and it is common practice for federal and state regulators to coordinate their enforcement efforts. Additionally, state financial institutions almost always utilize some federal benefit that subjects them to federal regulation.
State-chartered financial institutions often utilize the federal deposit or share insurance, and/or become members of the Federal Reserve System. Federally chartered credit unions are regulated by the National Credit Union Administration, while state-chartered credit unions are regulated at the state level. Although not formally part of the Federal Reserve System, these institutions are subject to system regulations, including reserve requirements. Therefore, even state and federally chartered credit unions can become subject to the Federal Reserve’s requirements if the credit union opts to utilize the reserve’s benefits (subject to certain requirements and restrictions), such as the centralized check collection system that state financial institutions obtain security and benefits from, and/or becoming a member of the Federal Reserve. Both subject state institutions to federal regulation. The Federal Reserve provides vital payment services, such as a centralized check collection system and coin and currency services.
State financial institutions often utilize a federal bank holding company due to a variety of tax and business structure benefits. Currently, approximately 80% of all banks are controlled by holding companies (Board of Governors of Federal Reserve System, 100th Annual Report 281). Federal bank holding companies are subject to federal regulations pursuant to the Bank Holding Act of 1956.
The point is that the federal government has made itself indispensable to state financial institutions, tying essential banking services and benefits with strings to federal regulations. A state financial institution would have to forego pillars of the banking structure to avoid federal regulation and would be unable to provide a whole host of necessary banking services. Between the “coordinated” dual enforcement efforts, federal deposit insurance, federal holding company regulations, and federally administered payment systems, it is clear federal oversight is prevalent even in state-chartered credit unions, which leaves cannabis banking possibilities severely restricted.
To fix this issue, the cannabis industry either needs to change federal law, or support a state financial institution (likely a brand new financial institution) that does not partake in any of the federal services or memberships identified above. Banking at such an institution would not be without its risk — it’s likely to not be insured or to offer all the checking, wire and currency services that are basic at most institutions. However, such a bank would likely be successful and heavily utilized in markets where cannabis legalization has occurred, prompting other financial institutions to put substantial pressure on federal lawmakers so that they can get a piece of the cannabis banking action.
Jana Weltzin is a member of Rose Law Group’s medical marijuana and zoning/land use departments. She advises clients in the cannabis industry in Arizona and Alaska. Rose Law Group assists its clients with business structure, compliance with state and local laws, zoning approval and use permits, site selection, and product regulations.