By Paula Durham, CFE, CCCE

Despite still being federally illegal as a Schedule I controlled substance, at least for now, 38 U.S. states and the District of Columbia have legalized the sale and use of cannabis for medical and/or recreational purposes.¹ Both direct and indirect cannabis-related businesses (CRBs) continue to grow at a rapid rate in many states. Revenue from medical and adult-use cannabis sales in the United States is estimated to reach $32 billion in 2024 and is forecast to reach nearly $60 billion in 2030.²

Because cannabis is illegal federally, financial institutions face a dilemma when deciding to provide services to CRBs. Do they take significant legal risk and work with these companies or stay out of the market and miss out on a significant revenue opportunity? For the most part, financial institutions have been unwilling to take the risk, but times are changing.

This article discusses the banking trends among cannabis-related businesses, particularly the complexities of using cash, the shifting federal landscape, Congressional actions impacting banking and CRBs, and how banking is changing. The explosion of state legalization of cannabis has touched many industries, both directly and indirectly. Understanding the implications of doing business with a CRB is both challenging and necessary.

Federal Law vs. State Law

In 1986, Congress enacted the Money Laundering Control Act (MLCA) that made it a federal crime to engage in certain financial and monetary transactions with the proceeds of “specified unlawful activity.”³ Due to its Schedule I status, CRB transactions are technically illegal transactions under the MLCA.

Financial institutions, therefore, risk violating the MLCA if they choose to do business with CRBs, even in states where cannabis operations are permitted. In addition, financial institutions could also face criminal liability under the Bank Secrecy Act (BSA) for failing to identify or report financial transactions that involve the proceeds of cannabis businesses operating legally under state law.⁴

States began legalizing cannabis in 1996, and by 2009 13 states had laws allowing cannabis possession and use.⁵ Aggressive enforcement of federal cannabis laws changed under the Obama administration when, shortly after being elected, President Obama stated that his administration would not target legal CRBs that abided state laws.⁶ In 2009, the Department of Justice (DOJ) issued three memos designed to guide federal prosecutors in this area, but none of the DOJ memos issued from 2009 through 2013 address the potential financial crime related to the legal sale or distribution of cannabis in states allowing the use of medicinal or recreational cannabis.

To assist financial institutions, the Financial Crimes Enforcement Network (FinCen) issued guidance in 2014 that clarified how financial institutions could conduct business with CRBs and maintain compliance with their Bank Secrecy Act requirements (2014 Guidance).⁷ According to the 2014 Guidance, financial institutions may choose to interact with CRBs based on factors specific to each institution, including the institution’s business objectives, the evaluated risks associated with offering such services, and its ability to manage those risks effectively.

The 2014 Guidance requires those who choose to provide services to CRBs to design and implement a thorough customer-due-diligence review that includes, in part, analyzing the licensing of the entity, developing an understanding of the business operations of the entity, and ongoing monitoring of the entity.⁸ In addition, financial institutions are required to file a Suspicious Activity Report (SAR) for every transaction they process for a CRB should they choose to accept the business.

Although the 2014 Guidance does outline a path for financial institutions to engage with CRBs, it does not change federal law. Thus, it does not eliminate the legal risk to financial institutions.⁹ The DOJ’s enforcement posture, however, is changeable, depending on each administration.

Because of the uncertainty and high risk, most banks continue to be unwilling to serve CRBs. Those that do take the risk charge CRBs exorbitant fees ($1,000-$2,500 or more per account per month is not uncommon). For many smaller operators, this can price them out of the financial services market.

Potential Rescheduling

President Joe Biden directed the U.S. Department of Health and Human Services (HHS) to engage in an administrative review to determine whether cannabis’s status as a Schedule I drug should be changed.¹⁰ In August 2023, HHS announced that cannabis has a currently accepted medical use, recommending that it be moved from Schedule I to Schedule III of the Controlled Substances Act (CSA). The Department of Justice issued a Notice of Proposed Rulemaking in May 2024 that would implement the HHS recommendation.¹¹ However, the U.S. Drug Enforcement Agency (DEA) subsequently announced that it would hold a hearing on the subject no earlier than Dec. 2, 2024.¹²

Although this proposed shift in federal policy could result in some positive outcomes for CRBs (e.g., tax implications), absent other legal changes rescheduling would not likely improve CRBs’ access to financial services. The difference between Schedule I and Schedule III is that Schedule III substances have an “accepted medical use,” while Schedule I substances do not. Rescheduling cannabis would allow for medical use of cannabis, but it would still allow for federal criminal control of the substance pursuant to the CSA.¹³ In other words, rescheduling cannabis would not relieve financial institutions of their responsibilities under the BSA and MLCA.¹⁴ Moreover, approval of cannabis to be dispensed by prescription by the FDA will bring with it a whole host of additional federal regulatory requirements.

Cash Is King – or Is It?

The old adage “cash is king” is not necessarily true in the cannabis space. Bankless CRBs that are forced to use cash to pay business expenses can find the situation particularly difficult. Utility companies, payroll companies, and taxing authorities are just some of the service providers that are difficult, if not impossible, to pay in cash. Likewise, CRBs can’t use Amazon or other online retailers because online providers cannot accept cash.

Because dealing in cash is so difficult, CRB operators look for workarounds. One is the use of personal credit/debit cards to purchase business equipment and supplies. This doesn’t eliminate the cash problem entirely, as the credit card holder would have to accept cash as reimbursement. Such transactions could be considered an attempt to hide the source of the cash, which is, by definition, money laundering.

Some CRBs try to skirt the system by obtaining bank accounts under the name of management companies or other entities that are one step removed from the actual business. While operators often choose this route to streamline business and operate out of the shadows, it again runs afoul of banking law. Transferring cannabis-related financial transactions to another entity is, in fact, money laundering: a process used to conceal the existence or source of “illegal” funds.

In addition to the difficulties of making payments and purchasing business supplies, operating in a cash-heavy environment poses significant safety risks for cannabis operators. CRBs often have large sums of money onsite and transport large sums of cash when purchasing product or paying bills, making them a target for robbery.¹⁵

Managing all that cash increases the cost of doing business as well, particularly in increased labor, insurance, and security costs. Cash must be counted and double counted, which can be time consuming, not to mention the time it takes to deliver physical cash payments. Ironically, the lack of banking significantly decreases transparency and clouds the waters of compliance. In short, operating strictly in cash makes it easier to manipulate reported financial results.

Potential Congressional Solutions

Congress continues its efforts to pass legislation designed to provide CRBs with relief regarding financial services. In 2023, the Senate Banking Committee reported on the SAFER Banking Act (S. 2860), and the SAFE Banking Act (H.R. 2891) was introduced in the House. Each of these pieces of legislation are aimed at constraining federal banking authority from penalizing financial institutions for providing services to CRBs operating legally. Additionally, this legislation would protect financial institutions who provide services to CRBs from some legal liability under the BSA and MLCA laws.¹⁶

The Changing Banking Landscape

Even though there is little in the way of formal protections for financial institutions, an increasing number of banks are working with cannabis operators.

According to FinCen statistics, there were about 815 financial institutions actively involved with CRBs as of March 31, 2024.¹⁷ It is important to note that this is based on suspicious activity report (SAR) filings, which banks are required to file when an account or transaction is suspected of being affiliated with a cannabis business. However, some of these SARs may have been generated on genuine suspicious activity rather than on a transaction with a known cannabis customer.

Even with more banking institutions offering services, continuing challenges for CRBs include building/maintaining a compliance regime that will be acceptable to the institution and the cost to operators, given the high fees associated with CRB accounts.

How CRBs Get Accepted by Banks

The gap between CRBs’ need for banking and the financial service providers’ sparse and expensive offerings has created an opportunity for third-party firms. The ability to provide a compliance structure that will satisfy the needs of the financial institutions and make it easier for CRBs to a bank would be highly valued.

Third-party firms can perform extensive BSA-compliant due diligence on applicants to ensure potential customers are following the FinCen guidance required to receive banking services. After the completion of due diligence, these firms connect CRBs with financial institutions willing to do business with CRBs and provide checking/savings accounts, check writing capability, and merchant processor accounts. These third parties often provide additional services too, such as armored cars, cash vaulting, vendor screening, and pre-approvals before payments are made to vendors.

One such company is Safe Harbor Private Banking. It started as a project implemented by the CEO of Partners Credit Union in Denver, Colo., who set out to design a cannabis banking program that would allow Partners Credit Union to do business with Colorado CRBs.¹⁸ The program was successful and has since expanded into other states that have legalized cannabis.

Similarly, Green Check Verified connects CRBs to more than 150 financial service providers. Green Check offers financial institutions with compliance programs and other services that allow them to provide financial services to CRB’s, and also offers CRBs with compliance solutions as well.¹⁹

While these services offer hope for CRBs, the downside is cost. The operations necessary to find, open, and maintain a compliant bank account are expensive, pricing some small operators out of the market.

Conclusion

Although states are legalizing cannabis in one form or another in growing numbers, the fact that cannabis is still federally illegal poses a significant barrier for CRBs accessing the financial services market. Unfortunately, the potential rescheduling of cannabis will not likely provide relief in this area. Nonetheless, while most banks are still reluctant to offer services to this growing industry, more than ever are beginning to participate in the cannabis industry.

Many new options are available to help CRBs find a bank, develop compliance programs, and manage the cash-related problems encountered by most. However, these solutions may be out of reach for the budget-conscious small operator.

¹ Medical Marijuana Laws - NORML 
² MJBiz Factbook, 12th Edition, 2024.
³ U.S. Code Section 1956, Laundering of Monetary Instruments.
⁴ Robert Rowe, “Compliance and the Cannabis Conundrum.” ABA Banking Journal, Sept. 11, 2016.
⁵ MJBiz Factbook, 12th Edition, 2024.
⁶ Sarah Truble and Nathan Kasai, “The Past – and Future – of Federal Marijuana Enforcement,” ThirdWay.org (May 12, 2017).
⁷ FIN-2014-G001, BSA Expectations Regarding Marijuana-Related Businesses.
⁸ Ibid.
⁹ Cannabis Banking Coalition Statement.
¹⁰ Sam Reisman, “3 Takeaways from Biden’s Cannabis Reform Announcement,” Law360 (Oct. 7, 2022).
¹¹ Chris Roberts, “DEA: Marijuana Rescheduling Hearing Won’t Happen Until After General Election,” MJBiz Daily (Aug. 26, 2024).
¹² Ibid.
¹³ Department of Health and Human Services Recommendation to Reschedule Marijuana: Implications for Federal Policy (Sept. 13, 2023).
¹⁴ “Effect of Rescheduling Marijuana on Access to Financial Services,” Congressional Research Service (Aug. 26, 2024).
¹⁵ Ray Stern, “Robbers Hitting Phoenix Medical Marijuana Dispensaries: Is Bank Reform Needed?” The Phoenix New Times (April 11, 2017).
¹⁶ “Legal Consequences of Rescheduling Marijuana,” Congressional Research Service (May 1, 2024).
¹⁷ www.fincen.gov/sites/default/files/shared/MRB_Metrics_Spreadsheet.xlsx
¹⁸ Robb Mandelbaum, “Where Pot Entrepreneurs Go When the Banks Just Say No,” The New York Times (Jan. 4, 2018).
¹⁹ Solutions for Financial Institutions and Cannabis Businesses, Green Check 

Paula Durham, CFE, CCCE, is an associate director in J.S. Held’s strategic advisory practice and is an expert in the emerging field of cannabis regulation and investment. Durham has performed complex compliance reviews, fraud investigations, FCPA investigations, and litigation support in a wide range of industries. She can be reached at PDurham@jsheld.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}