OPINION: Ed Perlmutter On Cannabis Banking In The Time Of SVB

By Sahar Ayinehsazian, Hon. Ed Perlmutter and J. Devoy Dubuque

Prior to its sudden shutdown, Silicon Valley Bank had a reputation for serving start-ups and entrepreneurs. Amongst its lesser-known clientele were cannabis-related businesses, which have long struggled with access to depository and lending services.

Banking continues to be a constant pain point for the state-legal cannabis industry, despite its steady expansion across 39 states and multiple U.S. territories.  As a Schedule I substance under the Controlled Substances Act, cannabis is subject to a federal money-laundering statute that makes banking them largely unlawful.

In 2014, the Department of Treasury released a memorandum explaining the federal government’s enforcement priorities and offering guidance to financial institutions that sought to serve cannabis businesses (the “FinCEN Guidance”).  It also listed “red flags” for cannabis-related clients and established three associated levels of Suspicious Activity Report filings (“SARs”).

The FinCEN Guidance has been a cornerstone of cannabis banking for nearly a decade but has not opened the floodgates. Based on its review of SARs filed as of 4Q2022, FinCEN estimated just 773 financial institutions served the entire cannabis industry last year. Historically, most have been smaller community banks and credit unions, as larger institutions remain hesitant. This is great news for cannabis payment solutions companies but bad news for the cannabis industry.

While cannabis businesses can put their money into banks and credit unions, it remains to be determined whether their deposits will be insured by the Federal Deposit Insurance Corporation (due to federal prohibition), and access to lending remains limited.

For an industry with tenuous access to banking, at best, the recent shutdown of SVB has left many businesses asking, “What happens to us now?”  The answer is, “It’s going to be okay,” with the caveat that passage of the SAFE Banking Act (“SAFE”) is imperative.

Despite banks’ risk aversion in the current environment, now is a great time to serve cannabis-related businesses. Why? Running largely on cash, subject to strict compliance scrutiny from a variety of bodies and with limited recourse in the event of financial distress, cannabis businesses are lower risk than they seem to the untrained eye.

As banking concerns grow, withdrawals and thus, a need for additional deposits are inevitable. Due to the environment in which they are forced to operate, cannabis operators are flush with cash and present an ideal opportunity for financial institutions to replenish and potentially increase their depository reserves.

Cannabis businesses are heavily regulated. Their transactions are subject to strict state traceability, making them ideal clients from a compliance and transparency standpoint. The industry’s commitment to compliance is compounded by the Inflation Reduction Act (the “Act”), which allocated $45.6 billion to IRS enforcement. Cannabis businesses are no stranger to this increased scrutiny and stringently adhere to reporting requirements – a trend furthered by the Act’s allocations.

These industry constraints dictate that cannabis businesses are likely among a bank or credit union’s most law-abiding clients. They are also less prone to engage in sudden, voluminous withdrawals, making them reliable in unreliable times.

Furthermore, due to the federal prohibition of cannabis, bankruptcy and other similar protections are largely unavailable to cannabis businesses. Lenders who provide loans to cannabis businesses do not face the risk of the borrower declaring bankruptcy, as with other borrowers. Rather, cannabis borrowers – forced by federal law to function with limited remedies – are more likely to seek amicable resolutions with their creditors. Further, their loans tend to command higher interest rates, creating yet another incentive to lend to the industry.

Financial institutions should pursue the cannabis sector. Confer with regulators and examiners and, if all looks right, take the plunge.

Banks, credit unions and cannabis-related businesses should evaluate the adaptability of current banking processes to more stringent guidelines that are forthcoming. They should also assess how banking may be affected by federal de-scheduling or rescheduling of cannabis (both under consideration by the Biden administration). The first will likely require additional reporting and examinations for both businesses and financial institutions, while the 2020 FinCEN guidance on hemp-related businesses provides highly valuable insight into the latter.  

The most important step is the SAFE Banking Act. Following its introduction in the Senate, Sherrod Brown, Chairman of the United States Senate Committee on Banking, Housing and Urban Affairs, has stated that he intends to hold a markup for SAFE, suggesting he understands its importance. SAFE includes safe harbors for financial institutions that provide depository and lending services to the cannabis industry.  It would increase access to depository services (reducing reliance on cash), improve public safety and foster efficiency in related business dealings.

Increased access to institutional lending will encourage industry growth, which has proven beneficial for communities and the financial institutions that serve them. SAFE will also improve access to capital for small, minority-, women- and veteran-owned businesses, thereby advancing critical social equity goals within the industry – hence SAFE’s support from such groups and their advocates.  

In these uncertain times, one thing is certain – financial institutions should embrace the cannabis industry. While the passage of SAFE is a must, much can be accomplished by both the banking sector and the cannabis industry as we approach that watershed moment.

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