A new Thomson Reuters report asks if banks are fully prepared for marijuana legalization & the influx of related businesses that might want banking service
As marijuana becomes more accepted as both a medical and recreational option and more U.S. states legalize or consider legalization of marijuana, the federal government, after years and years of inaction, is finally talking about changing the federal ban on marijuana and ultimately, allow banks and other financial institutions to serve marijuana-related businesses (MRBs).
However, a new Thomson Reuters Special Report, asks if banks are indeed prepared for the legalization of marijuana and the influx of MRBs that might want to do business with the banks. The report, Are Banks Prepared for Legal Marijuana? ask whether banks have the due diligence wherewithal to be able to determine the identity, background, and current business profile of any MRBs with which they do business.
You can access the full report, Are Banks Prepared for Legal Marijuana? here.
As the report points out, although 33 states and the District of Columbia have legalized some form of marijuana use and many more are decriminalizing possession of small amounts of marijuana, it does seem like only a matter of time before federal laws are re-written. That would mean “the cloud of criminality hanging over the industry lifts, and MRBs are finally allowed to operate like any other legitimate business,” the report states, although it adds “we’re just not there yet.”
In fact, Gabe Hidalgo, Managing Director at K2Intelligence, recently told Reuters TV he didn’t see a path forward for current legislation like the SAFE Banking Act, until after the election cycle or beyond, perhaps even a decade away.
“You have a critical election year. I don’t think that they (Congress) will want to vote on something that is as controversial as this Act would be in regardless of your political bent,” Hidalgo said. In fact, he said he doesn’t think a law will get through until at least 2030 — a long time away for a budding cannabis market, so-to-speak. Decriminalization, or moving it off the schedule, is one of the biggest barriers.
“All that takes time,” Hidalgo explained. “My best guess is probably by 2030 we would see a federal kind of relaxation on marijuana… because you have to move it off of the schedule as a Schedule One drug into something else.”
Denying Access to “Illegal” MRBs
The report also makes clear that while access to banking services is a vital privilege for most legitimate companies, MRBs do not enjoy that access because marijuana is still considered an illegal drug under current federal law. That means, many banks won’t do business with MRBs until the law is changed.
That has had the effect of making doing business in the cannabis industry a strictly cash only operation, leaving an estimated $10 billion in industry revenue in 2018 without a way into the legitimate financial stream. Indeed, as the report mentions, even now, banks or financial institutions that work with MRBs could be charged by federal regulators for violations of the government’s anti-money laundering rules.
Of course, as the money pouring into the cannabis industry continues to grow — it’s estimated to top $25 billion by 2025 — some people in government are starting to think the legal prohibition on marijuana may be counter-productive. Indeed, owners of MRBs themselves say that forcing them to the fringes of the financial services world in which they cannot secure legitimate loans, process any credit card payments, and have to pay employees in cash actually makes them a target for scammers and criminals, the report notes.
Further, legalization advocates point out, all these cash-only transactions fare more difficult to auditing, making it easier to use the money for illicit purposes, and harder to tax.
Some Banks Venture In
Despite the threat of regulatory ire and possible enforcement penalties, the report makes clear that a few smaller community banks in the U.S. have been willing take the risk and do business with MRBs. And it’s likely many more banks are waiting for some “clarity and certainty” from the federal government around the legality of marijuana as a business concern, before they begin to more fully open their doors to MRBs, says K2’s Hidalgo. “Most banks are conservative by nature and won’t move forward on cannabis until the legal uncertainty is resolved,” Hidalgo says in the report, adding that once marijuana is legalized, many banks may not be ready for the changes in store when that happens.
“Banks should be preparing for legalization now,” he advises. “They should be doing a complete risk assessment to determine how they plan to serve cannabis customers, as well as a gap analysis to find out where they lie now in terms of staffing and resources, and what they need to do to get ready.”
See Thomson Reuters Gina Jurva in conversation with Gabe Hidalgo on Reuters TV and hear Gabe’s prediction on when a “safe harbor” cannabis banking bill will be signed into law.