🔒Tapping an all-cash business: Banks look for legal ways into cannabis lending

It was five years before the medical marijuana cultivation and dispensary company Canuvo could find a traditional financial institution that would allow it to maintain a deposit account.

“For the first five years, we lost a bank account every year,” says Canuvo’s director of operations, Josh Quint.

The company’s founders, Sage and Glenn Peterson, also lost their personal accounts during that time.

“The way it was, we’d go in, explain who we are, what we do and what we were looking for, which was traditional depositing and check-writing,” says Quint, who is the Petersons’ son-in-law. “For the most part, banks would say ‘OK’ and we’d bank with them awhile. But then they’d do their yearly compliance audits and we’d be kicked out.”

Maine legalized medical marijuana in 2010 and voters approved the use of recreational marijuana in 2016, though many of the regulations are still being ironed out. Even while 11 states have legalized recreational marijuana use, federally chartered banks have been relegated to the sidelines of the growing cannabis industry. Cannabis remains illegal on the federal level.

A number of Maine bankers have backed the Secure and Fair Enforcement Banking Act of 2019, known as SAFE Banking Act (HR 1595). If adopted, the proposed federal measure would allow legal marijuana and related businesses to access banking services and would bar federal banking regulators from taking certain actions against financial institutions for providing those services. The bill, co-sponsored by U.S. Rep. Chellie Pingree, D-Maine District 1, and U.S. Sen Angus King, I-Maine, passed the House last month and is being considered by the Senate.

Although Canuvo eventually found a financial institution to take deposits, it still can’t get a traditional loan.

“It’s ridiculous for cannabis businesses not to be able to do traditional banking,” says Quint. The result? “I think lot of people have been putting cash under the mattress or working with vendors who take cash. But that can make people less accountable, not more.”

The cannabis industry is as reliant on cash transactions as it was before legalization.

Caught between state and federal

Passage of the act would ease banks’ concerns about legal risk, says Kennebec Savings Bank President and CEO Andrew Silsby, who has been part of several delegations to Washington, D.C., to support the bill.

“The financial services industry is caught between state and federal law,” says Silsby, whose bank has $1.1 billion in assets and five branches.

Financial institutions are at prosecutorial risk if they’re seen as aiding and abetting activity considered illegal at the federal level, he explains.

“We would never do that knowingly,” Silsby says. “But the challenge is, where does legal state activity turn into illegal federal activity? I’m looking and all the other banks are looking for clarity on that.”

“To my knowledge no financial institutions in Maine or nationally have provided loans to cannabis businesses,” says Todd Mason, president and CEO of the Maine Credit Union League, which represents the state’s 55 credit unions. “In general, anytime a loan is given it is based on the ability of the borrower to repay it. For cannabis businesses, the ability to repay a loan is unfortunately put at risk with the specter of the federal government shutting them down because marijuana is illegal at the national level. As a result, financial institutions have stayed away from lending to cannabis businesses because of that risk, in addition to other legislative and regulatory hurdles.”

The situation gets murkier. Silsby posits an employee of a medical dispensary.

“That employee gets a W2 for wages,” he says. “In the mortgage business, we’re not allowed to use that W2 income for qualifications for their personal mortgage, because the income is coming from an illegal activity.”

He adds, “All of us probably have customers that are in some form or other are using their accounts for this activity. If we become aware of that, we would need to investigate. We would have to deal with that activity and it does mean closing accounts. And because the cash is not bankable, it goes underground.”

Moving between pockets

How much cash might that be? That’s difficult to say per company, says Jacques Santucci, founder of Portland-based Nucleus One Consulting, a cannabis advisory firm, and Strimo, a software platform.

Maine’s medical marijuana market is worth $58 million this year, according to Nucleus One estimates. If you add in the black market, Santucci estimates the value of the marijuana industry in 2019 could be as high as $300 million. And his company estimates the value of the legal market for medical and recreational marijuana could be nearly $300 million by 2025.

“So ultimately, you can think of it as $300 million in cash moving from one pocket to the other,” he says.

For legal retailers, payment apps like CanPay are emerging, allowing direct payment from a consumer’s checking account to the retailer. But such apps only cover a small portion of marijuana sales to date, says Santucci.

What do businesses do with the cash?

“That’s the essence of the problem,” says Mason. “Where is all that cash going? It’s problematic for business owners. One owner I talked to was so thankful to the credit union that was providing cannabis banking. He said he now feels safe at night for his wife and daughter. Before, he was either leaving that cash at his business or taking it home.

“Business owners are walking around literally with duffel bags and suitcases full of money. They’re paying employees and vendors in cash. It’s opening wide the opportunity for crime. That’s a problem for the state, too. If all the transactions are happening in cash, the state can’t properly track the amount of business that’s happening, from the regulatory, safety and security perspectives and from the tax perspective either. Those dollars need to go into the traditional financial services industry.”

Atlantic Cannabis Collective CEO Cliff Miller agrees. He’s been running a small medical marijuana business in Windham. With partners, he’s now developing larger cultivation facilities in Auburn for the adult use wholesale market.

“The only time you get in trouble with cash is when you don’t report it,” says Miller. “When I put cash into a bank, my accountant sees that cash. When we make a payment, we account that as an expense. The number you’ve provided as income is what you’re taxed on. I want everyone to know we’re an investable company. Because, eventually, these rules will change.”

‘Suspicious activity’

For banks, the regulations around cannabis are daunting. Transactions of $10,000 or more must be reported. Cannabis remains a “suspicious activity” to the federal government, so financial institutions are essentially deputized to investigate and report on that as well. Even if SAFE passes, those reports would still need to be filed. But the bill is a step in the right direction, says Mason.

It still doesn’t mean all credit unions or banks would be receptive to the industry, he adds.

“I think there will be some that choose not to provide services because marijuana remains a federal illegal substance and the stigma often associates with it,” Mason says. “There might be others that don’t want to take on the extra regulatory and reporting requirements, which are significant and can’t be underestimated. However, many credit unions will want to step in to help provide needed financial services to cannabis businesses”

Others point out that one additional step — making cannabis legal at the federal level by removing it from the government’s list of controlled drugs — would solve the banking problem all together.

“Whether you agree or disagree that the industry should be here, it is here and we need to deal with it,” says Silsby.