The landscape of the cannabis industry is rapidly changing; however, what’s still ‘immobile’ or moving at a snail’s pace are the reforms that would make borrowing money for cannabis businesses easy or rather ‘possible’.
None of the banks out there would generally provide you a loan for any cannabis-related business as the leafy-substance still remains federally illegal in the United States. The work, though, is in progress as the legal cannabis market worldwide may reach $57 billion by 2027, experts suggest.
Here are a few things that all lenders should know about the current scenario in the legal US Cannabis market:
The present situation
As on 31 March 2019, Cannabis still finds itself as a Schedule I drug under the Controlled Substances Act (21 U.S.C. Section 811). In layman terms, this classification simply means that federal laws consider marijuana addictive and of ‘no medicinal use’. Of course, research, and the legalization of medical marijuana in 33 states have contradicted the latter condition, but the resultant changes haven’t yet been made to federal laws, thus leading to chaos and confusion.
Federal laws vs. state laws
The federal preemption rule is one obscure issue that has been plaguing a number of states where recreational marijuana is legal.
The Cole Memo issued on 23 August 2019 by the United States Department of Justice had made it clear that prosecuting state-legal medical cannabis cases wasn’t a priority. In early 2018, however, Attorney General Jeff Sessions revoked the guidance and directed all U.S. Attorneys to enforce federal laws and follow standard principles in prosecuting marijuana offenses.
Thus the bottom line is that the federal law prohibiting the production, sale, and use of cannabis is always supreme, and no state law can protect against federal enforcement.
The financial institution dilemma
Since the banks are always at risk of running into money-laundering issues for providing services to anything federally illegal, they maintain a safe distance from all cannabis businesses even if the drug is legal in the concerned state.
In 2014, the Treasury Department & the Justice Department had issued guidelines stating that no bank will be punished for catering to legal cannabis businesses. However, it did not grant immunity against prosecution or civil penalties.
Many bankers boycotted the guidance saying it wasn’t enough to protect a financial institution; thus, even to this day, the financial institutions remain at the backfoot, forcing business owners to self-sustain their ventures.
How financial institutions can guard themselves
Since, as a lender, you would like to be away from all things of such sort, use the latest technology and software to monitor suspicious activities of customers. Lenders in states which have just legalized medical or adult-use cannabis should pay attention specifically to this point.
If any suspicious activity is reported, institutions can file a Suspicious Activity Report (SAR), which is usually of the following three types:
- Marijuana Limited: If a customer does not violate one of the Cole Memo priorities or state law.
- Marijuana Priority: If a customer violates Cole Memo priorities or state law.
- Marijuana Termination: The harshest SAR should be filed if the institutions find out that the customer is violating the former’s anti-money laundering program.
From the point of view of businesses and banks, this is indeed frustrating. But all these issues will vanish into thin air as soon as cannabis is legalized federally.
