Cannabis Banking: A Clash Between Federal and State Laws

Despite progress over the past decade, the cannabis industry still struggles to access a fundamental piece of the U.S. economy: the financial system. Congress should either legalize cannabis or stop deputizing banks as drug enforcement investigators.Although 18 states have fully legalized, cannabis is still a sticky issue for banks and other financial institutions because it remains illegal at the federal level. The cannabis industry might look like just another business for local police, where legal, but the DEA and other federal agencies have a different outlook. As a result, most of the industry is locked out of the financial system. For instance, Visa and Mastercard bar their networks from being used in the cannabis industry so long as federal laws remain unchanged.The State of Banking.To be clear, the existing policy does not ban financial services for the cannabis industry. Rather there are just too many legal risks and compliance costs, so most financial institutions stay away. In fact, only 518 of the nearly 5,000 commercial banks in the United States reported having served the cannabis industry in 2021. As Aaron Klein and John Hudak have explained in the past, financial institutions are required to file reports to Uncle Sam detailing a customer’s suspicious or illegal activities. That can prove costly. A bank can be subject to large fines if it incorrectly reports on its transactions, or if a future bank regulator accuses it of not following the reporting guidance properly. The reporting can be extensive, often covering every single action a customer takes, as it is based on the premise that the illegal activity is happening underground… One small credit union in Oregon that serves marijuana businesses filed 13,500 reports over the past two years for approximately 500 cannabis clients.In fact, the Financial Crimes Enforcement Network (FinCEN) told financial institutions that their review process should include:Verifying with the appropriate state authorities whether the business is duly licensed and registered;Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana‐​related business;Requesting from state licensing and enforcement authorities available information about the business and related parties;Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers);