Banking with Cannabis: Statutes, Regulations, and Risks

In the November election, Montana voters passed initiatives to legalize and tax recreational marijuana. CI-118 amended the Montana Constitution to allow for the legalization of marijuana. I-190 established legal possession and use of marijuana for adults over age 21 while imposing a 20% tax on marijuana sales.

The production and sale of marijuana, often referred to as cannabis within the industry, will continue to grow in Montana as decriminalization and further legalization occurs. Although the cannabis industry is legal under Montana law, it is not legal under federal law. Because cannabis is not legal under federal law, financial institutions that serve the cannabis industry should understand the statutes, regulations, and risks involved with this industry.

Statutes & Regulations

Marijuana is a Schedule I drug in the federal Controlled Substances Act (CSA). Schedule I drugs are characterized as having a high potential for abuse and no acceptable medical use in the United States. This classification makes business activity involving marijuana subject to the Money Laundering Control Act (MLCA). The MLCA prohibits individuals or institutions from engaging in financial transactions with proceeds that generate from specified unlawful activities.

Furthermore, the Bank Secrecy Act (BSA) creates reporting requirements designed to assist U.S. government agencies in detecting and preventing money laundering and other illegal business activity. The BSA requires Currency Transaction Reports (CTRs) for cash transactions of $10,000 or more in one business day and Suspicious Activity Reports (SARs) for transactions believed to come from illegal activities. The CSA, MCLA, and BSA have led to banking regulations designed to create compliance with these laws.

Given the federal legal exposure these acts create for financial institutions that provide services to cannabis businesses, it would be reasonable to assume modern banking is not available for state businesses in the cannabis industry. This is not the case. Although not prevalent, limited banking access does exist. According to the U.S. Treasury Financial Crimes Enforcement Network, financial institutions actively banking cannabis businesses increased from 401 in October 2017 to 715 in June 2019. This trend is likely to continue as the risk of prosecution goes down.

One reason the Department of Justice is not vigorously prosecuting financial institutions that accept deposits from cannabis sales is the correlation between banking and tax compliance. In March 2020, the Treasury Inspector General for Tax Administration issued a report entitled The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance.

This report is the most current and comprehensive government study of the cannabis industry in the United States. This report explains that limited access to banking services increases the risk associated with cash-only businesses and creates barriers to meeting tax obligations. Cannabis businesses without banking are cash-intensive and cash transactions are more difficult to trace and are therefore more likely to go unreported to the IRS. Simply put, laws discouraging banking for cannabis unintentionally create tax noncompliance.

Risks

Certain members of Congress recognize this phenomenon. Congress currently has two bills under consideration to allow banking for the cannabis industry. The first bill is the Secure and Fair Enforcement (SAFE) Banking Act. This bill would legally allow banks and insurance companies to offer services to cannabis businesses. The bill passed the House of Representatives in September 2019 and currently rests with Sen. Mike Crapo of Idaho, who chairs the Senate Committee on Banking, Housing, and Urban affairs. He has indicated reservations about the bill.

The second bill is the Marijuana Opportunity Reinvestment and Expungement (MORE) Act. The MORE Act would decriminalize marijuana by removing it from the list of Schedule I drugs in the CSA. Although the passage of the SAFE Act or MORE Act would allow financial institutions to bank the cannabis industry without risk of federal prosecution, the likelihood of this occurring is unclear.

The cannabis industry in Montana will continue to grow in response to the passage of CI-118 and I-190. This will create more demand for banking services. Financial institutions will have an opportunity to serve an emerging industry, but not without risk. Understanding the political, regulatory, and reporting environment is crucial in considering this opportunity.

The Anderson ZurMuehlen Financial Institutions Specialty Team understand the confusion and frustration the legalization marijuana imposes on financial institution. We continue to seek updated information and are available as a resource to you.

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