Prospects of Financial Relief Emerge for Cannabis Companies Excluded from the US Banking System

09 Oct, 2023

Prospects of Financial Relief Emerge for Cannabis Companies Excluded from the US Banking System

Running a completely legal business, yet being unable to open a basic checking account at a national bank, is the current unfortunate reality for individuals licensed to operate within the cannabis industry in the United States. This situation is surprising given the sheer size of the cannabis industry, but there may be hope for change on the horizon.

In the U.S., 38 states have legalized marijuana for medical use, and 23 of them have also legalized it for recreational purposes, including three territories and the District of Columbia. Additionally, eight states have decriminalized marijuana use. Both red and blue states with legalized marijuana laws have collectively generated a substantial $15 billion in tax revenue between 2014 and 2022, with $3.77 billion of that attributed to 2022 alone.

However, for those involved in cannabis-related businesses, there is little resemblance to a typical business experience. Various limitations and restrictions abound:

Advertising: Meta, the parent company of Facebook, allows only "limited" CBD and hemp advertising. Cannabis companies are prohibited from running TV or radio commercials for their products and are restricted to state-level campaigns due to the prohibition of interstate commerce. Local zoning laws often restrict their operations, and insurance carriers and payroll service providers are often hesitant to serve the industry.
Taxation: Cannabis businesses are unable to deduct expenses like rent, payroll, and other costs that other businesses can write off. They also face increased business licensing requirements and cannot take advantage of federal bankruptcy rules or trademark their products.
Banking: Cannabis businesses have limited options when it comes to banking, primarily relying on about 200 independent and community banks. These smaller banks may lack online banking, international access, wire transfer capabilities, investment options, financial stability, and other features offered by larger institutions. Federally chartered banks such as Wells Fargo, PNC Bank, JP Morgan Chase, TD Bank, and Key Bank generally do not engage with the cannabis industry, which has created challenges for many cannabis businesses seeking financial services. extensively in cash, which increases their vulnerability to theft and crime.

The primary reason behind these challenges is the federal classification of cannabis as an illegal controlled substance, subject to strict federal laws. Large corporations, including banks, insurance companies, and payroll services, remain wary due to their federal illegality.

However, there is potentially promising news on the horizon. The federal government may soon permit banks with federal charters to conduct business with cannabis industry entities. The Senate committee on Banking, housing, and Urban Affairs recently advanced the Secure and Fair Enforcement Regulation (Safer) Banking Act, which enables banks to engage with cannabis companies. The House has already passed a similar bill, making the Senate committee's approval a significant step.

Nevertheless, significant hurdles remain. Some representatives in both the House and Senate oppose the bill, citing concerns about compromising the integrity of the U.S. banking system and facilitating money laundering. Despite this opposition and a leadership void in the House, there is optimism that the Safer Banking Act will eventually pass due to its bipartisan support in both chambers.

In the meantime, those in the cannabis industry must continue to wait, advocate, and cope with restrictions that few other legitimate businesses encounter. Running any business presents challenges, but for those in the cannabis industry, the obstacles are particularly formidable.