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The cannabis industry is one of, if not the, fastest growing industries in the United States in recent years, and there are no signs of slowing. Growth requires capital. Banks need loans, and cannabis companies, which are rapidly becoming bankable need access to lower cost bank lending. While cannabis remains federally illegal, an impediment to access to financial institution credit, banks and credit unions are nevertheless entering the market in increasing numbers.

With the sponsorship and support of the Bankers Associations of Arizona, Colorado, Ohio and Utah, BMD organized an elite panel of bankers, bank and cannabis regulators, and cannabis industry executives to address this exact issue in a webinar titled: Banking & Cannabis: Cannabis Lending, The Next Frontier.

Tanner Daniel, the VP of Congressional Affairs for the American Bankers Association, gave a keynote address, sharing his perspective on the status and prospects of presently pending federal banking and cannabis legislation with the webinar’s 500 attendees – about 75% of whom were bankers representing more than 200 banks, including a dozen of the 56 largest. Here are some of the major takeaways:

• Follow the Money; Huge Opportunity for Bank and Cannabis Industries. Year-to-date reports indicate that 2021 cannabis industry borrowing could approach $5 billion +/-, three or four times 2020 levels, with only a very small percentage of those loans being made by banks. Even at prime plus 3 or 4 percent, this translates into hundreds of millions of dollars of interest income for banks and interest savings for cannabis companies.

Authors’ Note: The cannabis industry’s appetite for borrowing will continue to increase dramatically for the foreseeable future and, as demand increases, so too will the percentage of cannabis companies becoming financially attractive banking customers. Over the next 5-10 years, many, if not most, of the states that have not yet done so are likely to legalize at least medical marijuana, and many or most that have legalized or will legalize medical are likely to legalize recreational, translating into continuous, large increases in demand for capital, including loans.  

• The Perfect as the Enemy of the Good. While the SAFE Banking Act (“SAFE Act”), providing safe harbors for banks and other financial institutions, is likely the fastest path, its progress is being slowed by the desire of many to do more through a number of broader proposals.

• Out of the Shadows and into the Mainstream. Whether or not any of the pending federal legislation passes, the numbers of banks following the money into the cannabis markets will continue to increase. The growth in the pie, and those competing for their taste, will encourage others to join the fray.

• The Shrinking Elephant in the Room, the Deterrent Impact of Risks of Federal Illegality Will Likely Continue to Diminish. While no one can provide assurance that there is no risk in doing business with the cannabis industry, it appears that they are progressively becoming more theoretical than real, mitigated by:
  • The insular effect of federal guidance on how to provide banking services to the cannabis industry without violating federal anti-money laundering laws provided by the Financial Crimes Enforcement Network (“FinCEN”), the arm of the US Treasury Department charged with enforcing those laws.
  • A largely hands-off approach to banks following the FinCEN Guidance of both federal bank regulators and the Department of Justice.
    • Banks doing business with the cannabis industry are doing so with the knowledge of their federal regulators, usually working with them to develop policies and procedures, and those that do so have not been subject to adverse regulatory action.
    • Similarly, the DOJ has not actively pursued seizures and other enforcement initiatives against those banks, and is barred by federal budget amendments from prosecuting activities in compliance with state medical marijuana laws. While the budget amendments have not been modified to include state legal recreational activities, there is no evidence that the DOJ is approaching those activities differently.
  • There is safety in numbers.

• The Inevitable Intersection of Banks and Marijuana Related Businesses (“MRBs”); In For a Penny, In For a Pound. As the cannabis industry continues its explosive growth, more and more existing and potential good bank customers, even those in states which have not yet legalized marijuana, will have or establish financial or other business relationships that bring them under the FinCEN Guidance definition of MRBs, making it almost inevitable that even those banks that have not affirmatively elected to establish relationships with cannabis businesses will find it necessary to address the expanded due diligence requirements of the Guidance.

• The More Things Change, the More Things Stay the Same. While recognizing that lending to the cannabis industry involves different risks and issues then accepting deposits, Bank and Bank Regulatory panelists generally agreed that the principal difference in due diligence would be dictated by conventional credit analysis standards rather than the FinCEN Guidance.

• Unintended Consequences as Drivers of Change.
  • The cannabis executives on the panel noted that the lack of financial services available to the cannabis industry not only complicates their business operations, but also has a negative effect on their employees’ personal lives—the difficulty of opening bank accounts or getting mortgage loans.
  • It was also noted that even the IRS and state tax departments, which are not set up to handle the vast amounts of cash being generated as tax payments, were proponents of cannabis industry banking services.

• Keep Your Eyes on the Credit Unions; Keep Your Friends Close and Your Frenemies Closer. The federal credit union regulators have been much more progressive and aggressive on cannabis issues than their banking counterparts. Rodney Hood, a past Chairman and currently a member of the Board of the National Credit Union Association (“NCUA”), has been an outspoken proponent of the need for the regulators to act, even as Congress dithers.

Authors’ Note: Politics makes strange bedfellows, and while banks and credit unions have been historic rivals, there appears to be a community of interest worth taking advantage of.

We are contemplating a sequel to the webinar going deeper into the “weeds,” potential topics including: (i) security interests--what can you get and how can you get it; (ii) receiverships as an alternative to bankruptcy; (iii) asset seizures—what is the risk and how it can be mitigated; and (iv) deciphering cannabis companies’ financials.

Your input and suggestions regarding a sequel would be welcome and should be directed to Stephen Lenn, at salenn@bmdllc.com, and Jamie Young, at jbyoung@bmdllc.com. If you are interested in the webinar’s recording or the accompanying program materials, click here.