Cannabis and the U.S. Financial System: How Can Banks and Credit Unions Prepare? - Part 1

According to Fortune Business Insights, the global cannabis market is projected to grow from $28.266 billion in 2021 to $197.74 billion in 2028 at a CAGR of 32.04%. As such, cannabis banking services are a lucrative new venture for financial institutions to capitalize on, and some are already doing so. But as with many burgeoning new industries, like crypto, the regulatory framework around cannabis remains unclear, leaving those providing services to the industry exposed to compliance risks.

This 2-part series of articles is to serve as a primer to understand how the financial industry can prepare for providing services to the cannabis industry if reform is passed at the federal level. It also includes information on the topic of legalization of marijuana, as well as its distinction from cannabis – for educational purposes only.

Is It Legal to Provide Cannabis Banking Services?

The short answer is yes, provided that they are a state-legal cannabis business and you fulfill all necessary BSA protocols and know-your-customer (KYC) procedures.

On June 14, 2020, the former FDIC Chairwoman Jelena McWilliams met with Arizona bankers to discuss the challenges facing banks. As reported by the Phoenix Business Journal, she was asked, “What is the future of cannabis banking?” Her response was, in part, “I can’t give guidance on how you should bank a cannabis-related business. But where it’s legal at your state level, and you do appropriate due diligence based on state requirements (emphasis added), go ahead and file a suspicious activity report and follow guidance to make sure you’re in compliance (emphasis added)…”

“I know of no regulator – at least of credit unions and, perhaps, even of banks – who have shut down an institution that is legally going through the appropriate KYC protocols, that are following FinCEN guidelines and all the other tenets of a good BSA program.”– Rodney Hood, former Chairman of the National Credit Union Administration

In a Q&A session between Green Check Verified and NCUA Board Member and former NCUA Chairman Rodney Hood in 2022, Chairman Hood was asked, “Do you have an opinion on how to address a board’s concern that cannabis is not legal at the federal level?” Chairman Hood’s answer was, in part, “....Start by letting them know that there are banks and credit unions that are operating cannabis banking programs….You should let them know that SAFE is getting close to passing the finish line….I still maintain that it’s not a matter of if but when...I know of no regulator – at least of credit unions and, perhaps, even of banks – who have shut down an institution that is legally going through the appropriate KYC protocols (emphasis added), that are following FinCEN guidelines and all the other tenets of a good BSA program (emphasis added).”

How is Cannabis Currently Regulated in the US?

The U.S. Food and Drug Administration (FDA) is the primary regulator of cannabis and cannabis-derived products, including cannabidiol (CBD). It is important to understand how FDA treats cannabis products when you’re setting up your customer-due-diligence and know-your-customer programs.

For example, the FDA watch list includes the marketing of conventional food products and products labeled as dietary supplements that contain cannabis or cannabis-derived compounds in ways that violate the Federal Food, Drug and Cosmetic Act (FD&C Act). Under section 201(ff)(3)(B) of the FD&C Act [21 U.S.C. § 321(ff)(3)(B)], THC and CBD products are excluded from the dietary supplement definition.

“The license requirements for growing, formulating, selling, or dispensing are going to be different.”

Staying on top of evolving regulations and requirements is a challenge for most financial institutions, regardless of their size. Whether you’re a financial institution or a cannabis marijuana company, you need to know what the right licenses are and how to get them for your business. The license requirements for growing, formulating, selling, or dispensing are going to be different.  To help minimize the risks for those financial institutions that are serving the cannabis industry or intend to do so, it’s important to learn more about it.

Learnings from a Former Senior Special Agent

As a U.S. Postal Inspector in San Diego, I would spend my first five years investigating and learning about marijuana and other illegal narcotics. It was a “baptism by fire” into the profitable industry of cannabis. From attending the U.S. Postal Inspection Service Narcotics School and numerous other training classes, I learned a great deal about the history of Cannabis sativa, marijuana, its impact on the U.S. economy, and how the illicit proceeds were laundered throughout the world’s financial systems. My investigations would take me throughout the United States, “following the money” and speaking to hundreds of financial institutions on how to detect and deter money laundering. An important distinction I learned early is that people often use the words “cannabis” and “marijuana” interchangeably, but they don’t mean the same thing. Here is a short guide.

• Cannabis is all products derived from the plant Cannabis sativa, which contains approximately 540 chemical substances.
• Marijuana refers to parts of or products from the plant Cannabis sativa that contains tetrahydrocannabinol (THC).
• Cannabis-based products come from the dried flowering tops, leaves, stems, and seeds of the Cannabis sativa (hemp) plant.
• Cannabinoids are a group of substances found in the cannabis plant.
• The main cannabinoids are THC and cannabidiol (CBD).
• Some cannabis plants contain very little THC. Under U.S. law, these plants are considered “industrial hemp” rather than marijuana.
• The FDA has not approved the cannabis plant for any medical use; however, the FDA has approved several drugs that contain individual cannabinoids.

In part 2 of Cannabis and the U.S. Financial System: How Can Banks Prepare?, I will cover:

• The debate around marijuana legalization
• What marijuana reform means for financial institutions
• Canada’s approach to cannabis banking services

Disclaimer

Regology is impartial to the legalization of marijuana, and this blog does not serve as a pro, neutral, or against the legalization.  The information provided on this website does not, and is not intended to, constitute legal advice.