What Bankers and their Lawyers/Compliance Experts need to know about “banking” cannabis companies by Tim McTaggart

I will look to keep this brief and hit the highlights.  This is not legal advice and you should contact me with your specific facts and circumstances to discuss your particular situation, or you should call another lawyer with whom you have worked to review your particular situation.

1. Cannabis is in the process of becoming a "legal" substance under multiple state laws throughout the country.  All of these state law regimes are different but they are are comparable in terms of the strong degree of regulation that is expected from growers and dispensaries of cannabis.
2. Federal law restricts the cultivation and sale of cannabis and there is not a general waiver to permit activity as allowed under state law.
3. The DOJ during the Obama administration indicated a willingness to be flexible and to not prosecute the growing or distribution of cannabis according to the strict state law requirements in place.  Former AG Jeff Sessions disagreed with that policy, and rescinded the formal memo ("Cole memo") and raised the possibility of a more narrow interpretation of the law and possible prosecution.  AG nominee Barr appears to be somewhere between the Obama Administration position and the Sessions position, but likely to not expend resources to prosecute cannabis operations that are operating properly under state law.
4. There is still possible reputation risk to banks and other financial services providers who engage in business with cannabis entities.  For example, public figures such as former MLB pitcher Dwight Gooden has publicly stated his concerns about the use of cannabis/marijuana.  In some communities, there may be a reputation risk for NOT banking cannabis/marijuana related businesses("MRB").
5. Last year, Congress as part of the Farm Act bill passed new rules so that industrial hemp cultivation and sale would be viewed and regulated as agricultural commodities, and no longer treated as impermissible controlled substances/drugs.  There are therapeutic uses from the products and oils derived from industrial hemp. This suggests moving ahead for the next few years there will be a permissible industrial hemp pathway and a cannabis pathway with conflicting federal and state law.
6. Banks are subject to FinCen reporting obligations with respect to cannabis operations that wish to deposit funds at the bank.  This is a non-traditional treasury function for a bank.  The bank has to do an intensive diligence exercise to make sure that  the prospective depositor has complied and has processes in place to continue to comply with all governing state law requirements.  This includes limitations on interstate sales and some other possible interstate activity.   Banks will be expected to file suspicious activity reports, and those reports filed with FinCen have increased significantly measured by an annual aggregate number with respect to cannabis related deposits brought into the banking system.
7. Issues for banks include whether the significant increase in compliance cost to "onboard" a MRB would be a good business decision as compared to the deposits to be obtained and the business case with increased benefits from related fee income.
8. Banks certainly would be assisting MRBs operate more safely by moving large amounts of cash out of their business operations into a safer banking system solution.
9. Banks likely do open up potential director and officer liability exposure under D&O insurance since the impermissible nature of the MRB activity under federal law likely causes issues if a claim were to arise under the D&O insurance policy.
10. Likewise, investments in MRB businesses in the U.S., or possibly in Canada, or elsewhere would be potentially illegal and certainly problematic for banks or for their senior executives, board members or other controlling shareholders who might find difficulty maintaining their management rating as a prudent banker if an investment strategy of getting a windfall from this sector is pursued even if in the individual's own or family portfolios.
11. Banks likely will continue to not lend to MRBs because of uncertainty associated with being able to obtain collateral which would be immune from federal takeover in the event of a federal prosecution.  Likewise, banks likely will not be offering other transactional services to MRBs because of restrictions placed by processors, payment platforms and other entities.
12. A complete non-starter for a bank is if becomes aware of having opened up an account for an entity that controls a MRB and none of that was disclosed, or considered, prior to the establishment of the account by the bank.  This is a high risk situation for a bank, and one that likely will lead the bank to close the account promptly.
13. A harder question arises if a landlord, for example, is leasing the commercial property to a MRB under standard lease terms and other state law contractual conditions, including standard needed insurance coverages.  If the bank is "banking" the LL, there is some higher degree of risk with a MRB tenant, but if all conditions are being met under state law then the bank's indirect contact with the MRB becomes less risky.  That same type of analysis plays out for other third parties who are vendors to MRBs and are bank customers.
14. Banks should demand federal and state tax statements from MRBs and possibly their controlling shareholders depending on circumstances.  If the bank is not satisfied with the tax compliance, then the bank likely should close the account promptly.  If separately the bank is concerned about tax evasion or avoidance, then it needs to file SARs and possibly make other law enforcement referrals.
15. Banks need the board of directors to authorize banking MRBs, and there needs to be a MRB policy implemented by the bank prior to commencement of the activity along with obtaining technology oriented towards MRB customers and compliance and training implemented by the bank at all pertinent levels including making sure that there is strong AML compliance expertise on staff, on site.
16. Switching "seats" for a moment, and looking at this issue from the MRB position, the MRBs can be the most compliant of deposit account holders and the most loyal customers due to their difficulties in finding banks in the marketplace to work with MRBs.  Additionally, banks need to understand that some of the state law processes are "primitive" by comparison to well developed procurement, tax, contractual, licensing and other state administrative processes in place for other aspects of regulated state activity.  Potential MRBs must still be given due process, basic fairness as part of state level administrative processes and review and other "normal" licensing practices.  Unfortunately, some states are evolving slowly over time and the MRB industry may be moving ahead faster than the state constructed regulatory framework.   If a proposal is not well understood by state administrators, there may be a bias towards saying no or issuing a quick denial by a state administrative agency which is still in the process of staffing up and putting its enforcement and other regular administrative processes in place.   That may lead to an appeal to get a full hearing on the record of all the facts even if that means that the state agency has to assure that its appeals process passes muster for due process and fairness sake.  In sum, sometimes a MRB may get a slow yes on appeal after getting an initial quick no once the full state administrative process plays out.  Banks should not penalize MRBs for state administrative processes that are works in progress or are just getting some traction and experience in functioning as new agencies.
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McTaggart is available to discuss legal issues with banks and credit unions considering the MRB business or to work with those already in the business.  McTaggart is also available on a non-legal consulting basis to work with boards and other senior executives considering this area from a strategic standpoint.