Cannabis is a headache for banks.
The legalization of the cannabis drug in 50 American states is causing some headaches for the financial industry. Because, on the one hand, a very lucrative business with legal cannabis shops beckons, and on the other, it threatens to clash with the federal government.
The bank rarely admits in an official publication that it is violating criminal law. The current quarterly report of Severn Bancorp, the parent company of Severn Savings Bank headquartered in Annapolis, Maryland, says in black and white that the company has customers who sell cannabis with the medicinal verchribenem. “While planting, processing, and selling” cannabis plants in Maryland legally, provided the client has a doctor’s prescription, “the facility is currently in violation of federal laws.” In theory, Severn Bancorp does this. therefore, aiding and abetting drug law violations, and the management of the bank, which operates six branches and has 166 full-time employees, risks being sentenced to jail time or a fine.
This paradoxical statement can be explained by the attention of the SEC (Securities and Exchange Commission) to American federalism. And this is a federal judge, given the fact that 50 American states serve as “laboratories for democracy,” as Louis Brandeis once so aptly put it, and that the cumbersome central government in Washington is at times struggling to respond to new political events. In Maryland, for example, selling cannabis to chronically ill people who have gone through a complex approval process has been legal since December 1, 2017, and there are currently 14 licensed cannabis shops in the East Coast state that sell their cannabis products.
These legalization efforts – just 46 states in the United States have legalized the sale or use of marijuana, even though regulations vary greatly from state to state – in contrast to the federal government’s efforts to ban the drug. According to the DEA (Drug Enforcement Administration) classification system of the national drug control authority, cannabis is still considered a hard drug with a high potential for addiction and has no medical benefit. And the use or possession of cannabis products is severely prosecuted in some states.
A risky business.
Unsurprisingly, most financial institutions are ditching the (lucrative) legal marijuana business. They refuse to enter into relationships with customers with companies licensed to sell the drug for fear of conflict with investigative or regulatory authorities. In August, Wells Fargo annulled a Democrat’s runner-up for the Florida Agriculture Secretary. Reason given by a large bank: The candidate is actively advocating for legalizing the distribution of cannabis to chronically ill people, and Wells Fargo could act as a bank that is compliant with the regulatory regime in Washington.
On the other hand, Washington DC had one of the most important regulators – the Financial Crimes Network, better known as FinCEN – the industry was allowed to work with legal cannabis businesses four years ago. Accordingly, banks and savings banks that open the appropriate accounts must carefully weigh all risks and, in accordance with the rule of “know your customer”, closely monitor him. The bank should also become familiar with the specifics of the cannabis business and regularly report potentially illegal transactions to regulatory authorities (“suspicious activity reports” or SARs). But in principle, from a regulatory standpoint, there is nothing against forging business relationships, FinCEN said in February 2014.
The course change was only a hint.
The recommendations of FinCEN, the Department of the Treasury’s anti-money laundering and terrorist financing arm, remain in place, although they are based on policy decisions made by the administration of Democratic President Barack Obama. After taking office of his successor and changing personnel in the ministries of finance and justice, the new leader indicated a change in course, but so far it was only the publication of strategic documents. And when Treasury Secretary Stephen Mnuchin promised that he would soon make a clarifying statement.
Savings Bank Severn didn’t want to wait any longer – although the savings bank is subject to the government’s regulator – the Office of the Comptroller of the Currency (OCC), which is considered the hot dog in the industry. The bank sensed a niche in the market and positioned itself as the first address for a new industry when the first legal cannabis stores opened in Maryland. The Severn is sold quite expensively. As it is called in Maryland industry circles, opening a business account will cost $ 3,000 and $ 1,750 a month in bank fees for licensed cannabis businesses. (At the request of Sberbank, Severn declined to comment on these numbers and answer further questions.) In addition, Sparkasse requires a daily report from its cannabis consumers, which provides information on all financial transactions and in which it also includes transactions. Drug inventory must be disclosed. Finally, Severn bans the industry from accepting credit cards or checks because these transactions are processed through systems that are under the direct control of Washington regulators.
And while that sounds like a lot of work, for Sparkasse, expanding into the cannabis industry makes sense. From early April to late June, Severn made $ 449,000 from hemp store sales, according to the latest quarterly report. This corresponds to about a quarter of Sparkasse’s net income. Given that customer balances in the cannabis industry account for only 4.5 percent of all Severn bank deposits (or $ 27.8 million), this number suggests a significant margin.
Lobbying in progress.
However, this margin could come under pressure. Interest groups such as NORML (National Organization for the Reform of Marijuana Laws) are currently lobbying the national parliament for a bill dubbed the Safe Banking Act. The initiative seeks to codify FinCEN’s guidelines so that banks “no longer have to fear” a conflict with Washington investigating authorities over the cannabis business. Interestingly, this idea is supported by elected representatives of left and right, including such diverse figures as government critic Rand Paul of Kentucky and leftist populist Elizabeth Warren of Kentucky Massachusetts. It is simply absurd that the operator of a legal business is forced to carry out all operations in cash because banks refused to open an account, supporters of the proposal say. The large amount of cash that cannabis dealers will have to carry with them also poses a security risk.
Until now, supporters of the Safe Banking Act have been in the minority. In the Senate, 19 out of 100 members support the move, and 95 out of 435 parliamentarians in the House of Representatives have signed the law. However, the Safe Banking Law is not the only initiative aimed at clarifying this issue. A small group of senators (led by Elizabeth Warren and Republican Corey Gardner of Colorado’s cannabis paradise) have come up with a “State Act” based on an important principle of federalism. 50 states will be prosecuted for conflicting rules at the national level.
Interestingly, President Donald Trump said a few weeks ago that he “really” supports the initiative, probably also because he knows Senator Gardner well. The Colorado Republican, on the other hand, remains “confident” that the president will follow through soon and is lobbying for the passage of the “States Act” – although it was recently announced in Washington that the government has created a task force that, under the leadership of the White House, wants to with the gradual legalization of cannabis.