The legalization of cannabis in Michigan offers an emerging economic sector for banks and credit unions, but only if Congress enacts legislation to change existing federal law and allow them into the market.
Marijuana remains illegal as a controlled substance under federal law, generally leaving financial institutions on the sidelines of a rapidly growing market.
The proposed Secure and Fair Enforce (SAFE) Banking Act of 2019, introduced in March and now awaiting a U.S. House vote after clearing committees, would allow them to bank cannabis-related business by preventing federal regulators from penalizing financial institutions that serve the industry in states where it’s legal.
With cannabis legal in 33 states and 206 cosponsors for the bipartisan SAFE Banking Act, Michigan Bankers Association President and CEO T. Rann Paynter sees momentum growing to let bankers work in the pot industry. Paynter said he’s cautiously optimistic that Congress will enact the SAFE Banking Act.
“We feel like there is growing support for this or similar legislation, as members of both the House and Senate are increasingly aware of the need,” said Paynter, noting a July hearing in the Senate Banking Committee on cannabis and financial services.
“That, we believe, is very positive and we are anticipating forward, positive movement,” he said. “It’s a growing need to ensure that these businesses are able to have banking services. It would solve a public policy issue.”
Advocates for the SAFE Banking Act also view it as a public safety issue for cannabis businesses that, lacking traditional banking, operate on a cash-only basis.
In Michigan, a 2018 report issued by the East Lansing-based Anderson Economic Group LLC estimated that marijuana for recreational use by adults could become a $1.4 billion industry in Michigan in the years ahead.
Nationally, Grandview Research estimates that U.S. cannabis industry, at $11.9 billion in 2018, will expand at a compound annual growth rate of 24.1 percent from 2019 to 2025.
If Congress enacts the SAFE Banking Act, or similar legislation, Paynter expects some banks will move quickly to take advantage of the new business opportunity.
“There are banks that are certainly evaluating these possibilities and some will likely be on board sooner than others, as it is with any new opportunity,” he said. “But definitely there are those in the industry looking at what this might mean for their organization.”
Enacting federal legislation that allows credit unions to serve cannabis businesses “is not a huge priority or an essential bill for Michigan’s credit unions, but it is an issue that we strongly support,” Michigan Credit Union League CEO David Adams wrote in an email to MiBiz.
“It is more about protecting our credit unions in those instances where they may be unknowingly serving a cannabis business and wanting to be sure that they have a safe harbor against regulatory repercussions,” Adams said. “But also, for those credit unions who wish to proactively serve these businesses, it helps create that opportunity as well.”
Some banks have already moved into serving cannabis businesses under prior federal guidance. Under present federal law, those institutions face considerable risk.
In a 2013 memorandum issued under the Obama administration, the U.S. Department of Justice indicated it would exercise “prosecutorial discretion” not to prosecute cases under the Controlled Substances Act in states where cannabis was legalized and the industry rigorously regulated, said Rodney Martin, a partner at Warner Norcross & Judd LLP in Grand Rapids. The so-called Cole Memorandum also listed eight priorities for cannabis businesses to follow, such as preventing the distribution to minors and revenues from going to drug cartels or gangs, Martin said.
The memorandum was revoked in January 2018 by then-Attorney General Jeff Sessions, who left it up to individual U.S. attorneys across the country to decide whether to prosecute marijuana businesses licensed under state laws. Current Attorney General William Barr, in his confirmation hearing, indicated the Justice Department would operate the same way for the time being, Martin said.
“That’s one of the risks banks that want to get into banking marijuana businesses have to weigh,” Martin said. “Since this is all discretion and not law, the banking regulatory agencies and the Department of Justice could at any time change their position.”
At the same time the Cole Memorandum came out in August 2013, the Financial Crimes Enforcement Network (FinCEN), an organization in the U.S. Department of Treasury, issued guidance on how financial institutions could serve a marijuana-related business. The guidance set requirements such as a “significant amount of due diligence in taking on the customer,” and ongoing monitoring of the business to ensure its legitimacy and adherence to state law, Martin said.
A bank also has to monitor the sales of the business for any sudden sales spike and, if so, figure out why, he said.
The FinCEN guidance, which remains in effect, includes reporting requirements and “lists of number of red flags a bank has to be looking at to make sure the business continues to operate within the state law and within the expectations of the Department of Justice,” Martin said.
“Not many” banks have been willing to go through those hoops to serve the industry, Martin said.
“The problem for a bank, even if it determines it wants to do this, is there is a lot of work that has to be done to fulfill the due-diligence responsibility,” he said. “A bank has to devote a considerable amount of resources to fulfilling those responsibilities. Most banks will find they don’t want to do that or find for reputational reasons that they won’t want to be involved in that business at this point.”