Conner McClain and his business partner at In Between Dreams LLC plan to open an indoor growing facility for medical marijuana early next year in Vicksburg.
Like any new small business, they went looking for a bank to handle their company, only to find few options available.
Conner McClain of In Between Dreams struggled at first to find a bank that would work with his company, which plans to grow medical marijuana at an operation in Vicksburg.
COURTESY PHOTO
“So far, none of the big banks will take our money at this point,” McClain told MiBiz. “For the most part, it’s been a hassle. It’s been pretty hard to get the banks to work with us to be able to pay our employees or to pay for anything, really.”
Directed by its CPA, In Between Dreams eventually connected with a small bank in the Western Michigan market. That came after McClain found three banks willing to work with his company, one of which would only accept deposits through a third party.
The story for In Between Dreams illustrates the frustration and challenges that marijuana-related businesses face in Michigan’s emerging industry. Because marijuana remains illegal at the federal level, many banks decline to do business with companies operating in the market.
There are a handful of community banks and credit unions in Michigan serving marijuana-related businesses, although that relatively small number presents one of the many obstacles for operators starting up in the industry.
“It’s a barrier to entry,” said Robin Schneider, executive director of the Michigan Cannabis Industry Association in Lansing. “It makes it very difficult to get into this space.”
Difficulties aside, companies in the marijuana industry can find banking partners if they know where to turn.
Professional service providers such as attorneys and accountants who serve the cannabis industry say they refer clients to a handful of financial institutions in Michigan that quietly provide day-to-day banking services to marijuana-related businesses and are willing to take on the high compliance and reporting requirements of federal regulators. None of the institutions wished to be publicly identified.
Beyond day-to-day services, marijuana-related businesses face a larger challenge in the lack of credit availability through a traditional commercial bank loan, which has forced companies to pursue private capital to start, according to industry professionals.
“Getting a traditional loan is next to impossible, so our members have to go with private investors,” Schneider said.
That’s the route McClain and his partner took. They “got lucky” and were able to find private investors to back their business, he said. In Between Dreams plans to start by growing 500 plants for medical marijuana uses and later expand into marijuana for adult recreational use.
“So far, this is all privately funded through the members of our group,” McClain said.
Jumping through hoops
Contrary to what many executives think, marijuana-related businesses in Michigan do have options available for banking services to handle deposits, payroll, daily transactions, and more, said Erik Schumacher, a tax partner in Grand Rapids who heads the cannabis group at accounting and consulting firm Rehmann LLC.
Schumacher, who referred McClain and his partner to a bank for their business, believes the general view that marijuana-related businesses are completely off limits to the banking industry has been overstated. Those businesses may have to “work harder” to find a bank, but “you should be able to find somebody” in Michigan, Schumacher said.
“I don’t think it’s as dramatic as everybody says when they say there aren’t any banks playing in this space,” Schumacher said. “There are solutions out there.”
However, cannabis clients have to “jump through some additional hoops” and pay higher fees on those accounts because of the cost associated with high regulatory compliance and reporting requirements, he said.
Schumacher cites a recent story in the trade publication Marijuana Business Journal that reports there are 553 banks and 162 credit unions across the U.S. willing to serve the cannabis industry.
“And there’s more and more that are exploring it” as the industry emerges, he said. “There are a lot of smaller to mid-sized banking institutions that are figuring out how to play in this space.”
Holding back growth
Even though some banks are serving the fledgling industry, attorney Robert Hendricks of Grand Rapids-based Warner Norcross + Judd LLP believes the lack of wide access to banking has limited the number of operators seeking and obtaining marijuana business licenses in Michigan.
“I think that anybody who’s in this industry would tell you that the lack of access to regular banking opportunities makes it more difficult and probably has the effect of chilling some number of applicants from getting in the industry,” said Hendricks, whose law practice specializes in cannabis. “It’s very difficult to quantify that number precisely, but I think anybody who thinks about it says, ‘Yeah, for sure: There’s going to be some chilling effect based on the lack of access to regular banking services.’”
The banks in the state that do serve marijuana-related businesses are smaller institutions that see more reward than risk and they “are doing it very quietly,” he said.
“They’re not advertising, they’re not marketing. They are quietly, carefully, cautiously dipping a toe in to see what this is all going to be like,” Hendricks said.
Those banks are serving the industry under 2013 guidance from the Financial Crimes Enforcement Network, or FinCEN, an organization in the U.S. Department of Treasury. The guidance offers financial institutions a pathway to serve a marijuana-related business without violating the federal Bank Secrecy Act and anti-money laundering rules. The guidance set down requirements such as a much higher level of due diligence when taking on a customer and ongoing monitoring of the business to ensure its legitimacy and adherence to state laws.
The FinCEN guidance, which remains in effect, includes ongoing reporting requirements. A bank also must monitor the company’s sales for any sudden spikes and figure out why they happened.
Waiting for guidance
While federal guidelines do provide a way for financial institutions to get into the marijuana market, many executives remain concerned that the present environment could easily change, said Bill Pilkington of Grosse Ile, Mich.-based High Risk Compliance LLC, which works to connect marijuana-related businesses with banks.
The concerns of risk-averse bankers will persist until they get greater clarity through a permanent solution, said Pilkington, a former assistant director of banking for the state and risk management specialist with the Federal Reserve.
“It’s just the fear,” he said. “It’s just this unknown bogey man out there that is going to come get you.”
On top of that fear comes concerns about potentially harming the bank’s reputation, industry sources said.
Even with the FinCEN guidelines in place and the current U.S. Department of Justice practice that leaves it up to local U.S. Attorneys whether to pursue cases against marijuana businesses, many institutions, especially large banks, have refused to serve the industry until federal law changes, Hendricks said.
“None of those documents changed the basic underlying legal problems, which is marijuana-related activity violates the Controlled Substances Act, period,” Hendricks said. “So the big banks said, ‘You know what? This is a problem for us until the feds fix this.’”
Legislation stalls
That fix could come either through legalization of marijuana at the federal level or passage of the SAFE Banking Act, which would prohibit regulators from penalizing institutions that serve the industry in states where it’s legal. The U.S. House passed the SAFE Banking Act in September.
The legislation remains pending in the Senate, where passage seems unlikely unless changes are made.
The chairman of the Senate Banking, Housing and Urban Affairs Committee, Republican Sen. Mike Crapo of Idaho, said a week before Christmas that he opposes the bill as written. He invited “public feedback on ways to address public health and money laundering concerns with cannabis banking.”
“Significant concerns remain that the SAFE Banking Act does not address the high level potency of marijuana, marketing tactics to children, lack of research on marijuana’s effects, and the need to prevent bad actors and cartels from using the banks to disguise ill-gotten cash to launder money into the financial system,” Crapo said.
Banks that avoid the industry may even extend that stance to other clients that do business with marijuana-related companies, Hendricks said. For example, a bank could call in the loan of a property owner who has a tenant involved in the marijuana industry. The reason: The monthly lease payment going into the landlord’s bank account “is directly traceable to activity that violates the federal Controlled Substances Act, and the banks say, ‘No. We don’t want any part of that.’”
Finding solutions
Some of the community banks and credit unions that serve the marijuana industry use third-party service providers that assist them with compliance and reporting to federal regulators.
One of those companies is Seattle, Wash.-based Shield Compliance LLC, which offers banks and credit unions a platform that connects to databases of state regulatory agencies. The service can gather and analyze information on licensed businesses and monitor their sales on behalf of banks. The platform also enables businesses to upload financial information and other data they need to regularly provide.
“We’ll help keep them safe and we will allow them to focus their time on their riskiest aspects of the business instead of all of the fetching and organizing of data,” said Tony Repanich, president and COO of Shield Compliance.
The company works with three state-chartered community banks in western and southwestern Michigan and “we have some prospects that are in the southeast side of the state that are progressing,” said Repanich, a former chief banking officer of a $1.5 billion community bank in Washington state.
In addition to Michigan, Shield Compliance also operates in Colorado, Illinois, Massachusetts, Ohio and Washington. The company entered Michigan a year ago, viewing the market as having a “very strong” base of community banks and credit unions that are competing hard for deposits.
Those smaller, often closely held institutions, particularly those based in rural markets with limited growth prospects, are more apt to serve the marijuana industry than their larger counterparts, Repanich said.
“Growth has been hard and they see this as a unique, sort of one-time growth strategy,” he said.
As licensed recreational marijuana businesses now begin to open across the state, Repanich shares the belief that more financial institutions will eventually enter the market. He hopes to work with a few dozen more by the end of 2020 and credits trade associations and state regulatory agencies with helping pave the way “to make sure the businesses have access to financial services.”
“You’re going to have more banks and credit unions in Michigan serving this market in a very short period of time,” he said. “You guys are going to be a great market and, hopefully, other markets will flow toward Michigan as an example.”
If Congress ever legalizes marijuana at the federal level or enacts legislation enabling banks to serve the industry, “you would see a number of banks come off the sidelines,” Repanich said.
State takes notice
The challenges marijuana-related businesses face in finding a bank were noticed early on by the Michigan Marijuana Regulatory Agency as it began to implement medical marijuana rules.
The agency brought together trade associations, the state Treasury Department and bank regulators to look at “how we as a regulatory agency could potentially act as a bit of a facilitator to improve access to banking relationships,” said Executive Director Andrew Brisbo.
That led to the formation of a process in which banks operating in the industry can obtain background information on marijuana licensees directly from MRA, whether during due diligence or on an ongoing basis “so that they feel more comfortable in providing banking services,” Brisbo said.
“The challenges in establishing and maintaining banking relationships was something that we heard from stakeholders in the industry very early on in the implementation of the medical program that was an inhibitor to operating a normalized business,” he said. “The industry wanted to utilize banks, banks wanted to provide services, and ultimately it’s to the benefit of the citizens of Michigan if there’s not millions of dollars of cash flying around through the facilities, both in retail transactions as well as business-to-business transactions.”
The first Michigan retailers to sell adult-use recreational marijuana opened in December.
