KEY TAKEAWAYS
- Cannabis is still labeled a controlled substance at the federal level, which restricts access to federally regulated benefits such as banks, loans, and 401(k)s.
- Banks can still work with cannabis businesses but must navigate complex legislation, which most won't do.
- Since cannabis businesses can't rely on banks, their all-cash system poses both a financial and safety risk to employers and employees alike.
- New legislation to remedy cannabis banking issues continue to be shot down in the Senate.
Since the beginning of the legal cannabis industry, there’s been one chief issue for cannabis companies: They can’t really use traditional, federally insured banks, and by extension, have limited access to other financial services such as 401(k) plans and loans.
Regardless of whether it is legal at the state level, cannabis is still considered a controlled substance at the federal level. As a result, banks, which are federally regulated, are wary about working with cannabis businesses due to convoluted regulations and the chance of penalty—leaving cannabis businesses with limited options.
According to the American Bar Association and the federal Financial Crimes Enforcement Network, only a tiny sliver of the U.S. banking industry—563 banks and 160 credit unions,—were providing banking to marijuana-related businesses as of September 30, 2019. And, when it comes to 401(k) investments, which are legal for cannabis companies to provide employees, there are just a handful of providers.
The impact on the industry is profound. In a recent survey of 396 licensed cannabis companies compiled by Whitney Economics, over 70% of the respondents said lack of access to banking and investment capital was their top challenge as a company.
So, why is the legal industry set up this way and how do cannabis companies adapt? Let’s explore.
Compliance is a Nightmare for Banks
Curiously, there is no explicit law that says banks or 401(k) providers can’t work with cannabis businesses.
According to the federal government, banks are allowed to work with marijuana-related businesses—but only if they are willing to navigate a minefield of complicated federal anti-money laundering laws, which are complex and confusing.
“Many banks are wary of potentially violating federal anti-money laundering and other laws by engaging in transactions with the proceeds of federally illegal marijuana operations,” reports the American Bar Association.
For instance, the Bank Secrecy Act (BSA) requires banks to maintain rigorous recordkeeping and reporting practices and to “file a Suspicious Activity Report (“SAR”) to the Financial Crimes Enforcement Network (“FinCEN”) whenever there is a suspected case of money laundering, fraud or use of funds stemming from illegal activities – like a cannabis operation,” according to National Law Review.
Sure enough, the Treasury Department guidance requires banks still file suspicious activity reports even in states where marijuana-related activity is legal, meaning that, technically, banks would have to report every instance when they come in contact with money generated from cannabis sales to remain compliant with the federal government. Hence, most banks don’t see working with cannabis companies as worth the stress and paperwork.
“Currently, thirty-seven states, the District of Columbia, Guam, and Puerto Rico have all legalized the use of marijuana to some degree. Yet the possession, distribution, or sale of marijuana remains illegal under federal law, which means any contact with money that can be traced back to state marijuana operations could be considered money laundering and expose a bank to significant legal, operational and regulatory risk,” reports the American Bankers Association.
Going Without Banks
With limited and unreliable banking options, an estimated 70% of cannabis companies resort to all-cash operations. This poses major safety risks and operational challenges for a legal industry moving more than $33 billion dollars-worth of cannabis during 2022.
First and foremost, having all that cash sitting around is a major safety risk to employees. In Washington this last year, cannabis dispensaries were targeted in a slew of armed robberies, resulting in the injury and in some cases, murder of dispensary workers. It’s not just Washington, either, robberies at dispensaries are a problem throughout legal cannabis states.
Additionally, working without a bank creates a variety of operational challenges that affect their employees, partners, and even their taxes.
Operating all-cash makes it difficult to ensure fair and correct payment of employees and partners, as companies can’t use payroll systems or pay through direct deposit payments or company checks. As a result, it’s not uncommon for cannabis companies to be sued for unpaid wages and other worker violations. As well, all-cash affects payroll tracking and documentation, making it challenging to accurately maintain and document business expenses for taxes.
No Retirement Savings
Because banks are discouraged from handling any money related to cannabis, traditional 401(k) providers won’t get near it either, even though it is fully legal for cannabis companies to provide 401(k)s and other benefits to their employees. This diminishes most 401(k) options that these companies have.
Without access to traditional retirement options, cannabis companies cannot compete with other companies on a level playing field. While other companies will be quick to find options with a range of providers, cannabis companies don’t have that luxury.
Offering a retirement plan is a key benefit that both draws and retains employees. Many employees use retirement savings to prepare for life in the later years. Without it, employees may look elsewhere.
This discourages employees from staying at a cannabis employer for long, leading to higher turnover. This can weaken the strength of the work culture and cause training costs to remain high.
Thus, lack of access to traditional banking is about more than not having a place to deposit funds, it also directly impacts a cannabis business' ability to serve their partners, pay their taxes, retain talent, compete in the hiring market, and grow.
Changing the Landscape
Aware of how this banking issue affects this fast-growing and lucrative industry, US House lawmakers have tried to improve the situation.
On six occasions, the House has passed legislation called The SAFE Banking Act, designed to amend federal banking laws to accommodate legal cannabis companies. Unfortunately, that legislation has never made it to debate on the Senate floor due to the priorities of Senate leadership.
Recently, to pass the stalled bill, a bipartisan group of senators pushed to get the SAFE Banking Act passed within a larger U.S.- China competition package. Unfortunately, these efforts were blocked again by congressional leaders, who removed the cannabis banking provisions from the package in late June 2022.
It appears cannabis businesses will be forced to mind their own Benjamins for the foreseeable future unless they can work with one of those few reliable banks and retirement companies ready and willing to take them on.
Leading Retirement Solutions has a custom-made plan just for the cannabis industry. If you are a company ready to upgrade the financial benefits you provide your employees, let us know.
