Today, nearly four-fifths of the United States have regulated medical marijuana markets. Nearly half of the United States, consisting of twenty-one states along with Washington, D.C. and Guam, have acted to legalize recreational adult-use marijuana. However, the possession, distribution, and sale of marijuana remains illegal under federal law, which means any contact with money that can be traced back to state-legal marijuana operations could still be considered money laundering and expose a bank to significant legal, operational, and regulatory risk.
Several movements have recently occurred at the federal level which attempt to relax the federal criminalization of and prohibitions regarding marijuana-related activities. On October 7, 2022, President Biden announced that the Executive Branch of the Federal Government would pardon all U.S. citizens convicted of federal possession of marijuana, and also initiated a wholesale review of marijuana’s classification as a Schedule-1 drug under the Controlled Substances Act (CSA). A few months before, the House of Representatives passed a marijuana decriminalization bill on April 1, 2022 (MORE Act) and months later, several senators – including Senate Majority Leader Chuck Schumer – introduced the Senate’s own comprehensive marijuana legalization-and-regulation bill, the Cannabis Administration and Opportunity Act (CAOA), which would federally decriminalize marijuana. Throughout the past two years, the House of Representatives repeatedly (at last count, seven times) also passed the Secure and Fair Enforcement Act (SAFE Banking Act), which would affirmatively allow federally insured financial institutions to serve the marijuana industry. The MORE Act, CAOA, and SAFE Banking Act’s futures in the legislature are all uncertain at this time.
Cannabis Cash Flow
Marijuana has arrived – and it is big business. Revenue from the sale of legal marijuana is expected to top $32 billion by the end of 2022, up from $26 billion in 2021, and $18 billion in 2020. By 2026, the same group estimates annual sales will exceed $57 billion, which is projected to increase by an additional $14.5 billion if the nine states with a strong likelihood to legalize adult-use cannabis, and the nine states that are likely to legalize medical use prior to 2030, do so.[1]
To put that value in perspective, consider this: The sale of books throughout the United States – with surprisingly similar recent revenue trends as marijuana – reached nearly $30 billion in 2021, up from just over $26 billion in 2020, and just under $19 billion in 2019.[2] Similarly, the U.S. construction machinery manufacturing industry reported annual revenue of about $30 billion in 2021.[3] The pharmaceutical industry in the United States, by contrast, earned $300 billion from domestic sales in 2021.[4] And for good measure, the USDA expects net farm income in the United States (that is, the total amount of profit received by farmers) to reach approximately $150 billion in 2022.[5]
A Finance Conundrum: State-Chartered Credit Unions and Federally Insured Banks
Despite the dominance of the burgeoning marijuana industry, a conundrum has arisen – and has remained almost wholly unaddressed by the federal government for nearly a decade: If banks are either reluctant to, unable to, or prohibited from accepting marijuana-related money, where is all of that cash supposed to go?
While the prevailing narrative seems to be that all financial institutions are prohibited from providing services to marijuana and marijuana-related businesses, that may not necessarily be true in all cases. In fact, more than 700 financial institutions report providing various financial and banking services to marijuana and marijuana-related businesses.[6] However, state-chartered credit unions have been far more willing to serve the cannabis industry than federally insured banks. Why?
The reason may be twofold: First, state-chartered banks, credit unions, and federally chartered financial institutions can be required to comply with different laws that treat marijuana inconsistently. In states in which marijuana is no longer considered an illegal substance, the funds deposited by state-licensed marijuana businesses are not derived from “illegal” activities under state law, and activities performed solely in connection with intrastate commerce may not implicate federal requirements in some circumstances. But marijuana is still a Schedule I substance under federal law. Therefore, federally insured financial institutions dealing in marijuana are in violation of their nearest authority: federal laws.
Second, certain violations of federal anti-money laundering and racketeering laws could result in substantial consequences, which, as relevant to federally insured financial institutions, may include loss of status as a federally insured depository institution, as well as civil seizure and forfeiture of assets. As a result, federally insured depository institutions face significantly greater risks than some other financial institutions, such as uninsured state-chartered depository institutions or non-depository lenders operating solely in intrastate commerce.
Federal Regulation
While these anti-money laundering and racketeering laws serve important functions in combatting the black market and illegal drug trafficking, their applicability to state-legal marijuana industries is frustratingly unclear. For example, although the Financial Crimes Enforcement Network (FinCEN) has indicated it will not undertake enforcement action against financial institutions complying with its guidance in the provision of services to marijuana businesses, other agencies such as the Department of Justice, and even private parties under the authority of Racketeer Influenced and Corruption Organizations Act of 1970, are still free to take action against a marijuana-serving financial institution FinCEN declines to prosecute.
Financial institutions must comply with federal laws requiring them to engage in extensive initial and ongoing customer due diligence. Due to the inconsistent and complicated laws applicable to marijuana, this requires a deep understanding of the cannabis regulations applicable to each entity (which vary widely from state to state), federal law, and federal enforcement priorities. The significant requirements noted above make this process very difficult for financial institutions.
The Catch-22 of Marijuana Banking
The rift between federal and state law has left depository institutions trapped between their mission to serve the financial needs of their local communities and the threat of federal enforcement action [7]. Statements made by various federal agencies and their leaders reflect the muddled legal landscape financial institutions, attorneys, and government representatives are forced to navigate. Agencies’ attempts to clarify these positions are also confusing at best, and contradictory at worst. Former Chairman and current Board Member of the National Credit Union Administration (NCUA) Rodney Hood has consistently stated since 2019 that financial institutions which fall under the NCUA’s purview and which provide services to marijuana businesses will not be targeted for enforcement action based upon the fact that they are servicing a state-compliant cannabis business. On the other hand, former head of the FDIC, Chair Jelena McWillliams, stated in 2020, “At a federal level it is still an illegal substance. And at many state levels, it’s now legal, and it’s legal to frankly bank it at a state level.” Walking back that statement, she stated, “We know we have banks that are banking marijuana businesses, and you know, we can’t bless them and say ‘go ahead and do it.’ […] But to the extent you’re doing it because it’s legal in your state, follow FinCEN guidance.”
At the end of the day, financial institutions are well-advised to only enter the marijuana space accompanied by a team of cannabis regulatory experts who can assist with establishing and maintaining due diligence and reporting processes that comply with applicable law.
[1] “2022 U.S. Cannabis Report: Industry Projections & Trends,” New Frontier Data.
[2] “Publishing Industry Sales Rose by $3 Billion in 2021,” publishersweekly.com.
[3] “Construction Machinery Manufacturing Industry Profile,” firstresearch.com.
[4] “26 Incredible US Pharmaceutical Statistics [2022]: Facts, Data, Trends And More,” zippia.com.
[5] “2022 Farm Sector Income Forecast,” U.S. Department of Agriculture, Economic Research Service.
[6] “Marijuana Banking Update [2021],” Department of the Treasury Financial Crimes Enforcement Network.
[7] “Cannabis Banking, Bridging the Gap between State and Federal Law” American Bankers Association (aba.com).
