You already bank the pot industry. You just don’t know it

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Banks have mostly chosen to stay on the sidelines of the cannabis rush, deterred by the regulatory uncertainty around an industry that is still illegal at the federal level and concerns that the Trump administration seems opposed to legalization efforts.

But it may be a bigger challenge than financial institutions realize to keep their hands completely clean of the marijuana business. The burgeoning sector touches not just those who grow and sell pot in states where it is legal, but agricultural supply providers, commercial real estate holders of lands for farming marijuana, attorneys and lobbyists advocating for the new industry, and many more ancillary businesses.

The difficulty in avoiding marijuana-related business of any kind, and the regulatory risks inherent for banks that — without knowing it — are banking ancillary businesses that receive marijuana-related revenue, increase the need for banks to advocate for regulatory support of their servicing pot businesses.

Adult-use cannabis is legal in some form in about 30 states, but it is still viewed as a Schedule I drug at the federal level. The state legalization effort has helped make cannabis one of the fastest-growing industries in the country, which within 10 years may rival beer in sales. But banks’ discomfort even with organizations that are related to pot, but that do not handle it directly, was illustrated earlier this month when PNC Bank reportedly cut ties with the Marijuana Policy Project, a lobbying organization, upon determining that the MPP receives funding from businesses that directly handle the drug.

In other cases, banks are providing services to cannabis-related businesses that are not disclosing that their revenue — kept in deposit accounts — may come from legal marijuana providers. This exposes banks to even further legal and regulatory risk and uncertainty.

As in all gold rushes, there are the miners and there is everybody else. In addition to growing and selling cannabis, there is delivery and processing of cannabis into edible food products. Other ancillary services include lighting, soils and nutrients, concrete, gravel, greenhouse manufacturers, accountants, lawyers, office supply stores, and the list goes on.

All of these ancillary industries touch banks. Where do you think real estate investment ventures focused on properties in states that have passed laws legalizing pot will be depositing their cash? It is a fantasy for any bank to think it can police all the sources of indirect cannabis revenue being deposited into its accounts.

Most bank risk managers appear to be taking a zero-tolerance position with regard to cannabis-related funds. But banks cannot suddenly just close the door on local business. Financial institutions providing deposit and payroll services, and even business loans, to a greenhouse supplier or industrial lighting retailer or some other outfit must face the reality that they are banking the pot industry.

Yet the continued legal uncertainty means an ancillary service may be incentivized not to discuss sources of their revenues and identities of their customers in seeking out financial services. This just creates a knock-on impact from the regulatory non-awareness that will be very problematic for bank compliance officers.

Banks have every reason to want to support transparency. Like any high-growth sector, the cannabis industry is sure to have a high amount of failures. The promise of getting rich in a suddenly lucrative field will attract players who lack a sound business strategy and experience, or lead to an oversupply of some services where companies find they are too late to the party. Banks must be able to know if any of their borrowers are exposed to this risk. And in the likely event of bankruptcies and other legal disputes over failed ventures, the court discovery process will push banking relationships out into view possibly before banks even realize they are involved. Banks with unknown concentrations related to ancillary suppliers will find they have a bunch of bad credits on their books.

Being in the cannabis industry has a cool cachet to it, but in reality it is farming, branding and sales. Being a part of a new sector could be a good opportunity for financial services companies. But the legal and regulatory risks are still daunting. Since banks may not be able to avoid touching the cannabis industry, it behooves them to advocate for regulatory support of banking legal pot and its ancillary businesses.

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Source: 420 Intel – United States

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