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Will cannabis banking risk remain after federal recognition?


As I speak with bankers across the country who are considering launching cannabis banking programs, I am often asked about BSA/AML risk. Specifically, bankers want to know if they will still need to implement and maintain specialized compliance programs if the federal government legalizes marijuana, or at a minimum, recognizes state legalization programs.


In short, the answer is yes. The BSA/AML risk associated with serving cannabis-related businesses (CRBs) will not magically go away when Congress eventually passes marijuana reform legislation. I say ‘eventually,’ because while it may not happen this year, it is just a matter of time before we see policy changes at the federal level.


This could take the form of the SAFE Banking Act (which would allow financial institutions to provide services to cannabis clients without fear of federal penalties) or even more comprehensive marijuana legalization legislation.


That said, the benefits for financial institutions prepared to enter the market now– before federal action – can be significant. As evidenced by record sales volumes across the country, the cannabis industry has been somewhat pandemic proof. More states are recognizing the revenue opportunity in legal adult-use cannabis and are acting accordingly. The past year has seen adult-use cannabis legalized in New York, New Jersey, Connecticut, Arizona, and Montana. Today some form of medical or adult-use marijuana is legal in 38 states, representing upwards of 95% of the U.S. population. With plenty of examples of successful retail programs to draw from, states are hitting the ground running. For example, Arizona, which launched adult-use sales in January 2021, is on track to outpace first-year sales in Colorado and Washington, the first states to legalize adult-use cannabis in 2012.


So, what are some of the risks financial institutions face when serving CRBs, and why will enhanced due diligence continue to be required for this industry?


A Robust Illegal Market


The legal cannabis industry continues to compete with an outsized illegal market. According to research from BofA Securities, legal sales of cannabis in the U.S. grew 40% in 2021 to $25B. New Frontier predicts the U.S. legal cannabis market will experience further growth, reaching $41 billion by 2025. While the growth of the legal market is expected to be quite impressive, the illicit market is shrinking at a slower pace. According to some estimates, we are still dealing with a $65B illicit market. As you can see, while the cannabis industry is bringing in new users within the legal market framework, the illegal market is still going strong. As a result, BSA/AML requirements are unlikely to change dramatically because banks and credit unions still have to make sure that funds coming through their doors are from legal channels.


Bad Actors


Whenever you operate in an industry with a strong illicit market, you have to guard against unsavory individuals who try to associate themselves with legal entities. To ensure that bad actors are not attaching themselves to good businesses, the enhanced due diligence conducted around the underlining beneficial owners, above and beyond what banks and credit unions do for their typical commercial business clients, will continue to be at a heightened level for a prolonged period of time.


Legacy Cash


Because the cannabis market existed as a cash business long before legalization, we know there is still a lot of money buried in people’s backyards or stashed in vaults in people’s basements that eventually wants to find its way into the legal banking market. Compounded by the fact that this industry continues to operate largely as a cash business, a strong BSA/AML program will help ensure that the funds coming into the financial institution are from legal cannabis operations.


For these – and many other reasons – we expect bankers will need to invest in specialized BSA/AML compliance programs for the foreseeable future. While the added burden and cost associated with maintaining these programs may limit the total number of participants offering banking services to the cannabis industry in the short term, we expect competition from financial institutions to steadily increase as more states launch legal programs and we get closer to federal recognition.


The good news for financial institutions is that the compliance systems they’re investing in, the relationships they’re developing, and the customers they’re acquiring today will retain their value after the passage of the SAFE Banking Act or other federal legalization. The financial institutions that establish a strong foothold in the market now will also have a valuable first-mover advantage when federal policy changes and the economics of the industry change over time.



This article originally appeared in GRC Outlook on March 30, 2022