July 13, 2020 10 min read

By Laura Newcomer

Cannabis is legal in 33 states these days, but it wasn’t always that way. As recently as 2012, only two states (Colorado and Washington) had legalized recreational cannabis. The industry has grown quickly in the past few years, but it’s still very youngand banks are still figuring out how to handle it. 

That’s largely due to the fact that cannabis is still illegal at the federal level, which means banks that choose to work with cannabis companies could be putting themselves at risk. 

So long as (most) banks won’t work with cannabis companies, those businesses are left in the lurch. Managing a cash-only business comes with a huge host of challenges, including some that are unique to the cannabis industry. 

Let’s take a closer look at why banking is tough for cannabis companies, how the landscape of cannabis banking is changing, the challenges of running a business without a bank account, tips for cannabis business cash management, and the answer to that pressing question: Just wheredodispensaries keep their money? 

Why Is Banking a Challenge for Cannabis Companies? 

In just the past year, the cannabis industry has made significant strides in getting closer to legal banking options. But for much of the legal industry’s short life span, banking has been a major challenge for any cannabis business. 

The main reason for this is that cannabis is still classified as a Schedule I drug under the Controlled Substances Act (along with the likes of heroin), and the federal government still considers it an illegal substance. So as far as the federal government is concerned, any funds garnered by a cannabis business are deemed to be illegally generated

What does the federal government’s opinion have to do with banks, you might ask? 

Well, many big banks are federally insuredwhich means their wellbeing depends, in part, on remaining in the good graces of the federal government. These banks don’t want to jeopardize their standing with the U.S. government, so they’ve avoided doing business with legally dicey cannabis companies. 

The general inability to open accounts with federally insured banks has created a number of hassles for cannabis companies, from managing payroll and taxes to figuring out how to keep large sums of on-hand cash safe and secure. (We’ll dive into more of these challenges below.) 

Taxes are a particularly sticky wicket for cannabis companies. Even though the federal government effectively denies cannabis companies access to federally insured banking, the IRS still expects these companies to pay regular income taxesto the tune of nearly $5 billion a year

And here’s the real kicker: Cannabis companies are also disallowed from claiming corporate income tax deductions (with very few exceptions). This means cannabis businesses are subjected to astronomical tax rates while being denied access to the same banking resources as other businesses. In many cases, they have to pay these unusually high taxes in cash. 

But it’s not all bad news for cannabis companies looking for a viable way to secure their cash. 

Many companies have been welcomed by credit unions, state-chartered banks, or privately insured banks. Data from the Financial Crimes Enforcement Network suggests that, as of September 2019, just over 723 depository institutions (or 8.4% of all depository institutions in the U.S.) offered services to cannabis-related businesses. 

In states where cannabis is legal, this list includes some surprisingly big names. Depending on the locale, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo have all been known to work with cannabis companies. Still, 8.4% is an extremely small portion of the banking landscape. 

Even working with smaller banking institutions doesn’t absolve cannabis companies of all financial risk. The lack of federal insurance means these organizations could be less stable than the bigger banks. 

How the Landscape of Cannabis Banking is Changing

For much of the cannabis industry’s existence, the banking situation has looked pretty bleak. But in the fall of 2019, hope came in the form of the Secure and Fair Enforcement (SAFE) Banking in the Cannabis Act.

The act would allow financial institutionsincluding banks, credit unions, and insurance companiesto help manage cannabis companies’ funds without risk of punishment from the federal government. It passed in the U.S. House of Representatives by 321 to 103 votes. The act has also received support from the American Bankers Association. 

While this was a promising move for the cannabis industry, the act doesn’t become law unless it’s also approved by the Senate. So far, the bill has languished there, and it’s unclear whether it would have the Senate support necessary to pass into law. 

This isn’t the first time lawmakers have tried to make banking easier for legal cannabis companies. 

In 2014, the Obama Administration’s Treasury Department essentially told FDIC banks that they were allowed to work with legal cannabis dispensaries and other operations without fear of federal prosecution. But the guidance wasn’t set in stone, and most banks remained wary of cozying up with the cannabis industry. Then, in December 2017, then-Attorney General Jeff Sessions announced he’d be doing everything in his power to dismantle the guidance that had been established in 2014. 

Most recently, congress is seeking to include the SAFE Act in the HEROES Act, the latest Covid-19 relief package. Meanwhile, some states (such as Illinois) are looking to take matters into their own hands by proposing legislation that would make it safer for banks and cannabis companies to work together. 

Even if the SAFE Act passes, it doesn’t necessarily mean the future of cannabis banking will be all smooth sailing. 

Because cannabis is still classified as a federally illegal Schedule 1 drug, banks and lenders might still have concerns about working with cannabis companies. For instance, lenders operating in more conservative regions might fear pushback from stakeholders if they partner with companies that work with a substance that’s illegal at the federal level. The good news is that lenders in weed-friendly cities might be more willing to support cannapreneurs. 

So Where Do Dispensaries Keep Their Money? 

Okay, now you understand why cannabis banking is often a really fraught process. So that begs the question: In the absence of reliable banking options, where do dispensaries keep their money? 

As noted above, some cannabis companies have found refuge in credit unions or banks that are state-chartered or privately insured (read: not federally insured). But even the cannabis companies who have found a credit union or bank that’s willing to work with them generally have to jump through more hoops than conventional businesses. 

For instance, some banks will charge additional fees to cannabis companies, because managing these accounts can involve extra work for the banks. That’s thanks to the Bank Secrecy Act, a federal statute that outlaws money laundering and requires financial institutions to flag accounts that make a cash payment of $10,000 or more from a single buyer, among other rigamaroles. (Cannabis companies often conduct these kinds of transactions.) Adhering to these rules can be time-consuming, which is why those financial institutions that are willing to work with cannabis companies often charge hefty fees for said accounts. Some cannabis businesses are paying thousands of dollars a month simply to maintain a bank account. 

The Bank Secrecy Act also puts cannabis company owners at risk. These laws have led to legal cannabis business owners having their personal bank accounts closed or being removed from the banking system entirely. 

All of this helps explain why approximately 70% of all legal cannabis businesses do not operate with the support of banks. 

Cannabis companies that haven’t found a home with a credit union or a non-federally insured bank are forced to manage physical stacks of cash at all times. In the next section, we’ll cover some of the many risks associated with running a cash-only business. To quickly highlight how dire this situation can be, it’s worth noting that some cannabis business owners literally bury their money in the ground in the hopes of safekeeping. 

Even though the difference between operating with a credit union or running a cash-only business are pretty stark, cannabis companies do have a number of cash management options to choose fromwith more and more innovative cannabis startups coming out every day. Some of these workarounds are illegal (think: overseas accounts), but others inhabit a greyer area:  

  • Bank-to-bank transfers. These systems are fairly new to the scene and operate a bit like PayPal, in that consumers pay for cannabis products directly from their bank accounts. There are also new platforms such as CanPay, which enables transactions between credit unions and state-chartered banks that are comfortably working with cannabis companies. 
  • Cashless ATMs. This is a common cash management strategy among dispensaries. It involves returning physical change or an electronic rebate in exchange for a debit card transaction. These systems are essentially a non-compliant way of tapping into the ATM network, and they’re at constant risk of being shut down
  • Cryptocurrency. There’s a lot of promise around cryptocurrency, but crypto infrastructures are varied and specialized. So it still remains to be seen if it’s possible to create anything approximating a standardized network and if cryptocurrency is a viable cash management solution for dispensaries.
  • E-wallets and prepaid gift cards. These products serve as digital accounts into which consumers can load funds. Then they can spend those funds at a dispensary, sort of like they’re using a debit card. 
  • Token systems. Nevada is currently experimenting with a three-year pilot program that would allow cannabis companies and consumers to conduct transactions using electronic tokens, in much the same way as casinos. 
  • What Are the Risks for Cannabis Companies that Don’t Have a Bank Account? 

    As you can imagine, managing a business’ finances without a secure bank account poses a number of challenges. These include (but are not limited to) the following. 

    No access to banking services

    Banks do so much more for businesses than safekeeping their cash. They also provide lending services, payroll services, checking services, and debit and credit cards (most of which are FDIC-backed). 

    Without these resources, many dispensaries are forced to operate as cash-only businesses, which creates hassles for both the dispensaries and consumers. They also cannot issue tax payments electronically or by check, which forces dispensary owners to deliver huge wads of cash to state tax offices in person. This can be risky and costly; for instance, some owners hire armored vehicles or guards for this transport.

    Payroll challenges

    If you aren’t able to manage your finances electronically, then you won’t be able to set up automated payments for your team. You also might not be able to provide those team members with certain payment methods that are common in other industries, such as direct deposit. And manually managing payroll takes a ton of time and is much more subject to human error than an automated, electronic system. 

    Even once you’ve gotten payments into your team members’ hands, they might face their own challenges. For instance, their banks could refuse to allow them to deposit funds made in the cannabis industry. This can have repercussions when it comes to those team members qualifying for purchasing a home, financing a vehicle, and so on. Meanwhile, getting paid in cash can make people who work in the cannabis industry vulnerable to theft. 

    A reduced chance of securing loans

    When you don’t have a bank account, it’s harder to provide solid proof of your company’s financial standing. That can make it more difficult to obtain a loan. (Even more challenging? Many traditional loan programs won’t even consider cannabis companieswith or without a bank account.)

    Complicated vendor partnerships

    When a cannabis business doesn’t have a bank account, it can make it harder to develop trusting relationships with third parties such as janitorial, plumbing, or marketing businesses.

    Decreased sales

    When your business is cash-only, customers can only purchase whatever they can pay for with the cash they have on hand. This can lead to diminished sales. 

    Security challenges

    It’s a fairly well-known fact that many cannabis companies are forced to operate without a bank account. And that means thieves have set their sights on companies that might be storing lots of cash on their premises. This forces cannabis companies to invest in various security measures, whether that’s purchasing an expensive safe or hiring security guards.

    Tips for Cannabis Cash Management

    Whenever possible, a cannabis company should strive to secure its funds with some kind of banking institution. As a general rule, this is the safest and most efficient means of tending to a company’s finances. So don’t give up before you’ve tried. 

    Start the bank search by researching banks and credit unions in your area. See if they’re already doing business with cannabis companies; that’s a good indication that they’re comfortable and experienced with working with higher-risk businesses.

    Once you’ve created a list of possible banking partners, set up meetings to see if they could be a good fit. Be up front about the fact that you operate in the cannabis industry, and come prepared with profit and loss statements and other financial documents to demonstrate your professionalism. 

    No matter whether you’ve found a credit union or bank that’s willing to work with you or you’re still stuffing wads of cash under your mattress every night, there are several ways that cannapreneurs can more safely and effectively manage their finances

     

  • Put a lot of effort into establishing your company’s financial health. If the opportunity to open an account with a bank or credit union arises, you’ll have a much better chance of forging a successful relationship if your financial records are in order. Keep organized profit and loss statements, maintain clear payroll records, reconcile funds at the end of each workday, and so on.
  • Work with an accountant with cannabis industry experience. Businesses in all industries can benefit from working with an experienced accountant (whether contracted or full-time). That’s especially true in the cannabis industry, where rules, regulations, and tax laws are constantly changing at local, state, and federal levels. An experienced accountant can help you with bookkeeping, payroll, and taxes so you’re less likely to experience major headachesor, heaven forbid, the dreaded tax audit. 
  • Use a drop safe. Store all cash here at the end of the day for safety. It helps to separate the cash that’s designated for taxes from the cash you’ll need to doll out for payroll and manage other operating expenses. Limit access to the safe to reduce the risk of employee theft. 
  • Create procedures for identifying counterfeit cash. Teach your staff techniques for identifying counterfeit cash and/or invest in a device that can help with counterfeit detection. You don’t want to pay taxes on money that isn’t real. 
  • Invest in security cameras. Make sure they include every register in their frame. And be sure to inform employees of the cameras’ locations so they aren’t being filmed without their consent. 
  • If you need to transport lots of cash, research cash transportation services. There are a lot of quality cash transportation services that will be happy to work with legal cannabis companies. If you’re transporting a ton of cash (say, to pay taxes to the IRS or a state agency), this can be a smart way to protect your money. 
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    The Bottom Line on Cannabis Banking

    As you can see, cannabis banking is a complicated affair. 

    A tangled web of federal regulations make it difficult for cannabis companies to open accounts with banks. And even when cannabis businessesdofind a credit union or bank that’s willing to work with them, they’re often forced to pay enormous fees simply to keep their accounts open. 

    Thankfully, it’s not all doom and gloom.

    In some cases, cannabis companies are able to work effectively with, say, a credit union or a state-chartered bank. In others, they’re taking extra security measures or experimenting with different workarounds for managing a cash-only business.

    There’s also the hope of more forgiving federal legislation at some point down the line. If the Senate gets its act together and passes the SAFE Act, then many of cannabis companies’ banking headaches could disappear.

    Until then, it’s important for cannabis business owners to think carefully about cash management and invest in protocols, security systems, and other initiatives to keep their hard-earned money safe. 


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