Why Can’t Cannabis Companies Use Banks?
Understand the core legal and regulatory reasons limiting banking access for state-legal cannabis businesses despite growing industry demand.
The cannabis industry in the United States faces significant banking challenges. Although cannabis operations are legal in many states, they remain illegal at the federal level. This creates a conflict that limits access to traditional financial services for cannabis businesses. The core issue stems from the tension between evolving state laws and persistent federal prohibition, which impacts everything from basic checking accounts to access to loans and credit.
The Federal Legal Landscape
Cannabis is classified as a Schedule I controlled substance under the federal Controlled Substances Act (CSA), indicating no currently accepted medical use and a high potential for abuse. Despite state-level legalization, its federal illegality means financial transactions involving cannabis businesses can be considered proceeds from unlawful activity. Financial institutions engaging with cannabis businesses could be seen as complicit in federal crimes, such as money laundering, as the Bank Secrecy Act (BSA) requires banks to report suspicious activities involving federally illegal substances. This fundamental conflict between state and federal law creates a substantial legal hurdle for financial institutions.
Federal Banking Guidance
Federal agencies provide a framework for financial institutions serving cannabis businesses. The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury, issued guidance in February 2014 to clarify expectations for financial institutions under the Bank Secrecy Act (BSA). This guidance acknowledges that transactions involving state-legal cannabis businesses generally involve funds from federally illegal activity. As a result, financial institutions must file Suspicious Activity Reports (SARs) for cannabis-related transactions. FinCEN’s guidance outlines three categories of SARs:
Marijuana Limited: Filed when a financial institution believes the business does not violate federal enforcement priorities or state law.
Marijuana Priority: Used if the financial institution suspects a violation of federal priorities or state law.
Marijuana Termination: Filed if the financial institution decides to end its relationship with a cannabis business.
Additionally, FinCEN mandates enhanced due diligence, including verifying state licenses, reviewing license applications, and continuously monitoring for suspicious activity.
Banking Industry Concerns
Despite federal guidance, many financial institutions remain hesitant to provide services to cannabis businesses due to the significant regulatory compliance burden, requiring extensive and costly ongoing due diligence. Financial institutions also face the risk of federal asset forfeiture; if a bank provides services to a cannabis business, federal authorities could potentially seize assets or loan payments deemed proceeds from federally prohibited activities, creating substantial financial risk. Beyond financial and regulatory concerns, banks contend with reputational risk, as associating with a federally illegal industry can be perceived negatively by stakeholders. While direct federal prosecution of banks for serving state-legal cannabis businesses has been uncommon, the underlying federal illegality still presents a perceived legal risk. These combined factors lead many financial institutions to conclude that the risks outweigh the potential benefits of banking the cannabis industry.
Impact on Cannabis Businesses
Limited access to traditional banking services forces many cannabis businesses to operate primarily in cash. This cash-intensive nature creates significant security risks, including increased vulnerability to theft and robbery, and logistical challenges during transport. Paying taxes and managing payroll become cumbersome, often requiring large cash payments to agencies and complicating tax withholdings and record-keeping. This lack of banking access also severely limits a cannabis business’s ability to obtain lines of credit, loans, or other forms of capital necessary for growth and expansion. Overall, these banking restrictions hinder the financial transparency and stability of the cannabis industry, making it challenging to manage cash flow effectively and plan for long-term sustainability.
Current Legislative Efforts
Efforts are underway at the federal level to address the cannabis banking dilemma through legislation. The Secure And Fair Enforcement Regulation (SAFER) Banking Act aims to provide a safe harbor for financial institutions serving state-legal cannabis businesses, prohibiting federal banking regulators from penalizing depository institutions solely for providing such services. The SAFER Banking Act clarifies that proceeds from legitimate cannabis business transactions are not considered unlawful under federal anti-money laundering laws, and it includes protections against asset forfeiture for banks. Its provisions extend to various financial services, including loans, payment processing, and insurance. This legislative effort represents a potential path to integrate the state-legal cannabis industry more fully into the mainstream financial system, without federally legalizing cannabis itself.