Posted by Kevin Merritt
Since medical marijuana became legal in Arizona in 2010, operators in the industry have faced significant challenges in cash management and banking. At the time, effectively every financial institution refused to provide any services, since marijuana is still a Schedule 1 prohibited substance under federal law, with stiff penalties for possession, distribution and sale. As the result of that classification, every financial transaction involving the proceeds of the cannabis industry can arguably be considered money laundering under federal law. Times are changing, however…
As the legal landscape across the country has evolved, with 33 states now allowing either medical or recreational use of cannabis, the banking industry is starting to follow suit. On February 13 of this year, the American Bankers Association (the ABA) made the following statement: “Current federal law prevents banks from safely banking these [cannabis] businesses. Leaving this industry unbanked is no longer a viable option.”
The ABA went on to state that it “supports a banking-specific solution that would . . . allow banks to serve cannabis-related businesses in states where the activity is legal.”
This ABA statement was submitted to Congress as it was considering the SAFE Banking Act, which seeks to prevent banking regulators from penalizing banks working with state-legal cannabis-related businesses. On March 28, the Financial Services Committee referred the SAFE Banking Act to the full House by a favorable vote of 45 – 15. Watch here for updates as this piece of legislation makes its way through Congress.
The ABA, in its position paper, observed that “a small number of financial institutions have weighed the prevailing climate of non-enforcement and have decided to shoulder the risk in order to serve the needs of their communities.” This statement is true in Arizona. Locally, at least a few financial institutions will, subject to strict on-boarding procedures, accept deposits from the cannabis industry. Conventional financing for the industry, however, generally remains taboo.
On a related note, the Federal Agricultural Improvement Act of 2018, commonly known as the 2018 Farm Bill, made a narrow class of products derived from hemp legal effective as of January 1, 2019, subject to what is likely to be extensive regulation. In the absence of facing federal classification as a prohibited substance, operators in the new legal hemp industry should not face similar obstacles in obtaining access to banking services, and indeed financing from some non-traditional lending sources seems to be emerging.
Gammage & Burnham has a broad practice representing various aspects of the legal cannabis industry in Arizona. If you are interested in advice on how to legally operate a cannabis business in Arizona, or if you have questions concerning the topics above, please contact Lindsay Schube or Tim Forsman.
Due to the continuing legal prohibition of cannabis related activities under federal law, it is imperative that you seek advice prior to the time you engage in any potentially illegal activity.