Banking is a problem in the Cannabis Industry but the problem is not that banks can not take deposits. The problem is bankers don't want to. This has caused a general dislike if not anger toward bankers by people in the cannabis industry. I have heard many people in both the banking industry and cannabis industry state that businesses touching cannabis can not put money in a bank because it is federally illegal. Cannabis is federally illegal but there is a legal way for banks to take deposits.
At Goff Associates, we have been analyzing this problem for almost a year now and have been working with individuals in Oregon to determine a solution to the problem. When we started looking at the problem, we identified the Cole Memo and the FinCen's that regulate banks taking deposits and backed off of looking further at a solution because clearly banks can take deposits. As a matter of fact 100's of banks do take deposits. Problem solved but then the only bank in Oregon (MBank) publicly acknowledging that they take Cannabis deposits sold out to a Washington state banking group and we decided to take another look. It turns out that several Oregon State Chartered Banks are taking deposits but in a limited amount and they are not advertising.
This begs the questions: "Why aren't banks targeting cannabis companies for deposits?". Banks always want more deposits because that is how the get the money to make loans and they are able to charge fees on cannabis deposits when normally they have to pay customers to put money in their banks. The answer is it is complicated but generally it is because banks are regulated and anything they do has to be approved by up to 3 different regulatory bodies -- State or Federal bank regulators, FDIC, and Federal Reserve. All three question everything a banker does.
So, what factors influence a bank to take deposit cannabis related or not:
Relationship Banking: Bankers like to do business with people they know. This is actually supported by the regulators as customers that the bankers know have a higher probability of performing well at the bank -- not over-drafting, making payments on time, etc. The people in the cannabis industry that get bank accounts are able to do so because they have a non-cannabis relationship with their banker.
Market Area: Community Banks are also organized to serve a particular market area, so if you are not in that market area they may not do business with you. This market area might be a city or cities, county, or state. Bankers must get their market area approved by the regulators and this acts as a restriction. If a banker takes deposits or makes loans outside of their Market Area they may get in trouble with their regulator.
Business Plan Approval: Bankers have to get their business plans approved by their regulators. Once approved the regulators follow the execution of their plan and question any deviation. Any significant deviation requires approval. Therefore, if cannabis deposits are not in the currently approved plan the regulators will question what they are doing and be very critical to the point of issuing an order that they stop. Regulators can pull their approval to do business or ban a banker from the banking industry so there are serious implications. The banks in Oregon that are currently taking deposits are doing so on a limited basis. Although the regulators are critical, they will allow banks to take up to 5% of their deposits from the cannabis industry as long has they can demonstrate that they are following to the letter every FinCen requirement. The banks must be very exact. This is why they charge extra fees. There is extra work. A lot of extra work.
Money Laundering: If a bank makes a mistake and takes deposits from an individual or company that is not legal in the state, the board members and employees can be subject to fines and imprisonment. Bankers by nature are very risk adverse and just the risk of going to jail and ruining their career is enough to keep most bankers from having anything to do with cannabis deposits.
Concentration of Risk: One reason a bank will not be able to take 100% deposits from cannabis is concentration of risk. This is not because it is cannabis. It is because regulators do not want any bank with a concentration of any type. The regulators like the risk spread fairly evenly across several different markets, i.e., commercial real estate, consumer, commercial business, agriculture, etc. Cannabis can be a product line but like all other product lines it will be limited.
Hopefully, I have described to you why it is hard for a bank to take cannabis deposits but it is not impossible. The group I mentioned above is considering either acquiring an Oregon bank or starting one De novo. We will attempt to obtain approval from the regulators to take up to 25% deposits from legal cannabis touching companies. We have already talked to all three regulators: State Banking Regulators, FDIC, and Federal Reserve. They have all said they are interested in talking to our organizing group and are supportive. There is no guarantee but a high probability of success.
Many groups and communities do not have banks that support them and that is why they form a bank. For the cannabis community to get banking, it is going to have to proactively acquire or organize a bank and support it once it is open. If you have any interest in being an organizer or investor, please contact us.
Ben A. Goff BAGoff@GoffAssociatesInc.com (615)750-2900