Key Takeaways From BMD’s Banking And Cannabis Webinar – Cannabis & Hemp

The cannabis industry is one of, if not the, fastest growing
industries in the United States in recent years, and there are no
signs of slowing. Growth requires capital. Banks need loans, and
cannabis companies, which are rapidly becoming bankable need access
to lower cost bank lending. While cannabis remains federally
illegal, an impediment to access to financial institution credit,
banks and credit unions are nevertheless entering the market in
increasing numbers.

With the sponsorship and support of the Bankers Associations of
Arizona, Colorado, Ohio and Utah, BMD organized an elite panel of
bankers, bank and cannabis regulators, and cannabis industry
executives to address this exact issue in a webinar titled: Banking
& Cannabis: Cannabis Lending, The Next Frontier.

Tanner Daniel, the VP of Congressional Affairs for the American
Bankers Association, gave a keynote address, sharing his
perspective on the status and prospects of presently pending
federal banking and cannabis legislation with the webinar’s 500
attendees – about 75% of whom were bankers representing more than
200 banks, including a dozen of the 56 largest. Here are some of
the major takeaways:

• Follow the Money; Huge Opportunity for Bank and
  Cannabis Industries. Year-to-date reports indicate that
  2021 cannabis industry borrowing could approach $5 billion +/-,
  three or four times 2020 levels, with only a very small percentage
  of those loans being made by banks. Even at prime plus 3 or 4
  percent, this translates into hundreds of millions of dollars of
  interest income for banks and interest savings for cannabis
  companies.

• The Perfect as the Enemy of the Good. While
  the SAFE Banking Act (“SAFE Act”),
  providing safe harbors for banks and other financial institutions,
  is likely the fastest path, its progress is being
  slowed by the desire of many to do more through a number of broader
  proposals.

• Out of the Shadows and into the Mainstream.
  Whether or not any of the pending federal legislation passes, the
  numbers of banks following the money into the cannabis markets will
  continue to increase. The growth in the pie, and those competing
  for their taste, will encourage others to join the fray.

• The Shrinking Elephant in the Room, the Deterrent
  Impact of Risks of Federal Illegality Will Likely Continue to
  Diminish. While no one can provide assurance that there is
  no risk in doing business with the cannabis industry, it appears
  that they are progressively becoming more theoretical than real,
  mitigated by
  

  • The insular effect of federal guidance on how to provide
    banking services to the cannabis industry without violating federal
    anti-money laundering laws provided by the Financial Crimes
    Enforcement Network (“FinCEN”), the arm of the US
    Treasury Department charged with enforcing those laws

  
  

  • A largely hands off approach to banks following the FinCEN
    Guidance of both federal bank regulators and the Department of
    Justice.
    

    • Banks doing business with the cannabis industry are doing so
      with the knowledge of their federal regulators, usually working
      with them to develop policies and procedures, and those that do so
      have not been subject to adverse regulatory action.

    
    

    • Similarly, the DOJ has not actively pursued seizures and other
      enforcement initiatives against those banks, and is barred by
      federal budget amendments from prosecuting activities in compliance
      with state medical marijuana laws. While the budget
      amendments have not been modified to include state legal
      recreational activities, there is no evidence that the DOJ is
      approaching those activities differently

  
  

  • There is safety in numbers.

• The Inevitable Intersection of Banks and Marijuana
  Related Businesses (“MRBs”); In For a Penny, In For a
  Pound. As the cannabis industry continues its explosive
  growth, more and more existing and potential good bank customers,
  even those in states which have not yet legalized marijuana, will
  have or establish financial or other business relationships that
  bring them under the FinCEN Guidance definition of MRBs, making it
  almost inevitable that even those banks that have not affirmatively
  elected to establish relationships with cannabis businesses will
  find it necessary to address the expanded due diligence
  requirements of the Guidance.

• The More Things Change, the More Things Stay the
  Same. While recognizing that lending to the cannabis
  industry involves different risks and issues then accepting
  deposits, Bank and Bank Regulatory panelists generally agreed that
  the principal difference in due diligence would be dictated by
  conventional credit analysis standards rather than the FinCEN
  Guidance.

• Unintended Consequences as Drivers of Change.
  

  • The cannabis executives on the panel noted that the lack of
    financial services available to the cannabis industry not only
    complicates their business operations, but also has a negative
    effect on their employees’ personal lives-the difficulty of
    opening bank accounts or getting mortgage loans.

  
  

  • It was also noted that even the IRS and state tax departments,
    which are not set up to handle the vast amounts of cash being
    generated as tax payments, were proponents of cannabis industry
    banking services.

• Keep Your Eyes on the Credit Unions; Keep Your Friends
  Close and Your Frenemies Closer. The federal credit union
  regulators have been much more progressive and aggressive on
  cannabis issues than their banking counterparts. Rodney Hood, a
  past Chairman and currently a member of the Board of the National
  Credit Union Association (“NCUA”), has been an outspoken
  proponent of the need for the regulators to act, even as Congress
  dithers.

We are contemplating a sequel to the webinar going deeper into
the “weeds,” potential topics including: (i) security
interests–what can you get and how can you get it; (ii)
receiverships as an alternative to bankruptcy; (iii) asset
seizures-what is the risk and how it can be mitigated; and (iv)
deciphering cannabis companies’ financials.

Your input and suggestions regarding a sequel would be welcome
and should be directed to Steve Lenn, at salenn@bmdllc.com, and Jamie Young, at
jbyoung@bmdllc.com. If you are interested in the webinar’s
recording or the accompanying program materials, click here.

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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.