Legal, reputational and brand risks for cannabis companies must be effectively managed. Furthermore, cannabis businesses may face unique threats such as employee theft or tampering that require specific strategies.
Due to federal prohibition of marijuana, banking has always been risky business for banks that service this industry. Thankfully, several bills currently being discussed may help alleviate that risk; one such bill being considered is the SAFER Banking Act.
1. Legality
While cannabis has been legalized in some states, it remains illegal at a federal level. This leaves cannabis companies in legal limbo due to being denied mainstream banking services – forcing them to conduct their business using only cash – creating substantial safety risks at every touchpoint and making them attractive targets for criminals.
The SAFE Banking Act seeks to rectify this by barring federal regulators from penalizing banks that work with cannabis-related businesses, while offering protections to insurers who write policies covering these firms and their employees.
2. Risk
Due to federal prohibition, cannabis businesses often operate entirely with cash – which presents serious security risks. Furthermore, any theft of shipment or cyber breach can quickly drain a company’s reserves.
Cannabis business owners must assess operational risk to ensure that cultivation efforts are successful and avoid expensive failures, including pests, diseases, environmental conditions and weather changes. This may involve taking measures such as inspecting pests for signs of infestation or disease as well as considering changes in climate conditions that might create unexpected weather shifts.
Financial institutions must consider how sudden increases in cannabis-related deposits could impact deposit-to-loan ratios and funding outlook, in addition to determining appropriate resources, staffing levels and technology needs for managing cannabis banking programs. Consider also whether your institution can implement monitoring/heightened due diligence procedures specific to this industry.
3. Taxes
Bank heist movies often depict bank robbers unzipping bags of money and marking each coin with indelible ink. Unfortunately, for marijuana-related businesses (MRBs), federal prohibition against banking can have the same result: their revenues become stigmatized as they cannot access traditional banking services.
As such, the industry remains highly cash-dependent, paying taxes, utility bills and rent in cash. Furthermore, limited banking options hamper employee wages as well as mortgage/loan access – an issue which could damage its economic integrity.
The SAFE Banking Act, proposed in 2019, seeks to change this by barring federal regulators from punishing financial institutions who collaborate with state-legal cannabis businesses. This would create a safe haven for banks, credit unions, insurers and lenders who want to work with MRBs and help them operate, grow and expand their businesses.
4. Insurance
Financial institutions should carefully evaluate whether a cannabis strategy aligns with their mission, vision and values and is sufficiently profitable – this includes considering legislation such as SAFE or CLAIM bill (Clarifying Law Around Insurance of Marijuana).
Cannabis businesses operating within various locations may be exposed to third-party general liability, product liability and cyber liability risks. Furthermore, their cash-dependent business model increases these risks. Break-ins or robberies could even occur without warning!
As such, marijuana-related banks require strong internal controls and risk mitigation strategies. Financial Institutions should use separate depository methods for MRB funds that must remain separate from other accounts, and implement enhanced due diligence, monitoring, transaction verification processes as part of their cannabis banking strategy. Furthermore, communication with regulators and lines of business regarding cannabis banking strategies must occur regularly.
5. Financing
Cannabis industries are quickly expanding, necessitating financing. Unfortunately, due to stigma and federal prohibition of the industry, banks are typically unwilling to do business with cannabis-related enterprises.
Due to this trend, many MRBs operate solely with cash payments, running the risk of alienating customers while creating safety risks and making it hard to prove income.
Cannabis business owners can find lenders willing to work with them and offer competitive rates at reasonable terms. Finding a lender who understands your industry can provide services tailored specifically for MRBs – ultimately opening new paths of revenue growth, risk mitigation and strategic differentiation.