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HIGHLIGHTS
  1. Congressional hearings on cannabis banking begin today in Washington
  2. Insiders say many state credit unions and local banks are providing banking services
  3. Many see big U.S. banks staying out of cannabis due to extra requirements around compliance

Hype surrounding today’s first-ever U.S. Congressional hearing on cannabis banking happening is, legal pot investors say, mostly hot air.

Democratic control of the United States House of Representatives is raising hopes of legislative progress among marijuana industry insiders, especially after versions of the Safe and Fair Enforcement (SAFE) Banking Act have been introduced in every Congress since 2013, but is only now gaining traction. Yet investors and entrepreneurs gathered in Boston this week for the CannaVest Northeast conference were sceptical of any benefits the proposed law may bring.

“It gets under my skin about [banking] being a huge issue because the reality is there are plenty of state-chartered credit unions and local community banks that are providing banking services to the cannabis industry today,” said Matt Hawkins, managing principal at Cresco Capital, whose firm has invested in 29 cannabis-related businesses to date. “In fact, if an operator came to me with a deal that I liked, but then asked me if I could help them find a bank, I’d pass on the deal immediately because I’d think he is lazy.”

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Despite tales of cannabis business owners having to pay their taxes with duffel bags full of cash because of their inability to access even the most basic banking services, Mitch Baruchowitz agrees with Mr. Hawkins that such examples are usually exceptions to the rule.

“That is the biggest myth out there, I mean, there are two publicly traded banks that offer services to the cannabis industry already,” said Mr. Baruchowitz, managing partner at Merida Capital Partners, referring to Century Bank and Severn Bank.

The myth of cannabis businesses having to deal almost exclusively in cash has been around for nearly seven years, he said, adding early issues were not the fault of financial institutions.

“The biggest problem in the early days was illegal operators who were trying to transition into the legal markets and they didn’t have the historical background or didn’t want to give up their tax records or other things that would show the illegality,” Mr. Baruchowitz said. “So banks were just saying ‘we don’t want to deal with your business’ and that is how the myth propagated.”

Even those currently in the business of providing banking services to the cannabis sector are unconvinced congressional action will improve the state of the sector.

“We always look at this and say [cannabis] is a black cloud for the banking sector and that is why many financial institutions don’t want to get into the business because then you have this black cloud hanging over your head,” said Tina Sbrega, president of Safe Harbor of Massachusetts, a subsidiary of GFA Federal Credit Union that launched in November, 2018, specifically to offer banking services to the cannabis industry. “If there is some relief, whether they reclassify the drug or we get the STATES Act passed or something else that gives power to states to legislate, then that black cloud becomes light grey, still not sunny skies [BUT] it will be a huge step forward.”

Ms. Sbrega agrees with the authors of the SAFE Act – Rep. Ed Perlmutter of Colorado and Rep. Denny Heck of Washington – that the cash-intensive nature of the cannabis today represents a threat to public safety. In Massachusetts alone, she said as an example, roughly US$300-million is expected to be spent on legal cannabis during the first full year of sales with roughly 80 per cent of that total being in cash.

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“And that is cash just walking around in the streets,” Ms. Sbrega said. “So if someone doesn’t bank the industry, that is a huge public safety concern.”

Wednesday’s hearing is the first step in what is likely to be a long legislative process for what is expected to be the first of several cannabis-related bills to go before the new Congress. Yet, even if the United States were to fully legalize and regulate cannabis at the end of that process, she believes the biggest American banks will continue to avoid the space.

“My personal opinion, banking the cannabis industry, even if it was fully legal at the federal level, is highly compliant and that makes it labour-intensive. We have the Bank Secrecy Act, the anti-money laundering act, know your customer, you have to be cautious that there are no illegal funds being banked as a result of the industry that it is,” Ms. Sbrega said. “We have to file so many reports on every client every day, every week, every month and we have to validate constantly that for the big banks, it might just not be worth their while.”

The biggest change that might come as a result of any new U.S. cannabis banking law will not be in the private accounts universe, Steve Kaplan argues, but rather in the public markets.

“From an operation point of view, the folks running [cannabis] companies need something to pass because the stock exchanges will not list them right now,” said Mr. Kaplan, a partner a real estate investment firm Ladenburg Thalmann. “The transfer agents, the stock custodians, the prime brokers, all the people involved in moving stock need something they can hang their hat on to say ‘Oh, we can do this’ so while it might not change things on a day-to-day basis in the trenches, it will very much help bring institutional capital.”

Most in the American cannabis sector would likely welcome the arrival of more banking access and bigger investors to the space, though not everyone would. John Brecker, partner at Altitude Investment Management, told CannaVest participants the current level of chaos creates better opportunities.

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“The reason I was attracted to the cannabis business is because it is totally inefficient, but what is happening quickly in the United States is it is becoming more efficient,” said. Mr. Brecker. “And what happens when markets go from being inefficient to efficient? We still make money, but ultimately there is less returns and so I, for one, hope that we slow down and public banks still cannot take on cannabis companies because it is the inefficiencies that create outsized returns.”

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