Cannabis Banking Takes Another L in 2022

Because of federal prohibition, cannabis-related businesses are banned from financial services, putting banks serving those businesses at risk for federal drug charges. Although some smaller banks and credit unions will take on the risk for high fees, the majority of dispensary purchases are still done in cash.

Even so, around 75 percent of the pot industry is able to bank that money, according to Safe Harbor Financial CEO Sundie Seefried. One of Colorado's first financial institutions to serve cannabis businesses, Safe Harbor has helped facilitate billions of dollars in transactions since 2015, all while the plant remains federally prohibited.

Congress flirted with the idea of passing the SAFE Banking Act, a bill that would've approved federal protections for banks serving legal cannabis businesses, before the year ends, but that effort was stalled as new House of Representatives and Senate members prepare to take their seats in 2023. Although Seefried is rooting for the SAFE Banking Act, she doesn't think the bill addresses some major issues that the cannabis industry faces. We caught up with Seefried to learn more about the financial roadblocks and where the SAFE Banking Act came up short.

Westword: How much have you seen cannabis banking access change since Safe Harbor opened in 2015?

Sundie Seefried: When Safe Harbor started, almost every cannabis business struggled with cash handling and logistics. Owners worked hard to create effective workarounds, but the immense burden of dealing in cash was a liability in terms of safety and fraud. Then intrepid, future-focused financial institutions began compliantly banking operators who had been in desperate need of a safe, reliable place to store their money. By focusing on comprehensive transparency and due diligence in accordance with state and federal guidelines, about 75 percent of the industry is banked now. This growth and proven compliance has allowed even more financial services products to become available, and has shown regulators and policy-makers that cannabis banking is a net positive for the industry and for public safety.

There was talk of the SAFE Banking Act gaining more momentum in the Senate before the year ends, but that has since been tempered. How confident were you in SAFE Banking passing?

It’s refreshing to see more political support for any type of federal reform on cannabis, including SAFE Banking. But this type of incremental reform legislation doesn’t address other major issues that the industry faces, such as the increased tax burden caused by Section 280E or meaningfully improving access to capital or the public capital markets. Recent changes in the control in D.C. makes passing SAFE Banking seem highly unlikely at this point.

Reform must be addressed at a different level, really. The attempt to piecemeal federal reform is not going to necessarily be in favor of the industry. The bigger consideration, as it pertains to financial matters, centers more around access to capital and, even bigger, access to the public capital markets. Excluding cannabis businesses from access hinders the American market from competing on a global scale while other countries continue to move forward.

SAFE Banking also does not alleviate the 280E tax code that hinders organic growth of the cannabis businesses, as they cannot take normal business deductions. This high-tax situation makes it difficult for the legal market to compete with the untaxed illicit market and keeps retail prices artificially high for consumers. It sets the industry back from true legitimization when there are actual benefits to still operating unlicensed. States that want to generate higher tax revenues should consider additional enforcement against the illicit market in order to help licensed businesses compete.

Furthermore, getting reform passed should also include a social equity component. I believe lack of access to capital and other related business opportunities to be significant obstacles created by the War on Drugs. Politicians have the ability to begin removing those barriers by listening to the needs of these communities and the cannabis industry in order to create legislation that is truly beneficial.

What about SAFE Banking comes up short for cannabis businesses?

SAFE Banking does not address the compliance burden placed on financial institutions due to cannabis still being listed as a Schedule I substance according to the Controlled Substances Act. This Schedule I status subjects the cannabis industry to the Bank Secrecy Act and is the true source of the compliance burden faced by financial institutions and businesses in the cannabis industry.

The real solution is to deschedule cannabis. Multiple federal agencies, such as the Department of Justice and the IRS, would need to be involved in any such plans to remove cannabis from the Controlled Substances Act in order to walk the fine line of lowering the currently overly burdensome monitoring standards while also keeping the American public safe.

What is the Bank Secrecy Act, and how does it affect cannabis businesses?

Bank Secrecy is regulations that govern financial service providers and the tracking of funds entering the financial system. It is meant to assist with finding criminal activity. So when you consider the illicit market operating in plain sight among licensed entities, cannabis becomes a target for additional monitoring. It is an expensive compliance burden to financial service providers, and the fines are steep if insufficient attention is paid to fulfilling bank secrecy obligations.

Why doesn't the Bank Secrecy Act receive the same attention as IRS tax code 280E?

The BSA is focused on the obligations of financial institutions to prevent bad actors from leveraging the U.S. financial system for unlawful purposes. However, it's an operational expense for both cannabis business owners and financial institutions to meet the obligations of the Bank Secrecy Act.

Section 280E of the tax code probably impacts businesses to a greater extent than Bank Secrecy from a cost perspective. The IRS has even begun to target cannabis businesses for tax enforcement due to the greater tax burden of cannabis businesses. It's definitely a political challenge to reform this section of the tax code in order to carve out an exception for cannabis. National lobbying organizations have focused on full federal legalization in order to achieve the desired result of eliminating the effect of 280E on the industry.

Do any current congressional bills address the Bank Secrecy Act from a cannabis perspective?

Not really, to my knowledge. The BSA is all about protecting the financial system. Congress must strike a balance to address cannabis risks while ensuring that federal agencies or law enforcement have a basis to fight legitimate financial crime.