While it remains to be seen whether the Secure and Fair Enforcement (SAFE) Banking Act will become law this year, its passage in the U.S. House last week is a major step forward for the cannabis banking reform legislation, which begs the question: If the bill does indeed clear the Senate and earn President Donald Trump’s signature, how can the industry make the leap from cash-only operations to banked businesses?
Eric Berlin and Katie Ashton, who co-head the cannabis group at the law firm Dentons, say that many banks may still be hesitant to serve the cannabis industry, even when the SAFE Banking Act—or any other piece of banking reform legislation, for that matter—becomes law.
Even if reform legislation passes, the administrative burdens that will likely be required for banks to serve a federally illegal industry like cannabis may keep larger national banks from jumping in.
“There are lots of other risks involved that banks are considering,” Berlin tells Cannabis Business Times. “I think there’s some ambiguity in the bill itself—for example, its extension to securities. Banks would have significant burdens doing this because … there needs to be Suspicious Activity Reports (SAR), as well as other reports and due diligence into these businesses. Part of that is a premise to what [businesses] need to do to get set up, which is, in part, responding to those due diligence demands.”
Legislation like the SAFE Banking Act would likely inject capital into the market, Berlin says, which means that businesses need to have good corporate and accounting practices in order to attract investors. Both the capital markets and the banks themselves will perform deep dives into businesses to ensure their funds have been properly accounted for, and now is the time for companies to get their finances in order.
“The due diligence that banks are going to need to do likely will require tidy corporate and accounting housekeeping by these businesses,” Berlin says. “And, in addition to that, the folks who are going to be bringing additional capital into the market are going to want that, as well.”
“If you are hoarding millions of dollars of cash right now, make sure your books reflect where every single one of those dollars was generated from,” Ashton adds. “I do worry that there may be some [amendments] added to the Senate side of this legislation that says, ‘How do we know where all these millions of dollars came from? Is this money laundering?’ That is banks’ No. 1 concern, is anti-money laundering. So, I think that’s going to be a real practical concern [during] that first dump of cash into the system. I think the more you can really have tight records, … the easier it is for banks to get their heads around that, [and] the easier time folks will have establishing accounts and getting that money out of wherever it is that businesses would have had to be storing it, which has obviously been a huge issue.”
Businesses planning to access banking services when the opportunity arises should be having regular board meetings, Ashton adds, and they should ensure compliance with all company bylaws.
With federal prohibition still lending some level of uncertainty to the industry, cannabis businesses who do ultimately secure bank accounts should try to use more than one bank, when possible, and be transparent with those banks, Berlin adds.
“I wouldn’t give up any bank accounts,” he says. “In the cannabis industry, in some ways more than any other place, one is zero and two is one. So, I’m a believer in having some duplication and I would still recommend that. I’d recommend using more than one bank. And, of course, what we always say is to be honest in our actions. Even before or after this, you need to be honest about what you’re doing.”
Smaller businesses in the industry may have more difficulty securing banking relationships than the larger operators when the smoke clears, Ashton adds.
“Much like most things in business, I [think] the larger players will have easier access to the bigger banks as they are looking to jump in and really make their play,” she says. “I think it’s going to be harder still for the smaller guys on the corner to access loans, and I think the account prices are still going to be heavy. But I do think there is going to be some opening up there. I’m curious to see whether the real big national banks jump in on this quickly or not. I could see them taking a few of the biggest players, but I’m just still not seeing them wholeheartedly jump in on this.”
It’s not all bad news, though. Even if some banks hold on to their reservations should the SAFE Banking Act ultimately become law, the move will still advance the industry in a way that hasn’t yet been achieved, Berlin says.
“It reminds me of when [Former U.S. Attorney General Jeff] Sessions rescinded the Cole Memo and everyone took a step back,” he says. “It wasn’t really a wholesale change—it just meant that wherever people’s risk tolerances were, it seemed like they took a step back. With this situation, everyone will take a step forward … in taking more risk and seeing this as one more nail in the inevitable coffin of cannabis prohibition."
