Cannabis Banking: A Festering Sore in the Side of Reform

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Banking for the cannabis sector is one of the ongoing battles about reform that will not go away. In fact, besides scientific evidence of medical efficacy, banking is the other big issue behind legalization at the federal level. Further, as the industry expands (marijuana is now legal for some purpose in 44 states), it never stops being an increasingly pressing one.

Why is this Such a Big Issue?

The Controlled Substances Act, passed in the early years of President Nixon’s first term, specifically forbids the sale of cannabis. The reason? There is supposedly no medical efficacy to the drug. As a result, any financial transaction linked to such activity is illegal. This is the reason that asset forfeiture became such a formidable tool in the Drug War. Under legal reasoning derived from the CSA, law enforcement was able to seize not only cannabis it found. It was also able to claim other assets that could be linked to such sales. This means that any profits made from cannabis and used to buy other items could be confiscated too. Plus property.

This is the legal impetus behind seizing houses, cars, and planes as well as other property associated with “drug transactions.” Financial institutions, of course, are on the front line of this discussion. A bank can be fined or even lose its banking license if it can be proved that they provided financial services to such individuals.

This was supposed to be targeted at both drug cartels and money laundering operations. However, between the years 1996 and 2014, this tactic was also used to essentially stifle state-legal businesses in California.

It also discouraged (to say the least) even state banks from providing banking services to the industry. However as other states began to legalize both medical and recreational use, this rapidly became a top priority for every state. Why? Tax collection. One of the biggest justifications for legalization is to stop the black market. Further, the tax revenue from a newly legal industry has already been significant. However, with no banking services available, state-legal marijuana businesses, themselves unable to open a formal bank account, had to deliver their tax revenue in cash.

Colorado became the first state to install cash counting machines at local tax offices as a result.

It is an Inherited Problem

Since then, the problem has only mushroomed. The Obama Administration Justice Department repeatedly refused to tackle the problem directly. Instead, multiple “Department of Justice” memos were issued as guidance on how to treat this new industry. This included guidance memorandum from FinCen, the part of the Justice Department that prosecutes drug-related financial “crimes.”

Multiple efforts in legalizing states, including all of the early recreational reform movers, to establish even credit union authorization charters have so far largely gone nowhere.

These days, there are beginning to be, state credit unions who are quietly moving into this lucrative business. They tend to be financial institutions who are looking to capitalize on a huge volume controversial business. Many credit unions were set up originally to deal with things like alcohol and liquor businesses in communities where such issues were taboo. This is just the latest “thing,” or so the reasoning goes. Particularly because cannabis is an agricultural crop.

Today, there are credit unions in several states who will accept the businesses, but they are far from outgoing about the same. The reason? Technically, they could still be prosecuted under all of the underlying federal laws that have not yet changed.

When is Change Likely?

With Jeff Sessions at DOJ making rumbling noises about the prosecution of drug laws again, the industry is increasingly worried that the progress of the last decade will be wiped off the books for the rest of the Trump presidency.

However, the industry is not the only group that is worried. Increasingly, at the federal level, Congressional representatives understand that this situation must change. With 88% of Congress now representing the industry, congressional passage of some kind of solution is more likely than ever. Further, enough potential votes exist to create a veto-proof bill. Trump, in other words, could refuse to sign such legislation and Congress could override him very easily.

Such a move is clearly on the minds of those who are strategically looking for reform anyway they can get it. Politically, if the desire to send a message to Trump about other issues becomes more urgent than it is now, an effort to reschedule the drug (and clear up banking by default) would also send a message of no confidence both to the White House and globally.

Given growing tensions in an increasingly chaotic Washington, it might not be the most direct way to send a desire to reign in an increasingly unpopular President. However, it would send a strong message.

For that reason, any kind of marijuana reform in Congress on either banking or schedule reform is a highly strategic tool that will be used politically soon as the Trump Administration enters what appears to be the next stage of its attempts to cut itself off from the world.

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Marguerite Arnold

Marguerite Arnold

Marguerite is an American expat. She has worked in digitalization of two industries (film and finance) for over 25 years as well as a professional journalist and writer. She lives in Frankfurt where she is also just finishing her Executive MBA at the Frankfurt School of Finance and Management, working as a freelancer and writing a medical marijuana/FinTech business plan. She published her first ebook on the pace of marijuana reform last year.

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