We have updated our series on banking and transaction processing for the cannabis industry to reflect changes since the original 2017 publish date.
So, what’s the story on transaction processing for legal cannabis businesses?
I’m sure you have heard plenty of people telling you that you can get banking and credit card processing and other related financial services for your state licensed cannabis company.
On the other hand, you know it’s still illegal federally, and therefore how have banks all the sudden made the change and decided to embrace the industry? Or did this even happen? Maybe it’s all just bulls**t.
It’s hard to tell, isn’t it?
UPDATE: So much has changed in the past two and a half years, yet we remain in the exact same limbo as an industry that affected us then. We still don’t have solid, legal – at least at the federal level – banking or transaction processing in place, and it does not appear that we are going to get that resolved this year… again.
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If you’re new to the industry, or maybe not up on all the legal tangles that surround banking and transaction processing, or you just want to confirm what you already know, keep reading. I’m going to break the whole thing down for, over a couple of articles, since there’s a lot to take in, and even more to think about.
First, let’s rundown the categories in the legal cannabis industry on the retail front. I’ve talked to a number of my colleagues in the transaction processing industry and we agree on the four I’m detailing below.*
UPDATE: No changes here, on a positive note, the CBD and THC industries have been somewhat split into two groups, although Visa/MC/etc have not approved transactions for CBD specifically. Companies like Square have provisioned for CBD accounts, and even in light of the vaping situation that developed last year, there are still banks who are taking CBD accounts including vape manufacturers.
Once a consumer is involved in a transaction, a lot of different agencies want to get their hands in the pie; these aren’t always the same agencies that oversee things like growing, plant disposal, and OSHA, etc.
The retail sales category breakdown works like this:
1 – Paraphernalia and accessories. This is glass, cartridges, vapes, etc that are being sold empty. No product in them at all.
2 – CBD, topicals, sublinguals, hemp products under 3% concentration. This includes everything from soap to health and wellness products, as it applies to products being sold in the industry.
3 – Medical cannabis products. These are plant products being sold in state legal medical facilities.
4 – Recreational use marijuana. These are products that are only sold in recreational use states by licensed facilities.
For the sake of this part of the article, I’m going to assume that every part of the supply chain is properly registered, licensed, and compliant with all state laws. We’re not talking about black market supply or mis-labeled products that could be violating the variety of state laws in place.
UPDATE: The black and grey market vape products seem to have faded from view, along with the number of vape related lung illnesses. This could be attributed to taking a few bad apples out of the market, but is it really likely that these companies had a wide enough distribution to have caused a nationwide scare?
Each of these categories provides a different service or product to consumers, and it’s reasonable to think that they’ll be treated differently, based on that service or product. But that’s not always the case.
Why do the banks hate the cannabis industry?
The banks don’t hate the industry, trust me. They would love nothing more than to get in on the action and start collecting fees for any and every part of the business they can support.
These are the same banks that have rushed with open arms over the years to do business with adult entertainment, gaming, OTB, poker, supplements and holistic pharma products, and a laundry list of membership clubs, MLM (multi level marketing), and other marginal industries that were in the legal grey area.
There are several factors at work here, which range from the Cole Memorandum to the Industrial Hemp Farming Act of 2015. And don’t forget FinCEN, either.
But the banks are governed by either the FDIC or the NCUA (credit unions), and in order to do business in the US, they have to have things like routing numbers and SWIFT codes, or they can’t move money within the banking system. At all.
What’s the Cole Memorandum and what does it mean?
If you’ve been in the industry for any length of time, you’ve likely heard of Cole. James Cole was a deputy attorney general for the federal government. He wrote a memo, in 2013, that’s been used by federal enforcement officers, but it isn’t a law.
Since marijuana is still listed as a Schedule I narcotic by the DEA – meaning it has no medicinal value in the department’s eyes – that makes the distribution of the plant, in any form, a federal offense.
Cole sent out a memo that states that jurisdictions that have legalized marijuana in some form are less likely to be a threats to the federal priorities under the CSA if they have implemented strong and effective regulatory and enforcement systems to control marijuana growth and distribution.
The Cole Memo also gives wide prosecutorial discretion whether to prosecute state legal marijuana enterprises and hinted that it is probably not efficient use of federal resources to focus enforcement on state legal businesses.
UPDATE: In case you forgot, Jeff Sessions rescinded the Cole Memo during his tenure as Attorney General, and we’ve been hanging on by a thread with the protections in the Congressional spending bills. Transaction processing hasn’t really moved much, if at all, nor has federal law on establishing bank accounts.
FinCEN – how does it impact the ability of cannabis companies to get banking?
The Department of the Treasury’s Financial Crimes Enforcement Network is known as FinCEN for short, and they issued their own guidance on cannabis transactions to the banks after Cole was distributed.
FinCEN came out with their own “guidance” after Cole, and it reiterated that the marijuana industry was violating federal law, regardless of states and how their citizens voted. FinCEN classifies bank filings pertaining to funds like this:
Marijuana Limited – if the bank believes that a customer might not qualify under Cole to be in the cannabis business, they need to report the transactions. They should include names and addresses of related parties as well as the primary account holder.
Marijuana Termination – if the bank cancels an account because they think that the marijuana activities might be illegal under Cole, they need to report this; and they need to let other financial institutions that might be the next bank for this business know that they may have a problem.
And then there are a number of Red Flags – these range from depositing cash in a way that appears suspicious, to where the owner of a cannabis company lives, to carrying out interstate funds transfers. It’s a fairly long list for this category, and one that nearly everyone who traffics in legal cannabis could be considered suspicious with a narrow application of the guidelines is used.
What about the hemp laws on the books?
This one is kind of tricky, since there are a number of different interpretations of several different laws. The DEA still maintains that any production is illegal, since the growing the plants means that during the growing process, there’s going to be THC in them, and that is illegal. But the 9th Circuit struck down a DEA rule for being overbroad and opened the door for companies to import hemp and products derived from hemp (such as CBD and hemp oil) from countries that allow it and to sell them throughout the US.
UPDATE: Hemp, as you likely know, was legalized, albeit with a number of caveats, in the Farm Bill of 2018. Several government agencies spent 2019 fighting about who was going to be in charge of hemp and hemp-derived products, and it appears that the FDA is winning that battle for the moment.
I’ll refer you at this point to a GREAT blog on the legalities of the various bits and pieces of cannabis production and sales – KightOnCannabis.com – it’s really chock a block full of good stuff.
And just like with any good cliffhanger, this is the end of Part 1.
Next edition – Part 2 – We’re going to talk about how transaction processing is handled by the banks and the credit card companies – what’s high risk, and why.
*My colleagues are the banking kind, that have also been underwriting merchant transaction processing for the same 20 years or so that I have.