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Banks vs The American Cannabis Industry

Four states, along with Washington DC, have already legalized marijuana for recreational use, and many more parts of America are expected to join them in the not-too-distant future. With legalization spreading, it’s naturally becoming a lucrative business niche. Last year legal marijuana sales in the States spiked to $5.4 billion, a massive leap up from the figure of $4.6 billion in 2014. However, despite this commodity being a perfectly legal source of revenue for dozens of businesses, most banks in the US won’t handle weed money.


This is due to cannabis still being technically illegal under federal law, and banks, obviously, having to play ball with federal regulations. Sure, there are ways for the banks to accept money from the sale of marijuana without breaking federal law, however there are various additional steps they have to take to make sure they’re totally compliant. This means that if an American bank chooses to process money from cannabis sales, and one little detail turns out to be wrong, the bank will be at risk of losing its charter.


For most banks, the risk simply isn’t worth it. As it stands today, only 220 out of the 7,600 banks and credit unions in America accept money from cannabis businesses. This essentially means that if you want to start a weed firm, it almost always has to be a cash-only business. Of course, this is going to be a slight inconvenience for the consumers, who still have to find an ATM before they can buy, despite the reforms. However, it’s an even bigger issue for the farmers and distributors. The CEO of a cannabis business would have to pay all their employees in cash, not to mention the mortgage on the premises, their utility bills, and their taxes. For any business, not being able to deal with these transactions digitally is going to cause a massive difficulty.


Being a cash-only business, paying taxes can be one of the biggest difficulties for marijuana companies. Aside from that, due to them holding so much cash on the premises, many business owners are having to factor in the risk of robbery into every little decision they make. A lot of stores have had to rotate their staff’s pay schedules, and operate a buddy system where employees aren’t permitted to walk to their cars alone. It seems pretty ironic that with the industry being so widely legalized now, even with its own auxiliary services like this cannabis marketing agency, many businesses are being forced to operate like the organized crime rings of the recent prohibition era.


Due to legal marijuana companies not being able to pay their employees electronically, they also have to pay an extra 10% on top of their federal employee withholding taxes, according to one lawsuit which challenged the practice in 2014. Another big talking point is the fact that legal pot companies aren’t able to apply for all the tax deductions which pretty much all other small businesses are eligible for. This stifles the entrepreneurship and further legalization of the niche, for obvious reasons.


Again, the fact that so many banks won’t accept pot money means that small marijuana businesses carry an inherent risk. Many of the weed stores throughout the US have been forced to run their operation a lot like casinos, hiring private security firms using armoured cars and employing ex-military personnel, to ensure that no one steals their large, and perfectly legal, piles of cash.


While some weed stores have simply been soldiering on, there are those who don’t want to take it lying down. More and more discussions are springing up about a potential solution to the cash-only problem, but it’s facing various legal obstacles. Two years ago, not that long after recreational weed was first legalized, the state government of Colorado approved a charter for the Fourth Corner Credit Union, and made it the designated bank for marijuana companies. Despite the fact that the state itself chartered the credit union, the Kansas City branch of the Federal Reserve rejected its application to open a master account. If you weren’t already aware, this is necessary for a bank to operate! The Reserve also rejected its application to start using an electronic payment system, which would allow customers to pay for their pot using credit and debit cards.


This was followed up by the Fourth Corner mounting a lawsuit against the Federal Reserve, aiming to force it into giving it a master account. In January 2016, District Judge R. Brooke Jackson dismissed the action, reasoning that it would “facilitate criminal activity”, due to cannabis still being illegal under federal law. "These guidance documents simply suggest that prosecutors and bank regulators might 'look the other way' if financial institutions don't mind violating the law," Jackson was quoted in The Denver Post. "A federal court cannot look the other way."


Although the federal government has put more obstacles in the way of the Fourth Corner Credit Union’s quest to be a real bank, the state of Colorado has put its full support behind recreational marijuana, and the young industry’s right to use banks. Chris Myklebust, the Colorado Commissioner of Financial Services, was quoted in USA Today saying: “I’m a pro state’s rights guy, and in Colorado we have legalized… I’ve never even held a joint but I really want to see them banked."


With fiscal challenges like this, it’s no wonder why the legal marijuana industry isn’t seeing the rapid growth that so many have been hoping for. This massive banking obstacle, combined with the archaic stigma that the substance still carries in so many parts of the world, has forced many entrepreneurs into the slow lane, and scared countless investors away from the marijuana niche.


Overall though, with more and more states taking steps to legalize medical and recreational marijuana, the industry is certainly on its way forward. Policies in countries like Canada, Portugal and the Netherlands show no sign of repeal, and as political leaders become more educated on the topic, we’re expected to see regulations to the niche become more lax.

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