If you have ever attended one of our webinars (or speaking engagements) you will hear us say, “If your institution is in a state, or borders a state, that has some form of legalized cannabis sales, odds are that cannabis-related cash is in your financial system.” This has been an educated guess…until recently.

Here is a well-known fact: In 2021, legalized cannabis sales in the US grew 40% to $25B and a substantial amount is going through the US banking system, unreported or undetected.

Recently, researchers from four (4) different universities put together an abstract titled, “THC and the FDIC: Implications of Cannabis Legalization for the Banking System” dated December, 2021.

Below are some pertinent facts from the research:

• It examines the effect of state-level adult-use legalization on banks’^[1] deposit and lending activity.
• While the legal implications of accepting deposits from cannabis-related businesses are uncertain, the question of whether these funds make their way into the banking system is an empirical question.
• It found evidence that banks located in legalizing states exhibited higher levels of deposits after legalization relative to banks in the same period in non-legalizing states.
• It also found that lending activity increased for banks in legalizing states, and while increases in lending were less sensitive to deposits compared to non-legalizing states, this difference was economically small.
• Although banks can choose either a state or federal charter, all banks are subject to several federal regulations, which may make banks hesitant to engage in relationships with cannabis businesses.
• Although there is some guidance, the guidance we have is vague with respect to cost of compliance and threat of prosecution over time as national political attitudes change, so banks may remain reluctant to provide services to cannabis-related businesses.

The research concluded that there were two mechanisms by which banks may accept deposits from cannabis-related businesses:

1. Banks may believe that the federal government will keep its promise not to prosecute banks that conduct higher-risk customer due diligence. And if banks have these risk-based compliance measures in place and have the proper cost structure in place to allow the benefits to exceed the risks, the bank may accept deposits from cannabis-related businesses.
2. Cannabis-related depositors may operate discretely and not identify themselves, and the bank simultaneously opts to avoid investigating further (don’t ask, don’t tell).

Even though these research above demonstrates that cannabis-related cash is flowing through our financial system, there still is a banking shortage, including lending opportunities.  Most recently, a Whitney Economic report concluded that over 70% of the cannabis industry’s biggest concern is the lack of banking.

And furthermore, if you are a cannabis-related business, it is not a good practice to conceal your involvement in the cannabis industry as that is, by definition, money-laundering and you and your beneficial owners could face serious fines and potentially jail time as demonstrated in this legal case in Oklahoma.

HDCS works with several community banks and credit unions throughout the US assisting in the implementation of a risk-based cannabis banking and lending programs. After implementation we also assist with the ongoing monitoring and reporting along with keeping our financial institution clients up to date on all local and federal regulation and legislation.

To learn more about the HDCS proven solution, visit our website or email me directly at b.postar@hdcompliance.com.

Becky Postar

COO  |  HDCS, Inc.

---