European cannabis firms and investors enviously watching the rapid maturation of the multi-billion dollar North American industry may consider something both geographies have in common; the difficulty of getting banks onside.
This situation is unlikely to last much longer, however, as the US (never one to accept playing second fiddle, especially to Canadians) gets its regulatory act into gear, while Europe falls so far behind it may as well not be in the cannabis race at all.
Europe, home to 740m people, would be the world’s largest market should legalisation occur; this is unlikely any time soon, and even with mild thaw in some more liberal jurisdictions there is little evidence European banks want to provide support.
As cannabis remains federally illegal in the US, and even with the notorious anti-drug Attorney General Jeff Sessions out of the way, acquiring banking services has proved a huge burden for firms hoping to crack the US market. As of September 2018, Forbes reported just 30 percent of cannabis firms in the US had access to bank accounts.
“State-legalised marijuana businesses are still illegal under federal law, and banks that provide services to those businesses may be prosecuted for aiding and abetting violations of the US Controlled Substances Act,” said David Apfel, parter at Goodwin Proctor in Boston. In addition, the banks could be prosecuted for multiple financial crimes, including money laundering, violations of the unlicensed money remitter statute, and violations of the Bank Secrecy Act.
“Change is most definitely in the air,” said Apfel. “While it is still a relative trickle, more and more banks – investment banks as well as depository institutions – are providing services to the cannabis industry. Plus, there are federal legislative initiatives that, if passed, would open the floodgates to banks entering the market. The initiative that has gotten the most publicity is the STATES Act (Strengthening the Tenth Amendment Through Entrusting States Act), which appears to have bipartisan support in the Senate, and which President Trump has indicated support.”
In Canada, where cannabis is legal recreationally, lawyers report the process of getting banked is not as plain-sailing as it appears, but the country still holds all the cards. Bruce Linton, the chief executive of Canada’s shining light Canopy Growth, said: “You can check every box, they still don’t like you”. But it can be done and for the domestic firms there is not the threat of federal punishment lingering.
Will the Farm Bill help US banks reap the windfall?
“The lack of banking and merchant processing services are a severe impediment to cannabis businesses operating in the US,” said Rod Kight, leading international hemp and cannabis attorney.
He said the epic battle waged by Fourth Corner Credit Union, a bank located in Colorado that was chartered to serve the cannabis industry, is a prime example.
Fourth Corner applied for approval from the US Federal Reserve and also sued the National Credit Union Administration (NCUA) in 2015, claiming the NCUA improperly denied it federal share insurance.
The bank was granted conditional approval from the Federal Reserve Bank of Kansas City to serve individuals and companies that support the legalized marijuana industry but that do not touch the plant, however a recent ruling in the lawsuit against NCUA rendered the case moot.
The Court found that Forth Corner must reapply for share insurance coverage in order to serve marijuana advocates and groups since the credit union amended its business plan and field of membership since filing the suit. Although there have been several Congressional bills filed that attempt to rectify this situation none have passed.
“Banking and merchant processing is even difficult, and sometimes impossible, to obtain for federally legal industrial hemp businesses,” Kight told Cannabis Law Report. “Most (and perhaps all) national banks refuse as a policy to service hemp businesses.”
It’s a similar story with payment processors such as PayPal and Square, which are refusing to process hemp transactions. Payment processors themselves are also being squeezed by money laundering rules.
“My own law firm’s escrow account was closed by TD Bank after several lawful international hemp transactions,” said Kight. “Fortunately, more regional banks, such as First Bank in the Carolinas, are openly courting hemp businesses.” He said “at least two” merchant processors openly process hemp transactions.
Banks themselves often point the finger at the watchdogs when they are questioned on their reluctance to bank certain verticals, contending it is simply not worth the trouble. “Notwithstanding the lucrative opportunities marijuana-related businesses present, for the vast majority of banks, the risk is not worth the reward,” said Apfel. “The cost-benefit analysis, at least until very recently, has come down on the side of too-much-cost 99 percent of the time.
Regulatory technology expert Jim Richards, former director of financial crimes risk management at Wells Fargo, said US financial services regulators must give more guidance to firms frustrated by opaque and often conflicting advice.
“Unless and until the financial services industry gets clear, unequivocal, consistent, written laws, regulations, and guidance from Congress, Treasury, and Justice to provide banking services to marijuana-related businesses, it will and should do what it is currently doing – balancing the undue risks against the insufficient rewards – and continue to stand on the sidelines while our communities, veterans, patients, doctors, caregivers, and others suffer.”
Most recently, in his confirmation hearings, and then again in written answers to questions posed by Congress, Attorney General Designee William Barr has stated that he would not ‘go after’ state-legalised marijuana businesses,” Apfel told Cannabis Law Report. “In Barr’s view, the conflict between federal and state law should be addressed through the legislative process rather than administrative guidance,” he said. “In the meanwhile, every indication is that he will adhere to the approach detailed in the Cole Memos in practice even if he does not formally reinstate the guidance.”
Cannabis firms are not special
This often wooly act of “de-risking” allows banks to shutter business it doesn’t like the look of, or simply turn them down outright, usually on the basis of “suspicious activity” or money laundering concerns. Anecdotally, reasons are often not given for a business being refused, there is very little clarity or consistency in the decision-making process.
HSBC was fined $1.9bn in 2012 and subject to strict monitoring controls for allowing Mexican and Colombian drug cartels to launder billions through its branches in Mexico. It eventually pulled out of the Mexican market entirely after pleading guilty, after coining hundreds of millions of dollars in fees.
Some may see irony in HSBC banking illegal drug cartels for several years while refusing to provide accounting services to legitimate CBD oil sellers, but as gatekeepers they will always retain that influence. Banks, and HSBC are not the exception, are set up to cater to the top 10 percent of customers, the ones who make them the millions and take out loans, not the ones who might want to help sick people.
Cannabis firms are only experiencing the same headaches endured by those in other highly-regulated sectors, notably gambling, bitcoin and cryptocurrency, fintech and money remitting, by virtue of being “high risk”.
In Europe, lenders are being forced to open up through new legislation, whilst also being subject to increasingly stringent anti-money laundering laws. Two directives went live in two years, the second very quickly enacted following terror attacks in Brussels and Paris.
Banks obliged to hand over customer data to new players are warned that being open and loose with data is the worse thing they can do, and that crippling fines based on turnover await those who flaunt the new data protection, market abuse, and money-laundering rules.
Europe’s banks are pulling back from even legitimate business in the wake of this; they are loath to invite more scrutiny by opening the door to the marijuana trade.
In the US, 2014 FinCEN guidelines allow financial institutions to provide banking services to cannabis businesses, with a couple of caveats. FinCEN says they “should enhance the availability of financial services for, and the financial transparency of, marijuana-related businesses”. Despite this, there has been little movement and lenders remain risk-averse.
Kight believes the 2018 Farm Bill, which contains robust protections for hemp, will likely open the door for more access to US banking by hemp industry firms, so the next 12 months will give a good indicator on what is in store for Europe and the rest of the world once the banking industry wakes up.
From chemists to doctors and banks, Europe is a slow burn
In the immediate future, the picture in Europe remains fairly bleak for small and medium enterprises, and the proliferation of CBD oil, or products claiming to contain it, should fool no-one that cannabis is going mainstream just yet.
A British chemist speaking on condition of anonymity told Cannabis Law Report he had turned away two walk-in reps selling over-the-counter cannabis products with “lots of claims about benefits but no clinical evidence”.
Although the UK updated its legislation in November to allow medicinal cannabis to be prescribed to individuals suffering a wide variety of symptoms, doctors remain as reluctant and hesitant as banks.
“We have been closely watching the situation in the US,” said Robert Jappie, head of the cannabis practice at Mackrell Turner Garrett law firm. “A number of customers have come to us for regulatory advice in setting up a new cannabis business. We have great contacts in the financial services sector and we have been surprised at how reluctant the banking industry has been to get involved; they don’t appear to have the appetite at the moment.”
Mackrell Turner Garrett set up its regulatory practice in response to huge amounts of legitimate business being done already, but Jappie said the banks are still reticent even when there is more clarity now from the government.
“It’s short-sighted and in my view, backwards,” he said. “We are hearing that payment providers are also refusing legitimate services as they are not willing to enter the sector. It’s a perfectly legitimate industry, but banks and service providers are extremely cautious at the moment.”
The European Union has put cannabis on the agenda for 2019, and looks set to pour money into medicinal cannabis research, and to sketch out a formal, standardised regulatory approach that will apply across each state.
It’s very early in a process that could take one year, or 10, given how slowly the wheels of democracy turn in Brussels. But with several European countries actively pursuing their own licensing schemes and putting networks in place to allow for import, export or both, the threat of a fractured, siloed cannabis market with a mishmash of rules across each state may jolt the EU into laying down a blanket framework for each to adopt.
Germany is the European Everest for American cannabis firms, with Canadian and US giants scrambling to gain a foothold as the largest EU state by population irons out the kinks in its medicinal cannabis licensing scheme. Establishing a beachhead in the jurisdiction would give any firm trouble-free access to serve the rest of the Union’s single market via the bloc’s passporting rules.
Yet the popularity of Germany as a destination for marijuana firms comes as the country’s two largest banks Deutsche Bank and Commerzbank, are in dire trouble and considering a merger. Such is the rotten state of German banking, the tie-up was condemned as “two drunks propping each other up”.
It is a similar story elsewhere in the bloc where Italian and Spanish lenders are also in the mire as their countries jostle for the position of Europe’s top cannabis dog; both countries have received significant investment from Canadian firms over the last 12 months, eager to put boots on the ground and wait it out.
A view to the future
At just over a decade on from the financial crisis, the slew of industry regulatory reforms appears to have stemmed as the EU takes stock. Last year was particularly brutal with the introduction of no less than five wide-ranging regulations and directives that touched on every part of a bank or financial services firm’s activities.
Competition laws are now starting to have an effect, and a new wave of apps are hitting the market, built by fledgling technology companies eager to make their mark in finance.
In turn, it is forcing the banks to think more about their offerings, and to again look at the small and medium enterprise market as somewhere to target, which can only be good news for budding cannabis companies in the long-run.
“There will be banks that are more innovative in their business methods; it’s a case of finding the right service providers who are willing to engage,” said Jappie. “If there is clear advice from lawyers that activity in this area is lawful, that should satisfy banks as to their Know Your Customer requirements.
There are reputational issues to consider, Jappie said, but looking at it from a long term basis this industry is only going to expand.
“Hopefully things are starting to become a bit more liquid in the US and that will transfer to the UK and Europe over time; we are working hard to convince the banks to see things this way,” he said.
It has taken 10 years to move on from the financial crisis, and in that time the US investment banks have recovered enough to completely dominate finance. The initial advantage is with Canada, but the financial strength of New York ensures a similar situation will eventually apply in the cannabis industry.
“I don’t like to make predictions, but the trend definitely seems to be toward a normalised, highly regulated industry,” Apfel said. “I anticipate that at some point within the next several years, and perhaps as soon as this year, either the STATES Act or something like it will pass. If and when that happens, the tension between federal and state law regarding marijuana will disappear.”
He said even in the absence of federal legislation, virtually every state within the United States is likely to legalise and regulate marijuana for adult use within the next 5-10 years.
If Europe waits another 10 years to get its act together on cannabis instead of giving support and guidance to banks and firms now, it may find itself permanently locked out of this most exciting and profitable emerging market.