The Importance Of Compliant Cannabis Banking

Best Practices

Federal legislation hasn’t caught up with the times

Author: Anh Hatzopoulos CEO of Dama Financial

Thirty-three states and the District of Columbia have legalized the sale or use of cannabis. Yet, the federal government is struggling to keep up, and cannabis legislation has been stagnant. As a result, there is no safe harbor in the cannabis industry, meaning there is no legislation that assures the safety of banking cannabis. So, many who enter the cannabis industry have preferred stealthier ways of banking. While banking workarounds to open, or compliant, banking may work, they come at a cost. In the long term, businesses that openly bank have access to more reliable financial options.

Still, many in the cannabis industry don’t believe it is that simple, and thus don’t openly bank for a few reasons. Firstly, there is a common misconception that it is illegal to bank cannabis, which deters some financial institutions from participating. This creates a lack of access to compliant banking. Some banks also fear their regulators will look poorly on it because the industry is relatively new. For example, Elavon, a U.S. Bank subsidiary, pulled out of the industry because of the restrictions and lack of legislative assurance offered to banks wanting to enter the cannabis industry. Many financial institutions are unwilling to take the risk, worrying it will put the rest of their business at risk if something happens in the cannabis sector. Sometimes they believe the investment in the people and processes required is simply too high.

However, businesses that opt to use banking alternatives experience short- and long-term consequences. There are two main banking workarounds to open banking: hiding in the banking system or cash-intensive operations.

Hiding in the banking system forces businesses to make up corporations, or LLCs, with different names and purposes to get access to banking. This illegal practice utilizes shell accounts, which charge their customers for different products, allowing the businesses to mask the services and products they sell for less. For example, a client’s bank history would reflect a different company whose products may be something as unrelated as children’s toys for the price of however much they bought from a cannabis business. And, because the bank isn’t aware of the high-risk business it is banking, the cannabis business is able to bank more cheaply. It simply crosses its fingers that it won’t be discovered. Eventually, however, most of these accounts are uncovered, and the business must scramble to find a new bank provider and place to temporarily hold its cash. The business may be barred from that original provider and may even be sued for wire fraud. This form of unstable banking and the operational inefficiencies that come with it create major disruptions in the short term. It jeopardizes payroll and paying vendors and partnering businesses. Similarly, operating by hiding in the banking system eliminates the possibility of qualifying for a loan. Because of the illegitimate provider, businesses can’t build any sort of bank history.

On the other hand, a business that operates with a high percentage of cash creates safety issues for the business and its employees. Having and transacting with large amounts of cash on-site puts the business at risk for robberies. Even without the loss due to theft, conducting cannabis business solely in cash is expensive because it requires a multitude of security measures and training. Additionally, the business must pay to store its profits in heavily guarded private locations. This method has been the norm, which explains the resistance to switch to another form of financial management. Businesses using this method have already taken into account the losses due to shrinkage and possible damage from storage.

But why not switch to a more sustainable system that, because of its automation, reduces the risks of financial loss, theft, and errors due to accounting and reconciliation? Investing in the people, processes and systems that carry out open cannabis banking is not only more secure, but is a more transparent business option. Yes, compliant cannabis banking may be initially more expensive; however, the benefits surpass the price. Having the resources to perform thorough compliance checks inherently costs more, but in the long run, compliant banking actually saves money. The alternatives over time create greater deficits that overshadow the extra costs a company pays for compliant banking. Banking openly comes with real benefits, including FDIC insurance, no cash deposit limits and the possibility of business credit, which opens up options for the future.

Federal legislation hasn’t caught up with the time. Hopefully, establishing a safe harbor for the cannabis industry becomes a priority. All cannabis businesses should be offered transparent and compliant banking options.

This Article Originally Appeared On Forbes

This post was originally published on this site

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