Cannabis: The Gray Areas of a Billion-Dollar Industry

Credit unions are not-for-profit, community-based, member-owned financial institutions uniquely positioned to help America’s more than 27 million small businesses. They return yearly earnings to their members in the form of lower interest rates on loans, lower fees on accounts and better interest on savings accounts — including business accounts and loans. They also offer smaller business loan amounts, which can be a huge advantage for entrepreneurs.

Beyond these dollars and cents advantages, credit unions are operated on the principle of “people helping people.” What this means for small businesses is a more personal, local approach to loan approval — often a big hurdle for the new small business. The approval process is more likely to include the credit union’s own interactions with the applicant than a big bank’s universal application process.

A credit union is also more likely to understand a community’s need for and the potential success of a small business, as they themselves have deep roots in the community. Credit unions are all about keeping local dollars in the local economy.

And Michigan credit unions, specifically, are fulfilling this need. Commercial loans grew nearly 12% in the fiscal year ending in March, which far outpaced the national rate. However, there is a growing contingent of small businesses in Michigan that credit unions currently don’t feel safe banking cannabis-related businesses.

In November of last year, the passage of Proposal 1 made cannabis medically and recreationally legal in the state of Michigan. But it remains federally illegal. As a result, credit unions are very apprehensive about providing financial services to cannabis-related businesses. What this means is that there is a rapidly growing number of small businesses in need of financial services that don’t have access to the products and services of the most well-equipped and community-minded industry.

Why Do Cannabis Businesses Need to Be Banked?
Josh Hovey, communications director of the Michigan Cannabis Industry Association (MICIA) and senior vice president at Truscott Rossman, told the Michigan Credit Union League (MCUL) that the cannabis industry in Michigan is projected to be a billion-dollar business. A strange thing about this potential billion-dollar business is that it’s all primarily done with cash.

“The retail transactions are in cash, employees are paid in cash, taxes are paid in cash. The companies' vendors are being paid in cash and that's just not the attainable solution,” said Hovey. “It's 2019 and there's no other industry in Michigan that operates entirely in cash that is legal.”

As an advocate, Hovey leads off with this talking point: It is absurd to have a billion-dollar cash industry. But he follows that up with a clarification that cannabis legislation isn’t about whether lawmakers support and believe that marijuana should be legal. “That's the law of the land in the state now and it's not only impacting cannabis companies, it's impacting the small businesses that serve them: accounting firms, law firms, website development companies, office supply companies.”

In other words, this is a small business issue, and as Hovey told MCUL, the small businesses in the state that have an opportunity to expand their market into an entirely new service area are severely limited if laws aren’t changed.

“It's not just the cannabis companies that can't bank, but any small business that accepts money from a cannabis company for services, their bank could potentially refuse to work with if they knew that they were taking money from a cannabis company,” continued Hovey. “The residual impact is really something that opens the eyes of lawmakers and when they understand that this is not just a cannabis business issue but a small business issue across the state, that’s when people really start to pick up their heads and take another look at this issue.”

Besides being a small business issue or partisan issue, Hovey also called it a “common sense issue,” saying that as more and more communities become comfortable with the idea of having a business operating in their community and begin to realize these are legitimate business owners who are active members of the community — paying taxes; and building, renovating and improving their community — it will be easier to mobilize others to speak on behalf of the issue. It will become clear, he said, that preventing a billion-dollar industry from operating solely in cash is common sense for everyone in the state.

An Unsafe Environment
At the 2019 MCUL Annual Convention & Exposition in Detroit in June, Patricia Neighbors, president/CEO of Community Credit Union of Southern Humboldt in Garberville, California, spoke to attendees about her years of experience banking cannabis-related businesses.

Neighbors stressed that banking these businesses will come with an uptick in operating costs due to the importance of implementing industrial fans, cleaning equipment, drop boxes, masks, alarm systems, cash handling systems and merchant teller spaces. Many of these items will be necessary to properly deal with the amount of cash, and the specific nature of this cash, which will be different to the touch and smell.

After reading that, some people could easily conclude that without the properly operating structure, money from cannabis-related businesses is currently being handled in less than safe environments. And, again on a small-business level, access to capital, financial counseling and planning services, and lower-fee accounts is vital to millions of small businesses across the United States. Credit unions understand this and are uniquely positioned to deliver the tailored finance solutions that small businesses need, yet there are small businesses that aren’t able to take advantage of credit union products and services.

On the subject, Hovey said, “The few banks in the state, the credit unions that are willing to work with these companies have to hire extra compliance officers and there's a whole lot of paperwork that goes into ensuring that these businesses are operating responsibly, and so it's just a completely inefficient system and it's not beneficial for anybody the way it's working right now.”

Gray Areas, Gray Markets
When asked what happens if the status quo remains — if there continues to be a legislative gray area for credit unions — Hovey said it adversely affects the market. “When a cannabis company has to spend time and resources on counting cash and taking extra precautions to ensure that cash is safe using an armored vehicle service and storing large amounts in safe locations, that adds costs to the business and those costs get passed down to consumers. And, especially right now when we're only operating in medical marijuana, those consumers are often people who are undergoing cancer treatments or have other serious ailments that make every dollar spent really important to them.”

If the federal government can allow these businesses to be banked just like any other business, he said, it allows these businesses to operate more efficiently and will make everything less expensive for consumers.

“We've been working with the state to try and ensure that enough product is available in the licensed and regulated market for consumers so that they're not forced back into the black market, or into the gray market,” Hovey said on behalf of the MICIA, “which Michigan's kind of been working under kind of a gray market since 2008 when we first legalized medical marijuana under the caregiver system.”

He said one of MICIA’s big-picture goals is to see the black market diminish as much as possible, which will ultimately be impacted by how the state enforces and implements its rules and regulations.

Legislative Agenda
Of course, for this change, reform will need to happen at the federal level. In the meantime, many associations in Michigan, including MCUL and MICIA, are advocating that a safe harbor be put in place to allow financial institutions to provide services to legal cannabis-related businesses until there is more legislative clarity.

When asked if he thought this billion-dollar industry would have a major impact on the federal election in 2020, Hovey said it would and that it has become less and less of an issue split down party lines. “More and more Republicans are understanding that this is a real business with real economic impact opportunity to their communities.”

He went on to say the experience we saw in the state 2018 election, where pro-cannabis voters were able to have an important impact on the attorney general election and the governor’s office in terms of voter turnout, activism and party politics, it will all be amplified going further.

What Is the Best Outcome?
MCUL talked with Chuck Holzman, an attorney at Holzman Law, who provides counseling and legal services to credit unions about what he’s hearing from financial institutions regarding cannabis banking. Unsurprisingly, he said there is a lot of confusion and frustration.

“There is a lot of demand on credit unions to provide banking for marijuana-related businesses. A lot of the demand is coming from current members but also from people who aren't members but are looking for banking alternatives because they're involved in marijuana-related businesses,” said Holzman. “The real frustration for a lot of credit unions is the fact that they're finding it difficult to provide services to existing members, and finding that their policy prevents them from continuing to provide service to existing members when they find that an existing member is engaged in a marijuana-related business.”

So, how do financial institutions go about continuing to serve existing members when they have become involved in this industry? The lack of guidance on this, according to him, has been the biggest frustration to many credit unions.

Besides basic clarity, MCUL asked Holzman what he thought is the best legislative outcome for financial institutions and consumers. He responded that cannabis should be removed as a Schedule 1 drug under the Controlled Substance Act, which would allow marijuana-related businesses to be banked no differently than any other business.

“For example, I could, if I were a credit union, open up an account and provide the full array of banking services to the local pharmacy down the street from my credit union without having any additional oversight responsibilities over that pharmacy than I do the electrical contractor next door,” said Holzman. “So, if I can serve a pharmacy without having to engage in any additional oversight or regulatory filings than I do any other business member, then why should I not be able to serve a licensed medical marijuana dispensary who is dispensing medical marijuana that's prescribed by doctors in accordance with state licensing? Why do I have to treat those two entities differently?”

The lawyer continued, drawing another equivalency that he thought highlights regulatory inconsistencies, this time with recreational marijuana:

“I can open up an account and provide a full array of banking services to the liquor store that's down the street from the credit union. I don't have to monitor the liquor store to make sure they're not selling it to minors. Why would I have to then monitor a marijuana dispensary that's acting in full accordance with state law, licensed under state law? Why do I have to make sure that they're not selling the marijuana to minors? So, I think that the perfect scenario for credit unions is for cannabis to be treated no differently than any other business member that we need to serve. And certainly, we have due diligence requirements under the Bank Secrecy Act. We know your customer/member requirements that we have to do. We've got account opening due diligence that has to be done. We have ongoing monitoring that has to be done. None of that should be different based upon the lawful industry that the business is operating in.”

What Are the Barriers?
If treating cannabis-related businesses just like any other small business is the goal, what are the barriers to get there? When asked, Holzman replied with an emotional one that dates back much further than our contemporary culture:

“Well, I think part of the problem is, we have this hundred-plus-year-old prejudice among our federal government of marijuana. Our prejudice against marijuana at a federal level started back in the late 1800s, early 1900s, when people fleeing the Mexican Revolution came to the United States and brought marijuana with them. There was this stereotype that if you smoked this stuff you became crazy, and it gave you superhuman strength that led you to rape, murder and pillage.”

This perception was perpetuated through the 1930s, ´40s and ´50s, he said, before the Controlled Substance Act was put into place in the ´70s, which cemented the idea, in the majority of the public’s eye, that cannabis serves no legitimate purpose.

“Let's look at marijuana today from a medical perspective,” continued Holzman. “There is tremendous medical science that marijuana helps relieve side effects from chemotherapy. There is medical evidence that shows that marijuana can inhibit the growth of certain cancers. There's scientific evidence to show that marijuana helps alleviate the symptoms of CTE [chronic traumatic encephalopathy] and other concussion syndromes. So, there's no doubt today that medical science has concluded that this drug does have benefits.”

Until the federal government recognizes that there are legitimate purposes for cannabis, he said, it’s going to be an uphill battle for consumers and financial institutions seeking relief on the issue.