What Should Have Been Said About SAFE Banking: An Open Letter From Green Check Verified CEO

About Green Check

Green Check Verified is the largest provider of banking and financial services for the cannabis industry. Founded in 2017, Green Check currently services 130+ financial institutions who work with cannabis operators and maintains a growing list of 5000+ cannabis businesses in their ecosystem.

Our compliance framework has allowed financial institutions and the cannabis companies they serve to flourish despite the challenges the industry faces.  We believe it is imperative to have an open, honest, and thoughtful discussion on where the industry currently stands with banking, and how to position things for the future.

As such, we have crafted this open letter to the members of the committee and the world at large to hear, from us, how this can be achieved. We will be responding to both the statements made by the panelists, and to the questions posed directly by the members of the committee.

Thursday, May 11, 2023

09:45 AM

Dirksen Senate Office Building 538

To: The United States Senate Committee on Banking, Housing, and Urban Affairs

The Honorable Sherrod Brown, Chair

The Honorable Tim Scott, Ranking Member

Majority members:

Jack Reed, Robert Menedez, Jon Tester, Mark R. Warner, Elizabeth Warren, Chris Van Hollen, Catherine Cortez Masto, Tina Smith, Kyrsten Sinema, Raphael G. Warnock, and John Fetterman.

Minority members: 

Mike Crapo, Mike Rounds, Thom Tillis, John Kennedy, Bill Hagerty, Cynthia M. Lummis, J.D. Vance, Katie Boyd Britt, Kevin Cramer, and Steve Daines.

Where the industry is today

The cannabis industry, as it stands, is a patchwork of semi-connected markets, with each state and territory approaching legalization or decriminalization differently. Despite these differences one thread that remains the same throughout: access to banking and financial services is difficult (to say the least). Even the fact that hundreds of financial institutions are serving the cannabis industry, though not as many as some might have you believe, doesn’t change that. Think of it like operating a normal small business with the difficulty settings turned all the way up. 

The SAFE Banking Act as written in its most recent version addresses these hardships head on. While not a perfect bill, it does address the key pieces we believe to be imperative for the future success of this industry: safety, equitable access, legitimacy, and regulatory consistency. 

Safety

In terms of safety, it comes down to two distinct points; safety for workers and business owners and safety for financial institutions. 

Cash is perhaps the riskiest payment method out there, which is one of the reasons why the world has largely moved away from it. Because it’s hard to track, it attracts the attention of criminals, making it a problem that plagues the dollar store industry, as outlined in this article about a Dollar General store that was robbed four times in three months:

“Daniel Rosenberg, director and coordinator of the nonprofit Crime Stoppers of Central Indiana, said that people also choose to rob these stores over, for example, a Walmart because dollar stores generally carry cash. Given that most items cost under $10, shoppers tend not to buy on card. The same is true for convenience stores and gas stations, he said.“

Cash attracts criminal interest, and when a cannabis business isn’t banked, they’re made a target, one that’s easily more attractive than a dollar store because they’re not selling items under $10. For instance, an eighth of cannabis flower, the most common amount sold at a dispensary, on the lowest end would cost between $20 and $30. Plus, unlike the dollar store, the dispensary isn’t able to take its earnings to the bank at the end of the day. An unbanked dispensary quickly accumulates a literal pile of cash and there’s a certain element that will exert as much pressure as necessary to take that with them. This has, and will continue to, result in violence perpetrated against the staff of cannabis businesses. That crime will also have a follow-on effect of cultivating fear in the community and distrust of cannabis businesses.

The SAFE Banking Act would allow for increased services by financial institutions that would effectively remove the “all cash” nature of this business, a major point of concern brought up by Mr. Brown, Ms. Packer, and Mr. Oyefeso multiple times in their testimony. 

This could take the form of allowing credit card companies to service the industry, or more broadly for common digital payment methods to become available. Therefore reducing the amount of cash on hand that cannabis operators currently deal with. 

For financial institutions, SAFE removes many of the perceived barriers that currently preclude them from participating in this growing industry.

Equitable Access

Equity is a central point within the cannabis legalization movement. Whether it’s approached as a means for righting the wrongs of the war on drugs, or as a piece of the social movements occurring across the country, one fact remains: people of color, veterans, and other disenfranchised communities are often talked about as reasons to legalize cannabis and then forgotten when it comes to basic business services. There’s a paradoxical challenge at play here: states build social equity programs to make sure that those disproportionately affected by the failed war on drugs have an opportunity to participate in the industry but seldom do states then address the issue of getting these folks access to banking. It is well known that these communities already face challenges with access to banking, as the National Black Banking Foundation outlines based on a report prepared by the Board of Governors of the Federal Reserve System:

“Forty-nine percent of Black households were underbanked or completely unbanked, compared to just 15 percent of White households in 2019, according to the Federal Reserve. The US Census Bureau’s Annual Survey of Entrepreneurs found that Black families are rejected for credit at twice the rate for white applicants.”

As part of the licensing process every state requires an applicant to provide proof of some sort of banking relationship, a provision that effectively disqualifies those that the social equity programs are meant to support. That starts with the systemic issues noted above and is exacerbated by the fact that eligibility for social equity programs often requires proof that the applicant has a history of incarceration for nonviolent prior marijuana-related offenses, making them unfortunately unattractive to conservative financial institutions that aren’t willing to add the risk associated with banking the formerly incarcerated with the risk of banking cannabis.

One of the ways that historically disadvantaged groups have been able to access capital to open businesses - and to sustain them through the lean times - is via federal assistance programs like those offered through the Small Business Administration. Yet in 2018, the SBA made it clear that even these are inaccessible to cannabis operators:

“Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana may be ineligible for SBA financial assistance.”

We, at Green Check, believe it is imperative that fair and equal access be afforded to everyone seeking to work within the cannabis industry. That includes access to the basic financial services that every other American takes for granted: car loans or mortgages for employees, access to small business loans or lines of credit for business operators, or any of the litany of other solutions that businesses outside of the cannabis ecosystem have access to.

Legitimacy 

Each piece of the cannabis supply chain operates like their “normal,” non-cannabis business counterparts. The cultivation process, for instance, is largely like any other agricultural business, and processors run operations that don’t deviate far from what you would see in any other consumer packaged goods manufacturing process. Dispensaries are, at the end of the day, simply retail operations. Extraction, delivery, distribution, packaging, and all of the other steps in between follow the same supply chain process that puts a meal on your table or a phone in your pocket. They pay federal, state, and local taxes on their activities, even though Section 280e of the tax code makes it so that their burden is astronomical compared to the non-cannabis business down the block from them. With the inability to take any deductions outside of the cost of goods sold, the National Cannabis Industry Association estimates that plant-touching marijuana businesses are effectively subject to a 70% tax rate. 

These are businesses that were widely designated “essential” during COVID lockdowns and they continued to operate yet they were ineligible for support via the Payroll Protection Program even as they served as a lifeline to their communities.

The deck is stacked against these businesses solely because of baggage many of us carry with us from our days being indoctrinated via D.A.R.E. programs in the belief that marijuana was a corrosive personal and social ill that rivaled that of heroin and cocaine. Yet these are legitimate businesses that make positive contributions to society, but without access to banking they are forced to operate in ways that make them vulnerable to crime and in many ways require them to engage in risky financial practices. If you don’t have access to basic billpay services you’re paying your taxes in cash, toting perhaps millions of dollars to some government office in the proverbial duffel bag. To pay their utility bills they may have to go and buy stacks of money orders at the local grocery store. 

If we want to keep illicit funds out of the financial system - which we absolutely need to do - then we HAVE to bring cannabis businesses into our banks and credit unions in a meaningful and equitable way, so that FinCEN and other government agencies can focus their limited resources on the fight against true threats to the financial system.

There’s always going to be a cloud around cash-based businesses, particularly those that have to resort to work-arounds just to pay their bills, so with that in mind we believe that access to basic banking services is one step towards acknowledging the legitimacy of this industry and the positive impact it has on communities.

Regulatory Consistency

Federal guidance issued by FinCEN in 2014, “BSA Expectations Regarding Marijuana-Related Businesses,” lays out a strong framework that banks and credit unions use to build compliance programs that meet their examiner’s expectations of what a well-run cannabis banking program looks like. 

We and our financial institution partners sincerely appreciate that the Department of Treasury has provided us with a strong framework for building a program, without which it is doubtful that more than a handful of financial institutions would be banking the industry today, but on certain points there is unfortunately significant room for interpretation by different regulators, auditors, and legal counsel that FinCEN has been reluctant to address. For instance, something as simple as determining whether the “Marijuana Limited” suspicious activity report (SAR) must be filed quarterly on marijuana-related businesses that don’t actually touch the plant. It is clear that this would apply to a dispensary that sells marijuana to patients or customers, but does a financial institution need to file a Marijuana Limited SAR quarterly on a plumber where one of their fifty customers is a dispensary? What about supporting businesses that produce packaging materials or agricultural products used in cultivation that are then sold to plant-touching processors? 

While this may sound like a relatively academic point, filing every individual marijuana SAR takes time and effort that could otherwise be spent on other of the numerous regulatory obligations a bank or credit union’s compliance officer must deal with each day. Keeping up to date with SAR filing is also one of the very few areas where financial institutions banking cannabis have ever been subject to regulatory enforcement actions. 

To be clear, the problem isn’t with cannabis per se but a failure to keep up with BSA obligations including the requirement to file quarterly ongoing SARs on businesses that the financial institutions have no reason to believe are violating state law. Having clarity on that point would potentially ease the compliance burden of financial institutions, reduce the costs associated with hiring additional compliance staff just to handle federal filing requirements, and mitigate some of the uncertainty felt by financial institutions as they build their programs. 

Unfortunately, apart from a 2020 guidance document issued in response to the Agricultural Improvement Act of 2018 that directly addressed the SAR issue related to banking hemp following its legalization (FIN-2020-G001) “FinCEN Guidance Regarding Due Diligence Requirements under the Bank Secrecy Act for Hemp-Related Business Customers,” FinCEN has remained officially unresponsive to requests for clarity on this or any of the other areas open for interpretation. This has led to a certain amount of inconsistency in how this guidance is applied based on the regulatory agency, the personality and experience of the examiner, and even regional differences related to whether a financial institution is in a part of the country that’s been banking cannabis for a long time (the West Coast) or a short time (the South).

Bankers view any uncertainty as a risk, and any individual risk might be the one that keeps a financial institution away from banking the industry. One of the strengths of the SAFE Banking Act (see this version from 2021) is one of its least discussed provisions: “Not later than 180 days after the date of enactment of this Act, the Financial Institutions Examination Council shall develop uniform guidance and examination procedures for depository institutions that provide financial services to cannabis-related legitimate businesses and service providers.” With FFIEC guidance all of that ambiguity would presumably be removed, and financial institutions would for the first time have a clear rubric provided directly by the interagency group that actually writes the exam manuals for banks, credit unions, and other financial services providers. In a very real way the passage of the SAFE Banking Act would finally “put on paper” what financial institutions have been doing since 2014 by officially defining how to build and run a compliant cannabis banking program. This might in turn offer some currently reluctant financial institutions the assurance they need to enter the market once the gray areas associated with cannabis banking have been removed. Any time a risk is removed the cannabis industry benefits with more options, and having a more competitive market would drive down the price tag associated with cannabis banking and encourage financial institutions to offer more fully-featured banking products. All of this would have a real and immediate effect within 180 days of the passage of the SAFE Banking Act.

Conclusion

Safety, equitable access, legitimacy and regulatory consistency are four key pieces for success of the existing and growing legal cannabis industry. We believe addressing any of these factors individually would fully warrant the passage of the SAFE Banking Act, but taken together it’s impossible to deny the positive effect it would have on both the cannabis and financial services industries.

This post was authored by an external contributor and does not represent Benzinga's opinions and has not been edited for content. This content contains sponsored advertising content and is for informational purposes only and not intended to be investing advice.