While cannabis sales grow at a breakneck monthly 3.8% pace in Illinois, when it comes to the industry’s financial infrastructure, it’s all still illegal from a federal perspective. And since banks cannot operate without federal financial regulator approval, finding and maintaining a good banking solution for a cannabis business is a difficult proposition.

From a bank’s perspective, state-approved cannabis businesses are under constant threat of elimination by the federal government, and servicing a leaf-touching cannabis business requires filing weekly reports with federal regulators. However, for many small banks, the cannabis businesses’ high volume of cash deposits can be very profitable.

“There’s always a risk that federal regulators could come and shut down the bank, remove FDIC deposits, or put the bank under review because you’re essentially money laundering for drug dealers,” one cannabis banking expert told Grown In.

Still, in a series of interviews with bankers, payment company executives, attorneys and Illinois leaf-touching businesses, most of whom wanted to remain anonymous or only speak off the record because of the sensitivity of their work, Grown In found Illinois’ banks are straining to serve its nascent cannabis banking industry. A potential banking crisis may be coming this fall, as a tiny group of Illinois banks serve a cannabis industry set to add over 100 new dispensary, craft grow and infuser licenses in 2020, each of which will need a bank to provide financial services.

Contradictory Federal Policies

Cannabis and banking is largely limited by three federal policy documents. The first, The Bank Secrecy Act of 1970(BSA), sets anti-money laundering rules for banks, sets due diligence requirements for what kinds of businesses banks can serve, and establishes federal examination rules for banks. Essentially BSA requires banks to know most everything about what kind of business their customers are in, where they got their money, and then report any suspicious activity to federal regulators. 

Since cannabis is an illegal drug in federal eyes, everything a cannabis business might do is considered suspicious activity, according to federal banking regulators. Those regulators are empowered by federal law to seize from banks any assets they believe to be illegal, or to be placed under intense, regulatory scrutiny limiting their operations.

The second document, a 2014 U.S. Treasury memo from the Financial Crimes Enforcement Network commonly known as “FINCEN”, opened the door to banking cannabis businesses by establishing guidance to banks on what limitations they should seek, under what circumstances they should be filing suspicious activity reports, and exactly what would constitute a “reg flag” for federal regulators overseeing bank activity.

The third document, a 2018 memo issued by  thenU.S. Attorney General Jeff Sessions, directs local U.S. Attorneys to “use previously established prosecutorial principles that provide them all the necessary tools to disrupt criminal organizations, tackle the growing drug crisis, and thwart violent crime across our country.” The Sessions memo, sometimes called “Cole II”, rescinded a 2013 memo from Obama-era Deputy Attorney General James Cole that directed U.S. Attorneys to focus on non-cannabis-related matters. 

Now, under Sessions’ directive, each of the 94 local U.S. Attorneys can set their own policy on whether or not they will prosecute and seize cannabis businesses. Yet, contradicting Sessions’ 2018 directive, the U.S. Treasury’s FINCEN guidance still holds, creating a precarious situation for banks trying to determine whether or not to hold cannabis-related proceeds on their ledgers.

Small Banks Move In

While the Department of Justice maintains the right to criminally prosecute cannabis businesses and their banks, federal banking regulators have opened the door to bank the cannabis industry. As a result, reporting requirements are exhaustive, and for large banks the social stigma of banking cannabis remains. Therefore, cannabis banking has largely remained the purview of small banks willing to overlook the risk in return for large cash deposits and potentially high bank fees.

In Colorado, which legalized recreational cannabis in 2014, “There are probably no more than two dozen banks actively banking a dispensary or grow operation,” according to Zane Gilmer, a cannabis banking attorney at Stinson.

But in Illinois, there are likely no more than five or six banks serving multiple cannabis businesses, according to people knowledgeable of the local banking system. Even for bankers, It is difficult to have a clear sense of how many banks are serving the cannabis industry, as bankers rarely share information about their business with each other.

The lack of banks serving Illinois’ cannabis industry concerns those banking cannabis, as dozens of new cannabis licenses are expected to come online later this year. 

One senior banker in Illinois who works with cannabis clients expressed alarm to Grown In in a typical, subtle banker’s manner. “When you consider the amount of consumer demand and new business applications, it’s essential that you have more than a handful of Illinois banks overtly serving the industry. It’s simple math.”

In addition, smaller banks, many who operate with less than $200 million in assets, may find their asset base quickly swamped by cannabis business deposits, a red flag for regulators and a generally bad business practice, since it exposes a bank too much to the fluctuations of one particular industry.

“For dispensaries, because it is such an expensive product, there might be as much as $10 million of deposits a month,” says Bob Craig, CEO of PayQwick, a cannabis-focused payments company. “You’re going to be depositing to a bank a huge amount of money. For a small bank, that could quickly become as much as 5% of their deposits being cannabis. This could be uncomfortable for a board [of directors].”

Banks, seeking to limit their risk, may put sharp limits on how much cannabis business they will do, says Craig.

“When the banks wade in [to cannabis], they either say, ‘We’ll cap your deposits at $500,000 a month, or you need to find another institution to take your second license money.’ Or, they’re not going to take any new accounts, because they just have too much of cannabis as an asset base.”

Banks also rarely advertise their cannabis banking services, instead relying on word of mouth to acquire new cannabis industry customers – if they want them at all.

“There is a whisper tree,” says Dispensary 33 owner Zach Zises, “I got a bank, I think I know a bank.” Zises says his company is now on his third bank, and even had to operate without a depository for a few months, holding cash in safe deposit boxes, as one bank after another discovered how regulatory-intense it was to bank the cannabis industry, and then decided they wanted to get out of the business.

“Many institutions go so far as to have an NDA with their customers, so you don’t tell all your friends you are banking with them. Because they don’t want you to tell your friends and then the bank gets 100 calls from prospective customers,” says banking attorney Gilmer.

As a result, many banks banking cannabis charge high fees for their services. 

“Cannabis businesses are paying substantially more, it’s not just double digits. A lot of [non-cannabis] businesses don’t pay much, they have a service fee, a couple hundred bucks a year. But for cannabis, we’re talking thousands and thousands of dollars a month just to have a deposit account,” says Gilmer. And for non-cannabis businesses, banks typically throw in all kinds of other services for a nominal fee, like checking, savings, credit monitoring and even lines of credit. 

Not for most cannabis businesses.

At one bank, Dispensary 33 was paying thousands a month just for the deposit account, “Plus we’ll charge you some basis points for every dollar you deposit,” says Zises. Now his current bank charges about $1,000 a month in fees.

Not every bank charges cannabis businesses such high fees. Banks with long-standing customer relationships may charge less – especially if the customer has other large deposits at the bank. One leaf-touching business told Grown In their banking experience was almost exactly the same as any other business account, but this seems to be a rare experience according to both banks and bank customers Grown In spoke to.

For multi-state operators the banking picture is even more complicated, say cannabis banking experts. Although small banks can operate across state lines, because of the volume of deposits and regulatory requirements, many MSOs are required to source a different bank for every state they operate in, creating a highly complex financial operation.

The Cost of Regulation and Cash

Working with cannabis customers is an expensive proposition for a bank. First, because it is a cash-intensive business, banks and customers alike need to have staff available to count large amounts of cash. Second, banks need to closely examine their customers’ business activities, have staff well-trained in anti-money laundering regulations, and file weekly suspicious activity reports with regulators. Even state-chartered banks, which still answer to federal regulators, are bound by these rules.

“On the federal level there’s a lot of reporting for FINCEN,” said PayQwick’s Bob Craig. “You have to minimize the opportunities for money laundering, according to the state laws and regulations.”

As a result, banks that serve cannabis businesses tend to have trouble just “dipping a toe” into the business. Once you have to manage the regulatory costs and cash-counting, you’ve built an operation that really only becomes profitable when you have multiple cannabis business accounts. 

“Cannabis businesses want the same services as most commercial accounts,” says a senior cannabis-industry banker. “The complexity is in the level of expertise to adequately perform the enhanced due diligence, monitoring, and reporting. Because it’s cannabis, it will naturally be scrutinized more closely by the bank regulators.” 

For leaf-touching businesses in Illinois, payments between cultivators and dispensaries – once cash-based – are now generally like any other, by check, ACH payments, or by wire transfer. But retail dispensaries, who still take almost all payments from customers by cash, it requires new skills in “cash management”, and maybe even see a bright side to all the grunt work.

“We hire professionals to transport it for us a couple of times a week. You get good at it,” says Dispensary 33’s Zises. “You invest in a good cash counter that can sort it for you. You eventually get good at it and it’s a part of the business. Assuming customers spend as much as they would with credit cards, my costs are [ultimately] substantially lower than they would be with credit card fees.”

Limitations On Services

While banks are beginning to provide deposits and checking services to leaf-touching cannabis businesses, one financial service typically remains a no-go zone: lending.

The difficulty is in the forfeiture risk, say cannabis bankers and their attorneys. In theory, if you made a loan to a cannabis business, and federal prosecutors decided that business was engaging in criminal activity – which from a federal perspective every cannabis business is doing – then the bank could lose access to any assets used as security for the loan. While corn farmers can use their crops as security, cannabis cultivators cannot. And buildings owned by leaf-touching businesses cannot act as lending assets either, since those could also be seized by prosecutors. 

Seeing an opportunity, some independent real estate developers have begun to develop potential dispensary locations, which they then lease to separate dispensary businesses at an arm’s length relationship, says attorney Gilmer. “There is some financing available for that. But it’s still few and far between for many banks because the risk is frankly too high.”

But lines of credit or commercial loans to leaf-touching businesses are, “Very rare,” says Gilmer. “Very few institutions lend in this industry. Those who have done it, it’s a direct customer. The instances I’m aware of are for very long standing relationships, and even then it was on a limited basis.”

“If the federal government started enforcing law,” says Gilmer, “if they started shutting down grow operations, it is much easier for a bank to give the deposits away, because they are just giving away someone else’s money. If you loan to them, you are giving them your money. If [you hold a loan and] you’re served a subpoena or investigated by the regulators, you can’t exit very easily. You’d have to forfeiture collateral – like if the property collateral is sized. Not only do you not get the loan back, but the feds seize the property that served as collateral. You can’t make yourself whole.”


Editor Mike is a co-founder and the editor of Grown In, a U.S. national cannabis industry newsletter and training company. His career has taken him from Capitol Hill to Chicago City Hall, from...