Federal Law Scaring Local Financial Institutions Away from Cannabis Banking

Some local bank and credit union officials say they’re anxious to cultivate the blossoming marijuana industry.
There’s just one problem.

Although Michigan voters approved the sale and use of medical and recreational marijuana, the drug is still an illegal controlled substance under federal law.

“We’ve made the decision that since we are a federally-regulated institution and marijuana is still illegal at the federal level, we won’t serve licensed marijuana businesses,” said Mike Worden, president and chief executive officer of Honor Bank. “It’s not worth the risk for us.”

Every bank and credit union president contacted for this story expressed the same concern. They fear being sued or even put out of business by regulators or the U.S. Justice Department, which so far has taken a dim view of marijuana legalization efforts across the county.

Thirty-three states have legalized medical marijuana. Recreational marijuana also is legal in 10 of those states.
Michigan is just beginning to license medical marijuana businesses, 11 years after voters approved legalization of the sale and use of medical marijuana. The state is expected to start licensing recreational marijuana businesses this fall.

In May, Traverse City approved 13 provisional permits for medical marijuana provisioning centers in the city. Only one of those permits was issued to a local businessperson – Valerie Rissi of Beulah. The rest went to applicants mostly from metro Detroit.

But with the approval by Michigan voters of recreational marijuana last November, many think the cannabis industry will explode. Banks and credit unions are hungry to capture what Marijuana Business Daily has said could be a $1.7 billion-a-year industry in the state over the next several years.

“Cannabis banking seems to be the hot button issue in the industry,” said 4Front Bank President and CEO David Leusink, who’s been considering getting into that line of business for a year. “Almost every conference you go to has a speaker or multiple speakers talking about cannabis.”

Leusink said allowing marijuana businesses to deposit the cash they generate in banks and credit unions will be critical in promoting safety for business owners.

But the risk to financial institutions in taking deposits from marijuana growers and sellers goes beyond just those businesses. Banks and credit unions could run afoul of regulators by doing business with vendors of marijuana businesses, especially if regulators suspect money laundering could be involved.

Leusink said 4Front’s current policy is that if a vendor to a marijuana business — say a plumber or office supply company — doesn’t touch the plants, the credit union will do business with that vendor.

Melisa Bertram, a Traverse City real estate agent who helps marijuana entrepreneurs acquire locations for their provisioning centers, said the lack of banking services is limiting who can get into the marijuana business. “Unless you are a cash player, you are not able to play the game right now,” she said.

Bertram said she recently closed a cash provisioning center deal in Traverse City that involved the use of five cashier’s checks to pay the various parties in the transaction.

She said she also is representing two more local provisional permit holders, but declined to name any of her clients because of the sensitive state of the marijuana business. A former Michigan state banking regulator who now advises community banks and credit unions on marijuana banking issues, says many are being too cautious in shying away from doing business with marijuana entrepreneurs.

“Nationwide about 500 institutions — two-thirds of them community banks and one-third credit unions — are involved in cannabis banking. Nobody’s been punished,” said William Pilkington, owner of High Risk Compliance, a Grosse Ile consulting firm.

Pilkington estimates there are about 30 financial institutions in the state providing banking services to marijuana businesses. Most of them are quietly serving existing customers who are attempting to enter the cannabis arena.

“Nobody’s stepped up yet and said, ‘I’m the cannabis institution,’” he said.

That could change if efforts on the state and federal levels are successful in protecting banks that serve marijuana businesses.

Michigan Attorney General Dana Nessel has joined a bipartisan coalition of state attorneys general that are urging Congress to pass the Secure and Fair Enforcement Banking Act.

The pending legislation would prevent federal banking regulators from revoking deposit insurance from a bank or credit union because it provides services to a legal marijuana business. “All legal and legitimate businesses should have a safe place to put their revenue and not have to rely on under-the-floorboard safes to store their legally earned money,” Nessel said.

The Michigan Department of Insurance and Financial Services said last year it “remains neutral on whether financial institutions should provide financial services” to legal marijuana businesses.

“It is imperative that any decision to provide or not provide such services be made with a complete understanding of the associated risks,” the department said in a memorandum issued in March 2018.

For now, local banks and credit unions say they’re playing it safe in not offering financial services to marijuana businesses. But they hope to be able to in the not-so-distant future.

One credit union executive said providing banking services to marijuana businesses is aligned with the mission of credit unions to serve people and businesses who are ignored by commercial banks. “That same spirit has prompted credit unions to pay close attention to the cannabis industry,” said Keith Carey, vice president of marketing at 4Front Credit Union.