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Financial institutions face risks serving cannabis businesses

August 20, 2019

Legal marijuana-related businesses face regulatory barriers accessing financial services, while financial institutions may face legal risks providing them.

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The risk environment customers face is changing all the time, sometimes in surprising and unexpected ways. A great example is the rapid movement we’ve seen in the legalization of both medicinal and recreational cannabis  in just a few short years. A total of 33 states now permit medical and/or recreational cannabis. The entire nation of Canada recently legalized the recreational use of marijuana. And while cannabis legalization presents a host of risk management concerns for businesses in many industries, banks and credit unions face complex regulatory and legal risks that other businesses do not.

As new legal enterprises, marijuana growers, distributors and dispensaries need financial services like those required by other businesses. But local banks and credit unions in many jurisdictions are still subject to laws prohibiting the offering of business accounts and services to organizations involved in cannabis production and distribution. At the federal level, U.S. law still forbids commerce in marijuana. While the U.S. Department of Justice has indicated that it will defer to the legislative intent of individual states regarding legalization, overlapping federal and state banking laws still present real risk management uncertainties for financial organizations.

Only about one in 30 banks or credit unions in the U.S. currently accepts marijuana-related businesses as clients. Those providing services often require much higher servicing and transaction fees to offset complicated and strict reporting requirements. One small credit union in Oregon had to file 13,500 reports over a two-year period for 500 cannabis-related businesses. Failure to comply with reporting requirements and other regulatory expectations can result in significant fines and other actions. Consequently, the current lack of clarity and uniformity in applicable laws is a bona fide risk management concern for many financial institutions and is a constraint on the ability of legal cannabis businesses to access the financial services products they need.

Zurich, along with many other voices, has been active on both the state and federal level on the issue. We are urging action to bring uniformity to cannabis laws in the U.S. There is hope that current proposals in both the U.S. Senate and House of Representatives will ultimately provide greater clarity for financial institutions and bridge the gap between state and federal laws, providing a safe harbor for local financial institutions across the nation to provide services to newly legalized and chartered MRBs.

The insurance industry is closely watching developments in cannabis legalization and the potential risk management dimensions for customers of all sizes and business segments, including financial services. Until there is greater uniformity in the laws governing financial transactions provided to marijuana-related businesses, our recommendation to banks, credit unions and other financial services providers is to incorporate a clear understanding of applicable laws and banking regulations within overall risk management strategies. Seek reliable advice from experts who know and understand current marijuana laws and who can help your institution remain safely within the regulatory guardrails. And, as is always the case when providing services to new financial services customers, perform robust due diligence to make sure you know from where their funds are coming and how they are being used.

For more insights about how marijuana legalization is impacting businesses, read the following white papers available on this website: