With recreational pot sales slated to begin statewide in July and financial institutions largely staying away from the industry, the state’s top cannabis official Steve Hoffman has proposed setting up a state-run pot bank.
But even with no other alternatives on the table and very little time to find a solution, trade groups and cannabis lawyers say a state-run bank is not a viable solution, as it would be extremely difficult and risky to set up.
“We have been opposed to a state-run bank for a long time,” said Jon Skarin, executive vice president at the Massachusetts Bankers Association.
Paul Gentile, president and CEO of the Cooperative Credit Union Association, agreed that he would rather leave the banking to more established institutions.
“To me, a good solution is if we have firmer federal legislation around pot,” he said. “We still think a lack of federal regulation is making this such a hazy area for financial institutions.”
According to Skarin, the state legislature created a commission in 2011 to examine the possibility of state-run bank, although back then the idea was being studied for economic development and small business lending purposes.
The final report concluded it would be very expensive to create an entity and that the risks associated with it outweighed the public good, he said. And since marijuana is a federally defined Schedule 1 drug, the state-run bank would not enjoy the same privileges of typical banks.
Bram Berkowitz
“You wouldn’t be able to get federal deposit insurance. Millions of dollars would be completely uninsured unless the state wants to step up, and that’s a big risk to Massachusetts taxpayers,” said Skarin. “Basically, the state would have to create something outside the traditional payment system … and that is not an easy thing to do, and it strikes me as a fairly expensive thing to do [in a short period of time].”
A state-run pot bank could also create regulatory concerns, said California-based attorney Sahar Ayinehsazian, who specializes in marijuana banking at the marijuana law firm Vicente Sederberg, which also has a Boston office.
“The problem with a state bank, at least in respect to California (also considering state-run pot bank), is a financial institution can’t take on too many accounts in one sector because of concentration risks,” she said. “Imagine having a bank where 60 percent of a bank’s clients are shoe stores. If tomorrow everyone decides to go barefoot, the shoe economy collapses. To think a single institution can service these businesses worries me.”
Risky but Lucrative
Despite the risks associated with the industry, marijuana is a huge opportunity for state-chartered banks and credit unions: It’s projected to hit $1 billion in sales by 2020 and large banks with a federal charter won’t touch it because they risk being flagged.
But federal law surrounding recreational marijuana is even more of a mystery than it is for medical.
Despite the rescinding of the Cole Memo in January, the federal government remains barred from using federal funds to prosecute properly licensed, compliant medical marijuana facilities. However, this protection does not extend to recreational marijuana.
Banking marijuana also does not have a lot to offer banks in Massachusetts from a reputational or business standpoint.
Many financial institutions’ hometowns and cities have proposed bans on medical and recreational marijuana, which could create tension if a bank decided to start serving marijuana businesses.
Financial institutions in Boston and Massachusetts are also for the most part thriving – there is plenty of loan demand, a recent tax reform bill that will put money back into their pockets and strong potential for reduced regulation.
“There is solid loan activity out there … it’s not a time when people are scrambling to find new business,” said Skarin. “With all of the challenges associated with the marijuana business, bankers are saying, ‘We are struggling to keep up with demand as it is, why would we want to go down road?’”
That road, even for medical marijuana, is certainly not easy.
“It’s a lot of work,” said Amy Martel, executive vice president and COO at Middletown, Rhode Island-based People’s Credit Union, which has been banking Rhode Island and some Massachusetts medical marijuana business for the last six years. “It’s not something that you can tread in lightly.”
According to Martel, the credit union must file suspicious activity reports, which involves reviewing all transactions, every 90 days, a task that requires having staff on hand.
The credit union also has an onboarding process for these businesses and must do significant due diligence including checking a businesses’ tax returns, the documentation it submits to the state, making on-site visits, among many other steps.
No Immediate Solution
Skarin, Gentile, Ayinehsazian and Martel only see one real solution: Changing federal law or crafting legislation that would give financial institutions the confidence to bank recreational marijuana, knowing they could do so without breaking federal law.
“We are desperate for change at the federal level,” said Martel. “There are legal businesses that need help and have to get cash off the street. It’s a matter of safety.”
As Chelsea Police Chief Brian Kyes told the Boston Globe on Feb. 22, “If word gets out on the street that there’s large amounts of cash on hand at these places, someone’s going to roll the dice and go in with weapons.”
While still uncertain, there is growing momentum among lawmakers to institute change.
Nineteen U.S. attorney generals sent a letter to U.S. House and Senate majority and minority leaders on Jan. 16, requesting they craft legislation that would “provide a safe harbor for depository institutions” serving marijuana businesses in states in which the substance is legal.
And while U.S. Attorney General Jeff Sessions has made it harder to bank marijuana deposits, U.S. Treasury Secretary Steven Mnuchin appears much more open to the idea.
“I assure you that we don’t want bags of cash,” he said during a recent appearance before the House Financial Services Committee. “We do want to find a solution to make sure that businesses that have large access to cash have a way to get them into a depository institution for it to be safe.”
But even if the federal government acts quickly, it’s hard to say whether banks would be ready in time. While recreational marijuana is not yet legal in Rhode Island, Martel said if the credit union ever wanted to serve these businesses in the future, it would need to enhance its current framework.
