Earlier this year, the federal government spiked anxieties for legal marijuana businesses. Attorney General (AG) Jeff Sessions issued a memo that seems to ramp up the White House’s marijuana crackdown, challenging earlier issuance that hinted at a more lenient federal approach to cannabis.
“It is the mission of the Department of Justice to enforce the laws of the United States, and the previous issuance of guidance undermines the rule of law and the ability of our local, state, tribunal and federal law enforcement partners to carry out this mission,” AG Sessions said in the memo, which revoked the Cole Memo — previous guidelines that supported legal marijuana businesses’ operation at the state level.
It caught the Treasury Department, which oversees financial services regulation for the cannabis sector via its FinCEN (Financial Crimes Enforcement Network) branch, off-guard.
Last month, President Donald Trump vowed to support congressional lawmakers’ efforts to protect states that have legalized marijuana. And while reports in The Washington Post said the situation was thus “diffused,” the saga was a disruptive reminder that the regulatory landscape for marijuana companies — often small businesses (SMBs) — remains unclear, in flux and risky.
Those same risks apply for financial service providers too, which have largely left legal marijuana companies to operate entirely on cash. The typical reasoning behind this is that, because banks are regulated by federal law, and because federal law classifies marijuana as illegal, financial institutions (FIs) are unable to provide financial services to marijuana businesses even if they are legal under state law.
But the reality of the FinServ regulatory environment is more complicated, said Keegan Peterson, founder and CEO of Wurk, a company that provides HR services to highly regulated industries, including the cannabis sector.
He recently told PYMNTS that the federal government does not have to legalize marijuana in order for businesses to get banked.
“Those are separate issues,” he said. “They don’t necessarily have to happen together.”
Part of Wurk’s service portfolio includes payroll. Peterson explained that its payroll service varies depending on the customer.
“To be able to qualify for our payroll service, the company has to already be banked,” he said. “We have our banked and our unbanked customers. Our unbanked customers use our system to calculate payroll and taxes — and then they have to remit in cash. We can process payroll and taxes for our banked clients.”
This service is proof that legal marijuana companies can indeed get banked. According to Peterson, the FIs that agree to service these firms are typically state-level banks that are not FDIC-insured. These institutions have figured out how to remain compliant while navigating the risks of the cannabis market — which are vast, added Peterson, and account for why so many marijuana businesses remain unbanked.
Know your customer (KYC) regulations are front and center, he explained.
“Banks are liable for anything that happens within the bank. They have to know your customer — and know your customer’s customer,” he explained. “They need to run compliance. A lot of them do facility checks. They do seed-to-sale reports to make sure dollars were legally earned. There is a whole lot of compliance that goes into being able to bank one of these customers. It’s very labor-intensive.”
All of this means fees are passed on to the cannabis business customer, which Peterson said are typically much higher than they would be for a traditional business, rendering bank services unaffordable even to marijuana businesses that could access them.
Further, financial institutions rarely find it profitable to go through the hassle of servicing these companies, the CEO added. Because this industry is so high-risk, their capital and liquidity requirements are high too. FIs are required to pool cash to back up the liability of servicing a marijuana business, and because of that risk, Peterson explained, banks cannot loan out the money they take from these business customers.
“So, they can’t make money on that money,” he said, adding that FIs can only profit from these companies through high fees. “Because of these intricacies of cannabis, there is a lot less opportunity to get banked. That’s what we see more often than not: There are not enough banks right now to support the need in the industry.”
This, naturally, forces major risks on cash-reliant marijuana companies. The risk of robbery, not only for business owners but for employees getting paid in cash, spikes exponentially for unbanked businesses, Peterson said.
“If someone knows when payday is, employees are very susceptible to getting held up,” he said. “It creates a very unsafe environment.”
Business owners also struggle with cash flow management, accounting, recordkeeping, reconciliation, accounts payable and accounts receivable — the list goes on — all because transactions and reporting have to be done manually.
The current regulatory environment impacts marijuana businesses in other ways than just forcing them to be entirely reliant on cash.
“The challenge of this business is they can’t comply with the law right now,” he said. “We’re imposing laws on people [that] have no ability to conform to them.”
He cited the Affordable Care Act, which requires businesses with more than 50 employees to provide benefit plans.
“If you don’t have a bank account, there is no benefit carrier that’s going to back you. You can’t pay a benefit carrier in cash,” the CEO said, noting that similarly, these businesses cannot pay workers comp insurance providers in cash either.
The muddled, volatile regulatory landscape is a massive challenge for financial service providers, marijuana businesses and companies like Wurk, but Peterson said this industry has to collaborate with lawmakers.
“We have to help educate legislators on what’s going on,” he said. “We have an interesting perspective because we’re helping people get paid.”
Peterson said the Treasury’s reaction to AG Sessions’ memo earlier this year was a positive one that showed (at least some) federal legislators are in favor of reducing companies’ reliance on cash and the risks that come with it. But there are no guarantees when it comes to predicting the regulatory future of cannabis, and service providers have to be flexible, he said.
“It’s hard to say where we’re going to be,” said Peterson. “There doesn’t seem to be a political incentive to legalize [marijuana] for the current administration. I think right now politicians are afraid to make a big move. As soon as we get to the point where lawmakers don’t feel like they are the sole responsible person for legislation, we’ll start seeing things move quickly. But we’re a bit aways from that, unfortunately.”