January 20, 2020
Paul Dunford

The Cost to Your Community When You Say “No” to Cannabis Banking

This is the first part of a three-part series on the community, opportunity, and economic costs when financial institutions say “no” to cannabis.

Ask the typical banker or credit union executive why they aren’t banking State-legal cannabis-related businesses, and you are likely to hear a speedy retort along these lines:

  • We’re not allowed to – it’s still Federally illegal.
  • We would love to, but we don’t know enough about that industry to manage the risk.
  • We don’t think our customers/members would want our name/reputation associated with that.

At the surface level, these prudent practices make perfect sense. Regulatory risk, inability to assess risk, and reducing reputation risk are, individually and collectively, compelling reasons to stay far away from cannabis-related proceeds. 

But a relevant follow-up question to ask of those who hesitate to offer services to CRBs, is this:

“How are you going to help your community reduce the risks of leaving these businesses unbanked?”

Few, if any, have even contemplated that question, let alone have a response. And yet, it is not just possible, but probable, that forcing CRBs to operate on a “cash-only” basis endangers the communities in which they operate. 

It is easy for members of the public, including bankers, to disregard the risks to the CRB or its ownership. Their argument is that a CRB founder or funders knew going into their businesses that they were taking on elevated risk, simply due to the type of product they chose to grow or sell. But the risks to the community – and even to one’s own bank or credit union – are tougher to brush off. 

Risk to the Community

Risks to the community stem from direct and indirect sources. The obvious risks, such as the increased potential for crime and the resulting challenges to law enforcement, are frequently cited (e.g., as in this 2015 Colorado study). Indirect risks are less obvious, such as a community’s inability to identify or collect appropriate taxes on CRB proceeds. 

  • Cash on hand invites crimes of opportunity. A retail location that is well-known to have large cash volumes on hand produces a seductive temptation for the criminal element. To reduce the threats of robbery or theft, dispensaries rely on heavily-secured facilities and private security forces. Mitigating the risks of insider theft (employees grifting the till, or stealing merchandise, for example) require a litany of onerous security policies and procedures. Much of this resource commitment would disappear if less cash were involved in CRB operations.

  • Cash-based transactions make it harder for law enforcement to distinguish illicit proceeds from legitimate earnings. If an unscrupulous operator decides to commingle legal sales with sales that exceed established limits, it becomes much tougher for law enforcement to establish the ‘paper trail’ of evidence that can prove laws have been broken. Likewise, it’s tougher when looking at cash transactions to separate isolated oversights or human error from intentional violations. When law enforcement can’t easily trace proceeds from seed to sale, it takes longer to find and punish the bad actors who are operating outside legal boundaries. Not only does this harm the community by wasting taxpayer dollars on detection and enforcement, but it allows lawbreakers to continue their illegal activities for longer periods of time.

  • Cash is easy to conceal from revenue officials. When revenue goes uncollected, fewer dollars in the public coffers are the inevitable outcome. The Institute on Taxation and Economic Policy, in its “Taxing Cannabis” Report indicates that tax evasion, as well as ongoing competition from illicit marijuana operations, remain an ongoing concern in legal use states. Even with periodic audits and robust enforcement programs, detecting sales discrepancies and diversion of proceeds is an imperfect science, made even less so when currency is the primary means of value exchange.

So before your bank or credit union decides the risks of saying “yes” to banking CRBs is still too high, pause to consider the risks you’re allowing to affect your local community when you say “no.” Perhaps it’s time to take a fresh look at whether CRB banking is for you.  

Next up: The cost to banks and credit unions who say “no” to cannabis

If you’re curious about how other banks and credit unions are successfully banking CRBs today, contact us to learn more about your options and how we can help.