Federal legislation advancing through Congress this session could lead to more banks serving marijuana-related businesses in the U.S. and Michigan.
The Secure and Fair Enforcement (SAFE) Banking Act passed the U.S. House in April on a bipartisan 321-101 vote. The bill sits in an evenly divided Senate now under the slim control of Democrats who need to decide whether to push forward with the bill, pursue outright marijuana legalization or couple the issue with broader criminal justice reform.
Mike Tierney, president and CEO of the Community Bankers of Michigan, remains “very optimistic” the SAFE Banking Act can gain enough support to pass the Senate with the 60 votes needed to prevent a filibuster.
However, he is concerned about the potential for Democrats to pursue full legalization while there’s broad support for the SAFE Banking Act among the banking industry and financial institutions that want to serve what has become a nearly $1 billion industry in Michigan.
“Chances are good, except if they decide they want to go for the more aggressive legislation,” Tierney said. “We’d all like to just see the SAFE (Banking) Act. It would be fine if we could provide services to the cannabis industry without any federal repercussions. We don’t need to have marijuana legalized on the federal level.”
Reintroduced in March after failing to gain enough support in the prior congressional term, the SAFE Banking Act would prohibit federal agencies from penalizing financial institutions that serve marijuana-related businesses in states where it’s legal.
Since marijuana remains illegal at the federal level — despite legalization in some form in 38 states, including Michigan for medical and recreational use — banks and credit unions involved with the industry must comply with rigorous requirements. The regulatory burden, along with concerns about their reputation, keep most banks and credits unions from getting involved in the industry.
“There are a lot of banks that don’t want to regardless of whether it’s legal,” Tierney said. “That may change once it’s legal, but there are bankers that just don’t feel it’s an industry they want to serve right now. Some just don’t feel it’s a benefit to their community.”
State-legal industry
In Michigan last year, medical and recreational marijuana generated $984.7 million in sales, according to the state Marijuana Regulatory Agency. Through the first quarter of 2021, sales totaled more than $360 million, including $97.5 million in March alone for recreational marijuana.
Tierney estimates that about 10 banks in Michigan now serve the cannabis industry. The Michigan Credit Union League estimates a similar number of its members do it as well.
More credit unions would like to serve marijuana-related businesses if the SAFE Banking Act passes, Michigan Credit Union League CEO Patty Corkery said. Passage of the law is “a drum we’ve been beating for a while,” Corkery added.
“The appetite is definitely there because it’s what their communities are demanding and what their businesses are demanding. Even those that might not necessarily have a strong desire to get their feet wet in cannabis, that’s what they’re hearing from their communities and their businesses, and they’re going to roll up their sleeves and look into it,” Corkery said. “The bottom line is it is legal in our state and we need to support the businesses that are engaged in legal activities.”
Federal guidance
The financial institutions that serve the marijuana industry do so under 2013 guidance from the Financial Crimes Enforcement Network, or FinCEN, an organization in the U.S. Department of the Treasury. The guidance offers financial institutions a pathway to serve a marijuana-related business without violating the federal Bank Secrecy Act and anti-money laundering regulations.
The guidance includes requirements for a much higher level of due diligence when taking on a customer in the cannabis industry and ongoing monitoring of the business to ensure its legitimacy and adherence to state laws. A bank also must monitor the company’s sales for any sudden spikes and determine why that occurred.
Among the banks serving the marijuana industry is Mason-based Dart Bank, which has four branches in Eaton and Ingham counties plus seven loan production offices that include Ada, with $622.1 million in total assets.
When Michigan voters approved recreational marijuana in 2018 after medical use had been allowed for a decade, Dart Bank “looked at the landscape out there and were seeing businesses that couldn’t even be served,” CEO Bill Hufnagel said.
The bank also heard from state regulators and local elected officials who worried about the public safety aspects of purely cash businesses. Executives decided to work with regulators to learn about what was required to provide marijuana-related businesses a full array of banking services, from deposits to wire transfers to commercial loans.
“We’re a community bank, so we’re here to serve the communities that we work within,” Hufnagel said.
Dart Bank has invested heavily to build up the internal systems and staff needed to monitor marijuana clients and handle the high federal regulatory and reporting requirements, he said.
Building relationships, ‘lot of caution’
Serving the marijuana industry differentiates Dart Bank from competitors “of all sizes, shapes and forms,” and drives growth and deposits, Hufnagel said.
“We took this as an opportunity to build relationships with people who weren’t being served and to do something different for them,” Hufnagel said. “This is not a quick, flash-in-the-pan type of business for Dart Bank. This is something we’re hoping to continue to grow, not only in the state of Michigan, but with our partners that are going to grow into other areas, and we want to continue to grow with them and to offer them the service. This is a business line that we’re dedicated to.”
Nationwide, there were 515 banks and 169 credit unions providing service to marijuana-related businesses at the end of 2020, according to an April quarterly report by FinCEN.
In a recent survey by the industry trade publication Bank Director, just 7 percent of responding CEOs, directors and chief risk officers said their bank presently serves marijuana businesses. Another one-third were unsure if their bank was willing to do it, and 34 percent said they had at least discussed it but do not yet work with those businesses.
The survey results indicate “there is a lot of caution around” banking marijuana-related businesses, said Emily McCormick, Bank Director’s director of research.
That caution could stem from present U.S. Department of Justice guidance that leaves enforcement of the federal prohibition on marijuana up to the discretion of local federal prosecutors. If a U.S. attorney decides to prosecute a local marijuana business, a bank could lose all of the collateral that backs the company’s loan, Tierney said.
“Banks have not been wanting to lend to the industry because you didn’t want your collateral confiscated,” he said. “So, financing then becomes very difficult.”
Bob Hendricks, an attorney at Warner, Norcross + Judd LLP who chairs the Grand Rapids law firm’s Cannabis Industry Group, senses “that there is a fair amount of pent-up interest, not only in the small banks but in the larger banks, to providing banking services to what clearly seems to be an emerging industry with some serious legs and some serious growth potential.”
However, that doesn’t mean that banks and credit unions will flock to the industry, Hendricks said.
While passage of the SAFE Banking Act in the Senate — and President Biden’s signature — could bring more and larger institutions into the fray, the high level of due diligence, report requirements scrutiny, compliance costs and risk would remain. That will keep some financial institutions away, he said.
The continuation of a black market will also act as a deterrent for some banks and require great caution when taking on a marijuana client, he said.
“It’s not going to be like banking a donut shop,” Hendricks said. “This still is an industry coming out of the black market.”
To any bank that’s considering serving marijuana-related businesses, Hufnagel at Dart Bank advises them to make sure they fully understand the federal requirements and have the systems and staff needed to comply.
“Be prepared for what you’re going to be faced with,” Hufnagel said. “It’s an extremely difficult business and you have to be willing to put the effort in both the infrastructure and technical side.”
However, Hufnagel opposes the SAFE Banking Act. Dart Bank has made the investments and took on a large risk to serve the industry. The law could bring not only competition, but players that would not “operate in a way that’s going to be in the best interests of everything that we’re doing” and cause problems for the entire industry, he said.
