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Banks and Cannabis Industry: How Financial Institutions Can Navigate Compliance Regulations

The legality of cannabis in the US is a beautiful, frustrating mess. Unlike across the border in Canada, where the federal government has made cannabis legal for both medical and recreational use, cannabis is illegal in the US under federal law. But many states disagree with the federal stance on cannabis, with 11 states allowing cannabis use for recreational purposes, while 34 states have deemed it legal for medical purposes.

This discrepancy makes it difficult for people to understand the legality and use of cannabis products and derivatives, but that’s just the tip of the iceberg. Two business areas that experience the full scope of the problem are cannabis-related businesses and financial institutions (banks and credit unions).

Financial Institutions and Regulatory Compliance Issues in The Cannabis Industry

Cannabis is a booming industry. It's expanding on both the medical and recreational fronts, and businesses of all sizes and stages of the production and distribution chain have been entering the market. But since it’s still illegal under federal law, state laws are not as detailed as they should be. The banking industry doesn't have a lot of precedences and well-defined protocols to go on. Many financial institutions are staying away from the cannabis industry.

This isn’t just a problem for the businesses, which might not get the funding or full-fledged commercial banking products they need to effectively run their businesses (and seem credible to buyers and other stakeholders). Banks are also losing a great business opportunity. Right now, only about 700 banks and credit unions are providing banking services to cannabis-related businesses, which is less than 10% of the total. The situation is especially murky for banks or credit unions that are serving these businesses in those states where only medical use of cannabis is permitted. They have to ensure that businesses are providing finances and services to stay within their domain.

There are multiple ways that banks have been able to navigate the complex regulatory compliance landscape of the cannabis industry.

1. Based on whatever information and regulatory guidelines available, financial institutions have devised their own guidelines. These guidelines include conventional business inspection methods like site visits to more advanced methods of developing databases to track and record plants (and the whole crop’s) life cycles. This helps them mitigate risks.

2. FinCEN offered an insight into its guidance that financial institutions adjust and modify their money-laundering measures for profiling hemp-related business. There is a lot of overlap between hemp and cannabis, but hemp is legal in the US (under strict restrictions), and financial institutions need to ensure that the hemp business they are funding or servicing isn’t straying into cannabis territory.

3. Instead of treating every cannabis-related business under one category, financial instructions can create separate categories for different elements of a business, i.e., production, cultivation, derivative, etc. This will allow the bank to differentiate the compliance regulations that different cannabis businesses have to follow to stay on the right side of the law (or the same departments/elements of one business). It reduces effort, risk, and cost.


With the complicated compliance-landscape comes the high cost of compliance and risk. Banks and credit unions might have to charge higher fees for jumping through more hoops and creating and following additional protocols to service cannabis businesses. And if there are not enough cannabis businesses applying for funding and using products created specifically for them, financial institutions won’t be able to justify the costs.

Banks might have to serve these businesses at a loss or charge outrageous fees, which would make these services and products unfeasible for businesses. But this is an untapped market for financial institutions right now, and those who solve these riddles first might win the lion’s share of cannabis businesses.

How ComplyGenics Can Help

Many Fintech companies do not have the resources at hand to properly navigate an environment of increasingly complex regulations and compliance measures. ComplyGenics is here to help. We provide such services as compliance audit and program remediation, AML rule tuning, and model validation, helping you mitigate risks and keep up with the best industry KYC and FCP standards. We also specialize in staffing for the niche, helping you connect the right talent for your firm within the industry. For more information, visit our site or contact us.

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