CBD Banking Troubles

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Thirty-three states have loosely legalized marijuana, and 11 have adopted expansive laws for its recreational use. And yet marijuana-related businesses (MRBs) still face challenges finding financial institutions that will service them.

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These challenges arise from conflicting state and federal laws. MRBs remain ensnared in the contradiction of state-level laws that legalize the use of marijuana for medicinal purposes and federal laws that strictly prohibit it.

Further complicating matters is the passing of the Agricultural Improvement Act of 2018 which legalizes CBD derived from hemp but continues to prohibit interstate commerce of CBD. As a result, companies that sell hemp-derived CBD are barred from opening business accounts or accepting credit cards, leaving them to rely heavily on cash.

The 2018 Farm Bill

Many Americans carry the misperception that all CBD products are legal due to the passing of the Agricultural Improvement Act of 2018. But the “farm bill,” as it’s commonly called, lifts legal restrictions on hemp only, including CBD derived from hemp. Marijuana-derived CBD remains a Schedule 1 drug — drugs with a high potential for abuse — and therefore not federally legal.

Despite its legality under the bill, hemp-derived CBD is highly regulated, and CBD businesses face regulatory restrictions. For instance, the hemp can’t contain more than 0.3% tetrahydrocannabinol (THC) and businesses must follow state plans that license and regulate hemp. If a CBD business’s state doesn’t have a plan, it’s required to comply with a federally-run program and apply for a license.

To muddy the waters even more, the FDA doesn’t make a distinction between hemp-derived CBD and marijuana-derived CBD. After the farm bill became law in 2018, FDA Commissioner Scott Gottlieb released a statement warning the public that, under the existing Federal Food, Drug and Cosmetic Act, it’s still unlawful to introduce food containing CBD or to market CBD products, whether or not it’s derived from hemp.

In September 2019, the Federal Trade Commission joined the FDA by issuing its own warning to companies selling and advertising products containing CBD.

While the FDA researches the safety of CBD, CBD remains legal under the bill as long as a business follows state requirements and until the FDA updates the public about known health risks involved with the use of CBD.

Why Banks Hesitate To Work With CBD Companies

With the rise of CBD-related businesses forced to work in a state–federal gray area, banks are trying to make sense of the legal ambiguity. Banks ultimately want to protect their own businesses from reputational risk and regulatory criticism.

In June 2019, the American Bankers Association sent a letter to financial regulatory agencies calling for clarification on the distinction between legal hemp and illegal marijuana and guidance on how to serve hemp-related companies.

In response, the Financial Crimes Enforcement Network released further guidance on hemp in December 2019. FinCen advises that while banks aren’t required to file suspicious activity reports on hemp-related businesses, they are required to file reports if they suspect suspicious activity — just as they do with all customers they bank with.

Despite increased clarity from FinCen, banks hesitate to bank with CBD-related businesses as they look for additional confirmation from the Secure and Fair Enforcement (SAFE) Banking Act of 2019. Passed by the House of Representatives and currently with the Senate, the act would prevent regulators from penalizing financial institutions if they choose to service cannabis-related businesses. It also directs regulators to provide stronger guidance on hemp-related business, so that banks don’t fear federal violations.

It’s ultimately a financial institution’s decision whether to offer banking services to CBD companies. One thing is for certain, however: Banks must operate under enhanced due diligence and ensure compliance with KYC — or “know your customer” — procedures and regulations if they decide to open their doors to CBD companies. They must also fully walk a fine line among the FDA’s position, CBD state laws and the 2018 Farm Bill. It’s enough uncertainty to give banks pause.

Where Can CBD Companies Bank?

As of June 2019, some 553 banks and 162 credit unions offer banking services to MRBs, according to the FinCen’s recent Marijuana Banking Update. Despite this, FinCen discloses receiving 87,239 suspicious activity reports on MRBs as of June 2019, with 22,132 cases concluding in account terminations due to one or more red flags.

Few banks advertise their willingness to work with CBD-related businesses. Still, these companies can start their research with the growing number of hemp- and CBD-friendly financial institutions already supporting MRBs. Outside of financial institutions are electronic payment services like Canpay and Payqwick, which provide tools like electronic invoicing, deposits and payroll processing. Payment and banking platforms like Hypur claim to help highly regulated industries like MRBs find banks and credit unions willing to serve them. There are also lenders that provide business loans to cannabis businesses and crowdfunding platforms that specialize in cannabis businesses.

Unfortunately, since CBD companies are not yet mainstream, they’ll continue facing adversity when opening up a more traditional business bank account. As financial institutions receive more government guidance, it’s likely that more banks will be willing to serve CBD-related businesses. And if the SAFE Banking Act — or an equivalent — passes, we may see these companies enter the mainstream.