Despite the passing of Amendment 2, entrepreneurs looking to open medical marijuana-related businesses in Missouri could be shocked when they look for financial backing.
“Banks are in a precarious place because although the state has legalized medicinal marijuana under its constitution, marijuana remains a controlled substance under federal law,” said Mathew Petersen, an attorney in the financial services group at Spencer Fane.
While there haven’t been a lot of banks willing to loan to marijuana-related businesses, recent statistics from the Federal Criminal Enforcement Network of the Department of Treasury show that about 440 banks are doing business with marijuana-related entities. Usually those are smaller credit unions.
“But it tends to be a business that chooses to say the risk is acceptable and we’re going to bank these accounts and do a lot of scrutiny on the accounts to ensure that we’re complying and we’re not engaging in anything that’s seriously illegal,” Petersen said.
From the bank’s perspective, the risks could be huge, though.
“Since marijuana remains an illegal activity at the federal level, technically for a bank that chooses to bank marijuana-related businesses, they’re engaged in money laundering,” Petersen said. “It’s simply taking illicit funds, putting it into a bank account, co-mingling that with the rest of the bank’s funds and then allowing a business to write a seemingly legitimate check. It is a legitimate check, seemingly from a legitimate funds to another business, so federal regulators would technically see that as money laundering.”
While federal regulators have provided guidance to financial institutions willing to fund marijuana-related businesses, it still leaves a risk.
Banks have to file Suspicious Activity Reports (SARS). The Department of Treasury has even created marijuana-specific SARS that banks are expected to file if any of their customers are suspected of being involved in the industry.
“Financial institutions are pretty conservative and risk-adverse entities,” Petersen said. “They are under significant amount of regulations both at the state and federal level. So most financial institutions will choose not to get involved at all.”
Yet the biggest obstacle in the path to medicinal marijuana will be time.
Petersen said it’s going to be a process to work out the legality of it all. He said it took a long time in other states to develop regulations once voters approved legalization.
In Missouri, the government is going to have to write its own regulations.
“In terms for bankers, they have to think about not only are they directly banking a marijuana-related business, someone who’s growing the crop, selling the crop, but also the indirect relationship that their customers may have with a marijuana-related business,” he said.
A greenhouse company selling the products to build a growing facility and even the fertilizer supplier are considered in the process.
“All those individuals are touching the marijuana-related business,” Petersen said. “Banks are going to have to be aware of who their customers are and whether or not they’re engaged indirectly in those related businesses.”
Petersen said there is hope that the federal regulators will fill in the details to allow banks to know better who their customers are and what specifics they should look for.
Petersen said the best guidance could come from what other states that have legalized marijuana are doing.
Colorado is a prominent example. For a long time, marijuana businesses were cash only. They paid bills in cash and paid employees in cash. Peterson said this created complications for regular business transactions and brought higher risks for robberies. And some of those businesses bought old banks with big vault technology to protect those large amounts of cash.
But opening a marijuana-related business in Missouri is not impossible.
Small business owners may just need to bring their own capital to the table.
“A financial institution is going to be unlikely to make a loan to a marijuana-related business, even the credit unions in the other states that have typically decided to take that risk and bank those customers are not making the loans to the individuals,” Petersen said.
The main reason is collateral. If something goes wrong, banks could at any time be seized by federal law enforcement if they choose to prosecute.
“While some banks might accept that risk, it’s going to be very, very rare and there hasn’t been an example of a lot of those financial institutions that are willing to take that risk,” he said.
Instead, individuals are starting smaller business with their own money to reinvest into expand into another marijuana-related business.
Missouri isn’t expected to have clear-cut guidelines in place until 2019.