Dyon A. Elliott
‘Clarity’ begins at home: ‘Banking’ on the Cannabis Economy may not be as straightforward
In wake of the COVID-19-induced global recession, governments globally are all on the hunt for that “wonder drug”—admittedly, pun intended—to add dollars back to their ailing economies. And with estimates projecting no less than 30% compound average growth rates for the cannabis-related industries, which have already grown to roughly US$15 billion in 2019, it’s no surprise that policymakers are inclined to dust off their cannabis “legalization” plans. But, for the developing world, “banking” on cannabis revives fears of “de-risking” by international correspondent banks, and for good reason.
In Belize, for instance, late October 2015 found several domestic banks losing correspondent banking relationships (CBRs) such that by mid-2016 “Belize’s domestic and international banks were prospecting for new CBRs,” one ECLAC report explained. “The Central Bank of Belize [had] stepped in to provide US dollar wire transfer and check clearing services until it discontinued this service in September 2016 at the request of its correspondent bank. Three domestic banks lost 90 per cent of their established CBRs during a twelve-month period in 2015 and 2016.”
The economic impacts of that unsettling episode in the region’s relatively recent history ranged from increases in costs for US-dollar transactions to increased operational costs being passed onto the consumers (including business customers).
It is likely those economic costs and more that Jamaica’s former Minister of Industry, Commerce, Agriculture and Fisheries Hon. Audley Shaw had in mind when he spoke on the matter in mid 2019, reminding Jamaicans that their “local banks are fearful of funding the growth of the medical cannabis industry for fear of being de-risked by their international counterparts in the US”. The Minister had gone on to underscore that all of Jamaica’s “local commercial banks are obliged right now to go through the New York system as it relates to the movement of money internationally.”
US Banks likewise need to feel “SAFE” to ACT
Interestingly, it’s not just Caribbean-based commercial banks that are apprehensive about the idea of providing banking services to cannabis-related “legitimate businesses”. Even the banks in the United States—where several states have already legalized the cannabis market—have demonstrated such trepidation, leading to many dispensaries operating predominantly in cash, a fact that presents additional criminal concerns.
The first answer towards quelling that banking sector unease may likely exist in whether or not U.S. legislators can agree on new financial sector regulations such as the proposed Secure and Fair Enforcement Banking Act (SAFE Banking Act). As Forbes Opinion writer Robert Hoban had succinctly put it, “The SAFE Banking Act is the first step. It provides that federal regulators shall not interfere in the actions of a depository institution dealing with state-legal cannabis businesses. It protects financial institutions that choose to do business with cannabis companies in legal states and provides clarity so that federal regulators cannot interfere with or punish financial institutions for working with legitimate cannabis-related businesses.”
Without diving too deeply into the regulatory maze faced by US commercial banks, the simple fact is that because cannabis remains illegal at the Federal law level, any bank that provides services to cannabis-related operations—notwithstanding the “legitimacy” of the business at the state level—could, as explained by the America Bankers Associations (ABA), “be considered money laundering and expose a bank to significant legal, operational and regulatory risk.”
But the plot thickens pretty fast! As the industry grows it inevitably impacts banking clients who are merely on the fringe of the cannabis industry’s ecosystem. “In addition to growers and retailers, there are vendors and suppliers, landlords and employees that are indirectly tied to the cannabis industry,” ABA explained, “thus posing legal risk for banks serving such entities and individuals, as indirect connections to marijuana revenues are hard, if not impossible, for banks to identify and avoid.”
The SAFE Act, which after having languished in the US Congress since 2019, was later incorporated into the 2020 HEREOS Bill which itself has been drudging its way through legislative process, despite its overt COVID-19 response objectives.
Even the most cursory glance reveals why the banking industry and other stakeholders have been eagerly anticipating the passage of the SAFE Act. The proposed law, if passed in its current form, says, among other things, that a “Federal banking regulator may not (a) terminate or limit the deposit insurance or share insurance of a depository institution … or take any other adverse action against a depository institution … solely because the depository institution provides or has provided financial services to a cannabis-related legitimate business or service provider”.
The proposed text would go on to offer similar protections for those “indirect” stakeholders that the ABA spoke of in their announced position. In particular, the proposed language in the SAFE Banking Act goes as far as to state that the regulators ought not to “take any adverse or corrective supervisory action on a loan made to … (ii) an employee, owner or operator of a … service provider [to a cannabis-related legitimate business] solely because the employee, owner, or operator is employed by a … service provider.” The Bill similarly suggests protections against adverse actions on loans taken out by the owners or operators of real estate or equipment “solely because” the real estate or equipment had been leased to cannabis-related legitimate business or service providers.
Hemp and the SAFE Act
There is utility in recalling the distinctions between the recreational, medical and industrial hemp industries, because while the moral arguments abound on the “recreational” side, there is significantly more principled concurrence on the value of medical cannabis and industrial hemp. As a matter of fact, several countries have already legalized these medical and industrial applications.
In Belize, for instance, the Misuse of Drugs (Amendment) Act, 2017, states: “‘cannabis’ includes any part of the plant of the genus cannabis sativa, any resin obtained from that plant and any product of which such resin forms a base, but does not include (a) medicinal preparations from that plant licensed or otherwise permitted under this Act; (b) industrial hemp”. The country would later enact the Misuse of Drugs (Industrial Hemp) Regulations, which, inter alia, establishes that “industrial hemp” refers to any part of the plant with tetrahydrocannabinol (THC) concentration below the prescribed threshold set out in the law.
These THC thresholds also matter, and countries interested in this industry should ensure that they address any mismatch with US laws. Like Belize and several other jurisdictions, the Hemp industry is also legal in the United States, made explicit so under the Agriculture Improvement Act (dubbed the “Farm Bill”), which defines hemp as having a THC concentration below 0.3%, a level the European Parliament recently announced via press release that they’ve agreed to match. Consequently, countries with more ambitious thresholds may need to reduce their THC levels if it is there’s any hope of doing business with the USA either directly or indirectly.
The THC levels for hemp aside, despite its more favorable legal status, US domestic banks have yet maintained a cautious stance, a hesitation that the SAFE Act equally desires to address. Fundamentally, the proposed law’s preamble outlines the challenges faced. “Despite the legalization of hemp, some hemp businesses (including producers, manufacturers, and retailers) continue to have difficulty gaining access to banking products and services,” it states, “and businesses involved in the sale of hemp-derived cannabidiol (‘CBD’) products are particularly affected, due to confusion about their legal status.”
It, thereafter, calls on Federal Banking Regulators to, within 90 days of the SAFE Act’s enactment, “issue guidance to financial institutions (a) confirming the legality of hemp, hemp-derived products, and other hemp-derived cannabinoid products, and the legality of engaging in financial services with businesses selling hemp [products]…after the enactment of the Agriculture Improvement Act of 2018.”
The regulators are also called upon to “recommend best practices” for financial institutions to follow when dealing with the hemp industry. The proposed legislation is intended to alleviate the aforementioned “confusion”, but the source of that clarity continues to suffer an uncertain future, as it is yet to be seen if the SAFE Act (even as it is presently tucked away in the Heroes Act) will make it into law.
‘Clarity’ begins at home
Naturally, it is possible to argue that the SAFE Act is a domestic matter for the US cannabis industry, but, to slightly adjust a fairly popular adage, the inescapable truth is that “clarity begins at home”. That is to say, as long as the US home-grown market remains unclear, the probability of a successful lobby by regional actors remains relatively low.
How far will the industry—which promises healthy jobs and economic growth—go without international banks feeling unperturbed with their customers’ customers? Fairly recent history teaches that the concerns regarding correspondent banking relationships cannot be relegated to an afterthought. As far as the economy goes, there is possibly no larger opportunity cost for regional policymakers in Barbados, Belize, Jamaica and other Caribbean countries to weigh as they contemplate their marijuana policy.
The success (or lack thereof) of the SAFE Act would be the Caribbean region’s most salient signal as to how US policymakers and, by extension, US banks will treat the budding sector.
The need to lobby for the international movement of money
In the meantime, following recent comments from Belize’s Minister of New Growth Industries Hon. Kareem Musa, the “legalization” debate is slowly reviving in the Central American country.
Speaking to the local media on the potential economic benefits of recreational cannabis, Musa discussed, among other things, his government’s intention to host stakeholder consultations geared towards developing an industry policy that could ultimately inform legislation to be taken before the House of Representatives.
“It is my hope that we could see the benefit of even Cannabis tourism in Belize. Just imagine for one second the amount of cruise ships whenever that does return. Imagine those people coming off of those ships actually engaging in Cannabis tourism,” Musa shared. “The amount of revenue that can be generated for Belize and so we have to find ways in order to make this not just a productive sector that can generate revenue for the country, but also an industry that would provide jobs for all of the people who have been affected by this Cannabis industry.”
Fundamentally, there is little disagreement on the potential economic benefits of exporting cannabis even via tourism; however, the lingering issue is that the lifeblood of any industry is its ability to access financing. As outlined above, the financial landscape is not yet so clear cut, even for the well-accepted hemp, much less for recreational marijuana.
Consequently, the question becomes a simple one: ‘is the success of this policy even really up to local and regional policymakers and stakeholders?’ In answering that question, it becomes important to recall, as elucidated by the ABA, that the long-arm of US Banking Regulators extends well beyond those directly involved cannabis-related legitimate businesses. Therefore, as economically promising as the industry—including its tourism-related subsector—may seem, it boils down to whether or not bankers to non-cannabis companies (for example, cruise lines or tour operators) that do business with “legitimate cannabis-related businesses” would countenance the perceived risk; and whether or not the region can preserve its CBRs.
Those two “simple” questions return us to the words of former Jamaican Minister Audley Shaw on the need to “lobby” the United States. “The passage of the SAFE Banking Act is a major step in the right direction, because, ultimately we have to deal with the issue of correspondent banking. An example of this is, we are here in Jamaica, we want to do business with Canada, the US and European countries, but how does the money move?” The former minister explained. “The SAFE Banking Act is dealing with how the money moves within the United States. Now we have to lobby the US government for that same Banking Act to embrace the international movement of money for countries that have a legitimate cannabis industry.”