Marijuana Industry Financial Woes In California

Marijuana growers in California find themselves in a unique situation. The California cannabis market is expected to exceed $5 billion in the year 2018 but the industry does not yet have appropriate access to banking and other financial services that would be available to most other businesses. This comes as little surprise given the relatively recent emergence of marijuana legalization in the U.S. Do you believe that there should be a greater focus on providing financial services for cannabis companies?

California cannabis entrepreneurs will earn $5.2B in revenue in 2018 as recreational use becomes legal there. The state of California will collect about one billion dollars in accompanying marijuana taxes. These numbers, estimated by Matt Karnes, industry analyst and managing partner of New York’s GreenWave Advisors, point to the giant need for banking and financial services in the nascent legal cannabis industry. These services however are generally not available says Karnes, and are federally illegal. Some glimmers of change though, are on the horizon.

Banking is severely limited for cannabis industry businesses. As a “schedule one” substance, cannabis is categorized to be as harmful as heroin and banks risk losing their federal charter if they work with cannabis companies. Financial institutions need to go on record with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCen) when they establish a relationship with a known Marijuana Related Business, and Karnes estimates that just 5% of all banks have done that. He believes that fewer than 1% of all banks in the United States are currently working with cannabis related companies.

Some technology start-ups like Shield Compliance in Illinois are offering software to help banks with compliance, financial transparency and record-keeping to reduce the risk of working in the industry but they haven’t made significant inroads yet.

This leaves many marijuana businesses to have no choice but to operate in cash, so they need to spend extra money on safes, video camera systems, security guards, and armored car pick-ups. Public safety issues can also arise when so much cash is stored in known locations said Karnes.

With limited options, some businesses turn to other methods to find banking. Many hide the nature of their business from their banks according to Karnes. Others turn to cryptocurrencies, which have their own sets of problems. Cryptocurrencies have a “questionable ability to pass regulatory scrutiny,” because they are so complex, said Karnes. Their lack of transparency also “remains a major stumbling block.” They also tend to fluctuate in value, so are much less stable than regular currency.

Despite the complexities, the industry in California is hiring. Vangst, a recruitment firm specializing in the cannabis space, says the number of people working full time in legal cannabis grew from 43,374 people in January to 47,711 in September.

While Attorney General Jeff Sessions regularly sends chills through the industry with his anti-marijuana pronouncements, Donald Trump’s desire to roll back banking regulations includes defanging The Sarbanes Oxley Act which was created to, among other things, reduce accounting fraud by asking company executives to certify their financial reports are accurate. This kind of deregulation could indirectly make cannabis banking easier. If the compliance burden associated with Sarbanes-Oxley is reduced said Karnes, banks and credit unions might have more time for their staff to focus on cannabis.

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Source: MJFeed

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