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Financial Institutions Remain Wary of Cannabis Industry


Cannabis Entrepreneurs Should Plan Banking Strategy Now
Those hoping to enter New York State’s emerging cannabis industry will likely have to navigate an obstacle that many other businesspeople do not face: the reluctance of banks to deal with proceeds from the sale of goods that are legal under state law but illegal federally.

Although 18 states and Washington, D.C. have legalized recreational adult-use cannabis, it is still outlawed at the national level. The continuing federal prohibition has resulted in banking difficulties for cannabis businesses. Cannabis entrepreneurs may thus need to make careful plans for dealing with monetary issues, including the problem of finding a secure place to deposit cash.

This article explains why federal law causes financial institutions to be wary of doing business with cannabis companies, discusses recent developments in the cannabis banking world, and advises those hoping to participate in New York State’s cannabis industry as to what they might expect to face in the banking sector going forward.

Suspicious Activity Reports: What They Are and Why Banks Must File Them

Federal anti-money laundering laws, including the Bank Secrecy Act, require financial institutions to submit “suspicious activity reports” or “SARs” when they suspect criminal activity. These SARs must be filed for transactions related to businesses in the cannabis industry notwithstanding the legality of cannabis on the state level. Federal law also criminalizes the deliberate engagement in monetary transactions involving the proceeds of unlawful activities, including the sale of cannabis.

Guidance from the U.S. Department of the Treasury (“Treasury Department”) requires banks servicing cannabis-related businesses to complete due diligence and state in SARs that these businesses do not raise certain red flags. Despite this apparent safe harbor, banks remain wary. There is no guarantee that a bank, even after complying with the due diligence, will not be prosecuted or fined. The Treasury Department’s guidance also allows for a bank to avoid compliance obligations by simply stating in an SAR that it has decided for business reasons to terminate its relationship with a cannabis-related customer.

Misrepresenting Business Dealings Could Result in an Event of Default

Businesspeople hoping to enter the cannabis industry should review their banking agreements to determine how they handle events of default. An event of default may occur when a representation of business dealings is found to be false or misleading, and this is common in many banking agreements. Agreements should be reviewed for whether they treat simply qualifying as a cannabis-related business as an event of default.

For example, most loan agreements allow the lender to accelerate all amounts owed and terminate the loan when the borrower defaults. Thus, if a borrower were to misrepresent a material fact, it may be in default and be required to immediately bring its account current, only to have its line of credit terminated.

However, if a cannabis business discloses all material facts, the question of whether qualifying as a cannabis-related business is an event of default will depend on the banking agreement’s terms.

Enforcement and Prosecution Involving Cannabis Proceeds

As a practical matter, federal officials may not be prioritizing prosecutions of those involved in the state-compliant cannabis industry. But again, banks have no formal guarantee that transacting with cannabis-related businesses will not result in criminal liability. The Obama administration’s non-binding “Cole Memorandum,” which was issued in 2013, was rescinded by the Trump administration. The memorandum guided federal prosecutors toward enforcing cannabis laws associated with violent crimes and minors, and away from taking action against businesses that operate legally under state law. This Obama-era cannabis policy remains in the Treasury Department’s banking guidance. For now, financial institutions will likely continue seeking to limit their exposure to potential liability arising from cannabis-related transactions.

Although the U.S. Department of Justice (DOJ) has indicated a willingness to steer clear of prosecuting state-compliant cannabis operators, federal officials have shown that they will take action against others operating in the cannabis sector. The National Credit Union Administration recently imposed a cease and desist order upon a credit union that allegedly failed to comply with the Treasury Department’s guidance for financial institutions that deal with cannabis-related businesses.

Moreover, according to the DOJ, two businessmen were recently sentenced to prison after being convicted of bank fraud for allegedly deceiving U.S. banks and credit unions into effectuating more than $150 million of credit and debit card purchases of cannabis by disguising those transactions as purchases of other types of goods.

Greater Acceptance of Cannabis Industry Coming Slowly in Banks and in Congress

While some financial institutions work with cannabis-related businesses, they represent only a fraction of the banking industry. American Banker recently reported that only 684 out of the thousands of U.S. banks and credit unions were offering services to cannabis-related businesses as of December 2020, and a few banks have started offering loans to cannabis companies—a step that even financial institutions that take deposits from cannabis firms were long unwilling to take.

What if money from cannabis sales never crosses state lines? Cannabis businesses in New York may be able to receive banking services with New York-based financial institutions because such a relationship would entail intrastate (rather than interstate) commerce and thus be governed by state (rather than federal) law.

Relief for cannabis businesses could materialize through passage of the Secure and Fair Enforcement Banking Act of 2021 (“SAFE Banking Act”), a bill that has been approved by the U.S. House of Representatives and would provide a safe harbor for financial institutions that transact with state-compliant cannabis customers. But the bill’s progress has stalled in the Senate, without a clear expectation of when it will move toward becoming law.


Banking is likely to continue to be a challenge for cannabis companies around the country, even in states where cannabis is legal. And unless Congress passes the SAFE Banking Act, or banks become more willing to take risks, the situation in New York State will likely be no exception. In light of these obstacles, potential cannabis entrepreneurs should begin thinking about how they will handle their banking needs in this ever-evolving industry.


Tristan D. Hujer is a partner at Phillips Lytle LLP, where he focuses his practice on class action, business and commercial litigation, representing companies in the financial, energy, health care, technology and cannabis industries. He can be reached at or (716) 504-5728. Joseph W. Schafer is an attorney at Phillips Lytle LLP, where he concentrates his practice in the areas of commercial litigation and cannabis law. He can be reached at or (716) 847-5403. Mary-Jane R. Morley is an attorney at Phillips Lytle LLP, where she concentrates her practice in commercial litigation, as well as data security and privacy and cannabis law. She can be reached at or (716) 847-8348.

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