FINANCIAL AND OPERATIONAL FEASIBILITY STUDY FOR STATE- BACKED FINANCIAL INSTITUTION
TO SERVE CANNABIS-RELATED BUSINESSES
Cannabis use for recreational or medicinal use is now legal in 33 states. California has been a pioneer in this area, legalizing medical cannabis use in California since 1996, and commercial sales for recreational use as of January 1, 2018. The global consulting firm Inner City Fund (ICF) International estimates that cannabis-related tax revenue in California could generate between $1.4 billion and $3.0 billion per year and the industry could create over one-hundred thousand jobs, for an additional $3.57 billion to $4.52 billion in labor income.
However, the fact that cannabis remains a schedule one illegal drug at the federal level, in the same class as heroin and LSD, places a “Sword of Damocles” over the state in that the federal government could, if desired, prosecute anyone involved in the cannabis industry
(directly or indirectly) under federal drug laws; and confiscate all funds and cannabis- related property. Accordingly, the banking industry is faced with at least four challenges when servicing the industry:
The bank may be at risk of criminal
or civil liability under federal drug and banking laws.
The industry is new, rapidly evolving, and large. This creates business risks even without federal enforcement of the federal drug laws.
There is a significant administrative burden to properly file the required federal reports governing cannabis banking transactions, and the penalties for incorrect filings may be severe.
The “Know Your Customer” requirements are more significant than normal because similar transactions may be allowed (e.g., proceeds from sale of cannabis within the state) or not allowed (e.g., illegal proceeds from sale of cannabis to another state).