Insights Into the Cannabusiness Banking Situation: Q&A With Attorney Ned Frisius

By John Schroyer

If you run a marijuana-related company, chances are you’ve experienced some difficulties opening – and keeping – a bank account.

Finding a financial institution willing to work with the industry remains one of the biggest challenges cannabis companies face, despite moves by the federal government earlier this year to ease the situation.

Stories abound about long-standing, reputable dispensaries losing an account they’ve had for years, while newer companies often have trouble finding a bank in the first place. Even ancillary businesses that don’t handle the plant face challenges obtaining banking services.

Against this backdrop, Marijuana Business Daily spoke with California attorney Ned Frisius to get some insight into the situation and learn how cannabis companies are landing bank accounts. Frisius has been working with cannabis companies from coast to coast for years and now spends a lot of time helping his clients figure out how to find banking services.

Here are excerpts of the conversation, edited for length and clarity:

Why is obtaining banking services still so problematic for many cannabis companies, even after the recent federal guidance?

The real restrictions that cannabis businesses are seeing today are largely being created by the banks themselves.

In general, bankers as a group of professionals are even more conservative than attorneys and CPAs. My experience is that most bankers realize that openly participating in a cannabis market that is only valued at $2.5 to $3 billion is simply not worth the potential worst-case scenario.

For a bank, that’s pretty serious, in that they can lose their bank charter, which would mean they would have to cease all banking operations. So while $3 billion sounds big to you and me, it’s a very small drop in a very large domestic financial services bucket.

What strategies are companies using to successfully open bank accounts?

Currently, bank accounts for dispensaries and other cannabis businesses are substantially opened based on a “don’t ask, don’t tell” policy.

Typically, a dispensary bank account will be established in the name of a related party. Bank accounts are opened by individuals, in their individual names, and those individuals are related to cannabis business operations.

A favorite approach from my clients involves forming a new management company and then properly characterizing that company’s activities to the bankers in an appropriate but very general “business activities” category. For example, using the description of the management company’s activities as including client services that support “payment activities for clients.”

That sort of statement conceptually involves all kinds of payment activities for that clientele, as well as dispersing payments for their clients. In that circumstance, the management company’s clientele is in fact just the dispensary that it owns.

It seems this is where the “don’t ask, don’t tell” comes in.

It’s important to understand that merely because a cannabis business establishes this kind of separate account, a separate management company, it doesn’t obligate that separate company to disclose the activities of the cannabis business that it owns.

It’s such a general description of activities that it’s not fraudulent. It’s clearly not full disclosure, but it’s not fraudulent. And there’s no banking relations requirement that demands full disclosure of a company’s clients’ activities.

When do you think we’ll see the banking situation ease, and what will it take for that to happen?

In order for banks to truly be comfortable handling cannabis business, it’s going to take an act of Congress, literally, to decriminalize marijuana. So how long does an act of Congress take?

There are (also) some test programs going on in Colorado where banks are working with a few select dispensaries in trying to create a program that will work.

What’s the biggest mistake marijuana companies make when it comes to banking?

I really think it has to do with the whole cash issue. Mixing cash and non-cash is the biggest flag.

We tend to forget that we are not mainstream businesses, because we deal with each other all the time. But especially from the banker’s perspective, we are the outcasts, so to speak.

Doing what (you) can do to interact with bankers as little as possible, to not be conspicuous about your business activities when you’re dealing with bankers, (is important). Don’t flaunt it, and stay under the radar. People get in trouble when they are too open.

John Schroyer can be reached at [email protected]

6 comments on “Insights Into the Cannabusiness Banking Situation: Q&A With Attorney Ned Frisius
  1. Ora Thornton on

    Although the Management company idea is a good one, after a certain dollar amount ALL financial instituions have to declare the source of funds being deposited and the same goes for any investments

    Reply
  2. Paula Guvens on

    The solution to the cannabis banking problem is solved by guiding financial institutions toward the realization that they can comply with their Bank Secrecy Act due diligence obligations and meet the expectations of regulators at the same time.

    I have developed an analytical framework for financial institutions to do this, and have licensed this framework for use in OR and WA to M Bank, who is now openly boarding cannabis dispensaries and cultivators. The FDIC and the Federal Reserve are not prohibiting financial institutions from servicing MMJ businesses. Any financial institution that applies my analytical framework to its MMJ customers can service such customers without federal intervention, assuming the MMJ businesses operate in full with all local, state and federal laws.

    Reply
  3. Jon on

    The only problem with m-bank is they want a $250.00 a month maintenance fee on the account, they perform a full audit on the company books and demand 1.5% of gross annual sales each year and this is just for starters. One should read the program in full before choosing m-bank.

    Reply
  4. Paula Givens on

    Banks have been saddled with anti-money laundering responsibilities by the federal government. That is why most banks don’t service casinos, pawn shops, internet gambling or MMJ businesses. To comply with the government’s requirements (Cole Memo & FinCEN Memo of 2/14/14) the banks must go to considerable expense. The rates charged by M Bank are not revenue generating rates, rather rates to cover expenses they incur in employing somebody full-time to comply with federal requirements.

    The CO banks servicing cannabis are charging from $5,000 to $12,000 per month. Seriously. The fees charged by M Bank are reasonable in relation to what it costs them to employ a Cannabis Risk Management Program. Without the fees, M Bank would not be able to service any cannabis businesses.

    Reply

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