Cross Border Cannabis?
As a banker focused on both U.S. and Canadian businesses, and in light of Canada’s recent legalization, I’m often asked about cannabis. Specifically, by Canadian companies on whether we can help with banking cannabis businesses across the border, and by U.S. companies about what the outlook for cannabis is as a legitimate business.
With legal annual spending in North America expected to more than double and likely top $28 billion by 2022, according to Arcview Market Research and BDS Analytics,1 business leaders aren’t blowing smoke when they talk about significant opportunities in the sector.
But businesses also bear in mind that while legal for medical or recreational use in several states, cannabis production, sale and possession is still illegal under U.S. federal law, and businesses associated with it are vulnerable to threat of prosecution. U.S. and Canadian financial institutions alike have therefore generally declined to do business with companies having cannabis activities in the U.S., in order to avoid accusations of criminal violations including money laundering, costly and difficult reporting requirements, and otherwise running afoul of U.S. regulators and prosecutors.
A Challenging Situation
Although cannabis companies operating only in Canada or other jurisdictions where it is legal have successfully listed on the New York Stock Exchange and the Nasdaq, none of the U.S. exchanges nor the Toronto Stock Exchange will list companies involved in the cannabis industry that may be violating U.S. federal law (some smaller Canadian exchanges, including the Canadian Stock Exchange, will list cannabis companies with U.S. activity so long as there is sufficient disclosure about the legal status of their activities and the risk of those activities). Even cannabis companies listed on Canadian exchanges risk delisting, depending on the exchange, if they have cross-border business activities or fail to adequately disclose them.
A similar heightened level of diligence also applies to banking services to Canadian-only companies, which, to avoid facilitating illegal activity, are carefully reviewed when involving transactions in U.S. dollars or funds flowing to the U.S. It is not illegal for a cannabis company operating only in Canada to have U.S. ownership or normal commercial transactions with U.S. companies – but transactions involving or promoting cannabis activity in the U.S. are prohibited. Given the significant perceived opportunity in the U.S., an innovative approach toward entering the market without breaking federal law was recently taken by Canadian corporation Canopy Growth, which struck a deal for the rights to buy U.S.-based cannabis operator Acreage Holdings. The acquisition will be triggered, subject to shareholder and court approvals, if and when cannabis production and sale becomes federally legal in the U.S., giving Canopy an established foothold in the country as soon as legally permissible.
In addition to the difficulty presented in monitoring cross-border transactions, determining whether a company is in the pot business is an increasingly muddied topic. For example, each of The Scotts Miracle-Gro Company, Anheuser-Busch InBev and Altria Group are on Yahoo Finance’s curated list of cannabis stocks to watch. Mergers and acquisitions are vertically integrating cannabis growers, distributors, and even relationship management software and technology.
Further adding complication is the status of hemp (or “industrial hemp”). Hemp is a term for strains of the cannabis plant which are low in THC, the chemical that gives cannabis its psychoactive effect. In Canada, it has been legal to grow hemp since 1998, but it remained illegal under U.S. federal law until the passage of the 2018 Farm Bill in December 2018. Although now federally legalized in the U.S. in the sense of no longer being regarded as “marijuana”, hemp comes with its own complications as well as interactions between state and federal laws. Under the 2018 Farm Bill, the U.S. Department of Agriculture is required to develop regulations for hemp, which are not yet in place and are not expected until late in the year. And hemp-derived cannabidiol (CBD) products, while commonly available in certain states, may also be subject to Food and Drug Administration regulations or even local health department restrictions. As is the case with cannabis, Canadian companies are in the process of forming relationships with U.S. hemp companies or starting U.S. hemp businesses of their own, to be positioned to enter the market quickly.
Even businesses and products not strategically in the space may find themselves connected to the cannabis industry, such as transportation equipment, warehousing or packaging businesses. The CEO of major cannabis player Tilray cites Ziploc as the biggest brand in the industry.2 In jest or not, as the industry grows, discerning cannabis businesses from the rest will grow increasingly difficult and may present additional challenges to financial institutions and regulators.
Inherent Risks
As it stands today, in light of the legal status of cannabis under U.S. federal law, the industry in the U.S.—including that within legalized states—is largely cash based, with little to no access to banking services or accounts. This introduces a significant risk of theft, violence and—as with all cash businesses—money laundering into the industry. The Secure and Fair Enforcement (SAFE) Banking Act, as currently under review by both chambers of Congress, would provide a safe harbor for depository institutions, insurers and their employees from actions by their regulators for banking licensed cannabis businesses operating legally within state law.
Treasury Secretary Steven Mnuchin has also encouraged Congress to pass legislation to provide clarity to financial regulators, citing the conflict between federal and state law as a problem, and noting the IRS has had to collect taxes in bags of cash and build “cash rooms” for the tax deposits paid by legal cannabis companies.3 The American Bankers Association also supports the legislation, noting that the “problem needs to be addressed, particularly with the public safety concerns that arise when these businesses are cut off from the banking system and forced to hold large amounts of cash. Not only will the SAFE Banking Act address some of those concerns, but it will also make tax collections from cannabis-related business activity more efficient and increase transparency.”4
Until a legislative fix addresses discrepancies in law and provides clarity on the banking issue, U.S. businesses in the industry—and even Canadian businesses with cannabis-related operations, investments or transactions in the U.S.—will continue to struggle to find banking services. In the meantime, cannabis-related businesses on both sides of the border should be mindful of the different laws and regulations that affect the legality of their operations.
4 American Bankers Association
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Laura Ullman
Director, Cross Border Banking
As a banker focused on both U.S. and Canadian businesses, and in light of Canada’s recent legalization, I’m often asked about cannabis. Specifically, by Canadian companies on whether we can help with banking cannabis businesses across the border, and by U.S. companies about what the outlook for cannabis is as a legitimate business.
With legal annual spending in North America expected to more than double and likely top $28 billion by 2022, according to Arcview Market Research and BDS Analytics,1 business leaders aren’t blowing smoke when they talk about significant opportunities in the sector.
But businesses also bear in mind that while legal for medical or recreational use in several states, cannabis production, sale and possession is still illegal under U.S. federal law, and businesses associated with it are vulnerable to threat of prosecution. U.S. and Canadian financial institutions alike have therefore generally declined to do business with companies having cannabis activities in the U.S., in order to avoid accusations of criminal violations including money laundering, costly and difficult reporting requirements, and otherwise running afoul of U.S. regulators and prosecutors.
A Challenging Situation
Although cannabis companies operating only in Canada or other jurisdictions where it is legal have successfully listed on the New York Stock Exchange and the Nasdaq, none of the U.S. exchanges nor the Toronto Stock Exchange will list companies involved in the cannabis industry that may be violating U.S. federal law (some smaller Canadian exchanges, including the Canadian Stock Exchange, will list cannabis companies with U.S. activity so long as there is sufficient disclosure about the legal status of their activities and the risk of those activities). Even cannabis companies listed on Canadian exchanges risk delisting, depending on the exchange, if they have cross-border business activities or fail to adequately disclose them.
A similar heightened level of diligence also applies to banking services to Canadian-only companies, which, to avoid facilitating illegal activity, are carefully reviewed when involving transactions in U.S. dollars or funds flowing to the U.S. It is not illegal for a cannabis company operating only in Canada to have U.S. ownership or normal commercial transactions with U.S. companies – but transactions involving or promoting cannabis activity in the U.S. are prohibited. Given the significant perceived opportunity in the U.S., an innovative approach toward entering the market without breaking federal law was recently taken by Canadian corporation Canopy Growth, which struck a deal for the rights to buy U.S.-based cannabis operator Acreage Holdings. The acquisition will be triggered, subject to shareholder and court approvals, if and when cannabis production and sale becomes federally legal in the U.S., giving Canopy an established foothold in the country as soon as legally permissible.
In addition to the difficulty presented in monitoring cross-border transactions, determining whether a company is in the pot business is an increasingly muddied topic. For example, each of The Scotts Miracle-Gro Company, Anheuser-Busch InBev and Altria Group are on Yahoo Finance’s curated list of cannabis stocks to watch. Mergers and acquisitions are vertically integrating cannabis growers, distributors, and even relationship management software and technology.
Further adding complication is the status of hemp (or “industrial hemp”). Hemp is a term for strains of the cannabis plant which are low in THC, the chemical that gives cannabis its psychoactive effect. In Canada, it has been legal to grow hemp since 1998, but it remained illegal under U.S. federal law until the passage of the 2018 Farm Bill in December 2018. Although now federally legalized in the U.S. in the sense of no longer being regarded as “marijuana”, hemp comes with its own complications as well as interactions between state and federal laws. Under the 2018 Farm Bill, the U.S. Department of Agriculture is required to develop regulations for hemp, which are not yet in place and are not expected until late in the year. And hemp-derived cannabidiol (CBD) products, while commonly available in certain states, may also be subject to Food and Drug Administration regulations or even local health department restrictions. As is the case with cannabis, Canadian companies are in the process of forming relationships with U.S. hemp companies or starting U.S. hemp businesses of their own, to be positioned to enter the market quickly.
Even businesses and products not strategically in the space may find themselves connected to the cannabis industry, such as transportation equipment, warehousing or packaging businesses. The CEO of major cannabis player Tilray cites Ziploc as the biggest brand in the industry.2 In jest or not, as the industry grows, discerning cannabis businesses from the rest will grow increasingly difficult and may present additional challenges to financial institutions and regulators.
Inherent Risks
As it stands today, in light of the legal status of cannabis under U.S. federal law, the industry in the U.S.—including that within legalized states—is largely cash based, with little to no access to banking services or accounts. This introduces a significant risk of theft, violence and—as with all cash businesses—money laundering into the industry. The Secure and Fair Enforcement (SAFE) Banking Act, as currently under review by both chambers of Congress, would provide a safe harbor for depository institutions, insurers and their employees from actions by their regulators for banking licensed cannabis businesses operating legally within state law.
Treasury Secretary Steven Mnuchin has also encouraged Congress to pass legislation to provide clarity to financial regulators, citing the conflict between federal and state law as a problem, and noting the IRS has had to collect taxes in bags of cash and build “cash rooms” for the tax deposits paid by legal cannabis companies.3 The American Bankers Association also supports the legislation, noting that the “problem needs to be addressed, particularly with the public safety concerns that arise when these businesses are cut off from the banking system and forced to hold large amounts of cash. Not only will the SAFE Banking Act address some of those concerns, but it will also make tax collections from cannabis-related business activity more efficient and increase transparency.”4
Until a legislative fix addresses discrepancies in law and provides clarity on the banking issue, U.S. businesses in the industry—and even Canadian businesses with cannabis-related operations, investments or transactions in the U.S.—will continue to struggle to find banking services. In the meantime, cannabis-related businesses on both sides of the border should be mindful of the different laws and regulations that affect the legality of their operations.
4 American Bankers Association
What to Read Next.
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The evolving cannabis landscape represents an opportunity for North American trade. Although the legal picture in the U.S. continues to be murky, som…
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