A TASI® Bank Perspective on the Cannabis Industry07.28.2023
TASI® Bank is governed by the Federal Deposit Insurance Corporation (FDIC) regulations that describe what services a bank or financial institution may provide to a business involved in the cannabis industry.
For the past several years, the U.S. Congress has been reviewing legislation (SAFE Banking Act) that would permit financial institutions to work directly with Tier 1 businesses. The legislation is currently in committee in the Senate. It has been “passed” seven times in various versions to date, but still requires a single bill that can be adopted by both houses.
“Because we spent a great deal of time studying the industry,” says Dave Joves, president of San Francisco-based TASI® Bank, “we have a good understanding of its needs and how we can support the businesses. And because we have long-standing relationships, we believe we are well-positioned to broaden our customer base once the SAFE Act is passed. In the meantime, we continue developing our relationships and expertise.”
As expected, the topic of cannabis and how banks are permitted to participate in the industry continues to be surrounded by a degree of confusion. It was only in late 2020 that the State of California passed a bill (A.B. 1525) that provided some guidelines to banks.
At the federal level, cannabis legalization legislation was introduced by a Republican congressperson from South Carolina, Nancy Mace. It was the first federal bill to legalize marijuana from a Republican. Its conservative roots are expected to give it better prospects in the Senate, unlike the Democratic proposals that preceded it, such as the MORE Act. The latest bill also has a head start on competing legislation from Senate Majority Leader Chuck Schumer, Senator Cory Booker, and others. While that has been much discussed since it was unveiled in July, it’s still only in draft form.
Essentially, California law now states that financial services and banking institutions can engage with a licensed cannabis business within the state of California.
With the momentum building, TASI® Bank, for instance, has adopted a moderately aggressive stance, giving full recognition to restrictions, working with regulators, and creating clear internal guidelines. The result is that the Bank has built a word-of-mouth reputation, backed by successful funding of the aspects of the cannabis business that the regulations were designed to encourage.
The result of TASI® Bank research was a program that began seven years ago. During the intervening time period, TASI Bank has provided nearly $20 million in financing to offices, warehouses, and real estate that house dispensaries and space used for cultivation. All of this is permissible under current FDIC guidelines and regulations.
“As regulations are changing, we are now allowed to pursue business relationships across all tiers in the cannabis industry,” says Hitesh Bajaria, Regional Vice President/Business Development Manager. “That means that C&I and real estate loans are permissible as well as accepting deposits from Tier 1 companies.”
“While we are not the largest bank in town by any means,” says Bajaria, “we are developing a reputation as a bank that understands the cannabis marketplace and how we can help all cannabis business customers.”
"As we have been with Tiers 2 and 3, we want to be in the forefront and to utilize our expertise to serve customers in all segments of the sector.”
TASI® Bank has worked with businesses of this nature in both Northern and Southern California. Jesus Leon Guerrero, Vice President/Relationship Manager who manages the Southern California market, says that TASI has developed an institutional base of knowledge of the industry.
“Where other banks are ‘studying’ the industry, we already have an infrastructure, guidelines, and a record of success.”
Understanding the potential of cannabis lending, Joves and Bajaria had attended the first International Cannabis Business Conference in San Francisco, held in 2015.
“Early on, we understood that there would be significant regulation and that we needed to do our homework,” Joves said. TASI completed its first cannabis-related transaction the same year.
Currently, the cannabis industry is divided into three tiers from the perspective of banks. For TASI® Bank, Tier 1 consists of distributors, retailers, and cultivators and is essentially off-limits. The prohibition is tied to businesses that “touch” cannabis. Tier 2 includes landlords, lawyers, and accountants with clients who are Tier 1. Tier 3 is comprised of hemp-related businesses.
Shawn McKenna, a Vice President/Relationship Manager, highlights that TASI is "highly compliance-oriented," a commitment that ultimately benefits both customers and the bank. Although TASI primarily focuses on the nine Bay Area counties, it has started receiving cannabis-related inquiries from the Central Valley, Sacramento, and Southern California. "People are approaching us, saying, 'I heard that the bank offers cannabis-related loans.' As an early adopter, our efforts are beginning to yield results."
The pace and breadth of state-level legislative activity continued throughout the year. To that end, New Jersey, New Mexico, New York, and Virginia each legalized marijuana for adult use in 2022. In Rhode Island, the Senate approved a marijuana legalization bill in June. While legislative leaders discussed holding a special session to send a final measure to the governor’s desk, it now appears more likely that the issue will be taken up again in 2022. North Dakota’s House also passed a recreational legalization bill, but it was later rejected in the Senate. Louisiana lawmakers, meanwhile, passed legislation this year that decriminalizes possession of up to 14 grams of cannabis.
States were also active in seeking reform measures regarding penalties and limits for marijuana possession. As an example, Colorado’s governor signed a bill in May to double the marijuana possession limit for adults in the state—and he also directed state law enforcement to identify people with prior convictions for the new limit whom he may be able to pardon. Separately, Alabama’s governor signed legislation to legalize medical cannabis in the state that same month.
The payoff for banks has enormous potential. Cannabis sales in California are over $4 billion. To put that in perspective, wine sales exceed $43 billion.
Currently, 39 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands, have all legalized the use of marijuana to varying degrees. Yet, the possession, distribution, or sale of marijuana remains illegal under federal law. Currently, cannabis and cannabis-related businesses are ineligible for SBA loans “with the exception of businesses that produce or sell hemp and hemp-derived products.” The rift between federal and state law requires extreme diligence for banks, such as TASI, who have navigated the regulations to create paths for cannabis-related businesses to find financing solutions.
Earlier in 2022, the American Bankers Association (ABA), on behalf of banks in all 50 states, made the industry’s position clear in a letter to the U.S. Senate’s leadership.
In part the ABA wrote, “The SAFE Banking Act is an urgently needed, and widely supported, bipartisan legislative solution. Because federal law prevents banks from banking cannabis businesses, as well as these ancillary businesses, without fear of federal sanctions the industry is operating primarily in cash, which causes significant public safety concerns and undermines the ability of cannabis regulators, tax collectors, law enforcement and national security organizations to monitor the industry effectively.
“The increased transparency that would come from processing transactions through bank accounts instead of in cash would ensure that regulators and law enforcement have the necessary tools to identify bad actors and remove them from the marketplace. The legislation would also enhance tax collection in the states where cannabis is now legal.”
However, passage of the SAFE Banking Act continues to be an illusive target. In early October 2002, the
Republican Study Committee (RSC)—a 156-member GOP House caucus—unveiled the Family Policy Agenda that warns against cannabis legalization and how it leads to violent crime and suicide. The overarching goal of the agenda is to “restore the American family.”
Of the 14 principles, 80 legislative recommendations are provided to achieve the GOP caucus’s goals to align with those principles. But the dangers of drug section zeroed in on cannabis—not other drugs like synthetic opioids which the CDC said accounted for over three-quarters of drug overdose deaths last year.
“Marijuana remains a federally scheduled controlled substance, but that has not stopped more and more states and localities from legalizing it under their own laws,” the Family Policy Agenda reads in the “Protecting Children from Dangers of Drugs” section. “This has led to an explosion of marijuana use among children, which is having a hugely negative impact on their health.”
The agenda continues, “Congress should not legalize marijuana, while also taking steps to constrain this new industry’s ability to harm children. At the very least, Congress should direct the CDC to gather data and conduct studies on the health impacts of THC use during childhood and early adolescence with a special focus on deaths by suicide and those involved in violent crime to provide Congress and the public with further information about these dangers.”