by Tim Szuhaj, Becker LLC
And then Jeff Session spoke—more about that later….
Legal marijuana use is becoming increasingly widespread. More than a quarter of Americans now live in areas which allow some form of legal cannabis for either medical or recreational use. Legal marijuana is becoming big business. In 2016, retail sales in these states totaled more than $6.5 billion. According to Marijuana Business Daily's newest report, "Marijuana Business Factbook 2017," legal U.S. weed sales are expected to jump 30% in 2017, another 45% in 2018, and reach $17 billion by 2021. The five-year growth between 2016 and 2021 is projected at approximately 300%.
Even as public acceptance of recreational marijuana use increases, the drug remains illegal under federal law. Marijuana is a controlled substance by virtue of its listing as a DEA Schedule I drug. This complicates matters for lenders seeking to fund activities related to the pot industry. As long as marijuana remains a controlled substance, banks insured by the FDIC must disclose any transactions related to its sale to federal regulators. This could result in additional regulatory scrutiny for the bank or financial institution. Accordingly, most of the largest banks in the U.S. have avoided any dealings with the legal cannabis industry.
In light of the bumper crop of states with legalized pot and the direct legal tensions between state and federal laws, the Obama administration’s Department of Justice issued what is collectively known as the Cole Memo, which allowed states to implement their own marijuana laws without fear of federal interference. The Justice Department also issued guidelines to help banks avoid federal prosecution when dealing with pot businesses in states where the drug is legal.
Nevertheless, most banks did not view these rules as a shield against charges that could include aiding drug trafficking. Moreover, the lending industry found the rules to be difficult to follow, in effect placing the burden on banks to determine if a pot business was operating within the law. Despite these “headwinds” the number of banks and credit unions willing to handle pot money was growing, but represented only a tiny fraction of the industry.
Now, the Trump Administration may be ending this long strange trip. Just this month, Attorney General Jeff Sessions rescinded the Cole Memo, raising the specter of renewed DOJ enforcement of federal drug laws, including in the myriad of states that have legalized cannabis use. These states and the pot industry as whole are in preverbal limbo pending further guidance or action by the DOJ. The short term effect of this policy reversal undoubtedly will further disincentivize lenders from funding legal marijuana businesses. In short, the scarce money available to the pot industry from traditional lenders has just gone up in smoke.
-- Tim Szuhaj is a Member of Becker LLC, a mid-market law firm, and is Chair of the Business Services Group and Co-Chair of the firm’s Staffing Group. Under the firm's Business Services model, Tim counsels staffing industry clients with respect to growth strategies, mergers and acquisitions, risk management and indemnity issues, and other operational issues.
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