Cannabis Banking Issues and the Necessary Due Diligence

Gotham Cannabis Associates  |

Can you imagine a world where you have no access to electronic banking? There would be no debit cards, credit cards or online payments. How about a world where you do not even have access to a checking account? It seems crazy and unfathomable in America in 2016, but that world exists for one of the country’s newest, hottest and most cutting edge industries.

That industry? Legal marijuana.

Banking and cash management are one of the cannabis industry’s greatest obstacles to growth. Most cannabis companies must operate exclusively in cash, which creates tracking and security issues for the companies and their investors.

This post discusses:

  • Banking problems facing the cannabis industry.
  • The direct impact they have on business owners, investors and customers.
  • Necessary due diligence that investors must conduct to effectively evaluate a target company’s banking and cash management practices.

The Banking Problem

Generally, banks in the US will not open accounts for businesses operating in the legal cannabis space.

Cannabis is currently a Schedule I narcotic under the US Controlled Substances Act, and thus, receipts from the sale of cannabis are, by definition, the proceeds of illegal drug trafficking according to federal law. It is therefore illegal under federal law for banks backed by the federal government to handle money from businesses in the cannabis industry. Essentially all banks in the US are insured by the FDIC, which is backed by the full faith and credit of the US government.

This means that most banks will not open accounts for cannabis companies. Cannabis companies also cannot accept credit card or other electronic payments, because credit card companies will not open accounts with businesses involved in the industry.

To date, the only banks that have opened accounts for cannabis companies are small community banks following guidance from the Financial Crimes Enforcement Network, a bureau of the US Treasury.

In an effort to help the cannabis banking problem (without actually solving the problem), the Treasury published guidance for banks that wish to handle funds from legal cannabis companies and still retain access to the Federal Reserve system. The guidance is geared to keeping a close eye on clients and reporting any suspected wrongdoing.

Although following this guidance may decrease the likelihood that the bank will run into money-laundering problems with the Fed, it does not guarantee it. Very few banks have been willing to take that risk so far; but numbers are trending in a positive direction. According to the Cannabist, the number of banks that work with cannabis businesses under this Treasury guidance has increased from 51 to 301 over the last two years.

Based on a chart published by Marijuana Business Daily, as of December 2015, only 30% of companies that ‘touch the plant’ had bank accounts, while about half of ancillary companies in the cannabis space (businesses that do not touch the plant) had bank accounts. The fact that companies that do not touch the plant are having trouble opening bank accounts shows just how resistant the banking industry is to the cannabis industry.

While the numbers are slowly heading in the right direction, the problem will not be resolved until marijuana is removed from the list of Schedule 1 substances, or Congress provides specific regulations allowing banks to accept cannabis companies as customers.

Industry Impact

The inability to access banking services has a major impact on the legal marijuana industry, including businesses, investors and customers.


Most cannabis companies must operate solely in cash, which poses many problems for running a business. The main day-to-day issues include:

  • Difficulty Paying Bills and Taxes - You cannot write a check or make electronic payments without a bank account, so cannabis companies are forced to pay bills in cash, including payroll, vendors, utilities, and taxes. As a result of dealing with so much cash, tax collection offices in Oregon and Colorado have added security including safety glass and security cameras.
  • Security - Marijuana businesses are targets for crime because it is well known that they are flush with cash. This poses a major threat to public safety. Many businesses hire security guards, install vaults and use armored cars to transport their cash--an added expense that many other types of business who have access to banks do not have to confront.
  • Money Tracking - Businesses need to be meticulous in tracking their money, which can be difficult in an all cash business. This is important not only for paying taxes and keeping business records, but also for raising capital. Investors should conduct financial due diligence on a company, and businesses cannot comply with these inquiries without proper and accurate tracking.

Another issue that arises is that even if companies are able to open a bank account, the bank may close it abruptly without much notice. Compliance for banks that handle cannabis companies is very expensive, so they can be quick to close an account, or decide at any moment that the risk in general is not worth it. This unpredictability can force businesses to either switch banks or store the money elsewhere.


Investors in cannabis companies must be aware of the operational and security concerns that cannabis companies face since these concerns directly impact the success of the business.

Furthermore, an investor’s own due diligence efforts in researching a cannabis company’s financial condition may be impacted by the company being forced to operate in cash.


The biggest inconvenience to customers when businesses do not have access to the banking system is that the customer cannot pay with credit, debit or other types of electronic payment. This forces customers to carry and use cash when dealing with a marijuana-related business.

Due Diligence

As a result of the lack of access to banking systems and the cash intensive nature of the industry, investors must conduct meticulous due diligence on the cash management practices of any potential target. It is vital for investors to ask the right questions.


Investors should start by identifying if the company operates in cash or through bank accounts. If the business has a bank account, try to find out which bank holds the account. Cannabis businesses often sign confidentiality agreements with banks so they cannot share where they do their banking. If this is the case, the business may not be able to share their banking information with a potential investor.

If the company does not have a bank account, assess its plan. Determine if the company is actively searching for banks or whether it has contemplated opening a bank account in its short or long term business plan.

Further, inquire about the target company’s banking history. Has the target had bank accounts that have been closed? As previously discussed, this can happen by no fault of the company. Nonetheless, a company’s banking history and future banking plans are important and may impact other operational areas of the company.

Cash Management

Investors should always examine the cash management practices of a potential target, but it is an absolutely critical step of due diligence if the company operates exclusively in cash.

The threshold issue when conducting due diligence on a company's cash management practices is determining how the business secures its cash. Specifically, does the company have:

  • Internal policies regarding cash management?
  • An armored car agreement?
  • A security services agreement?

Review internal cash management plans and determine how the business holds and tracks its cash. Is the cash kept in a vault, and if so, is that vault on or off site? What policies does the business have for calculating and tracking the cash? If the money, or a portion of the money, is off-site, does the company use an armored car transport system?

Examine the extensiveness of the security services protecting the cash. Security services can range from one security guard on the premises to elaborate alarm systems with multiple cameras and full-time surveillance.

Obtain and review any armored car or security service contracts. Evaluate the amount the business pays for these services and the term of the contract.

Look specifically for the following items, which could pose risks to the company if not properly accounted for or considered:

  • Does the security company have proper licensing?
  • Does the security company have any termination rights under the contract?
  • Does the business have the right to suspend or cancel the contract for various reasons, including the security company losing its license or the business gaining access to a bank account?

Also inquire as to whether the business has had any cash management issues in the past. Have there been any thefts or deficiencies in the money that the business should have? Or conversely, are their any excess funds that are not properly accounted for? This could cause state-law compliance problems or become an issue when paying taxes or proving finances to a bank to open an account.

The lack of banking system access and cash management risks do not have to be deal-breakers for investors looking to invest in companies in the cannabis industry. After conducting all of the necessary diligence and understanding a target’s banking plans and cash management practices, investors can then make an informed decision on whether the target is a smart investment.

For more information on Gotham Cannabis Associates, please visit

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:



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