The recent approval of the SAFER Banking Act by the Senate Committee on Banking, Housing, and Urban Affairs signifies a momentous achievement in the cannabis industry.
In an exclusive interview with Sundie Seefried, CEO of Safe Harbor Financial, we explore the far-reaching implications of this milestone, particularly for financial institutions making forays into the cannabis sector.
This legislation tackles enduring worries regarding legal protections, ushering in fresh prospects and dialogues in the corporate offices of financial entities.
Emerald Magazine: Sundie, thank you for sharing your insights on the passage of Secure And Fair Enforcement Regulation (SAFER) Banking Act in the Senate Committee. Can you explain the significance of this development for the cannabis industry?
Sundie Seefried: The approval of SAFER Banking by the Senate Committee on Banking, Housing, and Urban Affairs holds more significance for financial institutions entering the cannabis sector than for the industry itself. The bill alleviates concerns about prosecution and exclusion from the financial system, providing legal safeguards for banks and credit unions operating in the cannabis space. With the passage of the SAFER Banking Act, discussions about entering and banking the cannabis industry can progress in financial institutions’ boardrooms without the fear of adverse consequences.
EM: In your statement, you mentioned that while this is a positive step, it doesn’t solve all the banking challenges faced by the cannabis industry. Could you elaborate on some of the remaining challenges that the industry will continue to face?
SS: Financial institutions will still grapple with challenges even with the positive step taken by this legislation. The industry will remain governed by the Bank Secrecy Act (BSA) and other regulations, maintaining a burden that won’t be eased by SAFER. Existing FinCEN guidance, updated under SAFER, outlines how financial institutions can serve cannabis-related businesses while adhering to BSA obligations, entailing a rigorous reporting regime. The complexity and potential fines associated with BSA compliance, coupled with the ongoing battle against the illicit market operating alongside the legal one, pose persistent challenges for the cannabis industry in legitimizing itself. Establishing stable, healthy banking relationships will continue to be crucial for businesses seeking capital investment.
EM: The issue of cannabis being listed as a Schedule I drug under the Controlled Substance Act (CSA) was raised by you. How does this classification affect the banking guidelines and regulations for the industry, and what changes are needed?
SS: The current Schedule I classification of cannabis under the Controlled Substance Act (CSA) poses significant challenges for the industry. The illegality of cannabis operations prevents them from accessing normal business deductions, resulting in an exorbitant effective tax rate, often reaching 80%. This classification also necessitates complex business structures for tax mitigation, making it challenging for both businesses and financial institutions to navigate.
Moving cannabis to Schedule III would be a substantial benefit. It would simplify business operations by eliminating the need for intricate corporate structures to avail tax deductions. This change is anticipated to enhance the efficiency of cannabis businesses in managing their treasury operations and meeting their financial services needs.
Moreover, the shift to Schedule III would alleviate the tax burden imposed by 280E, enhancing operators’ profitability, increasing attractiveness to lenders and investors, and injecting more capital into the industry. This, in turn, would benefit financial institutions by providing opportunities for banking, earning, and growth alongside the industry’s expansion.
EM: You mentioned that financial institutions will still need to fulfill BSA obligations outlined in the 2014 FinCEN guidance. Could you describe these obligations and the resources required for compliance, both for financial institutions and small businesses?
SS: The 2014 FinCEN guidance provided a crucial directive for financial institutions to navigate banking with the cannabis sector. While it granted permission to work with the industry, it presented challenges in interpretation, with varying perspectives among institutions. The guidance focused on adapting present bank secrecy obligations to address the cannabis industry’s illicit facets, emphasizing the need to track and monitor cash flows.
Financial institutions faced reluctance due to the risk associated with interpreting the guidelines, potentially inviting regulatory scrutiny and fines. The guidelines aimed at intensifying due diligence to ensure the legality of operations, especially in a cash-intensive market prone to illicit activities. For financial institutions and small businesses, compliance required additional resources and a meticulous approach, given the unique challenges posed by the cannabis industry’s cash-intensive nature and the imperative to combat the illicit market.
EM: Rescheduling cannabis is highlighted as a crucial step. What would rescheduling mean for the industry, and how would it help address some of the current challenges, especially related to cash transactions?
SS: Rescheduling or de-scheduling cannabis may not significantly alter the industry’s cash-intensive nature, as consumer preferences for privacy in financial transactions persist. The reluctance to leave a record on personal activities remains a factor, much like cash transactions in other sectors. Even with a shift to Schedule III or descheduling, the cannabis industry’s inherent cash intensity and associated bank secrecy obligations are likely to persist.
While some cash may transition to electronic transactions, particularly with advancements in applications appealing to the younger generation, the industry’s reliance on cash is expected to endure. Major credit card providers may contribute to relieving the cash burden, but a complete shift away from cash transactions might be a gradual process.
EM: Can you discuss the impact of the current cash-intensive nature of the cannabis industry and how it affects both businesses and the broader community?
SS: The current cash-intensive nature of the cannabis industry poses safety concerns for the community. Addressing this issue was a primary focus when engaging in cannabis banking. Beyond safety, the substantial cost of carrying cash is a significant impact on both businesses and financial institutions. Moving large amounts of cash requires expensive courier services, contributing to increased operational costs. Reducing cash operations becomes essential for businesses seeking to minimize expenses, with potential savings estimated at 10-12% of their gross revenue. This shift aligns with broader business strategies aimed at optimizing operational efficiency.
EM: In your view, what additional measures or changes are needed to level the playing field for small business owners in the cannabis industry, particularly in the face of an active illicit market?
SS: The compliance challenges faced by larger operations and multi-state operators outweigh those of small mom-and-pop shops due to increased complexity and higher compliance expenses associated with operating across multiple states with varying regulations. Despite the challenges, small businesses have the advantage of agility and niche market positioning. The current trend in the industry involves not only acquisitions by larger entities but also small shops strategically utilizing vertical integration where permitted by state regulations. This approach grants them full control over the supply chain, offering a competitive edge and potential cost reduction in their business operations.
EM: SAFER Banking has advanced, but what do you see as the next steps for this legislation, and what challenges might it encounter as it progresses through Congress?
SS: While SAFER Banking is a positive step for legislation, the next challenge lies in addressing Bank Secrecy Act (BSA)-related obligations. The question remains whether there will be a reduction in these obligations for the cannabis industry, harkening back to the 2014 FinCEN guidance. Establishing processes and guidelines will be a time-consuming endeavor, involving various federal agencies such as FDIC, NCUA, OCC, and the Federal Reserve. The crucial next step is determining the extent of compliance required in the market, as decreased obligations can simplify banking for both financial institutions and clients.
EM: How can stakeholders, including cannabis businesses, advocacy groups, and lawmakers, work together to address the remaining banking and regulatory challenges faced by the industry?
SS: Over the past five years, the cannabis industry has effectively organized on a political level, lobbying for its interests while ensuring inclusion of financial institutions in the dialogue. By collaborating and presenting a unified front, stakeholders, including cannabis businesses, advocacy groups, and lawmakers, work together to address industry challenges. This approach ensures that legislation is developed in a way that benefits all parties involved, fostering a collective rise in the cannabis sector.
EM: Finally, what is your outlook for the future of the cannabis industry in terms of banking reform, and what message would you like to convey to those who are closely following these developments?
SS: Entering the cannabis industry in 2015, I was forewarned of an uphill battle, and we’re still on that ascent. Banking reform holds the promise of a plateau, but a lengthy one, contingent on legislative progress. Navigating diverse state regulations compounds the complexity, necessitating separate bank accounts for each state operation. Whether through rescheduling or de-scheduling, harmonizing interstate banking remains a challenge, emphasizing the ongoing intricacies of compliantly banking the cannabis industry.
As the cannabis industry continues to navigate the complex landscape of banking and regulations, the SAFER Banking Act represents a positive stride. However, challenges persist, from the overarching influence of the Bank Secrecy Act to the need for comprehensive changes in the federal classification of cannabis.
Sundie Seefried’s insights shed light on the industry’s journey, emphasizing the importance of collaboration among stakeholders for a collective rise.
The future holds promise, but the path to seamless and compliant banking in the cannabis sector remains intricate, requiring ongoing attention and legislative progress.
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