Illinois Cannabis and the SAFE Banking Act
The U.S. cannabis industry currently faces challenges with banking, insurance, and other financial services providers as cannabis companies and related service providers who legally operate in states that have adopted medical or recreational legislation face scrutiny at the federal-level. Among other states, Illinois has legalized cannabis for medical use and, come 2020, will legalize cannabis for recreational use. Cannabis remains illegal at the federal-level, which leaves financial institutions reluctant to engage in business with companies directly operating within the cannabis industry and companies that provide services to them. Many companies who operate within the cannabis industry face common banking challenges, including:
The alternatives to many of these challenges have forced cannabis businesses to consider dealing exclusively in cash or incur higher fees from select financial institutions. Additionally, these companies are forced to turn to non-conventional financing sources or investors when raising capital.
Enter the SAFE Banking Act
In September 2019, the U.S. House of Representatives passed the Secure and Fair Enforcement (SAFE) Banking Act, which creates safe harbor protections for depository institutions, insurers, and other service providers that serve legal cannabis businesses.
Regarding companies who operate within the legal cannabis industry, the SAFE Banking Act prohibits federal regulators from:
Furthermore, with respect to providing financial or other ancillary services to legal cannabis businesses, an entity may not be subject to criminal, civil, or administrator forfeiture of that legal interest pursuant to any federal law solely for providing such services or further investing any income derived from such services.
Effect on Illinois Cannabis Companies
In May 2019, the Illinois General Assembly passed the Illinois Cannabis Regulation and Tax Act, which will end prohibition and allow for recreational use of cannabis beginning January 2020. With this act, Illinois is positioned to become among the nation’s largest cannabis markets, projected at over $2 billion and will create thousands of new jobs.
Illinois cannabis businesses will continue to face such hurdles as storing cash, obtaining insurance, raising capital, and even securing real estate. Enacting the SAFE Banking Act is expected to:
Stemming from difficulties in banking with financial institutions, cannabis businesses face significant fraud risks surrounding cash. There is an increased importance on proper records and audit trails, as retail revenue will involve significant cash transactions and cashless service providers. Common ways fraud can be perpetrated are through larceny and skimming. Business owners not only need to consider risk management strategies, but also develop a strong internal control environment in order to mitigate risks of fraud.
Perpetrators of fraud seek to attack the weak point of a system. Business owners should strive to assess risks and identify vulnerabilities within their organization in order to adequately prepare to mitigate identified risks and reduce them to an acceptable level in order to minimize the potential impact of such events. Proper design and implementation of internal control activities, such as the following, can help business owners prevent fraud from occurring within their organization:
Even after implementation, business owners should continue to monitor the internal control environment in order to continue to detect any areas vulnerable to fraud as well as fine-tune existing internal controls.
Operating a cannabis business comes with obstacles, but with a sound risk management strategy and internal control environment, you can reduce the risk of fraud within your business. If you have questions or want more information about fraud prevention, contact FGMK.
Christopher J. Haddad
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.
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