eResearch | On Wednesday, September 25, the U.S. House of Representatives passed the Safe Banking Act in a 321-103 vote. The legislation now moves to the Republican-controlled Senate however, there is no date set for a vote.
The legislation supports collaboration between cannabis companies and banks as it would protect banks from federal prosecution for doing business in states where cannabis is legal. Despite unchanged federal prohibition of cannabis sales, this is a very significant step forward for the cannabis industry in the U.S. as this was the first time a body of congress approved a pro-cannabis legislation.
As more than 75% of states now have some form of legal cannabis, there has been a strong push for legislation from lobbyist supporting banks and large cannabis companies who want to quickly start working together.
The bill was introduced in March and sponsored by Colorado Representative Ed Perlmutter to address the serious implications of cannabis companies having to run cash-only businesses including: (1) increased risks of crime, (2) limited financial data oversight for regulators, and (3) financial restraint for the business in costs and optimal capital structure.
Currently in the U.S., regional banks and credit unions are taking the risks to service cannabis operations, but it is proving costly for companies as they have to pay a premium for the large amount of reports that financing bodies need to file detailing any suspicious or illegal activities, which if incorrectly done, risks large fines to the bank.
The costs associated with stringent reporting standards can be extensive, which may sometimes include analyzing every single transaction a customer makes; to put this into context, in Oregon, U.S., Maps Credit Union filed 13,500 individual reports related to 500 cannabis accounts between 2017 and 2018.
According to the Financial Crimes Enforcement Network, as of March 2019, there were 493 banks and 140 credit unions providing banking services to cannabis businesses in the U.S., but major banks such as Goldman Sachs (NYSE: GS) and J.P. Morgan Chase & Co. (NYSE: JPM) have been holding off as they are overly concerned about risk and reputation.
Even though cannabis is federally legal in Canada, risks from the U.S. are flowing over to major Canadian banks as well, who fear dealing with cannabis companies may hurt U.S. operations where it is illegal. However, banks such as Bank of Montreal (TSX: BMO), the fourth largest bank in Canada, have broken ranks with other major Canadian banks and have been consistently supporting cannabis businesses. This month, BMO closed a C$360 million credit facility with Aurora Cannabis Inc., the second largest cannabis company by market capitalization.
Currently, law makers are still trying to decide whether to give states the power to enact their own cannabis laws, to remove cannabis from the Controlled Substances Act as a Schedule 1 drug, or to federally legalize cannabis. Strong Republican support for the Safe Banking Act provides insight to how things might unfold.
Nevertheless, there are still long roads ahead for the U.S. to fully legalize cannabis.
Aurora Cannabis Inc. (NYSE: ACB, TSX: ACB; LSE: 0UJG; DB:21P)
- Headquartered in Edmonton, Canada, Aurora is the second largest cannabis company in the world, based on market capitalization.
- Aurora is currently trading at C$6.12 per share with a C$6.3 billion market capitalization.
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Canopy Growth Corp. (NYSE: CGC; TSX: WEED; LSE: 0UO9; DB:11L1)
- Headquartered in Ontario, Canada, Canopy Growth Corp. is the world’s largest cannabis company, based on market capitalization.
- Canopy was the first company to export cannabis to Germany, the first to make a partnership with a global beverage company, and the first to have an agreement to acquire a U.S.-based cannabis company.
- Canopy is currently trading at C$31.56 per share with a C$11.0 billion market capitalization.
