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Arkansas Banks Navigate Marijuana RoadLock Icon

6 min read
Banks Navigate Marijuana Road 128710 road closed illustration
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Simmons Bank of Pine Bluff offers financial services in eight states, and five of those allow the legal use and sale of marijuana for either recreational or medical use.

When medical marijuana was approved in Oklahoma in 2018, the state saw the industry take off rapidly and explosively. One year later, there are approximately 200,000 approved patients and thousands of approved licenses for dispensaries and cultivators, a far cry from the slow enactment of a medical marijuana law approved by Arkansas voters in 2016.

Officials at Simmons, which has a healthy exposure in the Oklahoma lending market, quickly decided the bank needed a plan. Marijuana is still illegal in the eyes of the federal government and banks are severely restricted in how they can serve the multibillion-dollar industry.

Simmons began to add a provision to its mortgage agreements with customers beginning in 2018 to protect itself from any medical marijuana fallout. The paragraph, which Simmons officials said is now standard, states that the borrower agrees to not “use any portion of the Property for any activity related to marijuana …” or industrial hemp or cannabidiol (CBD).

The U.S. House of Representatives recently passed, by a 321-103 vote, the Secure & Fair Enforcement Banking (SAFE) Act, which would loosen regulations on banks in states where marijuana is legal. The SAFE Act has not been scheduled for a vote in the Senate.

“That is our standard language in all our bank-prepared documents,” said Steve Wade, Simmons’ executive vice president and chief credit officer. “It is based on the inclusion of marijuana in the federal Controlled Substances Act. Until that [SAFE] Act is passed and signed into law, we are very constrained. We can’t lend money, can’t take deposits, can’t have loan collateral that is leased to marijuana-related businesses.”

A sample of Simmons mortgages filed in Washington County shows the paragraph provision in new lending agreements and in updated agreements.

“Oklahoma has had a real explosion, and that actually became as much of an influence on us as the Arkansas situation,” Wade said. “We thought it was necessary to get some policies in place.”

Banks Navigate Marijuana Road 128710
<p>Simmons EVP Steve Wade, left, says the bank is “very constrained” with how it can deal with the marijuana-related industry. Gary Head, CEO of Signature Bank, says extra paperwork and charges will find its way back to the customer, "That is what it comes down to. It’s not legal versus illegal because it is clearly federally illegal.”</p> ( Composite photo)

Suspicious Activity

As with most things in the legal word, there is a gray area with banking and marijuana. Bankers said they could, technically, offer financial services and receive marijuana-related deposits, but the paperwork would be titanic and there is no guarantee that federal regulators would look the other way.

During President Barack Obama’s administration, the Department of Justice issued the Cole Memorandum in 2013 advising that the federal government would not enforce the prohibition of marijuana in states that had legalized it. When President Donald Trump took office, then-Attorney General Jeff Sessions rescinded the Cole Memo.

“When Sessions took over, he said that Cole Memo is out the window; that is what put everybody on their ears,” said Gary Head, CEO of Signature Bank in Fayetteville. “You can lend to them and take direct proceeds but, if you do, you have to file suspicious activities report by the thousands. Literally, you would have to hire someone whose full-time job was just to do that. Simmons is obviously saying we’re not going to do that. We’re not going to go down that road.

“If I have to file a bunch of stuff that costs me more money, when your bill comes due, I will have to charge you for it. That is what it comes down to. It’s not legal versus illegal because it is clearly federally illegal.”

Head said Signature Bank’s official position is that it will not lend money to marijuana-related businesses or accept their deposits. If a borrower with a mortgage on an office building decides to lease to a dispensary or some other marijuana-related business, Head said, that is a gray area.

“I’m not sure we would call your loan and say, ‘Give me my money back,’” Head said. “We haven’t put anything in our mortgages to prohibit that, but there needs to be a conversation because we have to treat you different.”

Jon Harrell, chairman-elect of the Arkansas Bankers Association, said he has met with other bankers who told him that servicing a marijuana account can cost thousands of dollars a month because of the increased paperwork. And, again, there is no guarantee that the federal regulators would take a laissez-faire attitude.

“The unknown piece is how the regulators view that,” Harrell said. “Since we are federally insured and federally regulated, a majority of banks have chosen to stay out. I have heard stories of banks that have decided to take it, and they have had to hire people and they will really charge the heck out of those deposit accounts.”

SAFE Money

Banking experts said the SAFE Act would resolve several issues in the marijuana industry. The cash-only business aspect of marijuana and a lack of banks in which to deposit money or from which to pay employees directly make for a tempting criminal target. States such as California and Oregon have seen robberies increase at marijuana businesses.

Abaca CEO Dan Roda says a common narrative about marijuana banking isn’t true. See his commentary this week, SAFE Banking and Cannabis.

The second issue is taxes. Pro or con, there is no argument that the medical marijuana business in Arkansas, which took nearly three years to get off the ground, is booming, but when everything is cash it makes it harder to pinpoint exactly how booming.

That in turn affects taxes collected by city, county and state governments.

“That is why it is such a mess until they get some legislation with the federal government to legalize marijuana or not,” Head said. “It’s like we’re half pregnant. It makes no sense at all.”

Wade said it is a no-win situation. He recently visited Denver and his Uber driver was also a dispensary employee, but the driver couldn’t use a bank.

“People need to have banking services,” Wade said. “On our side, the idea that we could potentially be hit with a regulatory sanction for crossing the line and taking a loan payment from someone who is involved in the business unknown to the bank is a real concern.

“Even if the regulators are prone not to take action unless it is shown we know we are illegally taking proceeds, it is a regulatory issue that has to be dealt with internally to provide safeguards and monitoring and that sort of thing.”

Harrell said an ABA delegation recently toured Washington, D.C., and urged the staffs of Arkansas Sens. John Boozman and Tom Cotton to bring the SAFE Act to a passing vote.

“You can’t avoid it, and some of our legislators have a moral issue against marijuana and that’s debatable obviously, but still the financial issue is real and has to be dealt with,” Harrell said.

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