3 Questions Financial Institutions Must Ask When Considering Cannabis Banking

By Debra McManigle , Senior Vice President, HUB Financial Services, and Jay Virdi , Chief Sales Officer, HUB Cannabis Practice

Certain financial institutions, such as credit unions or smaller regional banks, have become key partners in the booming cannabis industry, playing a critical role in ensuring cannabis-related financial transactions are handled safely and responsibly.

But the risks to financial institutions working with cannabis-related businesses can be high. Even though cannabis is now legal in many states[1], it remains a Schedule I drug at the federal level, and “any money that can be traced back to a state marijuana operation could be considered aiding and abetting a federal crime and money laundering.” [2]

Larger federally regulated or insured financial institutions avoid the industry due to the federal illegality of the drug, which has created a banking services void for cannabis businesses. Fortunately, smaller financial institutions have stepped in to handle the important financial needs of dispensaries and other cannabis businesses by offering lending products and banking.

While the number of financial institutions offering services in states where cannabis is legal is slowly growing, the cannabis industry is still largely an untapped revenue source that can also give financial institutions the opportunity to support local businesses in their community.

However, it is important that financial institutions consider the risks before opening the door to cannabis businesses and take steps to minimize the exposure. An insurance broker who works closely with both financial institutions and cannabis businesses can help you understand the risks and determine your coverage needs.

Here are three questions to ask before working with cannabis businesses:

1.)    Is working with cannabis businesses excluded under my current policy? Insurance policies typically exclude illegal activities, so handling cannabis money may be considered a violation of a financial institution’s current policy, even if it is legal where the bank operates. For example, directors and officers coverage, which protects against regulatory and shareholder suits, often excludes cannabis claims because it’s illegal at a federal level. There may also be coverage exclusions related to financial institution bonds — a critical coverage for banks.

2.)    What risk management issues could arise from working with cannabis companies? Since cannabis is mainly a cash-only business, offering banking services to cannabis companies could increase your exposure to criminal activities, such as robbery and fraud, and present employee safety risks. Creating a risk management program that addresses these risks is essential to prevent losses and secure the best coverage at the best rate. A risk management expert can help you establish a robust risk management program with best practices around employee training, lending, cash handling procedures and ensuring regulatory compliance.

3.)    Will my insurance costs increase? Because of the risks associated with cannabis businesses, insurance rates can be higher for financial institutions that choose to work with these businesses. Finding an insurance expert who has established relationships with carriers can help your financial institution secure the right coverage to protect against cannabis-related risks for a price you can afford.

A cannabis and financial institution insurance broker can help you understand what is covered under your current insurance policy and will be able to work with carriers to either adjust policy language or obtain new coverage so certain protections are in place for lawsuits or regulatory violations.

Contact HUB’s financial institution and cannabis experts to learn more about how we can help your financial institution prepare to work with cannabis businesses and help you secure the best coverage for your risk.

[1]MJBizDaily.com, “Where marijuana is legal in the United States,” updated Nov. 13, 2023.

[2]National Conference of State Legislatures, “Banking and Cannabis: Yearning to Be Buds?,” March 7, 2022