By Allissa Kline, originally published in Buffalo Business First on Nov 8, 2019, 12:27am EST Updated Nov 8, 2019, 3:11pm EST.

CANNABIS ENTREPRENEURS LEARN FINANCING OPTIONS CAN BE DISJOINTED: Cannabis industry businesses search for willing lenders

Wheatfield Gardens LLC Wheatfield Gardens LLC grows row upon row of hemp plants in greenhouses in North Tonawanda. The company has a hemp cultivation permit from the state Department of Agriculture and Markets to study plants with high cannabidiol concentrations, but Wheatfield Gardens has experienced difficulty securing banking services and property insurance. (JOED VIERA)

The trouble started last year, long before the first sale had been made.

A pair of Buffalo entrepreneurs needed a business banking account. But because their startup is tied to the cannabis industry, they were rejected by the first two banks they contacted.

Then good luck struck, and they secured an account at another bank, which meant they could deposit checks from customers. Next, they set up a PayPal business app with a card reader so they could process purchases made with credit and debit cards.

But the good times didn’t last. Following a weekend of sales at a local festival – the company’s first vending event – PayPal closed the account and froze all $1,600 made at the festival.

“They said we were operating outside the ‘Terms of Use’ policy and said they’d release the money in 180 days,” one owner said. “But the startup costs in our industry are hefty and the product costs are hefty, so not having access to $1,600 was a big deal for us.”

The challenges didn’t stop there. In subsequent months, the company – which asked to remain anonymous out of fear of being dropped by their current bank – replaced the PayPal app with Square Inc. for point-of-sale purchases, but then was let go by Square. At one point this year, the owners had an ATM installed on-site so customers could get cash to pay for products.

They enrolled with two payroll processing firms, only to be rejected, so they’re now using 420payroll.com, a cannabis-friendly processor. The firm is now back with Square after participating in an invite-only beta payments pilot program for certain cannabidiol products, but forget about getting a loan to expand the existing production space.

“We put everything we make back into the business and run it very lean,” the owner said. “It’s our only option.”

Welcome to the world of trying to get banking services as a cannabis-related company – even a legitimate one.

Here’s the problem: One classification of cannabis is legal (hemp, which does not induce a high) and one is not (marijuana, which does). The difference between the two is so slight that some lenders and other highly regulated financial services firms decided that the risk of banking any company in the cannabis industry, regardless of the legality, is simply too, well, high.

That’s preventing some hemp farmers and processors and hemp-derived CBD manufacturers and distributors from entering the banking system – which means cash is going unbanked, business taxes are difficult to collect and it’s harder to regulate the industry.

“That line is very small and some banks and other businesses don’t understand it, so it’s easy to say no to those clients,” said Aleece Burgio, special counsel for the cannabis division at Barclay Damon LLP law firm. “A lot of these companies are getting banked, but the issue is that it’s not universal. It’s not like you can walk into any bank. It’s what bank will take a risk on you?”

A cloudy area for lenders

It used to be easier for financial institutions to just say no. The Controlled Substances Act of 1970 included cannabis as a Schedule 1 substance – with the likes of heroin, cocaine and LSD – which made it illegal to grow, import, possess, use or distribute, even if it is legal under state law.

Banks and credit unions stayed away, not wanting to take a chance on getting involved in possible money laundering and other troubles.

But the legalization of recreational marijuana in 11 states and counting and the December 2018 passage of the Farm Bill (which federally legalized hemp and hemp-derived products containing no more than 0.3 percent of the compound THC) creates gray areas for lenders.

Some are stepping into the hemp side of the industry and talking about it. Others cite federal law that prohibits doing business with clients engaged in illegal activities, so they don’t have much to say.

The CEO of Niagara’s Choice Federal Credit Union said the $194 million-asset organization is not currently banking anyone in the cannabis industry.

Why not?

“It’s the lack of clarity on legal regulations and the difference between federal statutes and state statutes,” Dan Keleher said. “There needs to be reconciliation between the two. If we were given that, I’m positive that standardized banking regulations for the businesses would be put into place and it would be a very lucrative and profitable industry to be in.”

Meanwhile, Lake Shore Savings Bank in Dunkirk is doing business with two hemp-related companies, according to President and CEO Daniel Reininga.

Both are CBD distributors. CBD, or cannabidiol, is a non-intoxicating cannabis compound whose popularity is on the rise as an ingredient in the natural products and wellness industry.

Reininga said Lake Shore Savings has a “very intense due diligence” process to ensure those two customers are only selling hemp-related products, not marijuana products.

That includes medical marijuana, which has been legal in New York state since 2014 but remains against the law on a federal level. Reininga said he’s not worried about violating compliance rules, but clarity is needed.

“We review these businesses and look at them and make sure they attest they’re CBD hemp-derived oil only, and we don’t have the marijuana side of it at all,” he said. “If we believed that was a concern, we’d close those accounts.”

The American Bankers Association, which represents banks of all sizes across the country, says the discrepancy between state and federal marijuana laws “(leaves) banks trapped between their mission to serve the financial needs of their local communities and the threat of federal enforcement action.” The group is lobbying for nationwide legalization of marijuana.

As for lenders involved with hemp-related businesses, ABA spokeswoman Blair Bernstein said in an email:

“Banks should be able to serve legal businesses in their state, particularly when it’s a business that state voters have approved. Congress removed hemp and certain hemp derivatives from the definitions of the Controlled Substance Act, making hemp like any other commodity. The challenge bankers face is being certain that a crop meets the qualifications established by Congress.”

Wheatfield Gardens CEO Paal Elfstrum Wheatfield Gardens CEO Paal Elfstrum wants to obtain financing to expand greenhouse operations, but lining up a traditional bank loan has been complicated. “When we got the (hemp cultivation) permit, I had to inform the local sheriff about what we’re doing here,” he says. “We grow a plant that looks like marijuana and smells like it, but genetically it is hemp.” (JOED VIERA)

Waiting for a road map

Bank on Buffalo President Martin Griffith said he’s waiting for “a clear road map or checklist” from regulators before his institution starts working with cannabis-related businesses.

But when it comes, he’s ready to go. The last four people he hired are anti-money-laundering professionals who focus on internal monitoring, compliance and risk management.

“This is a tremendous opportunity for banks and I don’t know of another banker that I’ve talked to in the past year that isn’t craving to bank this industry because we’ll all missing out on a deposit base,” Griffith said. “In our case, we will be reasonably aggressive moving down this path. We don’t want to be the earliest adopter, but we don’t want to be the last adopter, either.”

Such an open-arms attitude will be welcome relief for cannabis firms. That includes Wheatfield Gardens LLC in North Tonawanda, where CEO Paal Elfstrum and his team of 21 grow lettuce, herbs and hemp under 12 acres of greenhouses. About half of those acres are devoted to hemp farming.

The company, founded in 2015, is in partnership with the state Department of Agriculture and Markets to grow the crop for research purposes. It also grows for itself and sells starter seeds to farmers.

In the beginning, Elfstrum obtained banking services from M&T Bank. When M&T backed away, he said he shifted to Evans Bank N.A., but his account was closed this past summer.

Elfstrum said Evans didn’t want to end the relationship but the discrepancy between state and federal laws regarding cannabis was deemed by attorneys to be too risky. A spokesperson for Evans said the lender does not discuss specific relationships.

In a statement, the spokesperson said: “Evans has a tiered policy in place that addresses each specific client on a case-by-case basis depending on the nature of their involvement in the industry and the bank’s exposure to risk.”

Elfstrum said the company is now back to banking with M&T.

“There’s no clarity, so banks are left to form their own conclusions based on their attorneys,” he said. “When we came back to M&T, they took a really good, hard look at what we’re doing here and examined the owners and did the ‘know your customer’ kind of work.”

When asked about doing business with the firm, an M&T spokesperson said the bank is comfortable doing business with the hemp industry as long as it meets state and federal requirements.

‘Finding a needle in the haystack’

Burgio, the attorney at Damon Barclay, started her career as a cannabis lawyer at a small firm in Oregon, where recreational marijuana is legal. Her experience includes walking to the bank with $10,000 or $15,000 in cash to deposit into the firm’s bank account.

The cash came from marijuana clients who couldn’t get bank accounts and thus couldn’t write checks to pay for legal services. The law firm itself was dropped by four banks during the time she worked there, she said.

“It affects every part of your business, not being able to bank,” Burgio said. “There are problems with safety. There are issues for employees and problems for landlords (of these companies). Ninety-nine percent of cannabis businesses are legitimate businesses, but they can’t operate like a real business. They can’t write things off. They’re at a complete disadvantage.”

Some have reported limited success. Jushi Medical through its hemp subsidiary, Sound Wellness Inc., is one of two cannabis-related customers doing business with Lake Shore Savings.

Sound Wellness is a New York state-licensed industrial hemp/CBD processor and a subsidiary of Jushi Inc. The company has a CBD retail store on the first floor of the Dent Neurologic Institute, which has one of the largest medical marijuana clinics in the state.

Jushi Medical President Steve Przybyla said he turned to Lake Shore Savings after M&T dropped the firm. He suspects it is because Jushi Inc. is involved in marijuana.

When asked about Jushi Medical, the M&T spokesperson said:

“All new customer relationships go through a standard due diligence process. As a matter of policy, we do not comment on specific relationships.

“With regard to business relating to the cannabis industry, M&T continues to act in accordance with federal law and prudent risk management standards.”

Przybyla said the firm has also struggled to secure merchant services. It was dropped by one processor, then moved to a Cayman Islands-based processor with steep fees and eventually switched to Square.

And who knows what will happen when the company seeks financing to build a production facility on Buffalo’s East Side.

“Finding a cannabis bank is like finding a needle in the haystack at times,” Przybyla said. “It takes a lot of phone calls, meetings and a certain comfort level.”

Jushi's retail space at DENT tower Shalan Bishop pours out a sample of lotion on Jacob Craven at Jushi’s retail space at DENT tower. (JOED VIERA)

What’s on the horizon

There may eventually be some clearing. In September, the U.S. House of Representatives passed the Secure and Fair Enforcement Act, or SAFE Banking Act.

The proposed legislation would create protections for banks and credit unions that provide financial services to legal cannabis firms. It currently awaits action by the Senate Committee on Banking, Housing and Urban Affairs.

Cannabis attorney Tristan Hujer is special counsel at Phillips Lytle LLP who works with hemp companies in Western and Central New York and the Southern Tier. He said the SAFE Banking Act would be “tremendously helpful” for all parties.

“It would finally be not just guidance but law at the federal level,” he said. “And that would inform banks that you can do business with cannabis companies so long as they comply with state laws where they operate.”

Bank on Buffalo’s Griffith said the bank is committed to serving the banking needs of the cannabis industry. For now, it awaits more information from regulators on whom it should and should not be banking.

“I think there have been a lot of false starts where banks say, ‘Sure, come on in,’ and within 60 to 90 days they’re closing these accounts,” Griffith said. “Without passage of this legislation, it’s just false starts. And that doesn’t help anybody.”