Unlike the United States, where the sale of cannabis remains illegal federally, the sale of cannabis for medicinal purposes has been legalized in Canada. Following a recent announcement by the Canadian government, legislation has now been proposed that would expand access to cannabis by legalizing the sale of recreational cannabis by registered dealers in Canada. Under the proposed legislation, the production, sale and possession of certain amounts of cannabis will be federally legal, though provinces will ultimately decide how cannabis will be distributed and sold within their boundaries. The federal government hopes to clear the parliamentary and procedural hurdles to make cannabis legal by July 1, 2018, setting the stage for a growing cannabis industry to develop in Canada.
As the cannabis industry expands in Canada, cannabis-related businesses will increasingly seek banking and financial services from Canadian financial institutions. However, cannabis-related businesses would likely be considered high-risk clients under the Canadian anti-money laundering regime. Accordingly, opening and maintaining accounts for cannabis-related businesses will require substantial resources and diligence on the part of financial institutions, especially in light of the obligation imposed on financial institutions under anti-money laundering legislation to engage in ongoing monitoring of clients and their activities.
Despite the heightened risk of banking cannabis-related businesses, the current legal landscape for medicinal cannabis, and the expected regulatory framework for legalized recreational cannabis provide financial institutions with various controls to monitor and legitimately bank cannabis-related clients. For instance, the current licensing regime for medicinal cannabis producers is comprehensive and requires that the Canadian government complete extensive reviews and background checks on each licensed producer. A similarly comprehensive licensing regime is expected under the new legislation to legalize recreational cannabis. Financial institutions could rely on the government’s stringent vetting process to confirm the legitimacy of a cannabis producer when onboarding a client.
Licensed medicinal cannabis producers are also required to keep records of all cannabis-related activities and inventories, as well as file ongoing monthly reports. These monthly reports are very detailed and include, among other things, the total amounts produced, the total amount released for sale, the total amount received from other licensed producers, and the total amount sold or transferred to registered clients, other licensed producers and licensed dealers. Under the proposed legislation to legalize recreational cannabis, licensed dealers will most likely be required to file similarly detailed monthly reports. Financial institutions could rely on the information in these reports to monitor a client’s financial activity and determine whether account transactions mirror expected cannabis inventory and sales.
The decision to open, close or refuse any particular cannabis-related account will ultimately be made by each financial institution based on a number of factors specific to that institution. However, the regulatory regime for medicinal cannabis and the expected framework for legalized recreational cannabis in Canada can provide financial institutions with the means to legitimately bank cannabis-related clients in a lawful and rewarding way, meeting the growing financial needs of the cannabis industry in Canada.